SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Solicitation Material Pursuant to Rule 14a-11(c) or rule 14a-12
ATEC GROUP, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock and Series K Convertible Preferred Stock*
2) Aggregate number of securities to which transaction applies: 5,783,533
shares of Common Stock and 1,927,844 shares of Series K Convertible
Preferred Stock*
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): **
4) Proposed maximum aggregate value of transaction: **
5) Total fee paid: $5,362.66
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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* These registrant securities are being issued for the acquisition of all of
the equity securities of Interpharm, Inc. The total number of shares of
Common Stock to be issued to Interpharm shareholders at the closing of the
acquisition of Interpharm will represent approximately 42% of all of the
issued and outstanding Common Stock post-closing. If no conversion
restriction existed and all of the Series K Convertible Preferred Stock to
be issued to
Interpharm shareholders were converted into Common Stock immediately
following the closing of the acquisition of Interpharm, the total number of
shares of Common Stock issued to the Interpharm shareholders at the closing
together with the total number of shares of Common Stock issued upon
conversion of the Series K Stock will represent approximately 80% of all of
the issued and outstanding voting securities.
** The proposed maximum value of the transactions is $24,052,555, calculated as
follows: Each share of Common Stock is valued at its "market value" (the
average of the high and low prices for such a share on the American Stock
Exchange on December 19, 2002), each share of Series K Convertible Preferred
Stock is valued at the market value of the number of shares of the
registrant's Common Stock into which a share of Series K Convertible
Preferred Stock is convertible, calculated on March 30, 2003; and
$2,748,084, which represents the amount of net cash and promissory notes to
be paid to the registrant for the sale of its assets. The registrant will
receive two promissory notes in the aggregate principal amount of $1.75
million for the sale of its assets and will receive cash for the remainder
of the purchase price. The registrant anticipates that the cash portion of
the purchase price will be paid in part by approximately $1.171 million of
the registrant's cash which is part of the assets to be sold in the asset
sale.
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PRELIMINARY COPY
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ATEC GROUP, INC.
69 Mall Drive
Commack, NY 11725
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 2003
To the Stockholders of ATEC Group, Inc.:
You are cordially invited to attend the annual meeting of stockholders
of ATEC Group, Inc. ("Atec, our, we or us"), a Delaware corporation, to be held
at the Huntington Hilton, Melville, New York, on May 29, 2003, at 10:00 a.m.
local time, for the following purposes:
1. To approve the acquisition of all of the outstanding stock of
Interpharm, Inc., a manufacturer of generic pharmaceuticals, in
exchange for shares of common stock and a new Series K Convertible
Preferred Stock of Atec. The total number of shares of Atec Common
Stock to be issued to Interpharm shareholders at the closing of the
acquisition of Interpharm will represent approximately 42% of all of
the issued and outstanding Common Stock post-closing. If no conversion
restriction existed and all of the Series K Convertible Preferred Stock
to be issued to Interpharm shareholders were converted into Common
Stock immediately following the closing of the acquisition of
Interpharm, the total number of shares of Common Stock issued to the
Interpharm shareholders at the closing together with the total number
of shares of Common Stock issued upon conversion of the Series K Stock
will represent approximately 80% of all of Atec's issued and
outstanding voting securities;
2. To approve an amendment to Atec's Certificate of Incorporation to
change the name of Atec to "Interpharm Holdings, Inc.";
3. To approve the sale of the assets relating to the sole current
business of Atec to, and assumption of substantially all of the
liabilities of Atec by, Baar Group, Inc., the principals of which are
certain members of present management, in consideration of cash and
promissory notes. As of December 31, 2002, Atec estimates it would have
received net proceeds of approximately $2.748 million and that Baar
Group would have assumed approximately $1.889 million in liabilities.
The net proceeds would have consisted of promissory notes in the
aggregate amount of $1.75 million and cash of approximately $998,000.
This figure is based upon a base purchase price of $4,278,184, less
approximately $359,700 in closing adjustments and less approximately
$1.171 million of Atec's cash which Atec anticipates will be returned
to it as part of the purchase price;
4. To elect six members to the board of directors of Atec to serve
until their respective successors are elected and qualified;
5. To ratify and approve Weinick Sanders Leventhal & Co., LLP, as our
independent public accountants, to audit our financial statements for
the fiscal year ending June 30, 2003; and
6. To approve the adjournment of the annual meeting to permit the
solicitation of additional proxies in the event a quorum is not present
at the meeting or sufficient votes in favor of Proposals 1, 2 and 3 are
not received by the date of the meeting.
Only stockholders of record at the close of business on March 30, 2003
(the "Record Date") are entitled to notice of and to vote at the meeting.
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The acquisition of Interpharm and the sale of Atec's assets to Baar
Group are contingent on each other. Specifically, the manner in which they are
contingent on each other is as follows: Passage of Proposals 1 and 2 is
contingent upon approval of each of Proposals 1 through 3. In addition, passage
of Proposals 1 and 2 is contingent upon the election of Dr. Maganlal K. Sutaria
and Bhupatlal K. Sutaria, the two director nominees of Interpharm, Inc., in
Proposal 4. In the event that Proposal 1, 2 and/or 3 is not approved, or that
the two director nominees of Interpharm, Inc. are not elected, Proposals 1 and 2
will not pass, the two director nominees of Interpharm, Inc. will not be
elected, and immediately after the annual meeting of stockholders the Board of
Directors will appoint Ashok Rametra and James Charles (current Atec directors)
to fill the vacancies created.
In addition, the passage of Proposal 3 is contingent on the approval of
Proposals 1 and 2 and the election of Dr. Maganlal K. Sutaria and Bhupatlal K.
Sutaria, the two director nominees of Interpharm, Inc., in Proposal 4. In the
event that Proposals 1 and 2 are not approved and/or the two director nominees
of Interpharm, Inc. are not elected, Proposal 3 will not pass.
Under Delaware law, Atec's stockholders will not be entitled to
dissenters' rights of appraisal in connection with the acquisition of Interpharm
or the sale of assets to Baar Group.
Mona Rametra, the owner of 20% of Interpharm's capital stock, is the
daughter-in-law of Surinder Rametra, our chairman and a member of Atec's Board.
She is also the daughter of Dr. Maganlal K. Sutaria, the Chairman of the Board
and chief executive officer of Interpharm. Mrs. Rametra will receive 20% of all
of the consideration to be issued to the Interpharm shareholders for their
Interpharm stock. Although Dr. Sutaria does not own any Interpharm stock, his
other two children (i.e. Mrs. Rametra's brothers) collectively own 55% of
Interpharm stock and his nephew, Ravi Sutaria, owns the remaining 25%. Ravi
Sutaria is the son of Bhupatlal K. Sutaria, the President of Interpharm. In
addition, Munish K. Rametra, who is Mrs. Rametra's husband and Surinder
Rametra's son, will share a finder's fee of $100,000 with three other
individuals relating to the acquisition of Interpharm.
As of March 30, 2003, our affiliates, directors, executive officers and
the members of management who also are principals of Baar Group, including all
stockholders who beneficially own more than 5% of our voting securities, own
approximately 29% of Atec's stock entitled to vote on the proposals. Atec
believes that these individuals will vote their shares to approve all of the
proposals. In addition, taking into account shares of Common Stock which are
issuable upon the exercise of options, such persons beneficially own
approximately 58% of our voting securities.
A proxy statement and proxy are enclosed with this notice. If you are
unable to attend the meeting in person you are urged to sign, date and return
the enclosed proxy promptly in the envelope provided, which requires no postage
if mailed within the United States. If you attend the meeting in person, you may
withdraw your proxy and vote your shares. Details of the proposed acquisition,
the sale of assets to members of management and the other business to be
conducted at the annual meeting are described in the enclosed Proxy Statement.
We have also enclosed a copy of our 2002 Annual Report for the fiscal year ended
June 30, 2002.
By Order of the Board of Directors
Ashok Rametra, Secretary
Hauppauge, New York
[_________], 2003
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PRELIMINARY COPY
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ATEC GROUP, INC.
69 Mall Drive
Commack, NY 11725
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 29, 2003
Approximate Date of Mailing of this Proxy Statement: [___________], 2002.
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the board of directors of
Atec Group, Inc. ("Atec, our, we or us"), a Delaware corporation, for the annual
meeting of stockholders to be held at 10:00 a.m. local time at the Huntington
Hilton, Melville, New York on May 29, 2003, or any continuation or adjournment
thereof. At the meeting, the stockholders will be asked to vote on proposals,
which are listed in the Atec notice of annual meeting of stockholders and
described in more detail below.
This proxy statement and the enclosed proxy card are being mailed on or
about[_____________], 2003, to all stockholders entitled to vote at the meeting.
Atec's Annual Report for the fiscal year ended June 30, 2002, including
financial statements, is being mailed to all stockholders' entitled to vote at
the annual meeting. The Annual Report does not constitute a part of the proxy
solicitation material, except to the extent incorporated herein by reference.
At the meeting, Atec stockholders will be asked:
1. To approve the acquisition of all of the outstanding stock of
Interpharm, Inc., a manufacturer of generic pharmaceuticals, in
exchange for shares of common stock and a new series of preferred
stock of Atec (the "Acquisition");
2. To approve an amendment to Atec's Certificate of Incorporation to
change the name of Atec to "Interpharm Holdings, Inc.";
3. To approve the sale of the assets relating to the sole current
business of Atec to, and assumption of substantially all of the
liabilities of Atec by, Baar Group, Inc., the principals of which are
certain members of present management, in consideration of cash and
promissory (the "Management Buy-Out"). As of December 31, 2002, Atec
estimates that it would have received net proceeds of approximately
$2.748 million and that Baar Group would have assumed approximately
$1.889 million in liabilities. The net proceeds would have consisted
of promissory notes in the aggregate amount of $1.75 million and cash
of approximately $998,000. This figure is based upon a base purchase
price of $4,278,184, less $359,700 in closing adjustments and less
approximately $1.171 million of Atec's cash which Atec anticipates
will be returned to Atec as part of the purchase price;
4. To elect six members to the board of directors of Atec to serve
until their respective successors are elected and qualified;
5. To ratify and approve Weinick Sanders Leventhal & Co., LLP, as our
independent public accountants, to audit our financial statements for
the fiscal year ending June 30, 2003; and
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6. To approve the adjournment of the annual meeting to permit the
solicitation of additional proxies in the event a quorum is not
present at the meeting or sufficient votes in favor of Proposals 1, 2
and 3 are not received by the date of the meeting.
The Acquisition and the Management Buy-Out are contingent on each other.
Specifically, the manner in which they are contingent on each other is as
follows: Passage of Proposals 1 and 2 is contingent upon approval of each of
Proposals 1 through 3. In addition passage of Proposals 1 and 2 is contingent
upon the election of Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria, the two
director nominees of Interpharm, Inc., in Proposal 4. In the event that Proposal
1, 2 and/or 3 is not approved or that the two director nominees of Interpharm,
Inc. are not elected, Proposals 1 and 2 will not pass, the two director nominees
of Interpharm, Inc. will not be elected, and immediately after the annual
meeting of stockholders, the Board of Directors will appoint Ashok Rametra and
James Charles (current Atec directors) to fill the vacancies created.
In addition, the passage of Proposal 3 is contingent on the approval of
Proposals 1 and 2 and the election of Dr. Maganlal K. Sutaria and Bhupatlal K.
Sutaria, the two director nominees of Interpharm, Inc., in Proposal 4. In the
event that Proposals 1 and 2 are not approved and/or the two director nominees
of Interpharm, Inc. are not elected, Proposal 3 will not pass.
Summary Term Sheet
This summary term sheet highlights the material terms of the proposed
transactions described in this proxy statement. To understand the acquisition of
Interpharm and the sale of our assets, we urge you to carefully read the entire
proxy statement, including the exhibits and the documents to which we refer in
this proxy statement. We have included page references in parentheses to direct
you to a more complete description of the topics presented in this summary.
The Companies
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Atec, a Delaware corporation, is in the business of computer operations
and provides a full line of information technology products and services to
businesses, professionals, government and educational institutions. Atec's core
competencies are system design, networking, server-based computing, help desk,
e-commerce, ASP and Internet-Intranet solutions. Atec's principal executive
offices are located at Atec Group, Inc., 69 Mall Drive, Commack, New York 11725,
and its telephone number is (631) 543-2800.
Interpharm, Inc. ("Interpharm"), a privately held New York corporation,
is in the business of developing, manufacturing, and selling both prescription
strength and over the counter generic drugs in the United States. Interpharm's
sales are primarily to distributors and wholesalers. Interpharm's executive
offices are located at Interpharm, Inc., 75 Adams Avenue, Hauppauge, New York
11788, and its telephone number is (631) 952-0214.
Baar Group, Inc. ("Baar Group") was organized in July, 2002 for the
purposes of acquiring the assets of Atec and has not yet conducted any business
operations. Baar Group's principal executive offices are located at 1762 Central
Avenue, Albany, New York 12205.
The Acquisition
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The Acquisition of Interpharm (page 9)
Our board of directors has unanimously approved the acquisition of all
of the capital stock of Interpharm. If the Acquisition of Interpharm is
completed, Interpharm will become a wholly owned subsidiary of Atec.
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Stock to be issued to Interpharm shareholders (page 44)
In exchange for their Interpharm stock, Interpharm shareholders will
receive shares of our Common Stock and Series K Preferred Stock. Immediately
following the Acquisition, the Interpharm shareholders will own collectively
approximately 42% of all of our outstanding Common Stock. In addition,
immediately following the Acquisition, the Interpharm shareholders will own
collectively shares of Series K Stock equal to approximately 14% of our
outstanding Common Stock. As a result, immediately following the Acquisition,
the Interpharm shareholders will own approximately 48% of all our voting
securities, which are Common Stock and Series A, B and C preferred stock.
Series K Stock (page 44)
The Series K Stock to be issued to the Interpharm shareholders has the
following terms:
o Voting (page 44). The Series K Stock is entitled to one vote per
share, voting together as a class with the holders of our Common
Stock.
o Conversion (page 45). The Series K Stock will be convertible into
shares of our Common Stock no sooner than one year after the
closing of the acquisition of Interpharm, upon the occurrence of
any of the following events: (a) the American Stock Exchange
("Amex") deems Atec to be in compliance with its applicable
listing standards; (b) Atec is deemed by another exchange to be
in compliance with its applicable listing standards in the event
Atec's securities are listed on such exchange; or (c) Atec is no
longer listed on AMEX, the Nasdaq National Market or SmallCap
Market or the New York Stock Exchange.
Upon full conversion of the Series K Stock, the number of shares
of our Common Stock Interpharm shareholders will own will be
equal to approximately 80% of the number of our voting securities
as of the date the date of the closing of the acquisition of
Interpharm.
o Liquidation Preference (page 44). In the event of a liquidation,
dissolution or winding up of Atec, the holders of the Series K
Stock will be entitled to $7.50 per share prior to distribution
on any class of stock ranking junior to the Series K Stock,
including the Common Stock. Based upon the estimate that
approximately 1,927,844 shares of Series K Stock will be issued
at closing, the aggregate total amount of the liquidation
preference will be approximately $14.5 million. Atec agreed to
the liquidation preference at the request of the Interpharm
shareholders in the course of negotiations for purpose of
providing them greater security in their investment.
o Dividends (page 44). The holders of the Series K Stock will be
entitled to dividends to the same extent and in the same amount
as holders of our Common Stock.
The Board of Directors (page 61)
Balwinder Singh Bathla, James Charles and Ashok Rametra will resign as
members of our Board and be replaced by Dr. Maganlal K. Sutaria and Bhupatlal K.
Sutaria, two designees of Interpharm.
Name Change (page 52)
Our name will be changed to "Interpharm Holdings, Inc."
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Registration Rights (page 49)
The Interpharm shareholders will receive rights to demand that we
register the shares of our Common Stock they receive for resale by them,
including the shares of Common Stock that they will receive upon the conversion
of the Series K Stock.
Conditions to closing (page 47)
The obligations of each of the parties to complete the Acquisition are
subject to the satisfaction or waiver of various conditions, including various
customary conditions to closing and the following conditions:
o the Acquisition and the Management Buy-Out must be approved by
our stockholders.
o the Management Buy-Out must have been completed; and
o we must have not more than $650,000 in total liabilities, not
less than $3.7 million in stockholders' equity and not less than
$1.25 million in cash.
Interests of our directors and officers in the Acquisition (page 51)
Mona Rametra is married to the son of our Chairman of the Board,
Surinder Rametra. Ms. Rametra is a shareholder of Interpharm and will receive
20% of all of our Common Stock and Series K Stock that is issued to the
Interpharm shareholders. Additionally, Ms. Rametra's father is the chairman and
chief executive officer of Interpharm. Her husband, Surinder Rametra's son, will
share a $100,000 finder's fee with three other individuals.
Recommendation of the Board (page 42)
Our Board has determined that the Acquisition of Interpharm is fair to
you and in your best interests. Accordingly, our board, including all of the
unaffiliated members, has approved the Acquisition and has recommend that you
vote "FOR" the Acquisition.
The Management Buy-Out
The sale of our assets (page 53)
o Purchase Price (page 53). Our board of directors has unanimously
approved the sale of our sole current business consisting of
computer operations to, and assumption of substantially all of
the liabilities of Atec by, Baar Group in consideration of cash
and promissory notes. As of December 31, 2002, Atec estimates
that it would have received net proceeds of approximately $2.748
million and that Baar Group would have assumed approximately
$1.889 million in liabilities.
The net proceeds would have consisted of two promissory notes in
the aggregate amount of $1.75 million and cash in the amount of
approximately $998,000. This figure is based upon a base purchase
price of $4,278,184, less $359,700 in closing adjustments and
less approximately $1.171 million of Atec's cash which Atec
anticipates will be returned to Atec as part of the purchase
price. We anticipate that the $998,000 cash portion of the net
proceeds will be paid by contributions made by the principals of
Baar Group from their personal funds and/or loans. The principals
of Baar Group have informed us that they have verbally committed
to each other to contribute $500,000 of their personal funds at
the time of closing. In addition, the principals of Baar Group
have informed us that they are presently examining further
financing options including obtaining loans from financial
institutions or making further capital contributions from their
personal funds.
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o Adjustment to Purchase Price (page 55). The base purchase price
will be increased by 34% of income from operations from our
Albany, New York City and New Jersey computer operations from
July 1, 2002 through the date of the closing and reduced by
expenses which are allocated to our Long Island, New York office
from July 1, 2002 through the date of the closing.
As of December 31, 2002, the base purchase price would have
increased by approximately $86,600, representing 34% of income
from operations from our Albany, New York City and New Jersey
operations from July 1, 2002 through December 31, 2002, and would
have reduced by approximately $445,700, representing the expenses
which are allocated to our Long Island office from July 1, 2002
through December 31, 2002.
Taking into account (a) the base purchase price of $4,278,184,
(b) less $359,700 adjustment to the purchase price described in
the preceding paragraph, (c) plus $1.889 million of liabilities
to be assumed by Baar Group, and (d) less the $1.171 of Atec's
cash, as of December 31, 2002, the total amount of net proceeds
and assumed liabilities would have been approximately $4.637
million.
The promissory notes (page 55)
The principal amount of the first note is $1 million and is to be paid
in 12 monthly equal installments. The second note is $750,000 and is to be paid
in 36 equal monthly installments. Both of the promissory notes also have the
following terms:
o Interest. The interest rate is equal to 1.5% in excess of the
prime rate as announced by Citibank.
o Repayment. Repayment of the principal and interest commences one
month from the date of closing of the Management Buy-Out.
o Security Interest. The obligations under the promissory notes are
secured by substantially all of the assets of Baar Group,
including the assets it acquires pursuant to the Management
Buy-Out.
o Personal Guarantees. The obligations under the promissory notes
are personally guaranteed by Ashok Rametra, Rajnish Rametra and
Arvin Gulati.
Conditions to closing (page 58)
The obligations of each of the parties to complete the Management
Buy-Out are subject to the satisfaction or waiver of various conditions,
including various customary conditions to closing and the following conditions:
o the Management Buy-Out must be approved by our stockholders;
o the Acquisition of Interpharm must have been completed; and
o Baar Group must have received at least $500,000 in funding.
Interests of our directors and officers in the Acquisition (page 60)
The principals of Baar Group are the following members of our
management and board:
o Ashok Rametra, our President, Secretary, Treasurer and a
director;
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o Balwinder Singh Bathla, our Chief Executive Officer and a
director;
o Rajnish Rametra, our chief operating officer of technology
integration services; and
o Arvin Gulati, our chief operating officer of distribution.
Recommendation of the Board (page 53)
Our Board has determined that the Management Buy-Out is fair to you and
in your best interests. Accordingly, our board, including all of the
unaffiliated members, has approved the Management Buy-Out and has recommend that
you vote "FOR" the Management Buy-Out.
Record Date; Outstanding Shares
Only stockholders of record at the close of business on March 30, 2003
are entitled to receive notice of, and vote at our annual meeting. As of March
30, 2003, the number and class of stock outstanding and entitled to vote at the
meeting consisted of:
o 8,026,128 shares of common stock, par value $.01 per share,
o 7,631 shares of series A preferred stock, par value $.01 per
share,
o 1,458 shares of series B preferred stock, par value $.01 per
share and
o 281,005 shares of series C preferred stock, par value $.01 per
share.
Each share of our common and preferred stock is entitled to one vote on
all matters. As of the record date, we had 8,316,222 shares of our common and
preferred stock entitled to one vote per share outstanding. Atec has no other
voting securities.
Expenses of Soliciting Proxies
Atec will pay the expenses of soliciting proxies to be voted at the
Annual Meeting. Following the original mailing of the proxies and other proxy
materials, Atec and its agents may also supplement the solicitation of proxies
by mail, telephone, internet, telegraph or in person. Following the original
mailing of the proxies and other proxy materials, Atec will request that
brokers, custodians, nominees and other record holders of our common stock
forward copies of the proxy and other annual meeting materials to persons for
whom they hold shares of common stock and request authority for the exercise of
proxies. In these cases, Atec will reimburse such record holders for their
reasonable expenses if requested to do so.
Revocability of Proxies
If you attend the meeting, you may vote in person, regardless of
whether you have submitted a proxy. Any person giving a proxy in the form
accompanying this proxy statement has the power to revoke it at any time before
it is voted. It may be revoked by filing, with the corporate secretary of Atec
at its principal offices, 69 Mall Drive, Commack, NY 11725, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person.
Voting and Votes Required for Approval
Every stockholder of record is entitled, for each share held, to one
vote on each proposal or item that comes before the meeting. There are no
cumulative voting rights. By submitting your proxy, you authorize Ashok Rametra
to represent you and vote your shares at the meeting in accordance with your
instructions. If the meeting is adjourned, Mr. Rametra will be authorized to
vote your shares at any adjournment or postponement of the meeting, provided,
that in the event you vote against Proposal No. 6, Mr. Rametra will not have the
authority to vote your shares at any adjourned meeting that is being held
pursuant to Proposal No. 6.
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To vote by mail, please sign, date and complete the enclosed proxy and
return it in the enclosed self-addressed envelope, to North American Transfer
Agent, PO Box 311, Freeport, New York 11520-0311. If you hold your shares
through a bank, broker or other nominee, it will give you separate instructions
for voting your shares.
In addition to solicitations by mail, we may solicit proxies in person,
by telephone, facsimile or e-mail.
Proposal 1: Acquisition of Interpharm. Although the Delaware General
Corporation Law does not require Atec's stockholders to approve the acquisition
of Interpharm, such approval is being sought because of (i) the significant
relationships family members of certain members of our Board of Directors and
our management have with shareholders and members of management of Interpharm
and (ii) the rules of the American Stock Exchange ("AMEX"), which require
stockholder approval of issuances of our Common Stock, among other things, in
connection with an acquisition of another company (A) if any individual
director, officer or substantial shareholder has a 5% or greater interest (or
such persons have a 10% or greater interest), directly or indirectly, in the
company to be acquired and the issuance of common stock, or securities
convertible into common stock, could result in an increase in outstanding common
shares by 5% or more, or (B) if the issuance of common stock, or securities
convertible into common stock, could result in an increase in outstanding common
shares of 20% or more. Under Delaware law, the affirmative vote of at least a
majority of our shares entitled to vote, and voting together as a class, present
in person or represented by proxy at our annual meeting at which a quorum is
present is necessary for ratification of the acquisition of Interpharm. A quorum
is present if one-third of our outstanding shares of common stock and Series A,
B and C preferred stock collectively is present in person or by proxy at the
annual meeting. In the event Proposal 1 is not ratified by our stockholders,
Atec will not consummate the acquisition of Interpharm or the Management
Buy-Out.
Proposal 2: Amendment to Certificate of Incorporation. The affirmative
vote of stockholders owning at least a majority of the issued and outstanding
shares of our Series A, B and C preferred stock and Common Stock, voting
together as a class, is necessary for ratification of the amendment of the
Certificate of Incorporation changing our name to "Interpharm Holdings, Inc."
Proposal 3: Sale of the Assets in the Management Buy-Out. The
affirmative vote of stockholders owning at least a majority of the issued and
outstanding shares of our Series A, B and C preferred stock and Common Stock,
voting together as a class, is necessary for ratification of the sale of our
assets to Baar Group. In the event Proposal 3 is not ratified by our
stockholders, Atec will not consummate the Management Buy-Out or the acquisition
of Interpharm.
Proposal 4: Election of Directors. Directors are elected by a plurality
vote and the six nominees who receive the most votes will be elected. In the
election of Directors, votes may be cast in favor of or withheld with respect to
each nominee.
Proposal 5: Ratification of Selection of Auditors. The affirmative vote
of stockholders owning at least a majority of our shares of common and preferred
stock entitled to vote, and voting together as a single class, present in person
or represented by proxy at our annual meeting at which a quorum is present is
necessary for ratification of the selection of our auditors.
Proposal 6: Adjournment of the Annual Meeting. The affirmative vote of
stockholders owing at least a majority of our shares of common and preferred
stock entitled to vote, and voting together as a single class, present in person
or represented by proxy at our annual meeting at which a quorum is present is
necessary to adjourn the meeting.
The Acquisition and the Management Buy-Out are contingent on each
other. Specifically, the manner in which they are contingent on each other is as
follows: Passage of Proposals 1 and 2 is contingent upon approval of each of
Proposals 1 through 3. In addition passage of Proposals 1 and 2 is contingent
upon the election of Dr. Maganlal K. Sutaria and Bhupatlal Sutaria, the two
director nominees of Interpharm, Inc., in Proposal 4. In the event that Proposal
1, 2 and/or 3 is not approved or that the two director nominees of Interpharm,
7
Inc. are not elected, Proposals 1 and 2 will not pass, the two director nominees
of Interpharm, Inc. will not be elected and immediately after the annual meeting
of stockholders the Board of Directors will appoint Ashok Rametra and James
Charles (current Atec directors) to fill the vacancies created.
In addition, the passage of Proposal 3 is contingent on the approval of
Proposals 1 and 2 and the election of Dr. Maganlal K. Sutaria and Bhupatlal K.
Sutaria, the two director nominees of Interpharm, Inc., in Proposal 4. In the
event that Proposals 1 and 2 are not approved and/or the two director nominees
of Interpharm, Inc. are not elected, Proposal 3 will not pass.
Tabulation of Votes
The votes will be tabulated and certified by Atec's transfer agent,
North American Transfer.
Voting by Street Name Holders
If you are the beneficial owner of shares held in "street name" by a
broker, the broker, as the record holder of the shares, is required to vote
those shares in accordance with your instructions. If you do not give
instructions to the broker, the broker will nevertheless be entitled to vote the
shares with respect to "discretionary" items but will not be permitted to vote
the shares with respect to "non-discretionary" items (in which case, the shares
will be treated as "broker non-votes").
Quorum; Abstentions; Broker Non-Votes
The required quorum for the transaction of business at the annual
meeting is one-third of the issued and outstanding shares of common and Series
A, B and C preferred stock, collectively, at the annual meeting, in person or by
proxy. Shares that are voted "FOR," "AGAINST" or "WITHHELD FROM" a matter are
treated as being present at the meeting for purposes of establishing a quorum
and are also treated as shares represented and voting the votes cast at the
annual meeting with respect to such matter.
While there is no definitive statutory or case law authority in
Delaware as to the proper treatment of abstentions, Atec believes that
abstentions should be counted for purposes of determining both: (i) the presence
or absence of a quorum for the transaction of business; and (ii) the total
number of votes cast with respect to a proposal (other than the election of
directors). In the absence of controlling precedent to the contrary, Atec
intends to treat abstentions in this manner. Accordingly, abstentions will have
the same effect as a vote against the proposal.
Under current Delaware case law, while broker non-votes (i.e. the votes
of shares held of record by brokers as to which the underlying beneficial owners
have given no voting instructions) should be counted for purposes of determining
the presence or absence of a quorum for the transaction of business, broker
non-votes should not be counted for purposes of determining the number of votes
cast with respect to the particular proposal on which the broker has expressly
not voted. Atec intends to treat broker non-votes in this manner. Thus, a broker
non-vote will make a quorum more readily obtainable, but the broker non-vote
will not otherwise affect the outcome of the voting on a proposal.
Incorporation by Reference
A copy of Atec's Annual Report on Form 10-K and Amendment No. 1 to the
Annual Report on Form 10-K/A for the year ended June 30, 2002, previously filed
with the Securities and Exchange Commission by Atec pursuant to the Securities
Exchange Act of 1934, as amended, are being mailed to stockholders with this
Proxy Statement. Such Annual Report on Form 10-K and Amendment No. 1 are hereby
incorporated by reference to this Proxy Statement.
This Proxy Statement incorporates documents by reference which are not
presented herein. Such documents are also available to any person including any
beneficial owner to whom this Proxy Statement is delivered, without charge on
written or oral request directed to Atec Group, Inc., 69 Mall Drive, Commack,
New York 11725, Attention: chief financial officer, (631) 543-2800. Atec will
send the requested documents by first class mail within one business day of its
receipt of the request.
8
PROPOSALS TO STOCKHOLDERS
PROPOSAL NO. 1
ACQUISITION OF INTERPHARM
On November 25, 2002, Atec entered into a Capital Stock Exchange
Agreement with Interpharm and all of the shareholders of Interpharm, whereby
Atec agreed to acquire all of the outstanding stock of Interpharm in exchange
for Common Stock and a new Series K Stock. For a discussion on the number of
Common Stock and Series K Stock to be issued to the Interpharm shareholders, and
the number of shares that will be outstanding after the Acquisition, see pages
44-46. The issuance of the Common Stock and Series K Stock may substantially
dilute your ownership percentage in us and the value of your shares. The Capital
Stock Exchange Agreement provides that the Acquisition is subject to the
approval of Atec's stockholders. You should carefully read the documents,
including the Capital Stock Exchange Agreement, as well as an amendment thereto,
the Certificate of Designations, Preferences and Rights of the Series K Stock
and the Registration Rights Agreement which are included in this Proxy Statement
as Appendix A, as well as Atec's Form 10-K and Form 10-K/A for the year ended
June 30, 2002 and Form 10-Q/A for the quarter ended December 31, 2002 which also
are included in this Proxy Statement.
In the event there is a material change in the terms of the
Acquisition, including a material change resulting from the waiver of a
condition to closing, Atec will not consummate the Acquisition until its
stockholders have approved the Acquisition, with such change.
The Series K Stock to be issued to the Interpharm shareholders has the
following material terms and characteristics:
o Title. $.01 par value per share Series K Convertible Preferred
Stock.
o Voting. The Series K Stock is entitled to one vote per share,
voting together as a class with the holders of our Common Stock.
o Conversion. Upon the occurrence of certain events as detailed at
pages 44-46 below, the Series K Stock will be convertible into
shares of our Common Stock. Upon full conversion of the Series K
Stock, the number of shares of our Common Stock Interpharm
shareholders will own will be equal to approximately 80% of our
outstanding voting securities on the date of the closing of the
Acquisition.
o Liquidation Preference. In the event of a liquidation,
dissolution or winding up of Atec, the holders of the Series K
Stock will be entitled to $7.50 per share prior to distribution
on any class of stock ranking junior to the Series K Stock,
including the Common Stock.
o Dividend Rights. Same as Common Stock.
o Redemption Provisions. None.
o Amount Authorized. 3 million shares.
Interpharm
Interpharm's Corporate History, Management and Ownership Structure
------------------------------------------------------------------
Interpharm is in the business of developing, manufacturing, and selling
both prescription strength and over the counter ("OTC") generic drugs in the
United States. Interpharm's sales are primarily to distributors and wholesalers.
9
Interpharm was incorporated in 1984 and its plant and executive offices are
located at 75 Adams Avenue, Hauppauge, New York 11788, and its telephone number
is (631) 952-0214. Interpharm has a 50% owned subsidiary, Saturn Chemical, LLC,
a New York limited liability company, which acts as a purchasing agent for it.
Interpharm is owned and run by members of the Sutaria family. The
shareholders of Interpharm are Raj Sutaria, Perry Sutaria, Ravi Sutaria and Mona
Rametra. The members of Interpharm's Board of Directors are Dr. Maganlal K.
Sutaria, who serves as Chairman of the Board of Directors, Bhupatlal K. Sutaria
and Vimla Sutaria. Interpharm's current management and officers are as follows:
Name Position
---- --------
Dr. Maganlal K. Sutaria Chief Executive Officer
Bhupatlal K. Sutaria President
Vimla Sutaria Vice President
Jyoti Sutaria Secretary/Treasurer
Raj Sutaria Assistant Secretary
Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria are brothers. Dr.
Maganlal K. Sutaria is married to Vimla Sutaria and Bhupatlal K. Sutaria is
married to Jyoti Sutaria. Raj Sutaria, Perry Sutaria and Mona Rametra are the
children of Dr. Maganlal K. Sutaria and Vimla Sutaria. Ravi Sutaria is the son
of Bhupatlal K. Sutaria and Jyoti Sutaria. See also "Interpharm Related Party
Transactions"
The Generic Drug Market and Necessary Approvals
-----------------------------------------------
Pharmaceutical products in the United States are generally marketed as
either "brand-name" or "generic" drugs. Brand-name products are drugs generally
sold by the holder of the drug's patent or through an exclusive marketing
arrangement. A company that receives approval for a new drug application ("NDA")
from the U.S. Food and Drug Administration ("FDA"), usually the patent holder,
has the exclusive right to produce and sell the drug for about 20 years from the
date of filing of the patent application. This market exclusivity generally
provides brand-name products the opportunity to build up physician and customer
loyalties.
Once a patent on a drug expires, a manufacturer can obtain FDA approval
to market a "generic" version. A generic drug is therefore usually marketed
after the patent on a brand drug expires and is comparable to a brand-name drug.
In fact, the FDA requires that generic drugs to have the same quality, strength,
purity, identity and efficacy as brand-name drugs. While comparable to brand-
name drugs, generic drugs are usually far less costly than brand-name drugs,
resulting in substantial savings to consumers and hospitals. These cost savings
have resulted in sustained growth of the generic pharmaceutical industry in the
United States. According to a Congressional Budget Office study, "How Increased
Competition from Generic Drugs has Affected Prices and Returns in the
Pharmaceutical Industry," (available at http://www.cbo.gov/showdoc.cfm?index=655
&sequence=0) in 1984, 19% of prescription drugs sold in the United States were
generic. In 2002, according to a Federal Trade Commission Study in July, 2002,
"Generic Drug Entry Prior to Patent Expiration," (available at
http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf) that figure reached more
than 47%.
Much of the growth of the generic pharmaceutical industry has been
attributed to The Drug Price Competition and Patent Term Restoration Act of 1984
(the "Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Now, there is an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that the generic product is
bioequivalent to the brand-name product through the filing of an abbreviated new
drug application ("ANDA"). The ANDA may rely on information from the brand-name
drug's application with the FDA.
10
It has been estimated that the average drug takes 12 years and $270
million from initial discovery, through FDA testing and approvals, to public
use.1 Generic drug manufacturers can avoid almost all of these costs through the
ANDA process, which has typically cost Interpharm less than $500,000.
Interpharm's Business
---------------------
Interpharm currently manufactures and markets twenty generic drug
products in solid dosage form. Interpharm holds an ANDA for ten of the products.
The remaining products are manufactured under an OTC monogram or are drugs which
do not otherwise require ANDAs. Interpharm's products are solid oral dosage form
consisting of tablets, caplets and capsules.
Approximately 35% of Interpharm's sales are to wholesalers and
distributors which sell Interpharm's products to retailers and other wholesalers
under their own labels. Approximately 65% of Interpharm's sales are under its
own label. Interpharm distributes its products as follows:
o to distributors who sell to retail chain stores;
o directly to retail chains;
o to resellers who repackage Interpharm's products and sell them to
retail chains; and
o with respect to a contract awarded to Interpharm by the U.S.
Department of Veterans Affairs described below, through a government
appointed prime vendor which purchases Interpharm's products and
ships them as needed by the end user hospitals and facilities.
During the fiscal year ended December 31, 2002, two Interpharm
customers collectively accounted for approximately 48% of total sales. During
the fiscal year ended December 31, 2001, three customers accounted for
approximately 19%, 20% and 22%, respectively, of total sales. Except as
described below, Interpharm does not have a contract with any of these
customers. The customers submit purchase orders to Interpharm and are invoiced
for their orders.
During 2001, Interpharm had a contract with the Department of Veterans
Affairs for the supply of Ibuprofen through a prime vendor which accounted for
22% of total sales. That contract expired June 30, 2002, but has again been
awarded to Interpharm as of December 5, 2002 as described under "Recent Business
Developments," below.
The loss of any of Interpharm's largest customers could have a material
adverse effect on Interpharm's business.
As is the case with Interpharm's largest customers, most of
Interpharm's other sales are not made pursuant to contracts, but pursuant to
individual purchase orders. Therefore, there is nothing requiring many of
Interpharm's customers to continue to purchase generic drugs from Interpharm and
there can be no guarantee that they will continue to do so.
Interpharm's Product Line
-------------------------
Below is a list of drugs manufactured by Interpharm. The names of all
of the drugs under the caption "Brand-Name Drug" are registered trademarks. The
holders of the registered trademarks are non-affiliated pharmaceutical
manufacturers.
--------------------
1 PROJECTIONS OF DRUG APPROVALS, PATENT EXPIRATIONS, AND GENERIC ENTRY FROM
2000 TO 2004, C. Daniel Mullins, Ph.D., Francis Palumbo, Ph.D., J.D., and
Bruce Stuart, Ph.D. (2000).
11
Product Name BRAND-NAME DRUG
------------ ---------------
1. Acetaminophen 500 mg White Tablets Tylenol(R)
2. Acetaminophen 500 mg White Caplets Tylenol(R)
3. Acetaminophen 325 mg White Tablets Tylenol(R)
4. Acetaminophen, Pseudoephedrine, Chlorpheniramine
Maleate, USP Tablets 650mg/60mg/ 4mg Singlet(R)
5. Clorpheniramine Maleate 4mg Yellow Tablets Chlortrimetron(R)
6. Ibuprofen 200mg White Tablets Advil(R)
7. Ibuprofen 200mg Brown Tablets Advil(R)
8. Ibuprofen 200mg Orange Tablets Motrin(R)
9. Ibuprofen 200mg White Caplets Advil(R)
10. Ibuprofen 200mg Brown Caplets Advil(R)
11. Ibuprofen 200mg Orange Caplets Motrin(R)
12. Ibuprofen 400mg White Tablets Motrin(R)
13. Ibuprofen 600mg White Tablets Motrin(R)
14. Ibuprofen 800mg White Tablets Motrin(R)
15. Isometheptene Mucate, Dichloralphenazone,
Acetaminophen, Red/Red Capsule, 65mg/100mg/325mg Midrane(R)
16. Naproxen 250mg White Tablets Naprosyn(R)
17. Naproxen 375mg White Tablets Naprosyn(R)
18. Naproxen 500mg White Tablets Naprosyn(R)
19. Pseudoephedrine HCl 60mg White Tablets Sudafed(R)
20. Pseudoephedrine HCl, Triprolidine HCl White
Tablets, 2.5mg/60mg Actifed(R)
Product Development
-------------------
During the fiscal years ended December 31, 2002, 2001 and 2000, the
majority of Interpharm's revenues were derived from sales of Ibuprofen tablets
in both OTC and prescription strength.
Interpharm believes that its growth in recent years has been due
primarily to its ability to create competitive advantages in its existing
product line through efficient manufacturing processes, cost competitiveness,
and the ability to create loyalty among its customers.
12
Over the next few years, patent protections on a large number of
brand-name drugs are expected to expire which represent billions of dollars in
sales. These patent expirations may provide opportunities for the manufacturers
of generic drugs. In order to take advantage of these opportunities, Interpharm
intends to expand its product line and concentrate its new product development
activities on brand-name products that have proven markets.
FDA approval is required before any generic drug can be marketed
through an ANDA. While the ANDA has significantly streamlined the process of
obtaining FDA approval for generic drugs, it is difficult to predict how long
the process will take for any specific drug. Therefore, there is always the risk
that the introduction of new products can be delayed.
The ANDA process requires that a company's manufacturing procedures and
operations conform to FDA requirements and guidelines, generally referred to as
current Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in such
areas as production and quality control to ensure full technical compliance. The
evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that Interpharm may be adversely
affected by regulatory actions despite its efforts to comply with regulatory
requirements.
The ANDA process also requires bioequivalency studies to show that the
generic drug is bioequivalent to the approved drug. Bioequivalence compares the
bioavailability of one drug product with that of another formulation containing
the same active ingredient. When established, bioequivalency confirms that the
rate of absorption and levels of concentration in the bloodstream of a
formulation of the approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
Supplemental ANDAs are required for approval of various types of
changes to an approved application, and these supplements may be under review
for six months or more. In addition, certain types of changes may only be
approved once new bioequivalency studies are conducted or other requirements are
satisfied.
In December 2001 Interpharm received ANDA approval from the FDA to
produce prescription strength Naproxen. In addition, Interpharm has two new
drugs that are under development. There can be no assurances, however, that the
FDA will ultimately approve the drugs that are under development.
Even if an ANDA is approved, brand-name companies can impose
substantial barriers to market entry which may include: filing new patents on
drugs whose original patent protection is about to expire, developing patented
controlled-release products or other product improvements, developing and
marketing, as OTC products, brand-name products that will soon face generic
competition, and commencement of marketing initiatives, regulatory activities
and litigation. While none of these actions have been taken against Interpharm,
to date, there can be no assurance that they will not be taken in the future.
Recent Business Developments
----------------------------
In January 2002 Interpharm entered into an agreement to manufacture, on
a contract basis, four drugs in various dosage strengths. The contract is
subject to Interpharm receiving a Site Transfer Approval ("STA") from the FDA.
The agreement is for a five year term, which may be renewed for an
additional two years. The agreement also contains a non-compete provision
stating that Interpharm may not distribute any of the drugs covered by the
agreement for five years after its termination.
13
Whereas an ANDA approves the formula for a given product produced at a
specified location, an STA granted by the FDA allows for the production of an
approved drug at a site other than the one approved in the ANDA. In order for
the FDA to approve an STA, the new production location must demonstrate that it
will be able to comply with all of the terms and conditions set forth in the
approved ANDA, which include sources for raw materials, equipment, facility
approval, and standard operating procedures. Interpharm believes that it may
obtain an STA for the four drugs by the end of the second quarter of 2003. There
can be no assurances, however, that an STA for each drug will be granted by the
FDA.
On December 5, 2002, Interpharm was awarded a contract by the
Department of Veterans Affairs to supply Ibuprofen tablets for the period
January 2, 2003 through January 1, 2004 and includes four one year renewal
options after that at the option of the Department of Veterans Affairs. The
Department of Veterans Affairs has advised Interpharm that its estimated yearly
value of the contract is $5,054,879. Interpharm previously had this contract
which expired June 30, 2002.
The contract covers sales to the following entities: all Department of
Veterans Affairs facilities, all Indian Health Service facilities, Department of
Health and Human Service Supply Center at Perry Point and all Option 2 State
Veterans Homes. Upon mutual agreement, other government entities may be added to
the contract.
Interpharm believes that its continued growth is dependent upon its
ability (i) to continue increasing its market share in its existing product
lines by utilizing its manufacturing efficiency, cost competitiveness, and
customer loyalty, (ii) to obtain FDA approval for the drugs currently under
development, (iii) to continue to increase its product line, (iv) to leverage
off of its competitive strengths to capture market share on its new product
lines and (v) to utilize its manufacturing efficiencies to enter into additional
contract manufacturing arrangements. Interpharm believes that it will be
successful in implementing the strategies above, but there can be no assurance
that it will do so.
Research and Development
------------------------
Interpharm's research and development expenses in and prior to 2000
were negligible. In the fiscal years ended 2002 and 2001, Interpharm's
expenditures on research and development were approximately $211,450 and
$110,000, respectively.
Interpharm's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or will expire in the near future, (ii)
researching and developing new product formulations based upon such drugs, (iii)
obtaining approval from the FDA for such new product formulations, and (iv)
introducing technology to improve production efficiency and enhance product
quality. The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed and approved despite the amount spent on
research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
The research and development of oral solid dosage products requires
studies and FDA review and approval which has historically taken approximately
two to three years. However, the length of time necessary to bring a product to
market can vary significantly and can depend on, among other things,
availability of funding, problems relating to formulation, safety or efficacy,
patent issues associated with the product or barriers to market entry from
brand-name product manufacturers.
Interpharm contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required for FDA approval.
Historically, the vast majority of Interpharm's research and development
expenditures have been on biostudies. While Interpharm believes that the
companies contracted to perform the biostudies are reliable, there can be no
assurance that they will use the proper due diligence or that their work will
otherwise be accurate.
14
Intellectual Property
---------------------
Interpharm does not currently hold or license any patents and has not
trademarked its name.
Marketing
---------
Interpharm markets its products primarily to wholesalers, drug
distributors, repackagers, and other manufacturers through its internal sales
staff as well as independent sales representatives. Some of Interpharm's
wholesalers and distributors purchase products that are warehoused for drug
chains, independent pharmacies, state and federal governmental agencies and
managed healthcare organizations. Consistent with industry practice, Interpharm
has a return goods policy. Pursuant to its policy, any unopened items in its
original packaging may be returned if accompanied by (i) an authorization form
obtained from Interpharm, a "Returned Goods Authorization Number" obtained from
Interpharm and a proof of purchase. Transportation charges for returns are paid
by the customer. If the foregoing procedures are followed, Interpharm will
return the customer's original purchase price or the current market price,
whichever is lower.
Pursuant to its return policy, Interpharm will not accept any of the
following for return: (i) short-dated products (14 months or less remaining on
the expiration date), (ii) expired products, products which have been opened,
tampered with or which have a broken seal, (iii) products which have stickers or
other price markings, (iv) products which have been damaged by improper
handling, fire, flood or other catastrophes, (v) products stored under
conditions other than as specified on the label, (vi) products returned by
someone other than the direct purchaser from Interpharm, or (vii) products
without proof of purchase.
Interpharm has not experienced returns of material quantities of any of
the products it sells and therefore, does not believe that it is subject to
material risk of inventory buildup attributable to returns.
Subsidiary
----------
Interpharm has a 50% owned subsidiary called Saturn Chemical, LLC, a
New York limited liability company. Saturn acts solely as a purchasing agent for
Interpharm by purchasing Ibuprofen powder and supplying it to Interpharm. No
written agreement exists between Interpharm and the other 50% owner of Saturn
with respect to Saturn or the supply of Ibuprofen powder.
Interpharm has in the past sold finished goods to the other 50% owner
of Saturn. For the fiscal year ended December 31, 2001, there were $3,506,267 in
sales to the other owner. For the year ended December 31, 2002 however, there
were no sales to it.
Competition
-----------
The generic pharmaceutical industry is immensely competitive.
Interpharm has identified at least seven principal competitors. The primary
means of competition involve manufacturing capabilities and efficiencies,
innovation and development, timely FDA approval, product quality, marketing,
reputation, level of service, including the maintenance of sufficient inventory
levels to assure timely delivery of products, product appearance and price.
Price is one of the key factors in the generic pharmaceutical business. To
compete effectively and remain profitable, a generic drug manufacturer must
manufacture its products in a cost effective manner. Interpharm maintains
adequate levels of inventories to meet customer demand and have them readily
available.
In addition to generic manufacturers, Interpharm has also experienced
competition from brand-name companies that have purchased generic companies or
license their products prior to or as relevant patents expire. No further
regulatory approvals are required for a brand-name manufacturer to sell its
pharmaceutical products directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers for entry into
such market.
15
As is the case with many generic pharmaceutical manufacturers, many of
Interpharm's competitors have longer operating histories and greater financial
resources than Interpharm. Consequently, some of theses competitors may have
larger production capabilities, may be able to develop products at a
significantly faster pace at a reduced cost, and may be able to devote far
greater resources to marketing their product lines.
Certain manufacturers of brand-name drugs and/or their affiliates have
been introducing generic pharmaceutical products equivalent to such brand-name
drugs at relatively low prices. Such pricing, with its attendant diminished
profit margins, could have the effect of inhibiting Interpharm and other
manufacturers of generic pharmaceutical products from developing and introducing
generic pharmaceutical products comparable to certain brand-name drugs. This, in
turn, may discourage Interpharm's development of new products, reduce
Interpharm's sales and limit or preclude its profitability. Additionally,
consolidation among wholesalers, distributors, and repackagers, and
technological advances in the industry and pricing pressures from large buying
groups, could create pricing pressure, which would reduce Interpharm's profit
margins on its product lines.
In addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products being
reintroduced into the market, has led to an increase in demands by customers for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on Interpharm's earnings.
Brand-name companies also pursue other strategies to prevent or delay
generic competition. These strategies may include: seeking to establish
regulatory and legal obstacles that would make it more difficult to demonstrate
bioequivalence, initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand-name pharmaceuticals,
instituting legal action that automatically delays approval of generic products,
the approval of which requires certifications that the brand-name drug's patents
are invalid or unenforceable, or introducing "second generation" products prior
to the expiration of market exclusivity for the reference product, obtaining
extensions of market exclusivity by conducting trials of brand-name drugs,
persuading the FDA to withdraw the approval of brand-name drugs, for which the
patents are about to expire, thus allowing the brand-name company to obtain new
patented products serving as substitutes for the products withdrawn, or seeking
to obtain new patents on drugs for which patent protection is about to expire.
The ability of brand-name companies to successfully delay generic
competition in any of Interpharm's targeted new product lines may adversely
affect Interpharm's ability to enter into the desired product line or may impact
its ability to attain its desired market share for that product.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand-name companies are
utilizing this provision to extend periods of market exclusivity.
Some brand-name companies have lobbied Congress for amendments to the
Waxman-Hatch legislation that would give them additional advantages over generic
competitors. For example, although the term of a company's drug patent can be
extended to reflect a portion of the time an NDA is under regulatory review,
some companies have proposed extending the patent term by a full year for each
year spent in clinical trials, rather than the one-half year that is currently
permitted. If proposals like these become effective, Interpharm's entry into the
market and its ability to generate revenues associated with these products will
be delayed.
Raw Materials
-------------
Production and development depends upon Interpharm's ability to procure
raw materials, which are generally available, at prices which allow Interpharm
to compete with other generic drug manufacturers. The raw materials purchased by
Interpharm consist primarily of the generic drugs it sells, in powder form,
16
which Interpharm then mixes with several other ingredients and manufactures into
tablet form. Interpharm does not have any contracts or other long-term
arrangements with any supplier and therefore, there is no guarantee that
necessary materials will continue to be procured at the prices or delivery terms
currently available or acceptable to Interpharm. Interpharm usually purchases
its raw materials by submitting a purchase order to the supplier for which it
receives an invoice.
With respect to raw material purchases, Interpharm's 50% owned
subsidiary, Saturn Chemical, LLC, acts as a purchasing agent to supply Ibuprofen
to Interpharm. Saturn, however, is not the sole supplier. There is no written
agreement between Interpharm and Saturn.
During the fiscal year ended December 31, 2002, Interpharm purchased
raw materials from three suppliers totaling approximately 59% of its total raw
material purchases. During the fiscal years ended December 31, 2001 and December
31, 2000, Interpharm purchased raw materials from three suppliers totaling
approximately 65% and 53% of its total raw material purchases.
To date, Interpharm has experienced no significant difficulty in
obtaining raw materials and believes that raw materials will generally continue
to be available in the future.
Generally Interpharm attempts to minimize the effects of any lack of
raw materials supply by specifying, where economical and feasible, two or more
suppliers of raw materials for the drugs it manufactures.
Employees
---------
Interpharm currently has 128 full time employees.
Product Liability
-----------------
Like all pharmaceutical companies, Interpharm faces the risk of loss
resulting from, and adverse publicity associated with, product liability
lawsuits, whether or not such claims are valid. Interpharm currently has
products liability coverage for $2,000,000 per occurrence with a $2,000,000
aggregate limit. Although Interpharm believes that it has reasonably adequate
insurance coverage, it cannot be certain that such coverage will, in fact, be
adequate to cover claims or that Interpharm will be able to get adequate
insurance coverage in the future at acceptable costs. A successful product
liability claim that is excluded from coverage, or that exceeds Interpharm's
policy limits, could require it to pay substantial sums.
Government Regulation
---------------------
All pharmaceutical manufacturers are subject to extensive, complex and
evolving regulation by Federal local and state governmental entities,
principally by the FDA, and, to a lesser extent, by the Drug Enforcement
Administration and state governmental agencies. The Federal Food, Drug, and
Cosmetic Act, the Controlled Substances Act, the Waxman-Hatch Act, the Generic
Drug Enforcement Act and other Federal statutes and regulations govern or
influence the testing, manufacture, packaging, safety, labeling, storage, record
keeping, approval, advertising and promotion of Interpharm's products.
Noncompliance with applicable requirements can result in judicially
and/or administratively imposed sanctions including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures can involve the recall of products, as well as the refusal
of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with regulatory due process procedures. Although, Interpharm has
internal compliance programs and standard operating procedures which have been
reviewed by independent consultants, and has had a favorable compliance history,
if these programs were not to meet regulatory agency standards in the future, or
if Interpharm's compliance were deemed deficient in any significant way, it
could have a material adverse effect on Interpharm's business and earnings.
17
The FDA inspects manufacturer's facilities to assure compliance with
cGMP. Manufacturers must follow cGMP regulations at all times during the
manufacture and processing of drugs. To comply with the standards set forth in
these regulations, Interpharm must continue to expend significant time, money
and effort in the areas of production, quality control and quality assurance.
In addition to the Federal government, individual states have laws
regulating the manufacture and distribution of pharmaceuticals, as well as
regulations pertaining to the substitution of generic drugs for brand-name
drugs. Interpharm's operations are subject to regulation, licensing requirements
and inspection by the states in which Interpharm is located or conducts
business.
Interpharm must also comply with federal, state and local laws of
general applicability, such as laws regulating working conditions and equal
opportunity employment. Additionally, Interpharm is subject, as are all
manufacturers, to various federal, state and local environmental protection laws
and regulations, including those governing the discharge of materials into the
environment. Historically, the costs of complying with such environmental
provisions have not had a material adverse effect on Interpharm's earnings, cash
requirements or competitive position, and Interpharm does not expect such costs
to have any such material adverse effect in the foreseeable future. However, if
changes to such environmental provisions are made that require significant
changes in its operations or the expenditure of significant funds, such changes
could have a material adverse effect on Interpharm's earnings, cash requirements
or competitive position.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the industry, government agencies
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products. There can be no assurances that these studies will
not, in the future, result in the discontinuance of product marketing.
Description of Property
-----------------------
Interpharm does not own any real property. It leases an entire building
in Hauppauge, New York, pursuant to a lease expiring in October, 2019, which
houses its manufacturing, warehousing and executive offices. The leased building
is approximately 100,000 square feet and is located in an industrial/office
park. The current annual lease payments to the landlord, Sutaria Family Realty,
LLC, are $480,000. Sutaria Family Realty, LLC is owned by Mona Rametra, Perry
Sutaria and Raj Sutaria. Upon a change in ownership of Interpharm, and every
three years thereafter, the annual base rent will be adjusted to fair market
value, as determined by an independent appraisal. There are no tenants in the
building other than Interpharm.
Legal Proceedings
-----------------
On or about January 31, 2002, Teresa Casey and Jerry Casey, as
plaintiffs, commenced a lawsuit against Interpharm, as defendant in Superior
Court, State of Washington, County of Pierce. Plaintiffs allege that Teresa
Casey suffered a hemorrhagic stroke and aneurysm caused by ingesting
guaifenesin/phenylpropanolamine ("PPA") for relief of bronchitis symptoms.
Plaintiffs allege that Teresa Casey suffered severe injuries, including, but not
limited to, invasive surgery, physical and cognitive impairment, emotional
distress and other economic and non-economic damages. Plaintiffs allege that
Interpharm was the alleged designer, constructor, manufacturer, producer,
marketer, seller and distributor of the PPA Teresa Casey ingested. Plaintiffs
have alleged nine causes of action for product liability, tort liability,
negligence, breach of implied and express warranties and violation of the
Washington Consumer Protection Act. Plaintiffs seek unspecified damages,
attorney's fees, prejudgment interest, punitive damages and such other relief as
the court deems just.
Interpharm has denied the material allegations of the complaint,
believes it has meritorious defenses to the complaint and plans to vigorously
defend the action.
18
On or about August 13, 2002, Interpharm, as plaintiff, commenced a
lawsuit against General Star Indemnity Company, G.P. Insurance Agency, Inc. and
Mortsan General Agency, Inc., as defendants in the Supreme Court of the State of
New York, County of Suffolk. The lawsuit arose from General Star's refusal to
cover or defend Interpharm under an insurance policy with respect to the Casey
action discussed in the preceding paragraph. The insurance policy is alleged to
have been obtained for Interpharm by G.P. Insurance Agency, Inc. and Mortsan
General Agency, Inc.
The alleged factual basis for Interpharm's claims is as follows. On or
about July 28, 2001, General Star notified Interpharm that its Commercial
General Liability Insurance Policy would not be renewed, but did not provide it
with notice of extended reporting period coverage as required under New York
law. When Interpharm received the complaint in the Casey action above and
forwarded it to General Star in February, 2002, General Star refused coverage.
On or about June 7, 2002, Interpharm exercised its right to obtain extended
reporting coverage under its General Star policy.
Interpharm seeks a declaratory judgment that General Star is obligated
to cover and defend the action and seeks damages, costs and attorney's fees for
fraud misrepresentation and other claims.
In the event that Interpharm is not successful in its claim against
General Star, the payment of damages or a settlement of the Casey action could
have a material adverse effect on Interpharm's business and financial condition.
Interpharm Related Party Transactions
-------------------------------------
Because Interpharm is a family owned business, it and its owners and
affiliates have engaged in a number of related party transactions as detailed
below.
Loans from Shareholders, Officers and Directors
-----------------------------------------------
Dr. Maganlal K. Sutaria and Interpharm shareholders, from time to time
have made loans to Interpharm. Approximately $3,000,000 of the loans have a
maturity date of January 1, 2012, and the balance of the advances, as reflected
in Interpharm's December 31, 2002 financial statements, have no definitive
repayment terms. As of December 31, 2002, repayment of $3,000,000 of these loans
is subordinated to Interpharm's bank debt.
Lease
-----
On November 17, 1997, Interpharm entered into a lease for its facility
with Perry Sutaria, Mona Rametra and Raj Sutaria as landlords, ending October
31, 2019. Each of the landlords is an Interpharm shareholder and Raj Sutaria is
an Interpharm Officer. The current monthly lease payments are $40,000. The lease
was subsequently assigned to, and assumed by, Sutaria Family Realty, LLC which
is owned by Perry Sutaria, Raj Sutaria and Mona Rametra. Pursuant to the terms
of the lease, upon a change in ownership of Interpharm, and every three years
thereafter, the annual base rent will be adjusted to fair market value, as
determined by an independent appraisal.
No third party assessment or appraisal of the lease was made at the
time it was entered into or at any subsequent time. The Special Committee of
Atec's Board of Directors has taken the lack of a third party assessment into
account but believe that the lease terms are in line with other leases in the
area. This belief is based on the fact that Atec's offices are in the same area
as Interpharm's leased premises and ATEC is currently subletting similar space
for $5.50 per square foot whereas Interpharm is paying $4.80 per square foot.
An oral agreement exists among Vimojy Realty, Inc. and the owners of 75
Adams Avenue, Hauppauge, New York for Vimojy to act as managing agent for the
property. Vimojy is wholly owned by Bhupatlal K. Sutaria, Interpharm's
President.
As managing agent, Vimojy is responsible for and performs the following
functions: collection of rent, making mortgage, tax and insurance payments and
management and maintenance of the property, including, but not limited to,
arranging repairs, purchasing supplies and ensuring compliance with the lease.
19
Guarantees
----------
Raj Sutaria (Shareholder/Officer), Bhupatlal K. Sutaria (Officer),
Perry Sutaria (Shareholder) and Mona Rametra (Shareholder) have provided
unconditional joint and several guarantees of payment by with respect to:
1. HSBC Advised Secured Line of Credit Facility for $2.0 ($1.5
million to Interpharm; and $.5 million to Saturn Chemical); and
2. HSBC Non-Revolving Secured Facility for Equipment Purchases for
$1.5 million to Interpharm.
Interpharm has guaranteed the following loans relating to its leased
premises. Interpharm does not receive any payments or other consideration for
these loan guarantees which relate to its leased building.
1. July 21, 1999 Loan and Use Agreement relating to an $820,000 loan
for the purchase of 75 Adams Avenue, Hauppauge, New York, among
Bi-County Development Corporation, Perry M. Sutaria, Mona M.
Sutaria, Raj M. Sutaria, Interpharm and the New York Job
Development Authority;
2. July 21, 1999 Loan Agreement by and among Perry M. Sutaria, Mona
M. Sutaria and Raj M. Sutaria, as borrower, Interpharm as
guarantor, and the Long Island Development Corporation ("LIDC")
for an $850,000 loan from LIDC under guarantee by the U.S. Small
Business Administration; and
3. April 29, 2002 $1,859,000 mortgage loan from HSBC to Sutaria
Family Realty, LLC, which is owned by Perry Sutaria, Raj Sutaria
and Mona Rametra.
Market Price of and Dividends on Interpharm's Common Equity and Related
Stockholder Matters
-------------------
Interpharm has one class of common stock, $.001 par value, which is
held by the following four shareholders in the following amounts:
Name Number of Shares
---- ----------------
Raj Sutaria 1,400,000
Ravi Sutaria 1,000,000
Mona Rametra 800,000
Perry Sutaria 800,000
Interpharm's stock has never been publicly traded and no dividends have
ever been paid to the holders of Interpharm stock. Interpharm does not have any
equity compensation plans in place, nor does it have any outstanding options,
warrants or securities convertible into its common stock.
Financial Statements of Atec and Interpharm
The audited financial statements of Interpharm for the fiscal years
ended December 31, 2000, 2001 and 2002 are incorporated herein by reference, see
Appendix B.
For the audited financial statements of Atec for the fiscal years ended
June 30, 2001 and 2002, as well as selected financial data and quantitative and
qualitative disclosures about market risks, see Atec's Form 10-K and Form 10-K/A
20
which are being provided with this Proxy Statement and are incorporated herein
by reference. For unaudited financial statements of Atec for the quarter ended
December 31, 2002, as well as quantitative and qualitative disclosures about
market risks, management's discussion and analysis of financial condition and
results of operations, see Atec's Form 10-Q/A for the Quarter ended December 31,
2002, which is being provided with this Proxy Statement and is incorporated
herein by reference.
In addition, Atec also is supplementing its audited financial
statements for the year ended June 30, 2002 by providing the following
information regarding the pro forma effects of the Company's adoption of FASB
142 for periods prior to adoption:
For the Years Ended June 30
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported Net Income (Loss) ($1,676,408) ($4,525,134) $ 296,953
Add: Goodwill Amortization -- 189,327 186,626
----------- ----------- -----------
Adjusted Net Income (Loss) ($1,676,408) ($4,335,807) $ 483,579
Basic Earnings Per Share:
Reported Net Income (Loss) ($0.24) ($0.64) $ 0.04
Goodwill Amortization -- 0.03 0.03
------------ ----------- -----------
Adjusted Net Income (Loss) ($0.24) ($0.61) $ 0.07
Diluted Earnings Per Share
Reported Net Income (Loss) ($0.24) ($0.64) $ 0.04
Goodwill Amortization -- 0.03 0.03
----------- ----------- -----------
Adjusted Net Income (Loss) ($0.24) ($0.61) $ 0.07
Pro Forma Financial Statements
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
The following unaudited pro forma condensed combined balance sheet, as
of December 31, 2002, is based on the historical financial statements of Atec
Group, Inc. and Subsidiaries ("Atec") and Interpharm, Inc. and Subsidiary
("Interpharm") and gives effect to the pro forma adjustments described herein as
though the Management Buy-Out (as defined below) and the acquisition of
Interpharm (as described below) had been consummated at December 31, 2002. The
acquisition of Interpharm will be accounted for as a reverse merger in the form
of a recapitalization of Interpharm. The pro forma statement of operations have
not been provided since the pro forma statements of operations would be
substantially identical to the historical statement of operation of Interpharm.
The unaudited pro forma condensed combined balance sheet should be read
in conjunction with the notes thereto and with the historical financial
statements of Atec, as filed in its annual report on Form 10-K and Form 10-K/A
for the year ended June 30, 2002 and in its quarterly report on Form 10-Q/A for
the quarter ended December 31, 2002 and with the historical financial statements
of Interpharm included elsewhere herein. The unaudited pro forma condensed
combined balance sheet is not necessarily indicative of the Company's combined
financial position that would have been achieved had the Management Buy-Out and
the acquisition been consummated at December 31, 2002.
On November 25, 2002, Atec entered into an Asset Purchase Agreement
with Baar Group whereby Baar Group agreed to purchase the assets of Atec's sole
current operations and assume substantially all of the liabilities of Atec for a
purchase price of $4,278,184, subject to certain adjustments (the "Management
Buy-Out"). The purchase price is payable by delivery of (a) a $1 million
promissory note payable within 12 months, (b) a $750,000 promissory note payable
within 3 years and (c) cash for the remainder of the purchase price. The
principals of Baar Group consist of current directors, officers, employees
and/or shareholders of Atec. The column labeled "Atec Group, Inc.- After
Management Buy-Out" in the pro forma condensed combined balance sheet reflects
the Atec financial position as if the Management Buy-Out were completed on
December 31, 2002, prior to recording the affects of the Interpharm acquisition.
21
Under the terms of the Capital Stock Exchange Agreement dated November
25, 2002, Atec will purchase all of the issued and outstanding common stock of
Interpharm, in exchange for Atec common stock and a new Series K Convertible
Preferred Stock. Immediately following the exchange, Interpharm shareholders
will own approximately 48% of Atec's total voting stock.
The pro forma adjustments reflect the transactions based on currently
available information and certain estimates and assumptions as set forth in the
notes to the unaudited pro forma condensed combined balance sheet. However, the
actual amounts may differ from the pro forma amounts.
22
ATEC GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ATEC GROUP, INC.
ATEC GROUP, INC. After
Pro Forma Adjustments Management
ATEC GROUP, INC. --------------------------- Buy-out
Historical Debt Credit Pro Forma
------------ ------------ ------------ ------------
A S S E T S
-----------
Current assets:
Cash $ 1,171,000(1) $ 998,000 -- $ 2,169,000
Note receivable -
current portion --(1) 1,250,000 -- 1,250,000
Marketable securities, -- -- --
Accounts receivable 3,217,000 --(2) 3,217,000 --
Inventories 587,000 --(2) 587,000 --
Deferred taxes 401,000 -- --(3) 401,000
Other current assets 433,000 --(2) 323,000 110,000
-- -- -- --
------------ ------------ ------------ ------------
Total current assets 5,809,000 2,248,000 4,127,000 3,930,000
Property and equipment 214,000 --(2) 207,000 7,000
Note receivable -
non-current portion --(1) 500,000 -- 500,000
Other assets 155,000 --(2) 120,000 35,000
Deferred tax assets -- -- -- --
------------ ------------ ------------ ------------
$ 6,178,000 $ 2,748,000 $ 4,454,000 $ 4,472,000
============ ============ ============ ============
INTERPHARM, INC.
INTERPHARM, INC. Pro Forma POST-ACQUISITION
Historical Adjustments Pro Forma
------------ ------------ ------------
A S S E T S
-----------
Current assets:
Cash $ 106,000(4) $ (200,000) $ 2,075,000
Note receivable -
current portion -- 1,250,000
Marketable securities, 36,000 36,000
Accounts receivable 4,158,000 4,158,000
Inventories 3,389,000 3,389,000
Deferred taxes 60,000(6) 300,000 761,000
Other current assets 71,000 181,000
-- -- --
------------ ------------ ------------
Total current assets 7,820,000 $ 100,000 11,850,000
Property and equipment 3,359,000 3,366,000
Note receivable -
non-current portion -- 500,000
Other assets 11,000 46,000
Deferred tax assets 8,000(6) 1,000,000 1,008,000
------------ ------------ ------------
$ 11,198,000 $ 1,100,000 $ 16,770,000
============ ============ ============
23
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Revolving lines of credit $ 344,000(2) $ 344,000 -- $ --
Accounts payable 923,000(2) 923,000 -- --
Accrued expenses 377,000(2) 118,000 -- 259,000
Current maturities of bank
notes payable -- -- -- --
Due to related parties -- -- -- --
Other current liabilities 321,000(2) 321,000 -- --
------------ ------------ ------------ ------------
Total current liabilities 1,965,000 1,706,000 259,000
------------ ------------ ------------ ------------
Other liabilities:
Bank notes payable, less
current maturities -- -- -- --
Due to related parties -- -- -- --
------------ ------------ ------------ ------------
Total other liabilities
------------ ------------ ------------ ------------
TOTAL LIABILITIES 1,965,000 1,706,000 259,000
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred stocks 836,000 -- -- 836,000
Common stock - ATEC Group, Inc. 74,000 -- -- 74,000
Common stock - Interpharm, Inc. -- -- -- --
Additional paid-in capital 12,177,000 -- -- 12,177,000
Discount on preferred stocks (743,000) -- -- (743,000)
Accumulated other
comprehensive loss -- -- -- --
Deficit (7,333,000) -- -- (7,333,000)
------------ ------------ ------------ ------------
5,011,000 -- 5,011,000
Less: Treasury stock-at cost (798,000) -- -- (798,000)
------------ ------------ ------------ ------------
Total stockholders' equity 4,213,000 -- -- 4,213,000
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 6,178,000 $ 1,706,000 $ -- $ 4,472,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Revolving lines of credit $ 965,000 965,000
Accounts payable 4,014,000 4,014,000
Accrued expenses --(7) (118,000) 141,000
Current maturities of bank
notes payable 263,000 263,000
Due to related parties 305,000 305,000
Other current liabilities -- -- --
------------ ------------ ------------
Total current liabilities 5,547,000 (118,000) 5,688,000
------------ ------------ ------------
Other liabilities:
Bank notes payable, less
current maturities 336,000 336,000
Due to related parties 3,000,000 -- 3,000,000
------------ ------------ ------------
Total other liabilities 3,336,000 -- 3,336,000
------------ ------------ ------------
TOTAL LIABILITIES 8,883,000 (118,000) 9,024,000
------------ ------------ ------------
Stockholders' equity:
Preferred stocks --(4) 19,278 855,278
Common stock - ATEC Group, Inc. --(4) 57,835 131,835
Common stock - Interpharm, Inc. 4,000(4) (4,000) --
(4) (273,113)
(5) (7,333,000)
Additional paid-in capital 2,366,000(6) 1,300,000 8,354,887
(7) 118,000
Discount on preferred stocks -- (743,000)
Accumulated other
comprehensive loss (1,000) (1,000)
Deficit (54,000)(5) 7,333,000 (54,000)
------------ ------------ ------------
2,315,000 1,218,000 8,544,000
Less: Treasury stock-at cost -- -- (798,000)
------------ ------------ ------------
Total stockholders' equity 2,315,000 1,218,000 7,746,000
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 11,198,000 $ 1,100,000 $ 16,770,000
============ ============ ============
24
ATEC GROUP, INC. AND SUBSIDIARIES
PRO FORMA ADJUSTMENTS
December 31, 2002
(Unaudited)
(1) Record net proceeds, of $2,748,000 from the sale of the existing
business and various assets and assumption of various liabilities of
the Atec Group, Inc. (Atec) follows:
Cash $ 998,000
Notes receivable 1,750,000
------------
$ 2,748,000
============
Pursuant to the terms of the Asset Purchase Agreement between Baar
Group, Inc. and Atec Group, Inc., the Baar Group, Inc. will acquire
substantially all of the assets and assume substantially all of the
liabilities of Atec for a net purchase price of $2,748,000, subject to
certain closing adjustments. The pro forma adjustments are calculated
as at December 31, 2002. The actual purchase price may vary. The notes
receivable will consist of two interest-bearing notes: a $1,000,000
note which is payable over 12 months, and a $750,000 note which is
payable over 36 months. Accordingly, $1,250,000, of the notes
receivable, is classified as current and $500,000 is classified as
long-term. The notes are secured by the assets of Baar Group, Inc. and
are personally guaranteed by three of the four shareholders of Baar
Group.
(2) Eliminate assets and liabilities of the computer division.
Accounts Receivable $ 3,217,000
Inventories 587,000
Other Current Assets 323,000
Property and Equipment 207,000
Other Assets- non-current 120,000
Revolving Line of Credit (344,000)
Accounts Payable (923,000)
Other Current Liabilities (321,000)
Accrued Expenses (118,000)
------------
$ 2,748,000
============
As a result of the agreement with Baar Group, Atec has recognized
impairment losses for its goodwill and deferred compensation in the
amounts of approximately $865,000 and $162,000, respectively.
(3) The deferred tax asset of Atec, amounting to $401,000, will be retained
and available to reduce current taxes in future periods.
(4) Record the acquisition of Interpharm by Atec based upon the following
assumptions:
a. The acquisition transaction is based upon the total number of
common shares (8,026,128) of Atec outstanding as of March 30,
2003.
b. The shareholders of Interpharm will own approximately 48% of the
voting securities of Atec immediately after the transaction is
consummated.
c. Atec will issue common shares, and a newly created Series K
preferred stock, $.01 par value, in a 75/25 ratio to effectuate
the transaction.
d. Based upon assumptions a, b and c, Atec would issue 5,783,533 of
common shares and 1,927,844 Series K preferred shares in exchange
for all of the outstanding common shares (4,000,000) of
Interpharm.
25
e. Interpharm will incur an estimated $200,000 of costs associated
with the acquisition transaction, including a $100,000 finders
fee and an estimated $100,000 in professional fees.
f. The following pro forma journal entry #4 reflects items 4(d) and
4(e) above:
Additional paid-capital $ 273,113
Common stock - Interpharm (elimination of Interpharm
common stock) $ 4,000
Common stock - Atec (5,562,456 shares at $.01 par value) $ 57,835
Preferred stock - Atec (1,854,152 shares at $.01 par value) $ 19,278
Cash (costs associated with transaction) $ 200,000
(5) For accounting purposes, the acquisition transaction is being treated
as a reverse acquisition in the form of a recapitaliztion of
Interpharm. Interpharm is the accounting acquirer and Atec is the
target. The following pro forma journal entry reflects the elimination
of Atec's accumulated deficit, after the management buy-out, pursuant
to that accounting treatment.
Additional paid-in capital $ 7,333,000
Accumulated deficit $ 7,333,000
(6) To adjust the deferred tax assets to the amount estimated to be
realized by Interpharm after the acquisition.
Deferred Tax Asset - short term $ 300,000
Deferred Tax Asset - long term 1,000,000
Additional paid-in capital $ 1,300,000
(7) To adjust the liabilities of Atec to fair value.
Accrued Expenses $ 118,000
Additional paid-in capital $ 118,000
PRO FORMA EARNINGS PER SHARE DATA
---------------------------------
Introduction
------------
At March 30, 2003, Atec had the following capital structure:
o 8,026,128 shares of common stock issued and outstanding.
o 395,094 shares of Series A, B, C and J Preferred stock which are
convertible into 112,438 shares of common stock.
o Options to purchase 5,668,258 shares of Atec common stock.
The number of shares of Atec Common Stock and Series K Stock issuable to the
Interpharm shareholders is determined based upon the number of shares of Atec
common and preferred stock outstanding as of the date of closing. Accordingly,
the number of shares issuable to Interpharm shareholders at Closing is variable.
Additionally, the number of Common Stock shares issuable pursuant to the
conversion provisions of the Series K Stock is also variable. The exact number
of Atec shares that will be outstanding at closing are not presently
determinable. It is possible that some of the Atec Common Stock options could be
exercised, and such exercises are beyond the control of management. The
following tables present pro forma earnings per share ("EPS") based upon the
transactions that are likely to or may occur, which would significantly affect
the pro forma basic and diluted EPS. Other stock transactions could occur, but
they are not currently reasonably likely.
26
Table 1:
The following table sets forth the computation of pro forma basic and diluted
EPS for the year ended December 31, 2002 giving effect to the acquisition of
Interpharm by Atec as if the transaction (including the Management Buy-Out)
occurred on January 1, 2002, based upon Atec's currently existing shares
outstanding.
Interpharm, Inc. Atec Group, Inc. Pro Forma
2002 (1) 2002 Adjustments Pro Forma
------------ ------------ ------------ ------------
Numerator:
Net income $ 1,050,419 $ -- $ -- $ 1,050,419
Net income attributable to Series K
preferred stockholders 262,605 -- (133,929)(2) 128,676
------------ ------------ ------------ ------------
Numerator for pro forma basic EPS 787,814 -- 133,929 921,743
Effect of dilutive securities:
Net income attributable to Series K
preferred Stockholders 262,605 -- (133,929)(2) 128,676
------------ ------------ ------------ ------------
Numerator for pro forma diluted EPS $ 1,050,419 $ -- $ -- $ 1,050,419
============ ============ ============ ============
Denominator:
Denominator for pro forma basic EPS
Weighted average shares outstanding 5,783,533 8,026,128 13,809,661
------------ ------------ ------------ ------------
Total Denominator for basic EPS 5,783,533 8,026,128 -- 13,809,661
------------ ------------ ------------ ------------
Effect of dilutive securities:
Series A convertible preferred stock -- 1,526 1,526
Series B convertible preferred stock -- 292 292
Series C convertible preferred stock -- 5,620 5,620
Series J convertible preferred stock -- 105,000 105,000
Series K convertible preferred stock 26,770,731 -- 1,492,300(3) 28,263,031
Options - treasury stock method -- 373,075 -- 373,075
------------ ------------ ------------ ------------
Total common stock equivalents 26,770,731 485,513 1,492,300 28,748,544
------------ ------------ ------------ ------------
Denominator for pro forma diluted EPS 32,554,264 $ 8,511,641 $ 1,492,300 $ 42,558,205
============ ============ ============ ============
Pro forma basic EPS $ 0.14 $ 0.07
============ ============
Pro forma diluted EPS $ 0.03 $ 0.02
============ ============
27
Table 2:
The following table sets forth the computation of pro forma basic and diluted
earnings per share assuming the exercise of all 6,032,900 options prior to the
consummation of the transaction.
Interpharm, Inc. Atec Group, Inc. Pro Forma
2002 (1) 2002 Adjustments Pro Forma
------------ ------------ ------------ ------------
Numerator:
Net income $ 1,050,419 $ -- $ -- $ 1,050,419
Net income attributable to Series K
preferred stockholders 262,605 -- (133,929)(2) 128,676
------------ ------------ ------------ ------------
Numerator for pro forma basic EPS 787,814 -- 133,929 921,743
Effect of dilutive securities:
Net income attributable to Series K
preferred stockholders 262,605 -- (133,929)(2) 128,676
------------ ------------ ------------ ------------
Numerator for pro forma diluted EPS $ 1,050,419 $ -- $ -- $ 1,050,419
============ ============ ============ ============
Denominator:
Denominator for pro forma basic EPS
Weighted average shares outstanding 5,783,533 8,026,128 13,809,661
Effect of assumed exercise of all Atec
outstanding options 4,084,480(4) 5,668,258 9,752,738
------------ ------------ ------------ ------------
Total Denominator for basic EPS 9,868,013 13,694,386 -- 23,562,399
------------ ------------ ------------ ------------
Effect of dilutive securities:
Series A convertible preferred stock -- 1,526 1,526
Series B convertible preferred stock -- 292 292
Series C convertible preferred stock -- 5,620 5,620
Series J convertible preferred stock -- 105,000 105,000
Series K convertible preferred stock 26,770,731 -- 26,770,731
Effect of assumed conversion of all
Atec outstanding options on the
Series K conversion ratio 18,588,552(5) 18,588,552
-- -- -- --
------------ ------------ ------------ ------------
Total Dilutive securities 45,359,283 112,438 -- 45,471,721
------------ ------------ ------------ ------------
Denominator for pro forma diluted EPS 55,227,296 13,806,824 -- 69,034,120
============ ============ ============ ============
Pro forma basic EPS $ 0.08 $ 0.04
============ ============
Pro forma diluted EPS $ 0.02 $ 0.02
============ ============
Footnotes
---------
(1) Retroactive effect to the recapitalization of Interpharm.
(2) The net income attributable to the Series K Preferred Stock will be
reduced from 25% to 12.25% due to the fact that such shares will be
entitled to 25% of 49% of the total income, based upon the ownership of
the total shares of stock outstanding of the combined entity after the
transaction is consummated.
(3) Gives effect to increase in the number of common shares issuable to Series
K holders assuming 373,075 options were exercised prior to the Trigger
Event.
28
(4) Additional shares of Common Stock issuable to Interpharm shareholders at
closing assuming exercise of all of the Atec outstanding options.
(5) Increase in the number of shares of Common Stock issuable to Series K
holders assuming exercise of all Atec outstanding options, at any time
prior to the Trigger Event
BOOK VALUE (NET DEFICIT) PER SHARE DATA
---------------------------------------
a Atec Group, Inc. - Historical (Prior to Management Buy-Out)
Book value per share $ .25 (1)
b Atec Group, Inc. - After Management Buy-Out
Book value per share $ .25 (2)
c Interpharm, Inc. - Historical
Book value (net deficit) per share $(2.10)(3)
d Interpharm, Inc. and Atec Group, Inc. - Post Acquisition Pro Forma
Net deficit per share $ (.64)(4)
(1) Book value per share is computing by reducing the Atec historical
stockholders' equity as of December 31, 2002 (prior to the
Management Buy-Out) by the liquidation preference of the Series
A, B and C preferred stocks. Such liquidation preference totaled
$2,182,705 at December 31, 2002. The resulting amount is divided
by the total shares of common and Series J preferred stock
outstanding.
(2) Book value per share is computing by reducing the Atec
stockholders' equity as of December 31, 2002 (after giving effect
to the Management Buy-Out) by the liquidation preference of the
Series A, B and C preferred stocks. Such liquidation preference
totaled $2,182,705 at December 31, 2002. The resulting amount is
divided by the total shares of common and Series J preferred
stock outstanding.
(3) Reflects the retroactive effect of recording the recapitalization
of Interpharm. Book value (net deficit) per share is computed by
reducing stockholders' equity by the liquidation preference of
the Series K Stock issued in the transaction. The resulting net
deficit is divided by the number of shares of Common Stock issued
to the Interpharm shareholders by Atec. Such liquidation
preference totaled $14,458,830, based on an estimate of 1,927,844
shares of Series K Stock issued.
(4) Net deficit per share is computed by subtracting the liquidation
preference of all issues of preferred stock (totaling
$16,641,535) from the pro forma post acquisition stockholders'
equity and dividing such amount by the total number of post
acquisition common and Series J preferred stock outstanding.
29
Management's Discussions and Analysis of Financial Condition and Results of
Operations
For management's discussion and analysis of financial condition and
results of operations regarding Atec, see Atec's Form 10-K and Form 10-K/A for
the year ended June 30, 2002 and Form 10-Q/A for the quarter ended December 31,
2002 which are being provided with this Proxy Statement and are incorporated
herein by reference.
The following Interpharm management's discussion and analysis should be
read in conjunction with Interpharm's audited Consolidated Financial Statements
for the fiscal years ended December 31, 2002, 2001 and 2000, and related Notes
to those financial statements which are attached to this Proxy Statement as
Appendix B.
Overview
Interpharm, Inc. was incorporated in November 1984 and is in the
business of developing, manufacturing, and selling both prescription strength
and over the counter ("OTC") generic drugs in the United States. Approximately
35% of Interpharm's sales are to wholesalers and distributors which sell
Interpharm's products to retailers and other wholesalers under their own labels.
Approximately 65% of Interpharm's sales are under its own label. Interpharm
currently manufactures and markets twenty generic drug products in solid dosage
form. Most of Interpharm's revenues, approximately 70%, are derived from the
sale of Ibuprofen in four different OTC and prescription dosages.
Interpharm sells its products through an internal sales staff as well
as independent sales representatives. Some of Interpharm's wholesaler and
distributor customers purchase products that are warehoused for drug chains,
independent pharmacies, state and federal governmental agencies and managed
healthcare organizations. Consistent with industry practice, Interpharm has a
return goods policy. Sales are recognized when the product is shipped and
appropriate provisions are made for returns.
Interpharm has not experienced returns of material quantities of any of
the products it sells during the fiscal years ended December 31, 2002, 2001 or
2000, and therefore, does not believe that it is subject to material risk of
inventory buildup attributable to returns.
For the fiscal year ended December 31, 2002, two Interpharm customers
accounted for approximately 48% of sales. For the fiscal year ended December 31,
2001, three Interpharm customers accounted for 61% of sales. The loss of any of
these larger customers and Interpharm's lack of a very large customer base could
adversely impact Interpharm's business.
Over the previous three fiscal years, Interpharm has expanded its
operations and production facilities in order to meet increased demand from its
existing customers which have expressed satisfaction with Interpharm's products
and prices and indicated that they would buy more from Interpharm if Interpharm
could produce more. Accordingly, Interpharm leased an additional 38,000 square
feet of space in its building in January 2002 and has a plan to spend an
additional $1 million on equipment over the 12 to 18 month period which began in
January, 2003. Interpharm believes these expenditures will allow it to increase
manufacturing capacity by 40 to 50%.
The increase in Interpharm's production facilities consists of
equipment purchase and the lease of additional space. This increase in
production facilities has not changed Interpharm's cost structure which has
increased in proportion to the increase in production capacity.
The market for Interpharm's products is extremely competitive and
Interpharm anticipates that average selling prices for its products may decrease
in future periods, although the timing and amounts of these decreases cannot be
predicted with any certainty. These decreases may be offset by the introduction
of new drug products.
Interpharm believes that period to period comparisons of its historical
operating results should not be relied upon as being a good indication of
Interpharm's future performance because of Interpharm's dependence on a small
30
number of customers for the bulk of its sales. Should Interpharm lose one or
more of those customers, its business and operating results would be materially
affected. Although Interpharm has experienced significant sales growth recently,
it may not be able to sustain this trend.
The Special Committee of Atec's Board of Directors has taken
Interpharm's dependence on a small number of customers for the bulk of its sales
into account but determined that the acquisition of Interpharm is nevertheless
in the best interests of Atec shareholders because of demonstrated growth in the
past and the potential for future growth.
Results of Operations
Fiscal Year ended December 31, 2002 compared to December 31, 2001
Financial Highlights
o Net sales increased 32% or $5.9 million to $24.3 million from $18.4
million.
o Gross profit increased 22% or $.8 million to $4.3 million from $3.5
million.
o Operating income increased 80% or $.8 million to $1.8 million from $1.0
million.
o Net income increased 104% or $535,854 to $1,050,419 from $514,565.
Net Sales and Gross Profit
Net sales for the fiscal year ended December 31, 2002 were $24.3
million compared to $18.4 million for the fiscal year ended December 31, 2001,
an increase of $5.9 million. Of this 32% increase in net sales approximately
$5.1 million is attributable to increased orders from existing customers spread
evenly across Interpharm's product lines and resulting from Interpharm's
increased production capacity and $800,000 is attributable to the introduction
of Naproxen to Interpharm's product line. The increase in net sales was not
attributable to any change in prices which, for all products in Interpharm's
product line, remained stable from the fiscal year ended December 31, 2001 to
the year ended December 31, 2002. Gross profit for the year ended December 31,
2002 was $4.3 million, an increase of 22% or .8 million from the $3.5 million
for the prior year.
During the year ended December 31, 2002, two Interpharm customers
accounted for approximately 48% of Interpharm's total sales.
Cost of Sales
Cost of sales increased to $20 million in the fiscal year ended
December 31, 2002, or 34% from $14.9 million in the prior year due to increased
production. Approximately $3.7 million, or 73% of this increase is primarily raw
material purchases and approximately $1.0 million, or 12%, was for increased
labor costs. Raw material prices were constant during the period.
Interpharm increased its production to satisfy existing demand from
existing customers which have additional purchasing capacity. The increase in
production is attributable to the introduction of Naproxen as well as increased
production of Ibuprofen and Iso Cap, the production of which increased 25% and
30% respectively.
Research and Development
Research and development expenses for the fiscal year ended December
31, 2002 were $211,450, or 1% of net sales, compared to $110,000, or 1% of net
sales in 2001, an increase of $101,450. Research and development expenses were
used primarily for a biostudy for a new drug currently in development.
Selling, General and Administrative
Selling, general and administrative expenses were $2.1 million, in the
year ended December 31, 2002, or 9% of net sales, compared to $2.0 million, or
11% of net sales, for 2001.
31
Selling, general and administrative expenses for the fiscal year ended
December 31, 2002 were primarily made up of salaries ($492,000), selling
commissions ($164,000) freight expenses ($370,000), legal, accounting and other
professional services ($328,000), repairs and maintenance costs ($74,000) and
insurance expense ($23,000). Salaries increased $37,000 due to increases in
staff to accommodate increased production. In addition, bad debt expense
decreased by $214,000 due to the write-off of one customer balance in the
preceding year and write-offs occurring during the year ended December 31, 2002
were $47,000. No sales were made to the customer whose balance was written off
in the fiscal year ended December 31, 2002.
Income Taxes
The effective tax rate for the fiscal year ended December 31, 2002 was
32% compared to 29% for 2001. The increase in the effective tax rate for 2002
was primarily due to a decrease in the net deferred tax asset valuation
allowance in the 2001 fiscal period. The deferred tax asset was primarily
attributable to New York State investment tax and employment incentive tax
credits. The tax credits utilized are limited to the state taxes computed on the
minimum taxable income base. These tax credits also expire in 15 years if not
utilized. Management has estimated a reserve for the deferred tax asset based
upon prior years' actual credits utilized and projected credits to be utilized
on future taxable income. The valuation allowance reserve has decreased due to
Interpharm's increased taxable income which has utilized more credits and
management's estimate of future growth which has reduced the estimated credits
that will not be utilized
Year ended December 31, 2001 compared to December 31, 2000
Financial Highlights
o Net sales increased 62% or $7 million to $18.4 million from $11.4
million
o Gross profit increased 58% or $1.3 million to $3.5 million from $2.2
million
o Operating income increased 20% or $172,679 to $1,035,957 from $863,278
o Net earnings increased 52% or $176,801 to $514,565 from $337,764
Net Sales and Gross Profit
Net sales for 2001 were $18.4 million compared to $11.4 million for
fiscal 2000, an increase of $7 million or 62%. In 2001, Interpharm increased its
production capacity to satisfy demand from existing customers with the capacity
to make additional purchases. Once Interpharm's production capacity was
increased, it received a corresponding increase in orders from these customers.
Gross profit for 2001 was $3.5 million, or 19% of net sales, compared
to $2.2 million, or 19% of net sales, for fiscal 2000. This increase of $1.3
million, or 58%, was also attributable to increased production of Interpharm's
generic products.
The increase in net sales was not attributable to any change in prices
which, for all products in Interpharm's product line, remained stable between
2000 and 2001.
Cost of Sales
Cost of sales increased from $9.2 million in 2000 to $14.9 million in
2001, an increase of $5.7 million or 62% due to increased production. $2.6
million, or 46%, of this increase was attributable to raw material purchases,
$1.9 million, or 33%, was attributable to manufacturing overhead, $.2 million,
or 4%, was attributable to increases in the purchase of packing supplies and $.1
million, or 2%, was attributable to increased labor costs. Raw material prices
were constant during the period.
32
Research and Development
Research and development expenses for fiscal 2001 were $110,000, or 1%
of net sales, compared to $0, in fiscal 2000. This increase was largely
attributable to the new drugs currently in development.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.0 million, or 11%
of net sales, for fiscal 2001, compared to $1.3 million, or 11% of net revenues,
for fiscal 2000. For fiscal 2001, selling general and administrative expenses
were primarily made up of salaries ($456,000), freight expenses ($248,000),
commissions ($166,000), legal, accounting and other professional services
($199,000), repairs and maintenance expenses ($89,000) and, a bad debt of
$297,000 for one customer, the other 50% owner of Interpharm's Saturn
subsidiary. The bad debt and an increase in salaries of $218,000 relating to the
hiring of additional personnel in order to increase production comprised most of
the increase in selling, general and administrative expenses from 2000 to 2001.
Income Taxes
The effective tax rate for fiscal 2001 was 29% compared to 39% for
fiscal 2000. The decrease in the effective tax rate was due to the decrease in
the tax effect of permanent differences, primarily due to the minority owner's
share of the loss of Interpharm's subsidiary during 2000. At December 31, 2001,
Interpharm has net deferred tax assets of $298,000 primarily related to New York
State investment tax credits of approximately $268,500 and cumulative losses in
excess of its subsidiary basis. The net deferred tax asset has been reduced by a
valuation allowance of $151,000 because Interpharm may not be able to utilize
all of these deferred tax assets prior to their expiration.
Liquidity and Capital Resources
Since Interpharm's inception, it has financed its operations and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit and loans from Interpharm's shareholders. While
Interpharm relied more heavily on its shareholders in previous years, cash
provided from operations is currently the primary source of funds to operate and
expand Interpharm's business. Cash flows from operations were $1,747,585 during
the fiscal year ended December 31, 2002, $906,343 during year ended December 31,
2001 and $353,293 during 2000. As a result of Interpharm's cash flows from
operations during fiscal 2002, working capital increased $.2 million to $2.3
million from $2.1 million in 2001. Interpharm believes that its working capital
and cash provided by operating activities are sufficient to meet its operating
needs for the next twelve months.
Net cash used in investing activities for the fiscal year ended
December 31, 2002, 2001 and 2000 were $1,203,221, $964,259 and $175,583,
respectively. These were all for the purchase of production equipment except for
$19,011 in 2002 for the purchase of marketable securities. In the year ended
2002, Interpharm used $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. In the year ended 2001, Interpharm removed $313,166
of net equipment from service.
Accounts Receivable
The accounts receivable increase from December 31, 2001 to December 31,
2002 is primarily attributable to the increase in sales throughout 2002. This
increase resulted in an increased accounts receivable balance at December 31,
2002.
The accounts receivable days outstanding for the periods December 31,
2001 through December 31, 2002 consistently ranged from 54-59 days.
33
Inventory
During the later part of 2000 and early 2001 Interpharm commenced a
program to increase inventory production levels to meet the demand for
increasing sales. Due to the increase in sales at the end of 2001 Interpharm's
inventory had decreased. During 2002 Interpharm had increased production
capacity to produce more inventory to meet future demand resulting in a more
optimal level of inventory at December 31, 2002.
The inventory turnover for the periods ended December 31, 2001 through
December 31, 2002 has consistently improved with a decrease in number days sales
in inventory from 58 days to 50 days.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increase
from December 31, 2001 to December 31, 2002 is primarily attributable to
increased inventory production to meet future sales demands.
Cash and Cash Equivalents
The decrease in cash and cash equivalents from December 31, 2001 to
December 31, 2002 of $478,069 is primarily attributable to $1,184,210 in
equipment purchases and $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. These amounts were partially offset by $1,747,535
in net cash provided by operating activities.
Interpharm expects to devote substantial resources to continue its
research and development efforts, equipment purchases and internal expansion
necessary to support its growth. As a result, Interpharm anticipates that
capital expenditures will increase in absolute dollars over the next 12 to 18
months by approximately $1 million, which will be used primarily for purchases
of equipment. Interpharm also plans to spend approximately $500,000 on leasehold
improvements over the next 12 months to house additional equipment and
production facilities. While Interpharm anticipates that its cash flow and
current credit arrangements will be sufficient for at least the next 12 to 18
months, it may need or choose to raise additional funds or seek other financing
arrangements to facilitate more rapid expansion, to develop new products, or to
acquire or invest in complimentary businesses, technologies, services or
products. In the event that additional financing is required, Interpharm may not
be able to acquire it on acceptable terms, if at all.
Interpharm anticipates that once it has completed its internal
expansion it will be able to sell more of the products it currently produces to
its existing customers which have indicated additional purchasing capacity and
which have increased the volume of their orders when Interpharm has increased
its production capacity in the past. However, there can be no assurance that
additional orders will be received from existing customers once Interpharm's
internal expansion is completed because Interpharm has no agreements or other
binding commitments for such orders.
From time to time in the past, Interpharm's shareholders, directors and
officers had made loans to it for working capital. As of December 31, 2002, each
of these loans was paid by Interpharm with the exception of a loan with a $3
million principal balance from Dr. Maganlal K. Sutaria to Interpharm. The
$3,000,000 loan reflected in Interpharm's December 31, 2002 financial statements
has a maturity date of January 1, 2012. Repayment of this loan is subordinated
to Interpharm's bank debt.
34
Interpharm's Obligations
------------------------
As of December 31, 2002, Interpharm's obligations and the periods in
which they are scheduled to become due are set forth in the following table:
Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total Years Years Years Years
----------------------- ----------- ----------- ----------- ----------- -----------
Line of credit (1) $ 964,793 $ 964,793 $ -- $ -- $ --
Bank notes payable (1) 599,137 263,383 335,754 -- --
Due to related
Parties 3,304,750 304,750 -- -- 3,000,000
Operating lease (2) 8,080,000 480,000 1,440,000 960,000 5,200,000
----------- ----------- ----------- ----------- -----------
Total cash
obligations $12,948,680 $ 2,012,926 $ 1,775,754 $ 960,000 $ 8,200,000
=========== =========== =========== =========== ===========
(1) As described in Note 6 to Interpharm's Consolidated Financial
Statements for the years ended December 31, 2002 and 2001 and, as
described below, Interpharm has a credit facility with a bank
consisting of a $2,000,000 secured line of credit and a $1,500,000
non-revolving secured facility for equipment purchases. The line of
credit is due on demand, but is reviewed by the bank at least annually,
and automatically expires unless extended in writing. The line of
credit is scheduled to be reviewed by September 30, 2003. The credit
facility is collateralized by substantially all Interpharm assets and
personally guaranteed by Interpharm's stockholders. In addition,
Interpharm must comply with certain financial covenants. The material
covenants (as defined in the agreement) are as follows:
o Minimum debt service ratio of at least 1.2 : 1, on an annual
basis;
o Maximum debt to net worth ratio of not more than 1.0 : 1, on an
annual basis;
o Maintain a tangible net worth plus subordinated debt of at least
$3,950,000 as of December 31, 2002 with an increase of tangible
net worth plus subordinated net of not less than $50,000 for each
fiscal year end, thereafter. Repayment of $3,000,000 of the
amounts due to related parties are subordinated to the bank.
o Interpharm is also required to provide financial statements and
other financial information on a regular basis.
As of December 31, 2002 and 2001 and through the date of this proxy
statement, the Company is in compliance with all of the above
covenants.
(2) See Note 7 to Interpharm's Consolidated Financial Statements for the
years ended December 31, 2002, 2001 and 2000, which describes the
Company's guarantee of the mortgage related to these leased premises.
Bank Loans and Lines of Credit
------------------------------
Interpharm has the following loans and credit lines outstanding as of
December 31, 2002:
35
1. HSBC Advised Secured Line of Credit Facility for $2.0 million
($1.5 million for Interpharm and $500,000 for its subsidiary). The interest rate
on this credit line is at HSBC's prime rate plus .5% or, at Interpharm's option,
a fixed rate equal to HSBC's cost of funds plus 2.0%. The line of credit is due
on demand. The facility is reviewed by the bank at least annually and
automatically expires unless extended in writing. The line of credit is
scheduled to be reviewed by September 30, 2003.
2. HSBC Non-Revolving Secured Facility for Equipment Purchases for
$1.5 million. The secured credit facility is to amortize in no more than 60
equal monthly installments of principal and interest. Each advance under the
Equipment Purchase Line cannot exceed 90% of the invoice amount of the new
equipment. Each advance is converted into a separate note that is fully
amortizing in up to 60 equal monthly installments of principal and interest.
Interest on the notes payable is charged at the bank's prime rate plus .5%. At
December 31, 2002, there were four separate notes outstanding with current
aggregate monthly installments totaling $24,597. Such notes mature at various
dates through July 2006.
Loans that are guaranteed by Interpharm
---------------------------------------
The following loans are guaranteed by Interpharm as of December 31,
2002:
1. July 21, 1999 Loan and Use Agreement relating to an $820,000 loan
for the purchase of 75 Adams Avenue, Hauppauge, New York, among Bi-County
Development Corporation, Perry M. Sutaria (Shareholder), Mona M. Sutaria
(Shareholder), Raj M. Sutaria (Shareholder/Officer), Interpharm and the New York
Job Development Authority; and
2. July 21, 1999 Loan Agreement by and among Perry M. Sutaria
(Shareholder), Mona M. Sutaria (Shareholder) and Raj M. Sutaria
(Shareholder/Officer), as borrower, Interpharm as guarantor, and the Long Island
Development Corporation ("LIDC") for an $850,000 loan from LIDC under guarantee
by the U.S. Small Business Administration.
3. April 29, 2002 $1,859,000 mortgage loan from HSBC to Sutaria
Family Realty, LLC, which is owned by Perry Sutaria, Raj Sutaria and Mona
Rametra.
As of December 31, 2002, there is approximately $3,305,000 due under
the above guaranteed loans.
Interpharm leases its business premises from an entity controlled by
three of its stockholders under a noncancelable lease expiring in October, 2019.
Interpharm is obligated to pay minimum annual rent of $480,000, plus property
taxes, insurance, maintenance and other expenses related to the premises. Upon a
change in ownership of Interpharm, and every three years thereafter, the annual
rent will be adjusted to fair market value, as determined by an independent
party.
Critical Accounting Policies and Estimates
------------------------------------------
Management's discussion and analysis of financial condition and results
of operations discusses Interpharm's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that Interpharm make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis, Interpharm
evaluates judgments and estimates made, including those related to revenue
recognition, inventories, income taxes and contingencies including litigation.
Interpharm bases its judgments and estimates on historical experience and on
various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
36
Interpharm considers the following accounting policies to be most
critical in understanding the more complex judgments that are involved in
preparing its financial statements and the uncertainties that could impact
results of operations, financial condition and cash flows.
Revenue Recognition
Revenues from the sale of Interpharm products are recognized upon
shipment of the product. Revenues are recorded net of provisions for rebates,
charge-backs, discounts and returns, which are established at the time of sale.
Estimates for rebates, charge-backs, and discounts are calculated based on
actual experience and also cover discounts on sales to intermediary wholesale
prime vendors for the supply of ibuprofen to the Department of Veterans Affairs.
Interpharm purchases raw materials from a supplier, which is then used
in the manufacturing of completed goods and sold back to the supplier, by direct
drop shipment to the supplier's customers. The raw materials are also used in
the manufacturing of products for other Interpharm customers. Interpharm also
(i) has the general inventory risk by taking title to all of the raw material
purchased, (ii) establishes the selling price for the finished product and,
(iii) significantly changes the raw materials into the finished product under
Interpharm's specifications and formulas. These factors among others, qualify
Interpharm as the principal under the indicators set forth in EITF 99-19,
Reporting Revenue Gross as a Principal vs. Net as an Agent. If the terms and
substance of the arrangement change, such that Interpharm no longer qualified to
report these transactions on a gross reporting basis, Interpharm's net income
and cash flows would not be affected. However, Interpharm's sales and cost of
sales would both be reduced by a similar amount.
Principles of Consolidation
Interpharm consolidates the results of operations, financial position,
and cash flows of its 50% owned subsidiary as if we were operating as a single
entity. Interpharm's 50% owned subsidiary purchases raw materials on behalf of
Interpharm as a purchasing agent. Virtually all of the 50% owned subsidiary's
sales are to Interpharm (which are eliminated in consolidation) and all
management decisions relating to purchasing, selling price, storage and
accounting functions are performed unilaterally by Interpharm's management. In
addition, all of the subsidiary's bank debt is guaranteed by Interpharm.
Interpharm has not recorded a minority interest in the net losses of the
subsidiary, since the 50% minority owner is not responsible to fund any losses
beyond its initial investments. Therefore, Interpharm, although owning a 50%
interest in the subsidiary, recorded all of the losses in its consolidated
statements of income for each of the years in the three year period ended
December 31, 2002. Additionally, all of the guaranteed debt of the subsidiary is
included in our consolidated balance sheets.
Allowance for Doubtful Accounts
Interpharm records allowances for doubtful accounts based upon customer
specific analysis and assessment of past-due balances. Additional allowances for
doubtful accounts may be required if there is an increase in past-due balances
or for customer specific circumstances. The allowance for doubtful accounts was
$47,776 at December 31, 2002 and 2001.
Inventory
Interpharm's inventories are valued at the lower of cost or market,
determined on a first-in, first -out basis, and include the cost of raw
materials and manufacturing. Interpharm continually evaluates the carrying value
of its inventories and when factors such as expiration dates and spoilage
indicate that impairment has occurred, either a reserve is established against
the inventories' carrying value or the inventories are disposed of and
completely written off in the period incurred.
37
Recent Accounting Pronouncements
In January 2002, Interpharm adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 provides guidance on how to account for
goodwill and intangible assets after an acquisition is completed. The most
substantive change is that goodwill will no longer be amortized, but instead
will be tested for impairment periodically. Implementation of SFAS 142 did not
have any material impact on the consolidated financial statements of Interpharm.
In January 2002, Interpharm adopted SFAS 144, "Accounting for the
Impairment of Disposal of Long Lived Assets." SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. It
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. Implementation of SFAS No. 144 did not have any material
impact on the consolidated financial statements of Interpharm.
On April 30, 2002, the Financial Accounting Standards Board issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect and eliminates an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Generally, SFAS No. 145
is effective for transactions occurring after May 15, 2002. The adoption of this
standard had no material impact on the consolidated financial statements of
Interpharm.
Effective July 30, 2002, the FASB issued SFAS No. 146 "Accounting for
Cost Associated with Exit or Disposal Activities". The main provisions of this
statement address the recognition of liabilities associated with an exit or
disposal activity. The adoption of this standard had no material impact on the
consolidated financial statements of Interpharm.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. Interpharm is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for Interpharm in the December 31, 2002 financial statements.
Interpharm does not expect the adoption the initial recognition requirements to
FIN 45 will have a significant impact on its consolidated financial position or
results of operations.
38
Risk of Product Liability Claims
The testing, manufacturing and marketing of pharmaceutical products
subject Interpharm to the risk of product liability claims. Interpharm believes
that it maintains an adequate amount of product liability insurance, but no
assurance can be given that such insurance will cover all existing and future
claims or that Interpharm will be able to maintain existing coverage or obtain
additional coverage at reasonable rates.
Quantitative And Qualitative Disclosures About Market Risk
Interpharm presently does not use any derivative financial instruments
to hedge its exposure to adverse fluctuations in interest rates, fluctuations in
commodity prices or other market risks, nor does it invest in speculative
financial instruments. Borrowings under Interpharm's lines of credit are indexed
to the prime rate.
Due to the nature of Interpharm's borrowings and short-term
investments, it has concluded that there is no material risk exposure.
Forward-Looking Statements
The statements set forth in this proxy statement concerning the manner
in which Interpharm intends to conduct its future operations, potential trends
that may impact future results of operations, and managements' beliefs or
expectations about future operations are forward-looking statements. The
following statements that Interpharm makes in this proxy statement, in other
filings made with the SEC, in press releases, on Interpharm's website, or in
other contexts (including statements made by Interpharm's authorized
representatives, either orally or in writing), are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995:
(i) any statement regarding possible or assumed future results of
operations of Interpharm's business, the market for its products,
anticipated expenditures, regulatory developments or competition;
(ii) any statement preceded by, followed by or that includes the words
"intends," "estimates", "believes," "expects", "anticipates", "should",
"could", or the negative or other variations of these or other similar
expressions; and
(iii) other statements regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to:
o uncertainties regarding Interpharm's ability to successfully develop
and introduce new products on a timely basis in relation to competing
product introductions;
o Interpharm's ability to obtain required FDA approvals for new products
on a timely basis;
o the effects of vigorous competition on commercial acceptance of
Interpharm's products and their pricing;
o uncertainties regarding continued market acceptance of and demand for
Interpharm's core products;
o potential legislative or regulatory changes affecting the
pharmaceutical industry;
o uncertainties associated with the licensing of products developed by
others and the successful integration of acquired businesses;
o Interpharm's exposure to product liability and other lawsuits and
contingencies associated with Interpharm's products;
39
o competition from and actions taken by brand-name pharmaceutical
products and companies;
o Interpharm's ability to attract and retain key personnel; and
o changes in accounting and related standards promulgated by the
accounting profession or regulatory agencies.
The cautionary statements contained or referred to above should be
considered in connection with any subsequent written or oral forward-looking
statements that may be made by Interpharm or by persons acting on its behalf.
Interpharm undertakes no duty to update these forward-looking statements, even
though its situation may change in the future.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
During the previous two fiscal years, and the subsequent interim
period, Interpharm's accountant has not resigned, declined to stand for
re-election and was not dismissed. During the previous two fiscal years, and the
subsequent interim period, there were no material disagreements with
Interpharm's accountant with respect to any matter.
Similarly, during the previous two fiscal years, and the subsequent
interim period, Atec's accountant has not resigned, declined to stand for
re-election and was not dismissed. During the previous two fiscal years, and the
subsequent interim period, there were no material disagreements with Atec's
accountant with respect to any matter.
Background of the Acquisition
The Atec Board of Directors has been considering potential suitable
acquirers of, or merger candidates with, Atec for some time. Consideration of
such a transaction began in February 2000, when Atec received an unsolicited
proposal from Applied Digital Solutions, Inc. ("ADS") to acquire Atec. Following
negotiations, a non-binding letter of intent was entered into during the Spring
2000. The letter of intent provided that Atec and a wholly owned subsidiary of
ADS would merge. The letter of intent provided that each share of Atec Common
Stock would be exchanged for 1.25 shares of ADS common stock. However, following
due diligence, the parties mutually terminated the term sheet in Summer 2000,
and the transaction was never consummated.
Then, in October 2000, ADS revisited the transaction but indicated that
it only wanted to acquire the shares of Atec held by our then Chairman and Chief
Executive Officer, Surinder Rametra. Accordingly, it entered into a Stock
Purchase Agreement with Surinder Rametra. However, the transaction was
terminated by ADS in March 2001.
Thereafter, in April 2002, in order to improve shareholder value, our
Board instructed management to explore strategic opportunities for Atec,
including exploring potential candidates which could merge with Atec and thus
create a larger, more competitive company or which could acquire or could be
acquired by Atec. The Board believed that, given the current economic
conditions, which were compounded by the recent tragic events of September 2001,
the acquisition by, or a merger with, another company would be in the best
interest of Atec and its stockholders.
In Spring 2002, we entered into negotiations with Chell Group
Corporation ("Chell") to sell our assets for a purchase price of $4 million in
cash and stock of Chell. In June 2002, following due diligence, Atec ceased any
further discussions with Chell.
At about the same time, Ashok Rametra, Balwinder Singh Bathla, Rajnish
Rametra and Arvin Gulati, all members of our management, approached our Board to
inquire about acquiring the assets of Atec and assuming its liabilities. Such
members of management believed Atec's current computer operation would be more
40
competitive and profitable as a privately held business without the overhead
associated with a public reporting company. According to the Baar Group, they
believe that they could save approximately $750,000 annually in administrative
and overhead expenses such as legal expenses, auditing fees, printing costs,
transfer agent fees, premiums for directors and officers liability insurance,
exchange listing fees and reduction of work force. In addition, Baar Group hopes
to realize further savings by implementing additional cost cutting measures,
such as further reduction in the number of employees and reductions in
individuals' salaries, in order to make the computer operations profitable. As a
result of these savings, the Baar Group believes that the computer operations
could become profitable as a private company. Once the Chell transaction was
abandoned, the management group proposed to purchase our computer operations for
the value of our working capital plus $750,000.
As a result of the management team's proposal, a special committee of
independent directors of the board (the "Special Committee"), consisting of
David Reback and Stewart Benjamin, with Mr. Reback as the Chairperson of the
Special Committee, was formed to review the proposed management buy-out.
Although the members of the Special Committee believed that the management's
proposal appeared fair and was on terms more favorable than any other viable
proposal, Atec continued to explore other candidates for a potential merger or
to acquire Atec. At the same time, Mr. Reback continued his discussions with the
management group. Following the receipt of the management group's proposal, Atec
considered numerous other potential transactions, including potential
acquisitions of Atec; however discussions with such parties to potential
transactions ceased at the initial due diligence phase, and the Special
Committee determined that the terms offered by the management group, including
the purchase price, were more favorable than any of the other potential
transactions. In addition, the Special Committee believed that the parties to
the other potential transactions, none of which involved the payment of cash
and/or promissory notes, were less attractive candidates because of limited
operating history and/or inadequate revenues and assets. Accordingly, Mr. Reback
and our Chief Financial Officer continued negotiations with the management group
in order to consummate a management buy-out.
Munish K. Rametra, our Chairman's son who is a merger and acquisition
consultant, was aware that Interpharm was considering going public and that Atec
was seeking an acquisition candidate. He recommended that Atec and Interpharm
meet for discussions. As a result, Surinder Rametra met with Interpharm's
management. The Chairman of Interpharm's Board of Directors, Dr. Maganlal K.
Sutaria, is Munish K. Rametra's father-in-law and Mr. Rametra's wife, Mona
Rametra, is an Interpharm shareholder.
During the next few weeks, the discussions and negotiations continued
between Surinder Rametra, Dr. Sutaria and Bhupatlal K. Sutaria (Interpharm's
President). These discussions and negotiations resulted in a proposal whereby
Atec would acquire all of the outstanding stock of Interpharm in exchange for
40,000,000 shares of Atec Common Stock and whereby the loans made by Dr. Sutaria
to Interpharm would be converted into a new series of Atec preferred stock
paying 5% dividend per year. The 40 million shares of Common Stock would have
represented approximately 80% of the total number of Atec Common Stock issued
and outstanding after the closing.
On October 21, 2002 after reviewing the above-described proposal
submitted by Interpharm, our Board recommended that Surinder Rametra and James
Charles continue to negotiate with Interpharm with a view towards consummating
the acquisition of Interpharm.
Following further negotiations between Atec and Interpharm management
and further due diligence review, Interpharm revised its proposal. Interpharm
proposed that Atec acquire all of its outstanding capital stock in exchange for
Atec Common Stock and a new series of voting convertible preferred stock whereby
immediately following the closing of the acquisition the former Interpharm
shareholders would hold approximately 48% of Atec's voting stock. The shares of
Common Stock to be issued upon conversion of the new series of preferred stock,
together with the shares of Common Stock to be issued at closing, would
represent approximately 80% of the total number of Atec Common Stock. In
addition, Interpharm agreed that the new series of preferred stock would not be
convertible for at least one year and only after Atec is deemed to be in
compliance with the applicable exchange listing standards. Interpharm also
agreed that only one seventh of the total number of shares of the new series of
preferred stock will be convertible each year. The revised proposal also
eliminated the requirement that Dr. Sutaria's loan to Interpharm be converted
into Atec preferred stock.
41
Interpharm agreed to forgo its initial demand for 40 million shares of
Common Stock in exchange for its capital stock and agreed its shareholders would
receive, at closing, only such number of shares equal to approximately 48% of
Atec's voting stock in order to address Atec's concerns regarding the immediate
dilution of its stockholders. Further, Interpharm agreed to the restrictions on
the conversion of the new series of preferred stock described-above in order to
delay the full dilutive effect of conversion on the Atec stockholders.
Financial and legal due diligence review of Interpharm was conducted by
our Chief Financial Officer and outside legal counsel. On November 25, 2002, our
Chief Financial Officer reported to the Special Committee the results of the due
diligence review. He summarized the due diligence review and noted that although
the results of the due diligence review appeared satisfactory overall, there was
concern regarding a personal injury product liability claim pending in the
Superior Court of Washington (see "Legal Proceedings", pages 18-19). He reported
that Interpharm's insurance carrier had refused to provide coverage for the
claim. After considering the Chief Financial Officer's due diligence report, the
Special Committee determined that both the proposed management buy-out and the
proposed acquisition were fair and in the best interests of Atec and its
stockholders. With regard to the product liability litigation, the Special
Committee believed that the uncertainty associated with that litigation was
outweighed by the favorable consideration to be paid for the acquisition of
Interpharm and the potential growth of Interpharm's business. It recommended the
consummation of both the management buy-out and the acquisition of Interpharm,
each subject to a fairness opinion. Upon receipt of the Special Committee's
recommendation, our Board unanimously approved the management buy-out and the
acquisition of Interpharm and recommended their approval to Atec stockholders,
each subject to a fairness opinion.
Consequently, on November 25, 2002, both the Asset Purchase Agreement
and the Capital Stock Exchange Agreement were executed by the relevant parties.
Reasons for the Acquisition
In concluding that the Acquisition was fair to, and in the best
interest of all Atec stockholders, including unaffiliated stockholders, the
Board and the Special Committee considered the following information and
factors:
1. The Board and the Special Committee believed that the acquisition
of Interpharm was in the best interests of Atec and its
stockholders due to Interpharm's historical growth rate and the
potential for future growth. The Board and the Special Committee
noted that Interpharm has experienced substantial revenue growth.
It also noted the fact that Interpharm's revenue grew from
approximately $11 to $12 million during year 2000 to
approximately $18 million in year 2001. The Board and the Special
Committee also considered studies which show that the generic
drug market has been growing and the likelihood that the generic
drug market is likely to continue to grow due to the anticipated
expiration of patents for brand-name drugs.
2. The Board and the Special Committee believed that the acquisition
of Interpharm was in the best interests of Atec and its
stockholders due to Interpharm's historical profitability. It
noted that the net income of Interpharm for the year 2000 was
approximately $300,000 and for the year 2001 was approximately
$500,000. Further, Interpharm's net income for the nine months
ended September 30, 2002 was approximately $800,000.
3. In contrast to Interpharm's historical performance, the Board and
the Special Committee considered the downturn in demand for
Atec's services and products, as well a general reduction in
spending for information and computer technology due to the
recent economic and market conditions. In that regard, the Board
and the Special Committee noted that Atec's revenues had
decreased from approximately $72 million in fiscal 2000 to
approximately $39 million in fiscal 2002. Similarly, Atec's net
income had decreased during that same period from approximately
$300,000 to a net loss of approximately $1.7 million.
42
4. The Board and the Special Committee believed that the
consideration to be paid for the acquisition of Interpharm was
fair. They estimated, based upon the number of shares of Common
Stock issued and outstanding on November 25, 2002, that the total
amount of Common Stock to be issued to the Interpharm
stockholders at the closing and upon the conversion of their
preferred stock would be approximately 31 million shares. Based
upon the then current trading price of Atec Common Stock of
approximately $.32, the Board and the Special Committee estimated
that the value of the Common Stock to be issued to the Interpharm
shareholders was approximately $10 million, or less than
Interpharm's historical annual revenues. In light of Interpharm's
historical growth, potential for future growth and historical
profitability, as contrasted by the declining revenues and net
income of Atec, the Board and the Special Committee believed that
the consideration to be paid to for the acquisition of Interpharm
was fair to Atec and its stockholders.
5. The offer to purchase Atec's computer operations by the
management group was, in the determination of the Board and the
Special Committee, superior to all the other potential
transactions considered, including the proposed transaction with
Chell, or any other bona fide offer the Board and the Special
Committee believed they could receive. In this regard, the Board
and the Special Committee noted that only the management group
proposed all of the consideration to be paid in cash and
promissory notes which were secured by assets and were personally
guaranteed. The Board and the Special Committee also noted that
the consideration offered by the management group was superior to
the $4 million purchase price offered by Chell, most of which was
to be paid in Chell capital stock. The Board and the Special
Committee believed that in the event the Management Buy-Out is
consummated, Atec would not have any operations and therefore, it
was in the best interests of Atec and its stockholders to acquire
an operating business.
6. The Board and the Special Committee also considered other
information concerning the historical financial performance,
business operations, financial condition and prospects of
Interpharm.
The Board and the Special Committee also considered potentially
negative factors relating to the Acquisition, including (i) the dilutive effect
on the current stockholders of Atec, and (ii) the risk factors and uncertainties
which are described above in the description of Interpharm's business.
The Board and the Special Committee also considered the uncertainties
associated with the Acquisition, including (i) the possibility that the
transaction would not be approved by Atec's stockholders, (ii) the uncertainty
regarding the number of shares of Common Stock that may be issued to Interpharm
stockholders, and (iii) the possibility that AMEX would delist Atec's Common
Stock.
Based upon a review of the AMEX rules and regulations, we believe
Atec's Common Stock will not be delisted for the following reasons: (i) Atec
will continue to exist, (ii) Interpharm shareholders will own less than 50% of
the voting power of Atec, (iii) the majority of the board of directors will
consist of incumbent board members, and (iv) our Chairman and Chief Financial
Officer would remain as executive officers and only two new executive officers
would be added. In addition, we have had discussions with AMEX concerning both
the Management Buy-Out and acquisition of Interpharm. We have received
reasonable assurances from AMEX that Atec's Common Stock will not be delisted
from trading on the AMEX following the consummation of both transactions.
However, no assurance can be given that Atec will retain its AMEX listing.
Delisting would likely result in the trading of our Common Stock in the
over-the-counter market and cause the trading volume and share price of our
Common Stock to decline.
43
The Acquisition of Interpharm is not a "going private" transaction
under SEC Rule 13e-3 in that it is not being done with the purpose of, and is
not reasonably likely to cause, a delisting of Atec's Common Stock from trading
on the AMEX.
The Board and the Special Committee concluded that these potentially
negative factors were outweighed by the potential benefits to be gained by the
Acquisition. Thus, after taking into consideration all of the factors set forth
above, the Board and the Special Committee unanimously determined that the
Acquisition was in the best interests of Atec and its stockholders, and that
Atec should consummate the Acquisition.
Terms of the Acquisition
Pursuant to the terms of the Capital Stock Exchange Agreement, each
Interpharm shareholder will exchange all of their Interpharm stock for shares of
Atec Common Stock and Atec Series K Stock, thus making Interpharm a wholly owned
subsidiary of Atec. Immediately following the exchange, the Interpharm
shareholders will own approximately 48% of Atec's voting securities. This will
be accomplished by issuing to Interpharm shareholders (i) ATEC Common Stock
equal to approximately 72% of the total outstanding number of shares of Atec
Common Stock outstanding as of the closing, and (ii) Atec Series K Stock equal
to approximately 24% of the total outstanding number of shares of Atec Common
Stock outstanding as of the closing. As a result, your ownership percentage in
Atec will be substantially diluted. Your ownership percentage in Atec will be
further substantially diluted upon the conversion of the Series K Stock. If the
Interpharm shareholders were to sell the Common Stock they receive at closing or
upon conversion of their Series K Stock and sell such shares of Common Stock
into the market, such sales could have a negative effect on the market price of
our Common Stock and could dilute the value of your shares. In addition, once
the Interpharm shareholders are able to convert their Series K Stock, they will
most likely own in the aggregate the majority of the total voting equity of
Atec.
Based upon the number of shares of Common Stock outstanding as of March
30, 2003, Interpharm shareholders would receive 5,783,533 shares of Atec Common
Stock and 1,927,844 shares of Atec Series K Stock at the closing of the
Acquisition. Although Atec has no present intention of issuing shares of Common
Stock prior to the closing of the Acquisition, it may be required to do so in
the event holders of our options, warrants or convertible preferred stock elect
to exercise their options, warrants or the conversion rights under such
preferred stock. Under such circumstances, the number of shares of Common Stock
and Series K Stock to be issued to the Interpharm shareholders will increase.
For every 100 shares of Common Stock issued by Atec prior to the closing of the
Acquisition, the Interpharm shareholders will be entitled to receive
approximately 72 additional shares of Atec Common Stock and 24 additional shares
of Series K Stock at closing.
The Series K Stock. The relative rights, preferences and limitations of
the Series K Stock, $.01 par value per share, will be governed by the
Certificate of Designations, Preferences and Rights of the Series K Stock,
annexed to the Capital Stock Exchange Agreement which is attached to this Proxy
Statement. As of March 30, 2003, the total number of shares of Series K Stock to
be required to be issued to the Interpharm shareholders will be 1,927,844. Each
share of Series K Stock will be entitled to one vote, voting as a class with the
holders of Atec Common Stock. It also will be entitled to receive dividends to
the same extent and in the same amounts as Atec Common Stock. So long as any
shares of Series K Stock remain outstanding, Atec may not create any new series
or class of shares having preferences prior to, or in parity with or superior to
the Series K Stock as to voting or liquidation preferences.
In the event of a liquidation, dissolution or winding up of Atec, the
holders of the Series K Stock will be entitled to receive, subject to the rights
of any other class of stock ranking senior to the Series K Stock, $7.50 per
share prior to distribution on any class of stock ranking junior to the Series K
Stock, including the Common Stock. This means that if 1,927,844 shares of Series
K Stock are issued and outstanding, the holders of the Series K Stock will be
entitled to receive approximately $14.5 million upon the liquidation,
dissolution or winding up of Atec before the holders of our Common Stock. No
assurance can be given that Atec will have sufficient funds or assets to satisfy
the liquidation preference of the holders of the Series K Stock.
44
At the request of the Interpharm shareholders' request for greater
security in their investment in the Series K Stock, Atec agreed to provide a
liquidation preference for the Series K Stock. The Interpharm shareholders
initially requested a liquidation preference of $15.00 a share; however,
following brief negotiations, Interpharm agreed that it is will to accept a
liquidation preference of half that amount, or $7.50 a share. The Board and the
Special Committee believed that the liquidation preference was fair and
reasonable in light of the fact (a) they believed it to be customary for
preferred stock to contain a liquidation preference; (b) the Interpharm
shareholders will bear the risk of their investment in Series K Stock for
indefinite amount of time since the Series K Stock will not be registered and
there exists no market for the Series K Stock; and (c) no portion of the Series
K Stock will be convertible for at least one year and all of the Series K Stock
will be not fully convertible for seven years; and (d) while the total
liquidation preference represents a significant amount in comparison to the
total equity of the Company, Interpharm, as a growing company, could produce
significant shareholder equity in the future which could be greater than the
liquidation preference, which is fixed. Moreover, the Board and the Special
Committee believed that it was preferable to issue convertible preferred stock
with liquidation preference rather than a greater amount of Common Stock. By
issuing the Series K Stock, which coverts over a period of years, the immediate
dilutive effect of the transaction on current stockholders would be
significantly reduced.
The Series K Stock will be convertible into shares of Atec Common
Stock, no sooner than one year after the closing of the Acquisition, upon the
happening of any of the following events (the "Triggering Events"): Atec is (i)
deemed by AMEX to be in compliance with applicable listing standards; (ii)
deemed by another exchange to be in compliance with its applicable listing
standards in the event Atec's securities are listed on such exchange; or (iii)
Atec is no longer listed on AMEX, the Nasdaq National Market or SmallCap Market,
or the New York Stock Exchange.
Upon the occurrence of any of the above Triggering Events, the shares
of Series K Stock will become convertible into shares of Common Stock. The
aggregate number of shares of Common Stock to be issued upon the full conversion
of all of the Series K Stock is equal to the difference of (a) four times (i)
the difference of (i) the number of shares of Common Stock issued and
outstanding immediately prior to the closing of the date of the Triggering Event
and the number of shares of Common Stock that are issuable upon the full
conversion of any outstanding shares of Series A, B, C and J preferred stock on
the date of the Triggering Event, (ii) less the number of shares of Common Stock
issued after the date of the closing pursuant to obligation which arose after
the closing of the Acquisition, and (iii) less the number of shares of Common
Stock issued to the Interpharm shareholders, and (b) the number of shares of
Common Stock issued to the Interpharm shareholders. The net effect of the
conversion feature, together with the shares of Common Stock to be issued at
closing, is to issue to Interpharm shareholders Atec Common Stock equal to
approximately 80% of the total number of Common Stock outstanding as of the date
of the Triggering Event, after giving effect to the conversion, less shares of
Common Stock which may be issued between the date of the closing of the
Acquisition and the date of the Triggering Event arising out of obligations
which arose after the date of closing.
Beginning on the date of the Trigger Event and on each anniversary date
thereof, one seventh of the total number of shares of Series K Stock will
automatically convert into Common Stock until all of the Series K Stock has been
converted, provided, however, if at any time after the date of the Triggering
Event, the holders of the Series K Stock own less than 51% of Atec's outstanding
Common Stock, then the holders may convert such number of Series K Stock as will
be necessary such that the holder will own 51% of the outstanding Common Stock.
By way of example, if no additional shares of Common Stock are issued
after March 30, 2003 and until the closing of the Acquisition, on the date of
the closing there will be 8,026,128 shares of Atec Common Stock outstanding and
approximately 113,000 shares of Atec Common Stock issuable upon the conversion
of the Series A, B, C and J preferred stock. The Interpharm shareholders will
receive 5,783,533 shares of Common Stock and 1,927,844 shares of Series K Stock
at the closing of the Acquisition. Furthermore, assuming that following the
45
closing, no additional shares of Common Stock are issued prior to the date of
the Triggering Event, then the 1,927,844 shares of Series K Stock will be
convertible into approximately 26,770,731 shares of Common Stock. Of the
26,770,731 shares of Common Stock to be issued approximately 3,824,390 shares
will be issued as of the date of the Triggering Event and as of each of the
following six anniversary dates thereof, unless the holders of the Series K
Stock in the aggregate own less than 51% of all of the outstanding Atec Common
Stock in which case they will be able to convert additional Series K such that
they will own 51% of Atec's Common Stock in the aggregate.
When all of the Series K Stock is converted, the former Interpharm
shareholders would then hold a total of 32,554,264 shares of Common Stock
(5,783,533 received on the closing date and 26,770,731 received through
conversion of the Series K Stock over a seven year period).
The Series K Stock contains anti-dilution provisions which may allow
the holders of the Series K Stock to convert their shares into a greater number
of shares of our Common Stock. Pursuant to these anti-dilution provisions, for
every 100 shares of Common Stock that are issued prior to the closing of the
Acquisition or after the Acquisition pursuant to obligations of Atec which
existed as of the date of the closing (for example, as a result of exercise of
existing options) the number of shares of Common Stock to be issued to the
holders of the Series K Stock at closing and upon conversion will increase in
the aggregate by 400 shares. However, any shares of Common Stock that are issued
after the closing not due to obligations of Atec which existed prior to the
closing would have no effect on the number of shares to be issued to the holders
of the Series K Stock upon conversion.
Taking into consideration (a) the anti-dilution provisions contained in
the Series K Stock described in the immediately preceding paragraph pursuant to
which Interpharm shareholders can receive additional shares of Common Stock upon
conversion of the Series K Stock and (b) the anti-dilution provisions described
in page 44 above pursuant to which the Interpharm shareholders will be entitled
to receive additional shares of Common Stock and Series K Stock at closing if
shares of Atec Common Stock are issued prior to the closing, if 100 shares of
Common Stock are issued prior to the closing, Interpharm shareholders will
receive (a) 72 additional shares of Atec Common Stock at closing; (b) 24
additional shares of Series K Stock at closing; and (c) 328 additional shares of
Common Stock upon the full conversion of the Series K Stock. Similarly, for
every 100 shares of Common Stock that are issued after the closing pursuant to
obligations of Atec which existed as of the date of the closing, the number of
shares of Common Stock or Series K Stock the Interpharm shareholders are
entitled to receive at closing will not increase, but they will be entitled to
receive 400 additional shares of Common Stock upon the full conversion of the
Series K Stock. Lastly, if shares of Common Stock are issued after the closing
not due to obligations of Atec which existed prior to the closing, the number of
shares of Common Stock or Series K Stock the Interpharm shareholders are
entitled to receive at closing or the number of shares of Common Stock the
Interpharm shareholders are entitled to receive upon conversion of the Series K
Stock will not change.
Closing. Pursuant to the Capital Stock Exchange Agreement, the closing
of the Acquisition will take place on a date to be agreed upon by the parties.
The parties have agreed to select a closing date subsequent to the date of the
shareholders meeting.
Representations and Warranties. In the Capital Stock Exchange
Agreement, Atec and Interpharm, with its shareholders, make customary
representations and warranties to each other, including representations and
warranties regarding the following: (a) organization, (b) capitalization, (c)
authority regarding the Capital Stock Exchange Agreement, (d) consents and
approvals and absence of violations of or conflicts with certain laws and
agreements, (e) absence of undisclosed liabilities, (f) absence of material
events since the last financial statements reviewed by the parties, (g) taxes,
(h) litigations, (i) subsidiaries, (j) employee, employee benefit and labor
matters, (k) organizational documents, stock ledgers and minute books, (l)
intellectual property, (m) real property and (n) environmental matters.
In addition, Interpharm and its shareholders also make customary
representations to Atec regarding (a) acquisition of Atec stock for investment
purposes, (b) adequate rights to Interpharm's property, (c) the accuracy of
Interpharm financial statements, (c) material contracts and absence of defaults
thereunder, (d) Interpharm's receivables, (e) Interpharm's business
relationships with its largest customers, (f) transactions with affiliates and
(g) insurance matters.
In addition, Atec makes customary representations to Interpharm and its
shareholders regarding (a) the accuracy of Atec's filings with the Securities
and Exchange Commission, (b) the valid issuance of its stock, (c) compliance
46
with securities laws, (d) matters relating to the listing of its securities with
AMEX, (e) matters relating to the Investment Company Act and (f) outstanding
stock options and warrants and (g) treatment of certain accrued expenses.
Conduct Pending Closing. The Capital Stock Exchange Agreement provides
that, except as expressly contemplated thereby, during the period from the date
of the Capital Stock Exchange Agreement and continuing until the closing, each
of Atec and Interpharm will continue to (a) conduct its business in the ordinary
course, (b) file tax returns and pay or make provisions for taxes when due, (c)
maintain its insurance coverage and (d) comply with all laws and regulations
applicable to it. In the case of Atec, it also agreed to file all reports due to
be filed with the Securities and Exchange Commission and to use its reasonable
efforts to maintain the eligibility of its Common Stock for listing on AMEX. In
the case of Interpharm, it also agreed to use reasonable efforts to keep intact
its business organizations and goodwill, to keep the services of its employees
and officers and to maintain good relationships with it suppliers, lenders,
employees, customers and others having a business or financial relationship with
it.
Atec and Interpharm also agreed that, except as contemplated in the
Capital Stock Exchange Agreement, each will not (a) amend its charter or
by-laws, (b) (1) split, combine or reclassify any of its securities, or (2)
declare, set aside or pay any dividends with respect to its capital stock, or
(3) make, agree or commit to make any exchange for or redemption of any
securities, (c) issue or agree to issue any additional shares of its capital
stock, (d) incur any indebtedness for money borrowed or make or commit to
capital expenditures, except in the ordinary course of business, (e) adopt or
amend employee benefits or agreements or materially increase the compensation to
its officers, directors or employees, (f) enter into any material contracts, and
(g) not hold any meetings of the Board of Directors of stockholders without
inviting a representative of the other party.
Notwithstanding the foregoing, Atec may enter into and consummate the
Management Buy-Out and issue shares upon exercise of its existing options and
warrants.
Each of the parties also agreed that pending the closing or the
termination of the Capital Stock Exchange Agreement, it will not directly or
indirectly, solicit, encourage or initiate any discussions with, negotiate with
or provide any information to any other party regarding any merger or
acquisition of such party or any similar transaction. Except, in the case of
Atec, it is not prohibited from complying with Rule 14e-2 and Rule 14d-9 under
the Securities Exchange Act of 1934, as amended, with respect to a bona fide
tender offer or exchange offer or from disclosing another transaction involving
a merger or acquisition of Atec or any of its subsidiaries if Atec's Board
determines after consultation with legal counsel that such disclosure is
necessary. In addition, Atec may participate in negotiations or discussions
with, or furnish information to any person in connection with a merger or
acquisition proposal if such proposal is not solicited by Atec after the date of
the Capital Stock Exchange Agreement and such person submits the proposal in
writing to Atec's Board. Prior to any such negotiation, discussion or furnishing
of information, the Board must determine, after consultation with legal counsel
and financial advisors, that such proposal is reasonably likely to lead to a
superior proposal and that failure to participate in such negotiations,
discussions or furnishing of information would be inconsistent with the Board's
fiduciary duties. If prior to the closing of the Acquisition, a majority of the
Board determines that it has received a superior proposal and that consummating
the Acquisition of Interpharm would be inconsistent with its fiduciary duties,
the Board may withdraw or modify its approval or recommendation of the
Acquisition, approve or recommend the superior proposal, terminate the Capital
Stock Exchange Agreement and publicly announce its intention to do the
foregoing.
Conditions. The obligations of Interpharm to effect the transactions
contemplated by the Capital Exchange Agreement are subject to the satisfaction
of the following conditions: (a) the receipt of all approval, consents,
authorizations and waivers from governmental agencies and third parties required
to consummate the Acquisition, (b) no injunction or other order of any court
which prohibits the Acquisition shall be in effect, (c) Atec shall have
performed in all material respects its obligations contained in the Capital
Stock Exchange Agreement and complied with all material requirements, rules and
regulations relating to the Acquisition, (d) no material adverse change in the
business or condition of Atec since September 30, 2002, other than those
permitted in the Capital Stock Exchange Agreement, (e) the representations and
47
warranties of Atec set forth in Capital Stock Exchange Agreement shall be true
in material respects as of the closing and as if made at the time of the
closing, (f) the total number of shares of Atec Common Stock issued and
outstanding shall not exceed 12,000,000, (g) the completion of the Management
Buy-Out resulting in Atec having not more than $650,000 in total liabilities,
(h) Atec shall have not less than $3.7 million in stockholders' equity, of which
at least $1.25 million in cash, (i) the filing of the Certificate of
Designations of the Series K Stock, (j) fairness opinions as to the Acquisition
and the Management Buy-Out, (k) approval of the Acquisition and the Management
Buy-Out by Atec stockholders, (l) employment agreements with Surinder Rametra
for at least three years at an annual salary not in excess of $150,000 and with
James Charles for at least two years at an annual salary not in excess of
$80,000, and (m) Atec shall have entered into the Registration Rights Agreement.
The term "material adverse change" is defined in the Capital Exchange
Agreement as any event, change, circumstance or effect that is or is reasonably
likely to be materially adverse to the business, financial condition or results
of operations of a party and its subsidiaries taken as a whole or the ability of
such party to consummate the transactions contemplated therein.
The condition that the Management Buy-Out be consummated as a condition
to the acquisition of Interpharm was required by Interpharm. Interpharm does not
wish to consummate the transaction if Atec continues to own the computer
operations because it believes that Atec would find it difficult to raise
capital, when and if necessary in the future, unless it can show that it has a
single line of business which is the sole focus of the company. Furthermore,
Interpharm requires assurance that Atec would receive the cash and promissory
notes contemplated in the Management Buy-Out.
Similarly, the obligations of Atec to effect the transactions
contemplated by the Capital Exchange Agreement are subject to the satisfaction
of the following conditions: (a) the receipt of all approval, consents,
authorizations and waivers from governmental agencies and third parties required
to consummate the Acquisition, (b) no injunction or other order of any court
which prohibits the Acquisition shall be in effect, (c) Interpharm and its
shareholders shall have performed in all material respects their obligations
contained in the Capital Stock Exchange Agreement and complied with all material
requirements, rules and regulations relating to the Acquisition, (d) no material
adverse change in the business or condition of Interpharm, other than those
permitted in the Capital Stock Exchange Agreement, (e) the representations and
warranties of Interpharm and its shareholders set forth in Capital Stock
Exchange Agreement shall be true in material respects as of the closing and as
if made at the time of the closing, (f) no material change in the final
financial statements to be delivered by Interpharm from the financial statements
previously reviewed by Atec, (g) no more than 4,000,000 shares of Interpharm
common stock outstanding, (h) the approval of the Acquisition and the Management
Buy-Out by Atec stockholders, (i) receipt of all outstanding Interpharm stock
free and clear of any liens, pledges or encumbrances, and (j) a fairness opinion
as to the Acquisition.
Stockholder Meeting. In the Capital Stock Exchange Agreement, Atec has
agreed to duly call and give notice of a shareholder meeting and to use its
reasonable efforts to obtain the approval of its stockholders of the Acquisition
and the Management Buy-Out as soon as practical. Atec has also agreed to prepare
and file with the Securities and Exchange Commission a Proxy Statement, and
Interpharm agreed to deliver as soon as practical its audited annual financial
statements for the fiscal year ended December 31, 2001 and 2000, and reviewed
financial statements for the quarter ended September 30, 2002 for inclusion in
the Proxy Statement.
Termination. The Capital Stock Exchange Agreement may be terminated at
any time prior to the closing, whether before of after approval by stockholders:
(a) by mutual consent of Atec, Interpharm and Interpharm shareholders, (b) by
Interpharm and its shareholders if the conditions set forth above in
"Conditions" above as they relate to their obligations to consummate the
Acquisition have not been met by the time of the closing, (c) by Atec if the
conditions set forth above in "Conditions" above as they relate to its
obligations to consummate the Acquisition have not been met by the time of the
closing, (d) by Interpharm and its shareholders if there is a material breach in
any representation, warranty, covenant, agreement or obligation of Atec, (e) by
Atec if there is a material breach in any representation, warranty, covenant,
agreement or obligation of Interpharm or its shareholders, and (f) by Atec if it
receives a superior proposal.
48
If the Capital Stock Exchange Agreement is terminated as provided
therein, none of the parties will have any liability or further obligation to
the other parties, except if the Capital Stock Exchange Agreement is terminated
because it receives a superior proposal then, Atec is obligated to pay
Interpharm and its shareholders' costs and expenses in connection with the
Capital Stock Exchange Agreement. In addition, if the Capital Stock Exchange
Agreement is terminated due to a breach in any representation, warranty or
covenant of a party, such party is obligated to pay the other party a
termination fee of $500,000 plus the costs and expenses of such other party.
Indemnification. Interpharm has agreed in the Capital Stock Exchange
Agreement to keep in effect for a period of three years current insurance
coverage providing insurance for the current officers and directors of Atec for
their errors, omissions and similar sources of potential liability and Atec's
current policies regarding the indemnification of the current officers and
directors.
The Registration Rights Agreement. Pursuant to the terms of the
Registration Rights Agreement, the Interpharm shareholders are entitled to
certain rights relating to the registration with the Securities Exchange
Commission for resale of the Common Stock to be issued to them in connection
with the Acquisition and upon the conversion of their Series K Stock. Subject to
certain terms and conditions, one-third of the holders of the registrable
securities may demand up to two times that Atec file a registration statement
covering their Common Stock, provided the shares to be registered represent at
least one-third of all registrable securities and have an aggregate public
offering price of $1,000,000. In addition, in the event Atec decides to file a
registration statement, Atec must afford the holders of such registrable
securities to include their Common Stock in the registration statement. The
expenses in connection with the filing of the registration statements will be
borne by Atec.
Opinion of vFinance
Beginning in October 2002, our Chief Financial Officer began searching
for potential investment banks or accounting firms to deliver a fairness opinion
regarding the Management Buy-Out and the Acquisition. As a result of his search,
he received two written proposals from investment banks and one oral proposal
from an accounting firm. The three proposals were presented to the Special
Committee on November 25, 2002. The Special Committee narrowed the potential
candidates to the two investment banks upon the basis the fees sought by the
accounting firm were approximately twice the fees quoted by the two investment
banks. Of the two investment banks, the Special Committee determined that
vFinance Investments, Inc. had a stronger background and experience regarding
transactions of the nature contemplated by Atec. As a result, on November 27,
2002, the Special Committee selected vFinance Investments, Inc. as the
independent investment banker to issue a fairness opinion with respect to the
terms of the Management Buy-Out and the Acquisition of Interpharm.
vFinance is a multi-channel financial services company that provides
investment banking, trading and brokerage services to more than 10,000 corporate
and private clients worldwide. The company has offices in New York, Chicago, San
Jose, Atlanta, Houston, Boca Raton and 22 other cities nationwide. In the normal
course of business, vFinance is asked to perform and issue valuations and
opinions on behalf of private and public entities nationwide. vFinance has
recently issued opinions in transactions for companies such as Oriole Homes,
Options Talent Group and PartBase.
No material relationship has existed during the past two years nor is a
material relationship mutually understood to be contemplated between Atec and/or
its affiliates and vFinance and/or its affiliates.
Atec agreed to pay an aggregate fee of $38,500, plus expenses, for
delivery of the fairness opinions regarding both the Management Buy-Out and the
Acquisition. No portion of the fee is contingent upon the closing of either
transaction.
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vFinance delivered a written opinion dated as of December 17, 2002 to
our Board to the effect that, based upon the assumptions made, matters
considered and limits of the review undertaken, the Acquisition from a financial
point of view is fair to Atec's stockholders. vFinance did not recommend or
determine the consideration to be paid with respect to the Management Buy-Out or
the Acquisition. A copy of the opinion is attached as Appendix C and is
incorporated herein by reference. vFinance's opinion should be read in its
entirety by the stockholders of Atec for information with respect to assumptions
made and matters considered.
In arriving at its opinion with respect to the Acquisition, vFinance
reviewed (a) periodic reports filed by Atec with the SEC (b) certain publicly
available documents regarding Atec; (c) publicly available data and information
for companies vFinance determined to be comparable to Atec; (d) available
research reports for companies vFinance determined to be comparable to Atec; (e)
financial terms of other recent transactions deemed to be similar; (f) the
Capital Stock Exchange Agreement and all accompanying schedules and exhibits,
including the Certificate of Designations, Preferences and Rights of the Series
K Stock; (g) internal detailed financial statements for the years ended December
31, 2001 and December 30, 2000 and for the nine months ended September 30, 2002
provided to vFinance by Interpharm; (h) publicly available data and information
for companies vFinance determined to be comparable to Interpharm; and (i) the
Registration Rights Agreement. vFinance also held discussions members of Atec's
and Interpharm's management regarding the strategic rationale for, and potential
benefits of, the transaction and the past and current business operations,
financial condition and future prospects of Atec and Interpharm. It also
conducted such other financial analyses and examinations and considered such
other financial, economic and market criteria as it determined to be appropriate
for purposes of the opinion.
In rendering its opinion, vFinance relied upon the accuracy and
completeness of all of the financial and other information reviewed by it.
vFinance assumed that the financial forecasts provided by Atec had been
reasonably prepared on a basis reflecting the best currently available judgments
and estimates of the management of Atec.
The following is a summary of the financial analyses performed by
vFinance in arriving at its opinion regarding the Acquisition.
vFinance set out to perform a comparable analysis on companies similar
in nature to Interpharm. A total of 13 companies that vFinance believed fit its
defined parameters were included in the comparable sample. The 13 companies used
in the comparable analysis are Able Laboratories, Alpharma, Inc, Barr
Laboratories, Bradley Pharmaceuticals, Caraco Pharmaceutical Lab, Chattem Inc.,
CNS, Inc., Endo Pharmaceuticals, Eon Labs, Inc., Forest Laboratories, Halsey
Drug Company, Hitech Pharmacal Co., Impax Laboratories, Inc. The bases used to
determine comparability were same industry type, similar products and similar
distribution methods. These 13 companies ranged in market capitalization from
$15.4 million to $19.4 billion, with a mean market capitalization of
approximately $2.14 billion. The range of trailing twelve month revenue figures
generated by this group varied from $7.8 million to $1.9 billion, with a mean of
$394 million, as compared to the $23.2 million generated by Interpharm. Based on
vFinance's review of the multiples, it appeared that the market is rewarding
small, growing, generic drug manufacturers based on their ability to drive
revenue growth. Based on vFinance's valuation, it assigned an overall enterprise
value range of $49.7 to $55.7 million for Interpharm.
In arriving at the valuation range of $49.7 to $55.7 million, vFinance
first sought to compile a sample set of companies that were deemed to be
comparable to Interpharm. First, vFinance conducted an on-site due diligence
visit of the Interpharm facilities to better understand its operations. vFinance
then compiled a list of an initial sample universe of companies, which it
proceeded to cull down to those used in the comparable analysis. The culling
process involved examining publicly-filed documents, press releases, online
review of company websites and marketing materials and removing those that in
vFinance's determination, were not similar in form and substance to Interpharm.
Having arrived at a sample set of comparable companies, vFinance then compared
key operating metrics for Interpharm (EBITDA (Earnings before Interest, Taxes,
Depreciation & Amortization), EBIT (Earnings before Interest and Taxes) and Book
Value of Net Assets) to the public company sample set. It then sought to develop
a valuation range based on a comparison of the public company operating metrics
to the enterprise value and market capitalizations of those same companies.
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Using a mean for these derived values, they were then applied to Interpharm's
operating statistics, yielding a low end range based on enterprise value of
$49.7 million and a high end range of $55.7 million based on market
capitalization
Having reviewed the operating demographics of this sample set and
determining that Interpharm fell within the parameters of this group, vFinance
began to set forth the basis of its analysis. In the end, vFinance settled on 2
analytical techniques: Comparable Company Analysis and Buy-Out/Acquisition
Analysis, to arrive at what vFinance believed was a proper valuation range for
the contemplated transaction.
In terms of Comparable Company Analysis, vFinance saw that it would not
be possible to perform the analysis using earnings or cash flow as the valuation
methodology, as a significant amount of the sample set were currently not
generating earnings or cash flow. As such, vFinance determined that it would
derive multiples based on Market Price and Enterprise Value. These two items
were compared to each company's Revenue, EBITDA (Earnings before Interest,
Taxes, Depreciation & Amortization), EBIT (Earnings before Interest and Taxes)
and Net Assets. These multiples, once derived from the sample set, were applied
against Interpharm's operating statistics to arrive at its value.
vFinance sought to gather data on comparable buy-out transactions in
the field of generic drug manufacturing. vFinance noted a sample set of
approximately 6 transactions, ranging in size from $1.5 million to $644.2
million, with a mean deal size of $285.96 million. Revenues ranged from
approximately $12 million to $400 million, with a mean revenue size of $94
million. vFinance noted that in the sample set, the skewed data, where the
revenue size of the companies was either very small or very large, could
potentially lead to distorted buy-out multiples. As such, vFinance elected to
give no weight to these statistics in formulating their opinion regarding the
fairness of the Acquisition and instead, determined the fairness of the
Acquisition based upon the Comparable Company Analysis and equity ownership
analysis only.
Finally, vFinance performed an analysis of the equity ownership
structure of Atec at both the closing date and upon a full conversion of the
Series K Stock. Analysis of the equity ownership structure is an analysis of the
post-acquisition and post-conversion capital structure of Atec, and it indicated
the percentage ownership position of the interested parties (i.e. Atec public
stockholders, Atec insiders and Interpharm insiders) in the company. The
analysis received an equal weighting to the other analyses considered in
determining the fairness, from a financial point of view, to the shareholders of
Atec. While no new valuation is established for Interpharm under the equity
ownership structure analysis, a valuation is established, as it determines the
amount of Interpharm's value which will accrue to existing Atec shareholders.
The equity ownership analysis was essential to vFinance's determination of the
fairness because it established that the value to accrue to current Atec
shareholders post-Acquisition is greater than the value of the existing
business.
Based on a review of the Acquisition, vFinance determined that the
consideration being offered in the acquisition of Interpharm by Atec is fair,
from a financial standpoint, to Atec's stockholders.
Interests of Certain Persons
Mona Rametra, one of the Interpharm shareholders who is a party to the
Capital Stock Exchange Agreement, is the daughter-in-law of Surinder Rametra,
our chairman and a member of Atec's Board. She is also the daughter of Dr.
Maganlal K. Sutaria, the Chairman of the Board and chief executive officer of
Interpharm. Mrs. Rametra owns 800,000 shares of Interpharm common stock, or 20%
of the outstanding capital stock of Interpharm. As a result, Mrs. Rametra will
receive 20% of all of the Atec Common Stock and Series K Stock to be issued to
the Interpharm shareholders. Although Dr. Sutaria does not own any Interpharm
stock, his other two children (i.e. Mrs. Rametra's brothers) collectively own
55% of Interpharm stock and his nephew, Ravi Sutaria, owns the remaining 25%.
Ravi Sutaria is the son of Bhupatlal K. Sutaria, the President of Interpharm. In
addition, Munish K. Rametra, who is Mrs. Rametra's husband and Surinder
Rametra's son, will share a finder's fee of $100,000 with three other
individuals relating to the Acquisition.
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Accounting Treatment
Atec will have no operating assets, only general corporate liabilities
and no operations, after giving effect to the Management Buy-Out. Accordingly,
the transaction will be treated as a reverse merger in the form of a
recapitalization of Interpharm. As a result, the financial statements of
Interpharm will become the historical financial statements of Atec. The
consolidated pro forma balance sheet of Atec upon consummation of the Interpharm
transaction includes Interpharm's assets and liabilities on an historical cost
basis, plus the net assets of Atec, which will primarily consist of cash and
promissory notes approximating $4 million obtained from the Management Buy-Out.
Certain Federal Income Tax Consequences
The Acquisition will have no federal income tax effect on the current
holders of Atec stock. For federal income tax purposes, the Acquisition will be
treated as a tax-free reorganization under Section 368(a)(1)(B) of the Internal
Revenue Code.
No Dissenters' Rights of Appraisal
Under Delaware law, Atec's stockholders will not be entitled to
dissenters' rights of appraisal in connection with the Acquisition.
Governmental and Regulatory Approval
No federal or state regulatory requirements must be complied with or
approval must be obtained in connection with the Acquisition as of the date
hereof.
The affirmative vote of at least a majority of the shares present in
person and voting or represented by proxy and voting at the Annual Meeting at
which a quorum is present (which shares voting affirmatively also constitute at
least a majority of the required quorum) is necessary for approval of Proposal
No. 1.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 1 TO BE FAIR AND IN THE BEST INTERESTS
OF ATEC AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
ACQUISITION OF INTERPHARM BY ATEC.
PROPOSAL NO. 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
The amendment to the Certificate of Incorporation of Atec will change
our name from "Atec Group, Inc." to "Interpharm Holdings, Inc." In the Capital
Stock Exchange Agreement, the parties agreed to change Atec's name to
"Interpharm Holdings, Inc." as of the closing of the Acquisition. In addition,
pursuant to the terms of the Management Buy-Out, Atec has agreed to grant Baar
Group a perpetual license in its rights to the name "Atec Group, Inc." and to
assign such name to Baar when Atec changes its name. Because, following the
Acquisition and the Management Buy-Out, Atec's sole substantive business
operations will be those of its wholly-owned subsidiary, Interpharm, Inc.,
Atec's Board has determined that the name change will better reflect Atec's
business operations. The full text of the proposed amendment to our certificate
of incorporation is attached hereto as Appendix D.
The affirmative vote of at least a majority of our shares of our issued
and outstanding Series A, B and C preferred stock and Common Stock, voting
together as a class, is necessary for approval of Proposal No. 2. Under Delaware
law, there are no rights of appraisal or dissenter's rights that arise as a
result of a vote to approve the amendment to the Certificate of Incorporation.
52
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 2 TO BE IN THE BEST INTERESTS OF ATEC
AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE NAME
CHANGE.
PROPOSAL NO. 3
THE MANAGEMENT BUY-OUT
On November 25, 2002, Atec entered into an Asset Purchase Agreement
with Baar Group whereby Baar Group agreed to purchase the assets and assume
substantially all of the liabilities of Atec in consideration of cash and
promissory notes. As of December 31, 2003, Atec estimates that it would have
received net proceeds of $2.748 million and that Baar Group would have assumed
approximately $1.889 million in liabilities. The purchase price is payable by
delivery of (a) a $1 million promissory note payable within 12 months, (b) a
$750,000 promissory note payable within 3 years and (c) cash for the remainder
of the purchase price. The calculation of the estimated net proceeds is based
upon a base purchase price of $4,278,184, less $359,700 in closing adjustments
and less approximately $1.171 million of Atec's cash which Atec anticipates will
be returned to Atec as part of the purchase price.
The principals of Baar Group consist of Ashok Rametra, Balwinder Singh
Bathla, Rajnish Rametra and Arvin Gulati, each of whom is a current director,
officer, employee and/or shareholder of Atec. Other than the members of Atec
management who are principals of Baar Group, Atec shareholders will not receive
any consideration as a result of the sale of assets and assignment of
liabilities. The Asset Purchase Agreement provides that the Management Buy-Out
is subject to the approval of Atec's stockholders. You should carefully read the
documents, including the Asset Purchase Agreement, as well as an amendment
thereto, and the Schedules and Exhibits attached thereto, which are included in
this Proxy Statement as Appendix E, as well as Atec's Form 10-K and Form 10-K/A
for the year ended June 30, 2002 and Form 10-Q/A for the quarter ended December
31, 2002, which also are included in this Proxy Statement.
In the event there is a material change in the terms of the Management
Buy-Out, including a material change resulting from the waiver of a condition to
closing, Atec will not consummate the Management Buy-Out until its stockholders
have approved the Management Buy-Out, with such change.
Background of the Management Buy-Out
See "Background of the Acquisition" for description on the background
of the Management Buy-Out.
Reasons for the Management Buy-Out
In concluding that the Management Buy-Out was fair to, and in the best
interest of all Atec stockholders, including unaffiliated stockholders, the
Board and the Special Committee considered the following information and
factors:
1. As discussed above, the offer to purchase Atec's computer
operations by the management group was, in the determination of
the Board and Special Committee, superior to all the other
potential transactions considered or any other bona fide offer
the Board and the Special Committee believed they could receive.
2. As discussed above, the Board and the Special Committee felt that
the Management Buy-Out was in the best interests of Atec and its
stockholders due to the downturn in demand for Atec's services
and products, as well a general reduction in spending for
information and computer technology due to the recent economic
and market conditions.
53
3. The Board and the Special Committee also believed that the
consideration to be paid for the purchase of our assets was fair
based upon the then current trading price of our Common Stock.
They estimated that the total market value of Atec, as determined
by the approximate trading price of $.32 on November 25, 2002,
was approximately $2.7, million which amount is far less than the
purchase price offered by Baar Group, including approximately
$2.7 million to be paid by Baar Group in cash and notes,
approximately $1.9 million in liabilities to be assumed by Baar
Group and approximately $1.2 million in cash to be retained by
Atec,.
4. The Board and the Special Committee also believed that the
Management Buy-Out provided an opportunity to acquire Interpharm.
The Board and the Special Committee also considered potentially
negative factors relating to the Management Buy-Out, including the risk
associated with a large portion of the purchase price being paid in promissory
notes. In the event Baar Group defaults in the repayment of the promissory notes
or enters into bankruptcy, liquidation, reorganization, or some other
winding-up, we may be adversely effected. Although we have attempted to mitigate
these potential risks by requiring the obligations under the notes be secured by
substantially all of the assets of Baar Group, as well as personally guaranteed
by certain principals of Baar Group, there can be no assurance that the assets
of Baar Group will be sufficient or that such guarantors will be able to pay the
amounts due under the notes in the event of a default under the notes.
The Board and the Special Committee also considered the uncertainties
associated with the Management Buy-Out, including (i) the possibility that the
transaction would not be approved by Atec's stockholders; (ii) the uncertainty
regarding the amount of the purchase price to be received following the purchase
price adjustments, and (iii) the possibility that AMEX would delist Atec's
Common Stock upon the basis that Atec has disposed of its principal operating
assets. Based upon a review of the AMEX rules and regulations, we believe that
the Management Buy-Out will not result in delisting by AMEX if the Acquisition
of Interpharm also is consummated. Following the Management Buy-Out and the
Acquisition, Atec will continue to be an operating company engaged in a
commercial stage venture. However, no assurance can be given that our Common
Stock will not be delisted from trading on AMEX. A delisting would likely result
in our Common Stock being traded in the over-the-counter market and cause the
trading volume and share price of our Common Stock to decline.
The Board and the Special Committee concluded that these potentially
negative factors were outweighed by the potential benefits to be gained by the
Management Buy-Out. In addition, with regard to the promissory notes, the Board
and the Special Committee concluded accepting Baar Group's proposal to pay a
portion of the purchase price in the form of promissory notes to be in the best
interest of Atec and its stockholders based upon the fact that the notes provide
(a) an interest rate of 1.5% above Citibank's published prime rate, (b) security
interests in substantially all of the asset of Baar Group, (c) personal
guarantees and (c) all obligations are to be repaid within 3 years, with the
majority being paid within 12 months. Thus, after taking into consideration all
of the factors set forth above, the Board and the Special Committee unanimously
determined that the Management Buy-Out was in the best interests of Atec and its
stockholders, and that Atec should consummate the Management Buy-Out.
Terms of the Management Buy-Out
Pursuant to the terms of the Asset Purchase Agreement, Baar Group will
acquire the assets and assume substantially all of the liabilities of Atec in
consideration of cash and promissory notes. As of December 31, 2003, Atec
estimates that it would have received net proceeds of $2.748 million and that
Baar Group would have assumed approximately $1.889 million in liabilities. The
purchase price is payable by delivery of (a) a $1 million promissory note, (b) a
$750,000 promissory note and (c) cash for the remainder of the purchase price,
at closing. Accordingly, as of December 31, 2002, Atec would have received
promissory notes in the aggregate amount of $1.75 million and cash of
approximately $998,000. This figure is based upon a base purchase price of
$4,278,184, less approximately $359,700 in closing adjustments and less
approximately $1.171 of Atec's cash which Atec anticipates will be returned to
54
Atec as part of the purchase price. Atec also anticipates that the remaining
cash portion of the purchase price (i.e. approximately $998,000) will be paid by
personal funds to be contributed by the principals of Baar Group, including the
$500,000 in financing Baar Group is required to obtain as a condition to
Closing, and/or loans. The principals of Baar Group have informed us that they
verbally have committed to each other to contribute $500,000 of their personal
funds at the time of closing. In addition, the principals of Baar Group have
informed us that they are presently examining further financing options
including obtaining loans from financial institutions or making further capital
contributions from their personal funds.
Atec estimates that as of December 31, 2002, the total amount of
liabilities to be assumed by the Baar Group will be approximately $1,889,000
consisting primarily of approximately (a) $876,000 in accounts payable, (b)
$344,000 for amounts due under our bank revolving line of credit and (c)
$348,000 in accrued expenses. Accordingly, Atec estimates that the net proceeds
and liabilities to be assumed totals approximately $4,637,000.
Adjustment to Purchase Price. The base purchase price will be adjusted
at the time of the closing of the Management Buy-Out. It will be increased by an
amount equal to 34% of income from operations from Atec's Albany, New York City
and New Jersey computer operations during the period of July 1, 2002 through the
date of the closing. The purchase price will be reduced by an amount equal to
the expenses which are allocated to our Long Island, New York office from the
period of July 1, 2002 through the date of closing. These expenses generally are
for general corporate overhead and administrative expenses, including the costs
associated with this Proxy Statement and the costs incurred in connection with
the negotiation and consummation of the Acquisition and the Management Buy-Out.
The purposes of the adjustments are: (i) to give effect to an agreed
upon June 30, 2002 cut-off date for the sale of assets, which coincides with the
end of Atec's fiscal year and (ii) to compensate Atec for the taxes it will have
to pay on the income from operations it is selling (at the corporate rate of
34%), net of any deductible expenses.
The following table sets forth our approximate estimates of the
adjustments to the purchase price and the adjusted purchase price after giving
effect to such adjustments, and the net proceeds from the sale, which does not
take into account Baar Group's assumption of Atec liabilities, assuming
consummation of the Management Buy-Out on the dates indicated. The estimates
constitute "forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause deviations in actual results, performance or achievements to be
materially different from any future results, performance or achievements
express of implied.
December 31, 2002 April 15, 2003
----------------- ---------------
Base purchase price $ 4,278,184 $ 4,278,184
34% of income from operations from Albany,
New York City and New Jersey operations $ 86,600 $ 50,000
Expenses allocated to Long Island ($445,700) ($685,000)
============ ============
Adjusted Purchase Price $ 3,918,484 $ 3,643,184
Less Atec's Cash ($1,171,000) ($1,171,000)
============ ============
Net Proceeds $ 2,748,084 $ 2,472,184
55
Promissory Notes. Baar Group has agreed to deliver two promissory notes
as a part of the purchase price. The principal amount of the first note is $1
million. The principal amount of the first note and the interest thereon will be
paid in 12 monthly installments commencing one month from the date of the
closing. The principal amount of the second note is $750,000. The principal
amount of the second note and the interest thereon will be paid in 36 monthly
installments commencing one month from the date of the closing. Baar Group may
prepay either of the promissory notes, in whole or in part, without any penalty.
The interest rate on both of the promissory notes is equal to 1.5% per annum in
excess of the prime rate as publicly announced by Citibank as its prime rate
from time to time. Pursuant to the notes, the interest rate is adjustable on a
monthly basis.
The promissory notes contain customary default provisions including:
(a) failure to make payment of principal or interest, (b) bankruptcy and (c) the
breach of any representation or warranty or the failure to perform any of the
terms and covenants in the promissory notes, the Asset Purchase Agreement, the
Security Agreement or the Guarantee.
Security Agreement. Pursuant to a Security Agreement, all of Baar
Group's obligations under the promissory notes are secured by substantially all
of the assets of Baar Group, including the assets being acquired by Baar Group
pursuant to the Asset Purchase Agreement and after acquired assets such as the
accounts receivable, contract rights, general intangibles, instruments, monies,
securities, deposits, inventory, records, equipment and other personal
properties of Baar Group.
Guarantee. In addition, Ashok Rametra, Rajnish Rametra and Arvin Gulati
will guarantee the full and punctual payment and performance of all of the
obligations of Baar Group arising under the promissory notes. The liability of
Ashok Rametra under the Guarantee is limited to 50% of the guaranteed
obligations. Similarly, the liabilities of Rajnish Rametra and Arvin Gulati
under the Guarantee are limited to 25% of the guaranteed obligations, each.
Acquired Assets. The assets of Atec to be acquired by Baar Group
pursuant to the Asset Purchase Agreement include all of the assets of Atec other
than the following:
1. employment agreements of Surinder Rametra (our chairman) and
James Charles (our chief financial officer);
2. lease for our offices located in Commack, New York, including all
machinery, equipment, fixtures and office furniture located at
such offices;
3. assets and properties in our broker account with Merrill Lynch in
the amount of approximately $83,500;
4. our insurance policies, including any premium deposits, refunds
or rebates for such policies;
5. retainers provided to our special litigation counsel and our
accountants;
6. any tax receivables or tax credits;
7. intellectual property relating to our Nexar division;
8. various employee benefit plans and insurance, including our 2000
Flexible Stock Plan and 1997 Stock Option Plan; and
9. capital stock of any of our subsidiaries other than Micro
Computer Store, Inc. and Innovative Business Micros, Inc.
56
Assumed Liabilities. Pursuant to the Asset Purchase Agreement, Baar
Group has agreed to assume all of the liabilities of Atec other than the
following:
1. tax liabilities of Atec to the extent of any such liability
arising out of income from operations during the period of July
1, 2002 through the date of closing from our operations in
Albany, New York City and New Jersey;
2. expenses and liabilities arising out of a class action lawsuit
commenced entitled Asadour Manavazian v. Atec Group, Inc.,
Surinder Rametra and Ashok Rametra, civil action no. CV-99-4993,
pending in the United District Court for the Southern District
Court of New York. The class action lawsuit has been settled for
an amount of $1,675,000. The amount of the settlement represents
the balance of the coverage available under our insurance policy,
and the insurance carrier has paid the full amount of the
settlement to the claims administrator for distribution to
members of the class; and
3. certain liabilities arising out of a judgment against dissolved
subsidiaries of Atec in the amount of $118,000.
Ancillary Agreements. The Asset Purchase Agreement provides that the
parties also will enter into additional side agreements, including an agreement
whereby Atec grants an exclusive, worldwide, royalty free license to Baar Group
to use the "Atec" and "Atec Group" name. It is contemplated that following the
change of Atec's name to Interpharm Holdings, Inc. as set forth in Proposal No.
2 of this Proxy Statement, the "Atec" and "Atec Group" names will be transferred
to Baar Group.
In addition, Baar Group has agreed that in the event it sells, leases
or otherwise disposes of any interest in the customer lists, goodwill,
employees, real estate, equipment leases or vendor authorizations that it
acquires from Atec within 12 months of acquiring such assets, it will pay to
Atec 50% of the gross proceeds from such disposition of the asset.
As part of the Asset Purchase Agreement, Atec has agreed to sell its
interest in its subsidiaries Micro Computer Store, Inc. and Innovative Business
Micros, Inc. These two subsidiaries have New York State tax receivables due to
them in the aggregate amount of approximately $15,000. Pursuant to a side
agreement to be entered into at closing, Baar Group has agreed to deliver to
Atec these tax receivables when they are paid to the subsidiaries.
Representations and Warranties. In the Asset Purchase Agreement, Atec
and Baar Group make customary representations and warranties to each other,
including representations and warranties regarding the following: (a)
organization, (b) authority regarding the Asset Purchase Agreement, (c) absence
of violations of or conflicts with certain laws and agreements and (d) the
absence of any brokers or finders in connection with the Management Buy-Out.
In addition, Atec makes customary representations regarding (a) title
to its assets, (b) its subsidiaries, (c) the accuracy of its financial
statements, (d) absence of material events since June 30, 2002, (e) absence of
undisclosed liabilities, (f) compliance with applicable laws, (g) certain tax
matters, (h) its intellectual property, (i) inventory, (j) contracts to which it
is a party, (k) notes and account receivables, (l) absence of powers of
attorney, (m) litigation, claims and investigations, (n) warranties for products
manufactured, sold, leased or delivered by Atec, (o) employees, (p) certain
employee benefit matters, (r) compliance with certain environmental, health and
safety laws, and (s) acquisition of the promissory notes of Baar Group for
investment purposes. The representations and warranties of Atec are specifically
limited to the knowledge of Atec. The Asset Purchase Agreement provides that
knowledge of any of the principals of Baar Group is not attributable to Atec.
Furthermore, Baar Group has represented and warranted that to its knowledge and
the knowledge of its principals all of the representations and warranties made
by Atec are true, complete and correct in all material respects. Baar Group has
also represented that at the time of the closing of the Management Buy-Out it
will have at least $500,000 in cash and no material liabilities.
Conduct Pending Closing. The Asset Purchase Agreement provides that
during the period from the date of the Asset Purchase Agreement and continuing
until the closing, each of Atec and Baar Group will (a) use its best efforts to
take all actions that are necessary, proper or advisable to consummate the
Management Buy-Out and (b) give notices to and use reasonable best efforts to
obtain consents from third parties and governmental agencies as may be necessary
57
to consummate the Management Buy-Out. In addition, Atec agreed to (a) conduct
its business in the ordinary course, (b) keep its business and properties intact
and (c) permit Baar Group full access to all premises, records and personnel of
Atec.
Conditions. The obligations of Baar Group to effect the transactions
contemplated by the Asset Purchase Agreement are subject to the satisfaction of
the following conditions: (a) the representations and warranties of Atec set
forth in Asset Purchase Agreement shall be true in material respects as of the
closing, (b) Atec shall have performed in all material respects its covenants of
the Asset Purchase Agreement, (c) the receipt of all consents, from third
parties and governmental agencies required to consummate the Management Buy-Out,
(d) no action, suit or proceeding pending which prevents the Management Buy-Out
or adversely effects the assets to be purchased, (e) Atec shall have entered
into the side agreement regarding the license of the name "Atec Group" and (f)
Baar Group shall have received a minimum of $500,000 in financing.
Similarly, the obligations of Atec to effect the transactions
contemplated by the Asset Purchase Agreement are subject to the satisfaction of
the following conditions: (a) the representations and warranties of Baar Group
set forth in Asset Purchase Agreement shall be true in material respects as of
the closing, (b) Baar Group shall have performed in all material respects its
covenants of the Asset Purchase Agreement, (c) termination and release
agreements from the principals of Baar Group and John Pakiam terminating their
employment with Atec, (d) no action, suit or proceeding pending which prevents
the Management Buy-Out or adversely effects the assets to be purchased, (e)
receipt of a fairness opinion as to the purchase price for the Management
Buy-Out, (f) approval of the Management Buy-Out by Atec's stockholders, (g) a
determination that the Management Buy-Out will not result in the delisting of
Atec's securities from AMEX, (h) Baar Group or its principals shall have entered
into the following side agreements: (i) the guarantees by the principals of Baar
Group, (ii) security agreement relating to the Notes, (iii) the Notes, (iv)
agreement to deliver 50% of gross proceeds to Atec in the event Baar Group
disposes of certain assets within 12 months of the closing and (v) agreement to
deliver certain New York State tax receivables to Atec, (i) consummation of the
Acquisition of Interpharm and (j) Alan Prefer shall have entered into a Security
and Pledge Agreement whereby he pledges 100,000 shares of his Atec Common Stock
as security for payment of a certain promissory note. Under the terms of the
Asset Purchase Agreement, in the event that the Acquisition of Interpharm is not
consummated, Atec will not be obligated to consummate the transactions
contemplated in the Asset Purchase Agreement. However, Atec may waive this
condition at its option. Atec does not have any present intent to waive this
condition or any of the other conditions described above. In the event that the
acquisition of Interpharm is not approved by the Atec stockholders, Atec will
evaluate available options to determine which option is in the best interest of
Atec and its stockholders, including abandoning the Management Buy-Out or going
forward with the Management Buy-Out and thereafter liquidating Atec and/or
seeking other potential acquisition candidates. However, Atec will not
consummate the Management Buy-Out under such a scenario until its stockholders
have approved the Management Buy-Out without the Acquisition.
Termination. The Asset Purchase Agreement may be terminated at any time
prior to the closing: (a) by mutual consent of Atec and Baar Group, (b) by Baar
Group if Atec has breached any of its representations, warranties or covenants
or if the conditions set forth above in "Conditions" above as they relate to
Baar Group's obligations to consummate the Management Buy-Out have not been met
by the time of closing, or such other date as agreed to by the parties or (c) by
Atec if Baar Group has breached any of its representations, warranties or
covenants or if the conditions set forth above in "Conditions" above as they
relate to Atec's obligations to consummate the Acquisition have not been met by
the time of closing. In addition, either party may terminate the Asset Purchase
Agreement within 30 days provided that the terminating party pays the other
party's expenses associated with the Management Buy-Out up to $250,000.
If the Asset Purchase Agreement is terminated as provided therein, all
rights and obligations of the parties under the Asset Purchase Agreement will
terminate without any liability, except liability arising out a breach of the
agreement.
58
Opinion of vFinance
On November 25, 2002, the Board and the Special Committee determined
that the Management Buy-Out was fair and in the best interest of Atec and its
shareholders. It recommended the consummation of the Management Buy-Out, subject
to a fairness opinion. As a result, on November 27, 2002, the Special Committee
selected vFinance to issue a fairness opinion, and on December 17, 2002,
vFinance delivered a written opinion to our Board to the effect that, based upon
the assumptions made, matters considered and limits of the review undertaken,
the Management Buy-Out from a financial point of view, is fair to Atec's
stockholders. In making their determination on November 25, 2002 that the
Management Buy-Out was fair and in the best interest of Atec and its
shareholders, the Board and the Special Committee had not received vFinance's
opinion, and hence, they did not rely on vFinance's opinion in making such
determination. A copy of the opinion is attached as Appendix F and is
incorporated herein by reference. vFinance's opinion should be read in its
entirety by the stockholders of Atec for information with respect to assumptions
made and matters considered. Atec agreed to pay vFinance a fee for delivery of
its opinion.
In arriving at its opinion, vFinance reviewed (a) periodic reports
filed by Atec with the SEC; (b) certain publicly available documents regarding
Atec; (c) publicly available data and information for companies vFinance
determined to be comparable to Atec; (d) available research reports for
companies vFinance determined to be comparable to Atec; (e) financial terms of
other recent transactions deemed to be similar; (f) the Asset Purchase Agreement
and all accompanying schedules and exhibits; (g) the form of the notes, guaranty
and security agreement to be delivered by Baar Group and/or its principals.
vFinance also held discussions with members of Atec's management regarding the
strategic rationale for, and potential benefits of, the transaction and the past
and current business operations, financial condition and future prospects of
Atec. It also conducted such other financial analyses and examinations and
considered such other financial, economic and market criteria as it determined
to be appropriate for purposes of their opinion.
In rendering its opinion, vFinance relied upon the accuracy and
completeness of all of the financial and other information reviewed by it.
vFinance assumed that the financial forecasts provided by Atec had been
reasonably prepared on a basis reflecting the best currently available judgments
and estimates of the management of Atec.
The following is a summary of the financial analyses performed by
vFinance in arriving at its opinion regarding the Management Buy-Out.
vFinance included a total of 11 companies that it believed fit the
defined parameters in its comparable sample. The 11 companies used in the
comparable company analysis are Manchester Technologies, Inc., Syscomm
International Corp., Micros to Mainframes, Inc., Transnet Corp., Canterbury
Consulting Group, Inc., Tech Data Corp., American Management Systems, Inc.,
Infocrossing, Inc., Digital Fusion, Inc., Atlantic Data Services, Inc., Braun
Consulting, Inc. The bases used to determine comparability were same industry
type and similar products or services. According to vFinance, from a valuation
viewpoint, when companies in a sample set tend to be marginally profitable or
operating at a loss, it is common practice to examine valuation by comparing the
market capitalization versus the revenues being generated or an overall
enterprise values to arrive at statistics that can then used to value a company.
The 11 companies in vFinance's sample set range in market capitalization size
from just slightly under $1.0 million to $1.6 billion, with a mean market
capitalization of approximately $210 million. The range of trailing twelve month
revenue figures generated by this group varied from $10.3 million to $15.9
billion, with a mean of $1.6 billion, as compared to the $36.3 million generated
by Atec.
Having reviewed the operating demographics of this sample set and
having determined that Atec fell within the parameters of this group, vFinance
began to set forth the basis of its analysis. In the end, vFinance settled on
two analytical techniques; Comparable Company Analysis and Buy-Out/Acquisition
Analysis, to arrive at what they believe was a proper valuation range for Atec.
In terms of Comparable Company Analysis, vFinance saw that it would not
be possible to perform the analysis using earnings or cash flow as the valuation
methodology, primarily because most of the companies in the comparable sample
59
were currently not generating earnings or cash flow. As such, vFinance
determined that it would derive multiples based on Market Price and Enterprise
Value. These two items were compared to each company's Revenue, EBITDA (Earnings
before Interest, Taxes, Depreciation & Amortization), EBIT (Earnings before
Interest and Taxes) and Net Assets. These multiples, once derived from the
sample set, were applied against Atec's operating statistics to arrive at its
value. Based on this analysis, the range of value worked out to be $4.39 million
to $5.23 million.
After examining the selected comparable companies, vFinance examined
buyouts of similar sized companies in the field of information technology.
vFinance noted a sample set of approximately 16 transactions, ranging in size
from $1.2 million to $136.2 million, with a mean deal size of $27.9 million.
Revenues ranged from approximately $4 million to $102 million, with a mean
revenue size of $30.3 million. While the revenue size is comparable to Atec, the
buy-out sample set was not truly reflective of Atec's core business, which
skewed the overall valuation accorded to the buy-out multiple. A further review
of the sample set showed only three transactions that could be deemed comparable
to Atec, and the transactions ranged from $1.2 million to $22.3 million, with a
mean deal size of $9.5 million. Given the rather small sample set of buy-out
transactions of like companies, vFinance elected to give no weight to these
statistics in formulating its opinion regarding the fairness of the
consideration offered in the Management Buy-Out, and instead determined the
fairness of the Management Buy-Out on the Comparable Company Analysis only.
Based on a review of the Management Buy-Out, vFinance determined that
the consideration being offered in the Management Buy-Out is fair, from a
financial standpoint, to Atec's stockholders.
Interest of Certain Persons
The principals of Baar Group are Ashok Rametra, Balwinder Singh Bathla,
Rajnish Rametra and Arvin Gulati. Ashok Rametra is our President and Treasurer
and has been a director of Atec since 1994. Mr. Bathla is our chief executive
officer and has been a director of Atec since April 2002. Rajnish Rametra is our
chief operating officer of technology integration services. Mr. Gulati is our
chief operating officer of distribution. In addition, as of December 19, 2002,
each of the above-named individuals beneficially owned the following number of
shares of Atec Common Stock: Ashok Rametra - 627,242, Balwinder Singh Bathla -
325,000, Rajnish Rametra - 230,870 and Arvin Gulati - 58,462.
Ashok Rametra and Rajnish Rametra also are brothers of Surinder
Rametra, our chairman and a member of Atec's Board. As a result of the
above-described relationships, Ashok Rametra, Mr. Bathla and Surinder Rametra
recused themselves from participating in the negotiations or deliberations of
the Management Buy-Out, including the vote of the Board approving the Management
Buy-Out.
Accounting Treatment
The Management Buy-Out will be treated as a sale of Atec's assets.
Certain Federal Income Tax Consequences
The Management Buy-Out may result in an income tax obligation to Atec
in the amount of approximately $176,000, which amount may be offset by net
operating loss carry forwards.
No Dissenters' Rights of Appraisal
Under Delaware law, Atec's stockholders will not be entitled to
dissenters' rights of appraisal in connection with the Management Buy-Out.
Governmental and Regulatory Approval
No federal or state regulatory requirements must be complied with or
approval must be obtained in connection with the Management Buy-Out as of the
date hereof.
60
The affirmative vote of at least a majority of our shares of our Series
A, B and C preferred stock and Common Stock, voting together as a class, is
necessary for approval of Proposal No. 3.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 3 TO BE FAIR AND IN THE BEST INTERESTS
OF ATEC AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
MANAGEMENT BUY-OUT.
PROPOSAL NO. 4
ELECTION OF DIRECTORS
A board of directors consisting of six directors is to be elected at
the meeting. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for Atec's nominees named below. In the event that any
nominee of Atec is unable or declines to serve as a director at the time of the
annual meeting, the proxies will be voted for any nominee who shall be
designated by the current board of directors to fill the vacancy. In the event
that Proposals 1 through 3 are approved, it is not expected that any nominee
will be unable or will decline to serve as a director. If any of the foregoing
Proposals is not approved, Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria, the
two director nominees of Interpharm, Inc. will not be elected and immediately
after the annual meeting of stockholders, the Board of Directors will appoint
Ashok Rametra and James Charles (current Atec directors) to fill the vacancies
created. In the event that additional persons are nominated for election as
directors, the proxy holders intend to vote all proxies received by them in such
a manner as will assure the election of as many of the nominees listed below as
possible, and in such event the specific nominees to be voted for will be
determined by the proxy holders. The term of office of each person elected as a
director will continue until the next annual meeting of stockholders or until a
successor has been duly elected and qualified or until his or her earlier
resignation, removal from office, death or incapacity.
Unless otherwise specified, the enclosed proxy will be voted in favor
of the election of Surinder Rametra, David Reback, Praveen Bhutani, Stewart
Benjamin, Dr. Maganlal K. Sutaria and Bhupatlal Sutaria to our board of
directors. It is the intention of the persons named in the enclosed proxy to
vote the proxies for the election of the nominees named below, unless otherwise
specified.
The following table sets forth the names and ages of all current
directors of Atec and all persons nominated or chosen to become directors along
with their current position, offices and term:
Name of Nominee Age Position with Atec Director Since
--------------- --- ------------------ --------------
Surinder Rametra 63 Chairman of the Board, June 1994
and Director
Stewart Benjamin(1) 38 Director May 2001
David Reback(1)(2) 60 Director May 2001
Praveen Bhutani(1)(2) 55 Director May 2001
Ashok Rametra(2)(3) 50 President, Treasurer June 1994
and Director
James J. Charles(3) 60 Chief Financial Officer September 2000
Dr. Maganlal K. Sutaria 66 None n/a
Bhupatlal Sutaria 57 None n/a
61
---------------------
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Not nominated for election as a director
Set forth below is certain information with respect to each of the
nominees for director of Atec, including the individuals to be appointed as
directors by the Board of Directors in the event the Interpharm nominees are not
elected:
SURINDER RAMETRA. Mr. Rametra was appointed the Chief Executive Officer
and Chairman of the Board in June 1994. Prior to June 1994, Mr. Rametra was
president of one of our subsidiaries. In January 2002, Mr. Rametra resigned as
our Chief Executive Officer. Mr. Rametra received a Bachelor of Science Degree
from the Punjab Engineering College, India, and a Masters of Science Degree in
Engineering from 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.
PRAVEEN BHUTANI. Mr. Bhutani was appointed a Director in May 2001. Mr.
Bhutani was the founder of Ultra Spec Cables, Inc. and The Options Group, Inc.
He has served both companies as the Chief Executive Officer since 1992. Prior to
1992 he held various executive positions. Mr. Bhutani has Bachelor and Master
degrees in finance from the Delhi College, Delhi, India.
STEWART BENJAMIN. Mr. Benjamin was appointed a Director in May 2001.
Mr. Benjamin is a certified public accountant in the State of New York. From
January 1996 to the present, Mr. Benjamin has been self-employed as a sole
practitioner under the name of Stewart H. Benjamin, CPA, P.C. From 1985 through
December 1995, Mr. Benjamin was employed as a staff accountant in both private
industry and local public accounting firms. Mr. Benjamin received a Bachelor of
Business Administration degree from Pace University in 1985.
DAVID C. REBACK. Mr. Reback was appointed a Director in November 1997.
Since 1969, Mr. Reback has been a partner with Reback & Potash, LLP, a law firm
specializing in litigation, appellate matters and real estate. Mr. Reback
received a Bachelor of Arts degree from Syracuse University, and in 1965 he
received a Juris Doctor's degree from Syracuse University College of Law.
DR. MAGANLAL K. SUTARIA. Dr. Sutaria is a Cardiovascular surgeon and
has served as the Chairman of Interpharm's Board of Directors since 1989. Dr.
Sutaria received his medical degree from the Medical College, Ahmedabad, Gujarat
University in 1961. Dr. Sutaria has served as an Assistant Professor of Surgery
at the State University of New York at Stony Brook.
BHUPATLAL K. SUTARIA. Mr. Sutaria has served as the President of
Interpharm since 1990. Prior to joining Interpharm, Mr. Sutaria was an
entrepreneur involved in several businesses. Mr. Sutaria received a Bachelor's
degree in Chemistry from Saurashpra University in India in 1972 and a Masters of
Business Administration degree from the University of Palm Beach in 1974.
ASHOK RAMETRA. Mr. Rametra was appointed President in January of 1999.
Prior to January 1999, and since June 1994, Mr. Rametra was the Treasurer, Chief
Financial Officer and a Director of Atec. From June 1994 to March 1995, Mr.
Rametra also served as Atec's president. Prior to 1994, Mr. Rametra was the
president of a subsidiary of Atec. Mr. Rametra received a Bachelor of Science
Degree from St. Johns University in Accounting in 1980.
JAMES J. CHARLES. Mr. Charles was appointed Chief Financial Officer in
January 1999. Prior to his appointment, Mr. Charles was a financial consultant
to several public companies for the period of 1994-1998. Mr. Charles was also
the Chief Financial Officer of a printing company from 1991-1994 and a partner
at Ernst & Young from 1966-1991.
62
Directors are elected by a plurality vote and the six nominees who
receive the most votes of our Series A, B and C preferred stock and Common
Stock, voting together as a class, will be elected. In the election of
Directors, votes may be cast in favor of or withheld with respect to each
nominee.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 4 TO BE IN THE BEST INTERESTS OF ATEC
AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" ALL SIX OF THE ABOVE-NAMED
NOMINEE DIRECTORS TO THE ATEC BOARD.
MANAGEMENT
The following table sets forth the names and ages of all current
officers of Atec along with their current positions in Atec.
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 duly elected and qualified.
Name Age Position
---- --- --------
Ashok Rametra 50 President, Secretary, Treasurer
Balwinder Singh Bathla 46 Chief Executive Officer
James J. Charles 60 Chief Financial Officer
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The board of directors of Atec held a total of 5 meetings during the
fiscal year ended June 30, 2002. In addition, the board of directors acted 6
times by unanimous consent during the fiscal year ended June 30, 2002. During
the fiscal year ended June 30, 2002, each of our directors attended at least 80%
of the aggregate number of all meetings of the board of directors and of the
committees, if any, on which such director served. The board of directors has
standing Audit, Stock Option and Compensation Committees. It does not have a
nominating committee.
Audit Committee and Audit Committee Report
------------------------------------------
The board of directors created the audit committee in 1994. The audit
committee is responsible for reviewing reports of financial results, audits,
internal controls, and adherence to its Business Conduct Guidelines in
compliance with federal procurement laws and regulations. The committee
recommends to the board of directors the selection of Atec's outside auditors
and reviews their procedures for ensuring their independence with respect to the
services performed for Atec.
The audit committee is composed of directors: Stewart Benjamin, David
Reback and Praveen Bhutani. In the opinion of the board of directors, Messrs.
Benjamin, Reback and Bhutani are independent of management and free of any
relationship that would interfere with their exercise of independent judgment as
members of this committee and they are independent as defined in Section 121(A)
of the AMEX listing standards. The board of directors has adopted a written
charter for the audit committee.
The audit committee has reviewed and discussed the audited financials with
management and the matters required to be discussed by SAS 61. The committee has
also received the written disclosures and the letter from its independent
accountants required by Independence Standards Board of directors Standard No. 1
and has discussed with its independent accountant the independent accountant's
independence. Based on a review of the foregoing, the audit committee
recommended to the board of directors that the audited financial statements be
included in Atec 2002 Annual Report on Form 10-K. The audit committee met in
September 2002 to review results of the 2002 audit.
63
Stewart Benjamin
David Reback
Praveen Bhutani
Stock Option Committee
----------------------
The board of directors created the stock option committee in July 1994.
The stock option committee currently consists of directors' Ashok Rametra, James
Charles and David Reback. During fiscal 2002, the stock option committee met 2
times. The stock option committee is responsible for setting forth, and
approving any and all stock options under Atec's stock option plans as the stock
option committee deems is desirable and necessary, while mindful of and guided
by industry standards. In the opinion of the board of directors, Mr. Reback is
independent of management and free of any relationship which would interfere
with his exercise of independent judgment as a member of the stock option
committee. Mr. Ashok Rametra and Mr. James Charles are not independent as
determined by the board of directors based on their status as employees and
executive officers of Atec.
Compensation Committee
----------------------
In August 1994, the board of directors established a compensation
committee, which is responsible for decisions regarding salaries, stock option
grants and other matters regarding executive officers and key employees of Atec.
Ashok Rametra, David C. Reback and Praveen Bhutani currently serve on the
compensation committee. During fiscal 2002, the compensation committee met 2
times.
BOARD OF DIRECTORS COMPENSATION
Compensation of Directors
-------------------------
All directors are entitled to reimbursement of reasonable travel and
lodging expenses related to attending meetings of the board of directors and any
committee on which they serve. On January 9, 2001, our stockholders approved the
receipt by our non-employee directors of up to $5,000 for attendance at each
quarterly meeting of the board of directors, plus up to $1,000 for attendance at
each committee meeting. Non-employee directors are also eligible to participate
in and receive stock options under our 2000 Plan. Directors who are employees
receive no fees for attending meetings of the board of directors or any
committee on which they serve.
During the fiscal year ended June 30, 2002 no director received any
fees for attending meetings.
REPORT OF THE COMPENSATION COMMITTEE
This report outlines the framework used for making compensation
decisions. Management's compensation philosophy and the criteria used for making
compensation decisions in fiscal 2002 regarding the Chief Executive Officer and
the other named executive officers is set forth below.
Framework for Compensation Decisions.
The board of directors has overall responsibility for compensation and
benefit programs. The board of directors created the compensation committee in
August 1994 to facilitate its fulfillment of this responsibility. The committee
administers Atec's salary program and recommends to the board of directors
grants of stock options under our stock option plans. The committee specifically
reviews and recommends for board approval all decisions relating to the
compensation of the Chief Executive Officer and other named executive officers.
64
Philosophy of Management Compensation.
Atec has an aggressive goal to significantly improve stockholder value
by being an industry growth leader. The committee recognizes that the
compensation program must enable Atec to attract, retain, and motivate key
employees who are committed to creating stockholder value.
Criteria Used for Making Compensation Decisions in Fiscal 2002.
This section describes the criteria used by the board of directors and
the compensation committee regarding compensation decisions in fiscal 2002
affecting the Chief Executive Officer and other executive officers named in the
summary compensation table below. Before the establishment of the compensation
committee, salaries were based on individual employment agreements and any
bonuses were reflective of an individual's performance during the year and that
individual's current compensation compared to competitive market practices.
Base Salary.
In fiscal 2002, the committee reviewed and compared various executive
compensation programs established by competitors in Atec's industry to determine
whether compensation levels for Atec's executive officers were consistent with
competitive practice for companies in the same line of business. The committee
reviewed base salaries, bonuses and whether executive officers were granted
stock options at these comparable companies. The committee believed that these
levels should serve as a barometer of the compensation levels to which executive
compensation should be compared. Based on these comparisons, the committee
recommended and the board of directors approved the base salary for each of the
executive officers named in the summary compensation table effective July 1,
2000 and Mr. Bathla effective January 1, 2002.
Bonuses.
In the past, bonuses were awarded to executive officers based on the
successful achievement of specific quantitative and qualitative measures
including: growth in revenue run rates and customer accounts, and managing major
change initiatives. In fiscal 2002, based upon these criteria, no bonuses were
awarded.
Chief Executive Officer
The Chief Executive Officers' compensations were based upon employment
agreements. Pursuant to his employment agreement, Surinder Rametra was entitled
to a base salary of $200,000. In fiscal 2002, Mr. Rametra volunteered to reduce
his base salary for fiscal 2002 to $159,615 in light of the downturn in the
economy and the reduced demand for Atec services and products. In January 2002,
Mr. Bathla was appointed Chief Executive Officer. His employment agreement
provides for an annual base salary of $225,000, as well as annual discretionary
stock options, stocks and cash bonuses. Based upon downturn in the economy and
the reduced demand for Atec services and products, the compensation committee
recommended that no stock options, stocks or cash bonus be awarded to Mr. Bathla
for fiscal 2002, and accordingly, no such discretionary compensation was awarded
to Mr. Bathla.
Stock Options.
In fiscal 2002, the committee recommended, and the board of directors
approved, grants of incentive stock options to each of the executive officers
named in the summary compensation table below.
The committee believes that our compensation practices and plans bring
Atec's executives into line with current market conditions for pay and benefits
in its industry and supports Atec's mission and strategies going forward.
65
Ashok Rametra
David Reback
Praveen Bhutani
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In August 1994, the board of directors established a compensation
committee, which is responsible for decisions regarding salaries, stock option
grants and other matters regarding executive officers and key employees of Atec.
During fiscal 2000, David C. Reback and George Egan, a former director, were
members of the compensation committee. Directors' Ashok Rametra, Richard
Sullivan and Kristen Sickorez served on the committee from November 2000 to
March 2001. In May 2001, David Reback and Praveen Bhutani were appointed to the
Committee. In the opinion of the board of directors, Mr. Reback and Mr. Bhutani
are independent of management and free of any relationship which would interfere
with their exercise of independent judgment as a member of our compensation
committee. Mr. Rametra is not independent based on his status as both an
employee and executive officer of Atec.
EXECUTIVE COMPENSATION
The Summary Compensation Table for the years ended June 30, 2002, 2001
and 2000 is provided herein. This table provides compensation information on
behalf of the existing officers and directors who earned in excess of $100,000.
There are no Option/SAR Grants, Aggregated Option/SAR Exercises or Fiscal
Year-End Option/SAR Value Table for the years ended June 30, 2001, 2000 and/or
1999. There are no long-term incentive plan ("LTIP") awards, or stock option or
stock appreciation rights except as discussed below.
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 2002, 2001 and 2000
Annual Compensation Awards Payouts
Other
Year Compen- Options/ LTIP
Name Position Ended Salary($) Bonus($) sation($) SARs Payouts
---- --------- ------- --------- -------- --------- -------- ---------
Surinder Rametra Chairman* 6/30/02 159,615 14,367(1) NONE NONE
6/30/01 108,915 8,464(2) NONE NONE
6/30/00 200,000 12,731(3) NONE NONE
Ashok Rametra President 6/30/02 181,731 10,772(4) NONE NONE
6/30/01 215,077 50,000 10,766(5) NONE NONE
6/30/00 200,000 25,000 12,779(6) NONE NONE
Balwinder Singh CEO* 6/30/02 64,038 3,900(7) NONE NONE
Bathla
* Surinder Rametra was the Company's Chief Executive Officer during the
fiscal years ended June 30, 2000 and 2001 and part of 2002. Mr. Bathla
became the Company's Chief Executive Officer in January 2002.
(1) Major Medical $6,567, Leased Auto $7,800
(2) Major Medical $3,531, Leased Auto $4,933
(3) Major Medical $3,941, Leased Auto $8790
(4) Major Medical $3,064, Lease Auto $7,708
(5) Major Medical $3,058, Leased Auto $7,708
(6) Major Medical $5,611, Leased Auto $7,168
(7) Leased Auto $3,900
66
YEAR END OPTION TABLE
Year End Option Table. The following table sets forth certain
information regarding the stock options held as of June 30, 2002, by the
individuals named in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End (#) at Fiscal Year End (4)
Shares Acquired Value ----------------------------- ---------------------------
Name on exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------- ------------ -------------- ----------- -------------
Surinder Rametra (1) 0 0 2,297,000 750,000 0 0
Ashok Rametra (2) 0 0 1,345,000 750,000 0 0
Balwinder Singh
Bathla(3) 0 0 100,000 0 0 0
(1) Represents options to acquire: (i) 7,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 500,000 shares at $5.50 per share
exercisable through March 28, 2008; (iii) 250,000 shares at $4.67 per share
exercisable through September 27, 2008; (iv) 140,000 shares at $4.26 per
share exercisable through June 29, 2009; (v) 150,000 shares at $1.993 per
share exercisable through November 7, 2009 and (vi) 1,250,000 shares at
$.56 per share exercisable through April 23, 2011.
(2) Represents options to acquire: (i) 10,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 35,000 shares at 3.7125 per share
exercisable through October 8, 2008; (iii) 100,000 shares at $6.80 per
share exercisable through December 14, 2008; (iv) 200,000 shares at $1.993
per share exercisable through November 7, 2009 and (v) 1,000,000 shares at
$.563 per share excisable through November 14, 2010.
(3) Represents options to acquire 100,000 shares at $3.75 per share exercisable
through December 19, 2002.
(4) Computation based on $.40, which was the June 28, 2002, closing price for
our common stock.
Option Grant Table. The following table sets forth certain information
regarding the stock options granted during the fiscal year ended June 30, 2002,
by us to the individuals named in the above Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Granted to
Employees in Exercise Price Expiration
Name Granted (#) Fiscal Year $ / Share Date
---- ----------- ----------- --------- ---------
Surinder Rametra 750,000 28% $.50 2011
Ashok Rametra 750,000 28% $.50 2011
67
PERFORMANCE GRAPH(1)
Total Return to Shareholders
(Dividends reinvested monthly)
ANNUAL RETURN PERCENTAGE
Years Ending
Company / Index Jun98 Jun99 Jun00 Jun01 Jun02
-------------------------------------------------------------------------------------------------
ATEC GROUP INC 142.20 -47.46 -45.16 -61.88 -50.62
S&P SMALLCAP 600 19.46 -2.31 14.39 11.12 0.27
S&P 600 COMPUTER HARDWARE -43.51 22.12 -52.56 -31.04 3.55
INDEXED RETURNS
Base Years Ending
Period
Company / Index Jun97 Jun98 Jun99 Jun00 Jun01 Jun02
-------------------------------------------------------------------------------------------------
ATEC GROUP INC 100 242.20 127.26 69.79 26.60 13.14
S&P SMALLCAP 600 100 119.46 116.70 133.49 148.32 148.73
S&P 600 COMPUTER HARDWARE 100 56.49 68.99 32.73 22.57 23.37
-----------------------------
| TOTAL SHAREHOLDER RETURNS |
-----------------------------
[GRAPHIC CHART OMITTED]
(1) Source: Standard & Poor's.
68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 30, 2003, certain
information with respect to the beneficial ownership of the voting securities by
(i) any person (including any "group" as that term is used in Section 13(d)(3)
of the Securities Exchange Act) known by ATEC to be the beneficial owner of more
than 5% of our voting securities, (ii) each director and nominee, (iii) each
executive officer named in the Summary Compensation table appearing herein, (iv)
all present executive officers and directors as a group, and (v) all
shareholders of Interpharm. The table also sets forth the respective general
voting power of such persons taking into account the voting power of our common
stock and preferred stock combined. None of the persons in the following table
presently owns preferred stock.
In addition, the table sets forth information with respect to the
beneficial ownership of the voting securities, assuming the Acquisition of
Interpharm had closed as of March 30, 2003.
Post Acquisition of Interpharm
----------------------------------
Name and Address Amount and Nature Amount and Nature
of Beneficial of Beneficial Percentage of of Beneficial Percentage of
Owner Ownership of Voting Stock Ownership of Voting Stock
Outstanding Common Stock Outstanding(1) Common Stock Outstanding(2)
----------------------------- ---------------- --------------- ------------------ --------------
Balwinder Singh Bathla(3) 425,000 5.2% 425,000 2.6%
69 Mall Drive
Commack, NY 11725
Ashok Rametra (4) 3,022,242 28.2% 3,022,242 16.4%
1762 Central Avenue
Albany, NY 12205
Surinder Rametra (5) 4,158,040 36.1% 4,158,040 21.6%
69 Mall Drive
Commack, NY 11725
James Charles (6) 605,000 6.8% 605,000 3.6%
69 Mall Drive
Commack, NY 11725
Praveen Bhutani (7) 254,910 3.1% 254,910 1.6%
69 Mall Drive
Commack, NY 11725
David Reback (8) 36,000 ** 36,000 **
69 Mall Drive
Commack, NY 11725
Stewart Benjamin (9) 10,000 ** 10,000 **
69 Mall Drive
Commack, NY 11725
Dr. Maganlal K. Sutaria (10) 34,500 ** 34,500 **
75 Adams Avenue
Hauppauge, NY 11788
69
Bhupatlal K. Sutaria 2,000 ** 2,000 **
75 Adams Avenue
Hauppauge, NY 11788
Raj Sutaria (11) 30,946 ** 2,729,946 17.0%
75 Adams Avenue
Hauppauge, NY 11788
Ravi B. Sutaria (12) 0 ** 1,927,844 12.0%
5 Phillips Lane
Lake Grove, NY 11788
Mona Rametra (13) 22,016 ** 1,564,292 9.8%
116 Southwood Road
Woodbury, NY 11791
Perry M. Sutaria (14) 19,166 ** 1,561,442 9.7%
6 Buckingham Court
Morristown, NJ 07960
All directors and (2)(3)(4)(5)
(6)(7)(8) executive/officers
as a group (7 persons) 8,511,192 58.1%
----------------
** Less than 1%
(1) The percentages of beneficial ownership under this column are calculated
based on the number of shares outstanding as of March 30, 2003. On such
date Atec had 8,316,222 voting shares issued and outstanding consisting of
8,026,128 shares of common stock, 7,631 shares of Series A preferred stock,
1,458 shares of Series B preferred stock and 281,005 shares of Series C
preferred stock. Each share of common stock and preferred stock possesses
one vote per share. A person is deemed to be a beneficial owner of
securities that can be acquired by such person within 60 days from the
record date upon the exercise of options and warrants or conversion of
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities
that are held by such person (but not held by any other person) and that
are exercisable or convertible within 60 days from the record date have
been exercised or converted. Except otherwise indicated, and subject to
applicable community property and similar laws, to our knowledge, each of
the persons named has sole voting and investment power with respect to
shares shown as beneficially owned.
(2) The percentage of beneficial ownership under this column assumes that the
Acquisition of Interpharm had closed on March 30, 2003, and as a result,
that 5,783,533 shares of common stock and 1,927,844 shares of Series K
Stock had been issued to the Interpharm shareholders.
(3) The foregoing figure reflects the ownership of 325,000 shares of common
stock by Mr. Bathla. The foregoing amount also assumes the exercise by Mr.
Bathla of options to acquire 100,000 shares of the common stock.
(4) The foregoing figure reflects the ownership of 240,146 shares of common
stock by Mr. Rametra and 387,096 common shares owned by Mr. Rametra's
spouse and children. The foregoing amount also assumes the exercise by Mr.
Rametra of options to acquire 2,395,000 shares of the common stock. Mr.
Rametra disclaims beneficial ownership of shares of ATEC securities owned
by other members of the Rametra family.
(5) The foregoing figure reflects the ownership of 757,182 shares of common
stock by Mr. Rametra and 200,000 shares by Mr. Rametra's spouse and 11,000
shares jointly. In addition, the foregoing assumes the exercise by Mr.
Rametra of options to acquire 3,189,858 shares of ATEC common stock. Mr.
Rametra disclaims beneficial ownership of the shares of ATEC securities
owned by other members of the Rametra family, including independent
children.
70
(6) The foregoing figure reflects ownership of 10,000 shares of common stock by
Mr. Charles. The foregoing amount also assumes the exercise by Mr. Charles
of options to acquire 595,000 shares of common stock.
(7) The foregoing figure reflects the ownership of 244,910 shares of common
stock by Mr. Bhutani. The foregoing amount also assumes the exercise of
options for the purchase of 10,000 shares of common stock.
(8) The foregoing figure reflects the ownership of 1,000 shares of common stock
by Mr. Reback. The foregoing amount also assumes the exercise of options
for the purchase of 35,000 shares of common stock.
(9) The foregoing figure reflects options for the purchase of 10,000 shares of
common stock.
(10) The foregoing figure reflects ownership of 32,500 shares of common stock by
Dr. Sutaria and 2,000 common shares owned jointly with his spouse.
(11) The foregoing figure reflects the ownership of 30,946 shares of common
stock by Mr. Sutaria. The foregoing amount also assumes 2,024,237 shares of
common stock and 674,745 shares of Series K Stock to be issued to Mr.
Sutaria at the closing of the Acquisition.
(12) The foregoing figure assumes 1,445,883 shares of common stock and 481,961
shares of Series K Stock to be issued to Mr. Sutaria at the closing of the
Acquisition.
(13) The foregoing figure reflects the ownership of 10,966 shares of common
stock by Ms. Rametra, and 11,350 shares of common stock owned by her spouse
and child. The foregoing amount also assumes 1,156,707 shares of common
stock and 385,569 shares of Series K Stock to be issued to Ms. Rametra at
the closing of the Acquisition.
(14) The foregoing figure reflects the ownership of 19,166 shares of common
stock by Mr. Sutaria. The foregoing amount also assumes 1,156,707 shares of
common stock and 385,569 shares of Series K Stock to be issued to Mr.
Sutaria at the closing of the Acquisition.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Albany facility is leased from a company controlled by Surinder and
Ashok Rametra. Ashok Rametra is a current officer and director of Atec. Surinder
Rametra is the Chairman of our board of directors. Our lease with this company
requires annual rental payments of approximately $108,000 per year plus all
expenses and taxes attributable to the operation of the premises.
In April 2001, the Company entered the IT enabled services market. The
Company had no revenue from this division. In April 2002 we sold the division to
ITES, LLC, a company controlled by our Chairman, Surinder Rametra for 10% of its
pre-tax profits for a period of three years ending December 31, 2004 not to
exceed $100,000. At June 30, 2002 the company had revenues of $2,652 and a loss
of $37,000.
In March 2002, we paid $223,606 to Advance Computer Management Group
("ACM"), a company owned and controlled by our Chief Executive Officer,
Balwinder Singh Bathla. The payments were for the purchase of fixed assets and
inventory of $30,558, expenses paid by ACM for Mr. Bathla, $25,807 and $167,241
to purchase notes and over advances on commissions for former ACM employees who
entered into sales consulting agreements with us. The notes of $119,444 are
guaranteed by ACM.
Our Chief Executive Officer, Balwinder Singh Bathla, President, Ashok
Rametra and two non-executive officers, Arvin Gulati and Rajnish Rametra,
invested $25,000 each in a company controlled by Mr. Sonu Sodhi who is a
stockholder of ATEC and has a sales consulting agreement with us.
As described above, certain executives, directors and their family
members are involved in the Acquisition and the Management Buy-Out.
Our director, David Reback, was retained as attorney for Atec in
connection with certain collection proceedings against our former customers and
in connection with a litigation with Advance Computer Management.
71
Rajnish Rametra is the brother of Ashok Rametra and Surinder Rametra,
our Chairman. Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria are brothers. In
addition, Dr. Maganlal K. Sutaria's daughter is married to Surinder Rametra's
son.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To our knowledge, based solely on a review of such materials as are
required by the Securities and Exchange Commission, none of our officers,
directors or beneficial holders of more than ten percent of our issued and
outstanding shares of Common Stock has failed to timely file with the Securities
and Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended June 30, 2002.
PROPOSAL NO. 5
RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has appointed the firm of Weinick Sanders
Leventhal & Co., LLP ("WSL") as independent auditors of Atec for fiscal year
2003 subject to ratification by the stockholders. WSL has served as Atec's
independent auditors since April 18, 1996.
It is anticipated that a representative of WSL will be present at the
Annual Meeting and will be given an opportunity to make a statement if he or she
so desires and to respond to appropriate questions.
The affirmative vote of at least a majority of the shares represented
and voting at the Annual Meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required quorum)
is necessary for approval of Proposal No. 5. Under Delaware law, there are no
rights of appraisal or dissenter's rights that arise as a result of a vote to
ratify the selection of auditor's.
It is possible that in the event that the Acquisition and Management
Buy-Out are approved by the shareholders, it may be in Atec's best interests to
retain Interpharm's current accountants. Our board of directors may replace WSL
at that time.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 5 TO BE IN THE BEST INTERESTS OF ATEC
AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL NO.5.
ACCOUNTANT RELATED FEES
------------------------------------------------------------------ -------------
Audit Fees (1) $102,664
------------------------------------------------------------------ -------------
Financial Information Systems Design and Implementation Fees (2) $ 0
------------------------------------------------------------------ -------------
All Other Fees (3) $ 15,000
------------------------------------------------------------------ -------------
(1) Represents the aggregate fees billed for professional services by WSL for
professional services rendered to Atec for the audit of Atec's financial
statements for the year ended June 30, 2002 and for that firm's review of
Atec's financial statements included in Atec's forms 10-Q for that fiscal
year.
(2) Represents the aggregate fees billed by WSL for professional services
rendered to Atec for the fiscal year ended June 30, 2002 for: (i) directly
or indirectly operating, or supervising the operation of, Atec's
information system or managing Atec's local area network; and (ii)
designing or implementing a hardware or software system that aggregates
source data underlying the financial statements or generates information
that is significant to Atec's financial statements taken as a whole.
(3) Represents the aggregate fees billed by WSL for all professional services
rendered to Atec for the fiscal year ended June 30, 2002 other than those
disclosed in the above two categories in this chart.
72
Atec's Board of Directors did not consider whether the provision of
financial information systems designs and implementation services and other
non-audit services described above is compatible with the independence of WSL
because that firm did not perform any financial information systems designs and
implementation services and the only other non-audit related services performed
were related to tax return preparation.
PROPOSAL NO. 6
ADJOURNMENT OF THE ANNUAL MEETING
In the event that a quorum is not present at the meeting or sufficient
votes in favor of the proposals to approve the acquisition of Interpharm, the
amendment to the Certificate of Incorporation or the sale of the assets to Baar
Group are not received by the date of the Annual Meeting, a stockholder who is
represented may seek to adjourn the meeting until a quorum is present or to
permit further solicitation of proxies. By voting "FOR" Proposal 6, you are
authorizing Ashok Rametra to vote your shares to adjourn the meeting. In the
event that you vote against Proposal 6, Mr. Rametra will not vote your shares at
any such adjourned meeting.
The affirmative vote of at least a majority of the shares represented
and voting at the Annual Meeting is necessary to adjourn the meeting.
THE BOARD OF DIRECTORS DEEMS PROPOSAL NO. 6 TO BE IN THE BEST INTERESTS
OF ATEC AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL
NO. 6.
STOCKHOLDERS' PROPOSALS
A Stockholder of record may present a proposal for action at the 2003
Annual Meeting of Stockholders provided that Atec receives such proposal at its
executive office no later than July 8, 2003. We anticipate that the 2003 Annual
Meeting will be held in December 2003. The proponent may submit a maximum of one
(1) proposal of not more than five hundred (500) words for inclusion in Atec's
proxy materials for a meeting of security holders. At the 2003 Annual Meeting,
management proxies will have discretionary authority, under Rule 14a-4 of the
Securities Exchange Act of 1934, to vote on stockholder proposals that are not
submitted for inclusion in Atec's proxy statement unless received by Atec before
September 22, 2003.
GENERAL
Unless contrary instructions are indicated on the proxy, all shares of
Series A, B and C preferred stock and common stock represented by valid proxies
received pursuant to this solicitation (and not revoked before they are voted)
will be voted FOR Proposal Nos. 1, 2, 3, 4, 5 and 6.
The Annual Report to Stockholders (Atec's Annual Report on Form 10-K
and Form 10-K/A) for the fiscal year ended June 30, 2002 is enclosed herewith.
The Annual Report does not form any part of the material for the solicitation of
proxies, except to the extent incorporated herein by reference.
OTHER BUSINESS
The board of directors knows of no business other than that set forth
above to be transacted at the meeting, but if other matters requiring a vote of
the stockholders arise, the persons designated as proxies will vote the shares
of common stock represented by the proxies in accordance with their judgment on
such matters. If a stockholder specifies a different choice on the proxy, his or
her shares of common stock will be voted in accordance with the specification so
made.
73
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WE URGE YOU TO FILL IN, SIGN
AND RETURN THE ATEC FORM OF PROXY IN THE PREPAID ENVELOPE PROVIDED, NO MATTER
HOW LARGE OR SMALL YOUR HOLDINGS MAY BE.
By Order of the Board of Directors,
/s/ ASHOK RAMETRA
-----------------------------------------
Ashok Rametra
Secretary
Commack, New York
[__________], 2003
74
ATEC GROUP, INC.
Annual Meeting of Stockholders --May 29, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
By signing below you appoint Ashok Rametra with power of substitution, as proxy
to represent you at the annual meeting of stockholders to be held at the
Huntington Hilton, Melville, New York, on May 29, 2003 at 10:00 a.m. local time
and at any adjournment thereof, and to vote the shares of stock you would be
entitled to vote if personally present, as indicted on the reverse side of this
proxy card.
The shares represented by the proxy will be voted as directed. If no contrary
instruction is given, the shares will be voted FOR Proposal No. 4 for the
election of Surinder Rametra, Stewart Benjamin, David Reback, Praveen Bhutani,
Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria as directors.
Passage of Proposals 1 and 2 is contingent upon approval of each of Proposals 1
through 3. In addition passage of Proposals 1 and 2 is contingent upon the
election of Dr. Maganlal K. Sutaria and Bhupatlal K. Sutaria, the two director
nominees of Interpharm, Inc., in Proposal 4. In the event that Proposal 1, 2
and/or 3 is not approved or that the two director nominees of Interpharm, Inc.
are not elected, Proposals 1 through 2 will not pass, the two director nominees
of Interpharm, Inc. will not be elected and immediately after the annual meeting
of stockholders, the Board of Directors will appoint Ashok Rametra and James
Charles (current Atec directors) to fill the vacancy created.
Please mark boxes in blue or black ink.
1. Proposal No. 1 for approval of the Acquisition of all of the outstanding
stock of Interpharm by Atec.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Proposal No. 2 for approval of the amendment to Atec's Certificate of
Incorporation changing its name to Interpharm Holdings, Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Proposal No. 3 for approval of the sale of the Assets of Atec to and the
assumption of substantially all of the liabilities of Atec by Baar Group.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Proposal No. 4 - Election of Directors of the following nominees: Surinder
Rametra, Stewart Benjamin, David Reback, Praveen Bhutani, Dr. Maganlal K.
Sutaria and Bhupatlal K. Sutaria.
AUTHORITY
FOR withheld
all as to all
nominees nominees
[ ] [ ]
[ ] For, except authority withheld as to the following nominee(s):_________
_______________________________________________________________________
5. Proposal No. 5 for ratification of the selection of Weinick Sanders
Leventhal & Co., LLP as the independent auditors of Atec.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
75
6. Proposal No. 6 to approve the adjournment of the annual meeting to permit
the solicitation of additional proxies in the event a quorum is not present at
the meeting or sufficient votes in favor of Proposals 1, 2 and 3 are not
received by the date of the meeting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
7. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please date, sign as name appears at left, and return promptly. If the stock is
registered in the name of two or more persons, each should sign. When signing as
Corporate Officer, Partner, Executor, Administrator, Trustee, or Guardian,
please give full title. Please note any change in your address alongside the
address as it appears in the Proxy.
Dated: ______________________ _________________________________________
(Signature)
_________________________________________
(Print Name)
SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE
76
APPENDIX A
CAPITAL STOCK EXCHANGE AGREEMENT
THIS AGREEMENT is made as of this 25th day of November, 2002, by and
among ATEC Group, Inc., a Delaware corporation ("ATEC"), and INTERPHARM INC., a
New York Corporation ("Interpharm"), and RAJ SUTARIA ("Raj"), MONA RAMETRA
("Mona"), RAVI SUTARIA ("Ravi") and PERRY SUTARIA ("Perry"). Certain capitalized
and other terms used in this Agreement are defined in Annex A hereto and are
used herein with the meanings ascribed to them therein.
WHEREAS, Interpharm currently has (a) 8 million shares of $.001 par
value per share common stock ("Interpharm Common Stock") authorized, of which 4
million shares are outstanding which collectively represent all of Interpharm's
issued and outstanding capital stock (the "Interpharm Stock"); and
WHEREAS, the following are the only holders of the Interpharm Common
Stock in the following amounts: Raj - 1,400,000 shares, Ravi - 1,000,000 shares,
Perry - 800,000 shares, Mona - 800,000 shares (collectively the "Shareholders");
WHEREAS, ATEC and the Shareholders believe that it is desirable and in
their mutual best interests that ATEC acquire 100% of the issued and outstanding
Interpharm Stock for an aggregate consideration consisting of ATEC's $.01 par
value per share common stock (the "Common Stock") and shares of ATEC's new $.01
par value per share Series K convertible preferred stock (the "Preferred Stock")
on the terms and conditions set forth herein, making Interpharm a wholly owned
subsidiary of ATEC; and
WHEREAS, it the intention of the Parties that: (i) ATEC shall acquire
100% of the Interpharm Stock in exchange solely for the amount of common and
preferred shares of ATEC set forth herein; (ii) said exchange of shares shall
qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Code; and
(iii) said exchange shall qualify as a transaction in securities exempt from
registration or qualification under the Securities Act of 1933, as amended and
in effect on the date of this Agreement (the "1933 Act"), and under the
applicable securities laws of the states or jurisdictions where the Shareholders
reside;
NOW, THEREFORE, in consideration of the foregoing and the following
mutual covenants and agreements, ATEC, Interpharm and the Shareholders
(collectively the "Parties") agree as follows:
ARTICLE I
THE TRANSACTION
1.1 The Transaction. On the Closing Date, and at the Closing Time, as
defined herein, subject in all instances to each of the terms, conditions,
provisions and limitations contained in this Agreement:
1
1.1.1 the Interpharm Common Holders shall exchange all of their
shares of the Interpharm Common Stock with ATEC for:
1.1.1.1 a number of shares of Common Stock (the "Common Stock
Consideration") equal to:
(( X/.51) * .49)*.75
Where:
X = the total outstanding umber of shares of Common Stock outstanding
on the Closing Date
Any fractional shares shall be rounded up to the nearest share.
1.1.1.2 a number of shares of Preferred Stock which shall
have the designations and preferences set forth in Schedule 1.1.1.2 (the
"Preferred Stock Consideration") equal to:
((X/.51) * .49) * .25
Where:
X = the total outstanding umber of shares of Common Stock outstanding
on the Closing Date
Any fractional shares shall be rounded up to the nearest share.
1.1.2 the Board of Directors of ATEC shall appoint 2 designees of
Interpharm and the Shareholders as members of the Board of Directors of ATEC.
1.1.3 ATEC's name shall be changed to Interpharm Holdings, Inc.
1.1.4 ATEC and the Shareholders shall enter into the Registration
Rights Agreement annexed hereto as Exhibit 1.1.4.
The events set forth in the foregoing Sections 1.1.1 through 1.1.4 shall be
referred to herein as the "Transaction").
1.2 Exchange of the Interpharm Stock. Subject to the terms of this
Agreement and in reliance on the representations and warranties of ATEC, the
Shareholders shall exchange, sell, assign, and transfer to ATEC at the closing
of this Agreement (the "Closing"), free and clear of all liens and encumbrances,
and ATEC, subject to the terms of the Agreement and upon the basis of the
covenants, warranties and representations of Interpharm and the Shareholders set
forth herein, shall accept from them at the Closing all shares of the Interpharm
Stock issued and outstanding as of the Closing.
2
1.3 Consideration. Subject to the terms of this Agreement and in reliance
on the representations and warranties of Interpharm and the Shareholders, ATEC
shall deliver to the Shareholders, at the Closing, the Common Stock
Consideration and Preferred Stock Consideration (collectively the
"Consideration"), free and clear of all liens and encumbrances, which the
Shareholders shall accept based upon the covenants, warranties and
representations of ATEC set forth herein. The Consideration shall be distributed
among the Shareholders in accordance with Schedule 1.3.
1.4 Tax Treatment. The exchange described herein is intended to comply with
Section 368(a)(1)(B) of the Code, and all applicable regulations thereunder. In
order to ensure compliance with said provisions, the Parties agree to take
whatever steps may be necessary, including, but not limited to, the amendment of
this Agreement.
1.5 Closing. The Closing hereunder shall take place at the offices of
Interpharm, at 75 Adams Avenue Hauppauge, New York 11788, or at such other place
as the Parties may agree upon, no later than February 1, 2003, on a date to be
set by the Parties. The date and time on which the closing occurs shall be the
Closing Date and Closing Time, respectively.
1.6 Parties to the Agreement and Transaction. To the extent that any
provision of this Agreement calls for agreement by ATEC as a party hereto, such
provision shall mean ATEC as it exists prior to the Closing. To the extent that
provisions of this Agreement refer to ATEC after the Closing, the reference
shall also be to Interpharm Holdings, Inc., as successor to ATEC.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ATEC
Where a representation contained in this Agreement is qualified by the
phrase "to the best of a party's knowledge" (or words of similar import), such
expression means that, after having conducted a reasonable due diligence review,
the Party believes the statement to be true, accurate, and complete in all
material respects. Except as otherwise indicated in the Schedules annexed hereto
(which Schedules shall be arranged in paragraphs corresponding to the numbered
and letter paragraphs contained herein and which have been previously provided
to Interpharm and the Shareholders), ATEC represents and warrants to Interpharm
and the Shareholders, as follows:
2.1 Organization and Qualification. ATEC is, and each of its Subsidiaries
(as defined below) is, a corporation duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of incorporation and
each has the requisite corporate power and authority to carry on its business as
it is now being conducted. Each of ATEC and its Subsidiaries is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned or leased by it, or the
nature of its activities, is such that qualification as a foreign corporation in
that jurisdiction is required by law, except where the failure to qualify as a
foreign corporation would not reasonably expected to have a Material Adverse
Effect.
3
2.2 Capitalization. The capitalization of ATEC as of the date of this
Agreement consists of:
2.2.1 Common Stock. 70,000,000 shares of authorized common stock,
$.01 par value per share, of which a maximum of 8,300,000 shares are issued and
outstanding;
2.2.2 Preferred Stock. 10,000,000 shares of authorized preferred
stock, $.01 par value per share, of which the following series and designations
are outstanding and with the preferences and rights set forth in Schedule 2.2.3:
2.2.2.1 Series A - 8,371 shares issued and outstanding;
2.2.2.2 Series B - 1,458 shares issued and outstanding;
2.2.2.3 Series C - 309,600 shares issued and outstanding; and
2.2.2.4 Series J - 105,000 shares issued and outstanding.
The ATEC preferred stock listed (the "Existing Preferred") above is convertible
into no more than 475,000 shares of Common Stock and are not convertible into
any other ATEC securities of any kind.
2.2.3 Warrants and Options. ATEC currently has 8,598,299 options and
warrants outstanding with the terms and exercise prices set forth in Schedule
2.2.4.
Other than as set forth above, ATEC has no other capital stock authorized for
issuance or outstanding. As of the date of this Agreement all shares of ATEC
common and preferred stock outstanding were validly issued, fully paid, and
nonassessable. In addition, no shares of Common Stock are held in the ATEC
treasury, and no shares are reserved for issuance, nor were there outstanding
any options, warrants, convertible instruments or other rights, agreements or
commitments to acquire Common Stock of ATEC, except as fully and completely
described on Schedule 2.2.4 hereto.
2.3 Due Authorization. This Agreement has been duly and validly executed
and delivered by ATEC and constitutes a valid and binding Agreement of ATEC
enforceable in accordance with its terms, subject, however, to the approval of
its stockholders as provided for below and except as such enforceability may be
limited by general principals of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to or affecting
creditors generally. ATEC has all requisite corporate power and authority to
enter into this Agreement and to carry out the Transaction, subject, however, to
the approval of its stockholders as provided for below, and its doing so has
been duly and sufficiently authorized by its Board of Directors.
2.4 Absence of Breach; No Consents. The execution, delivery, and
performance of this Agreement, and the performance by ATEC of its obligations
hereunder, do not, nor will with the giving of notice or passage of time or
both:
4
2.4.1 conflict with or result in a breach of any of the provisions
of the Articles of Incorporation or Bylaws of ATEC or of any of its
Subsidiaries;
2.4.2 contravene any law, ordinance, rule, or regulation of any
State or Commonwealth or political subdivision of either or of the United
States, or contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, or
cause the suspension or revocation of any authorization, consent, approval, or
license, presently in effect, which affects or binds, ATEC or any of its
Subsidiaries or any of its or their material properties, except in any such case
where such contravention will not have a Material Adverse Effect;
2.4.3 conflict with, result in termination of, contravene,
constitute a default under, give to others any rights of termination or
cancellation of, or accelerate the performance required by or maturity of,
result in the creation of any lien or loss of any rights, or result in a
material breach of, or default under, any material indenture, loan, credit
agreement, mortgage, deed of trust, note, bond, franchise, lease, contract or
any other agreement or instrument binding upon ATEC or a Subsidiary, or to which
ATEC or a Subsidiary is subject; or
2.4.4 require the authorization, consent, approval, or license of,
or the submission of any notice, report or other filing with, any third party,
including any governmental agency.
2.5 Securities and Exchange Commission Filings. All reports filed by ATEC
with the SEC pursuant to the Exchange Act and any amendments thereto, since
November 1999:
2.5.1 to the best of ATEC's knowledge, fully comply with the
requirements of Section 13(a) or 15(d) of the Exchange Act;
2.5.2 to the best of ATEC's knowledge, as to the financial
statements contained in such reports, present fairly, in all material respects,
the financial condition and results of operations of ATEC as of the respective
dates or for the respective periods set forth therein;
2.5.3 to the best of ATEC's knowledge, do not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading as of the date of filing (and, if amended or
superseded, then on the date of such filing); and
2.5.4 to the best of ATEC's knowledge, as to the financial
statements contained in such reports, were prepared in accordance with GAAP,
except that unaudited interim financial statements are subject to normal
year-end audit adjustments, none of which will be material, and do not contain
footnotes.
2.6 No Undisclosed Liabilities. Neither ATEC nor any of its Subsidiaries
has any Liabilities which are not adequately reflected or reserved against on
the face of its June 30, 2002 balance sheet and the footnotes thereto, except
Liabilities (a) incurred since the date of such balance sheet in the ordinary
course of business and consistent with past practice; (b) which are of a nature
5
that would not be required to be disclosed on its balance sheet or the footnotes
thereto in conformity with GAAP; or (c) which individually or in the aggregate
would not have a Material Adverse Effect.
2.7 No Material Adverse Change. Since the date of ATEC's September 30, 2002
balance sheet, other than as contemplated or caused by this Agreement, there has
not been:
2.7.1 any Material Adverse Change in the business or condition
(financial or otherwise) of ATEC;
2.7.2 any damage, destruction, or loss, whether covered by insurance
or not, having a material adverse effect on the business or condition (financial
or otherwise) of ATEC;
2.7.3 any entry into any material commitment, contract, agreement,
or transaction (including, without limitation, any material borrowing or capital
expenditure) of, or involving, ATEC other than (a) this Agreement, (b) the
Management Buyout, as defined below and (c) agreements executed in the ordinary
course of business;
2.7.4 any redemption, repurchase, or other acquisition for value of
its capital stock by ATEC, or any issuance of capital stock of ATEC or any of
its Subsidiaries or of securities convertible into or rights to acquire any such
capital stock or any dividend or distribution declared, set aside, or paid on
capital stock of ATEC;
2.7.5 any grant, or commitment to grant, any bonus, commission or
other form of incentive compensation or increase or commitment to increase the
compensation or fees payable to or in respect to any of ATEC's employees,
directors, officers, sales representatives, independent contractors, agents,
consultants or Affiliates;
2.7.6 any labor union organization activity;
2.7.7 any loans to any Person;
2.7.8 any failure to maintain its financial records in accordance
with past practice;
2.7.9 any declared, made, set aside or payment of any dividend,
distribution, or payment on, or any purchase or redemption of, any shares of any
class of ATEC capital stock;
2.7.10 any transactions with any Affiliate of ATEC or any Subsidiary;
2.7.11 any amendment to the certificate of incorporation or bylaws of
ATEC;
2.7.12 any material change (for book or Tax purposes) in any method
of accounting or accounting practices; or
6
2.7.13 any settlement of any litigation, claim or proceeding to which
ATEC or a Subsidiary is a party.
2.8 Taxes.
2.8.1 Since July 1998, ATEC and its Subsidiaries have filed all Tax
Returns, as defined below, which they are required to file under all applicable
laws; all such Tax Returns are true and accurate and have been prepared in
compliance with all applicable laws; each of ATEC and each of its Subsidiaries
has paid all Taxes, as defined below, due and owing by it (whether or not such
Taxes are required to be shown on a Tax Return) and has withheld and paid over
to the appropriate taxing authorities all Taxes which it is required to withhold
from amounts paid or owing by it to any employee, stockholder, creditor or other
third party, and since June 30, 2002, the charges, accruals and reserves for
Taxes with respect to ATEC (including any provisions for deferred income taxes)
reflected on the books of ATEC are adequate to cover any Tax liability of the
Company if its current tax year were treated as ending on the date hereof.
2.8.2 No claim has been made by a taxing authority in a jurisdiction
where neither ATEC nor any Subsidiary does not file Tax Returns that such
corporation is or may be subject to taxation by the jurisdiction. There are no
foreign, federal, state or local tax audits or administrative or judicial
proceedings pending or being conducted with respect to Taxes of ATEC or any of
its Subsidiaries; no information related to Tax matters has been requested by
any foreign, federal, state or local taxing authority. To the best of ATEC's
knowledge, there are no material unresolved questions or claims concerning the
Tax liability of ATEC or any of its Subsidiaries.
2.8.3 ATEC has not (a) waived any statute of limitations; (b) agreed
to any extension of the period for assessment or collection; or (c) executed or
filed any power of attorney with respect to any Taxes, which waiver, agreement
or power of attorney is currently in force.
2.9 Litigation.
2.9.1 To the best of the knowledge of ATEC, no investigation or
review by any governmental entity with respect to ATEC or any of its
Subsidiaries is pending or threatened, nor has any governmental entity indicated
to ATEC an intention to conduct the same, and
2.9.2 there is no action, suit, or proceeding pending or, to the
best knowledge of ATEC, threatened against or affecting ATEC or its Subsidiaries
at law or in equity, or before any federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality.
2.10 Employees. There are no collective bargaining, bonus, profit sharing,
compensation, or other plans, agreements, trusts, funds, or arrangements
maintained by ATEC or any Subsidiary of ATEC for the benefit of its directors,
officers, or employees, and there are no employment, consulting, severance, or
indemnification arrangements, agreements or understandings between ATEC or any
of its Subsidiaries, on the one hand, and any current or former directors,
7
officers, or other employees (or Affiliates thereof) of ATEC or any of its
Subsidiaries, on the other hand. ATEC is not, and following the Closing will not
be, bound by any express or implied contract or agreement to employ, directly or
as a consultant or otherwise, any person for any specific period of time or
until any specific age.
2.11 Subsidiaries. All of the Subsidiaries of ATEC, direct or indirect, are
identified in Schedule 2.11, ATEC has no other Subsidiaries, and neither ATEC
nor any of its Subsidiaries is a partner of, or joint venturer with, any other
Person. No Subsidiary has outstanding any securities, warrants, options or other
rights convertible into or exchangeable or exercisable for any shares of ATEC's
capital stock, and there are no contracts, commitments, understandings,
arrangements or restrictions by which any Subsidiary is bound to issue shares of
ATEC's capital stock.
2.12 Employee Benefit Plans and Related Matters; ERISA.
2.12.1 Employee Benefit Plans. Neither ATEC, nor any of its
Subsidiaries maintains or contributes to any Pension Plan, Welfare Plan or
"employee benefit plan", as such term is defined in section 3(3) of ERISA,
whether or not subject to ERISA, and any bonus, incentive or deferred
compensation, severance, termination, retention, change of control, stock
option, stock appreciation, stock purchase, phantom stock or other equity-based,
performance or other employee or retiree benefit or compensation plan, program,
arrangement, agreement, policy or understanding, whether written or unwritten,
that provides or may provide benefits or compensation in respect of any employee
or independent contractor or under which any employee or independent contractor
is or may become eligible to participate or derive a benefit and that is or has
been maintained or established by ATEC or any of its Subsidiaries or any trade
or business, whether or not incorporated, which, together with ATEC or any of
its Subsidiaries, is or would have been at any date of determination occurring
within the preceding six years, treated as a single employer under section 414
of the Code, (such other trades and businesses hereinafter referred to as the
"Related Persons"), or to which ATEC or any Related Person contributes or is or
has been obligated or required to contribute or with respect to which ATEC or
any Related Person may have any liability or obligation (collectively, the
"Plans").
2.12.2 Neither ATEC nor any Related Person has been involved in any
transaction that could cause ATEC, any such Related Person or, following the
Closing, Interpharm or any of its Affiliates, to be subject to liability under
section 4069 or 4212 of ERISA. Neither ATEC nor any Related Person has incurred
(either directly or indirectly, including as a result of an indemnification
obligation) any liability under or pursuant to Title I or IV of ERISA or the
penalty, excise Tax or joint and several liability provisions of the Code
relating to employee benefit plans and no event, transaction or condition has
occurred or exists that could result in any such liability to ATEC, any Related
Person or, following the Closing, Interpharm or any of its Affiliates.
2.12.3 No employee of ATEC or any of its Subsidiaries is or will
become entitled to post-employment benefits of any kind by reason of employment
with ATEC or any of its Subsidiaries, including, without limitation, death or
medical benefits (whether or not insured).
8
2.13 Labor Matters. There are no activities or controversies, including,
without limitation, any labor organizing activities, election petitions or
proceedings, proceedings preparatory thereto, unfair labor practice complaints,
labor strikes or disputes pending or, to the best of the knowledge of ATEC,
threatened, between ATEC or any of its Subsidiaries and any of its or their
employees.
2.14 Valid Issuance of Stock.
2.14.1 The Consideration, when issued as provided in this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable.
2.14.2 Based in part on the representations made by the Shareholders
in Article 3 hereof and in the Investment Letters attached as Schedule 2.14
hereto (the "Investment Letters"), the offer and sale of the Consideration
solely to the Shareholders in accordance with this Agreement will be exempt from
the registration and prospectus delivery requirements of the 1933 Act.
2.15 Disclosure. To the best of ATEC's knowledge, no representation,
warranty or statement by ATEC in this Agreement, or in any exhibit, schedule,
statement or certificate furnished to Interpharm or the Shareholders pursuant to
this Agreement, when read as a whole, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
made herein, in light of the circumstances under which they were made, not
misleading.
2.16 Certificate of Incorporation; Bylaws; Minute Books. True and complete
copies of the Certificate of Incorporation and Bylaws (or comparable
organizational documents) of ATEC, as amended to and including the date hereof,
have been delivered to Interpharm. ATEC is not in violation of any provision of
its Certificate of Incorporation or is in material violation of its Bylaws (or
comparable organizational documents). ATEC's minute books, stock books and stock
transfer records, true and complete copies of which have been delivered to
Interpharm, contain true and complete records of all issuances and transfers of
capital stock of ATEC, and contain a materially complete summary of all
meetings, consents, proceedings and other formal actions of directors and
stockholders since January 1, 1995.
2.17 Securities Laws. Since at least July 1, 1999, (a) ATEC has complied in
all material respects with applicable federal and state securities laws, rules
and regulations as such laws, rules and regulations apply to ATEC and its
securities; and (b) all shares of capital stock of ATEC have been issued in
accordance with applicable federal and state securities laws, rules and
regulations. There are no stop orders in effect with respect to any of ATEC's
securities. All of ATEC's outstanding securities are validly issued, fully-paid
and are non-assessable.
2.18 AMEX Listing and Trading. ATEC's Common Stock is registered pursuant to
Section 12 of the Exchange Act and is currently listed for trading on the AMEX.
ATEC is in full compliance with all AMEX rules. ATEC has not been advised by the
9
AMEX that it has failed to meet any of its continued listing requirements or
that the AMEX will move to delist its Common Stock from the AMEX. Neither ATEC,
not any of its officers or directors, is aware of or has any reason to be aware
of any claim, inquiry or investigation by a state or federal regulatory
authority, or the AMEX, regarding trading in its Common Stock or any related
claim, inquiry or investigation. Notwithstanding the foregoing, ATEC makes no
representation concerning compliance with continued listing qualifications of
AMEX as of the date of this Agreement or upon the consummation of the
Transaction contemplated by this Agreement.
2.19 Investment Company Act. ATEC is not an investment company under the
Investment Company Act of 1940, as amended.
2.20 Intellectual Property. To ATEC's knowledge, the conduct of its and its
Subsidiaries' business has not infringed the rights of any Person in respect of
any Intellectual Property. There is no claim or demand of any Person pertaining
to, or any proceeding which is pending or, to the knowledge of ATEC, threatened,
that challenges ATEC's use of any Intellectual Property.
2.21 Real Property. ATEC does not own any real property. Schedule 2.21 lists
all real property leased by ATEC or its Subsidiaries (the "ATEC Leased
Premises"; the leases relating to the Leased Premises, collectively, the "ATEC
Real Property Leases"). Except for the ATEC Leased Premises, no real property is
used or occupied by ATEC or its Subsidiaries. ATEC enjoys peaceful and
undisturbed possession of the ATEC Leased Premises. ATEC and its Subsidiaries'
use of the ATEC Leased Premises and the improvements installed by or on behalf
of them upon the ATEC Leased Premises conform in all material respects to all
restrictive covenants, conditions and easements, and building, subdivision and
similar codes and all applicable laws, and neither ATEC, not its Subsidiaries
has received any notice of any material violation or claimed violation of any
such restrictive covenants, conditions or easements, or building, subdivision or
similar codes and all applicable laws. There exists no writ, injunction, decree,
order or judgment, or pending litigation, nor, to the knowledge of ATEC, any
threatened litigation, relating to the ownership, use, lease, occupancy or
operation of any of the ATEC Leased Premises.
2.22 Environmental Matters.
2.22.1 ATEC is in material compliance and at all times has complied
in all material respects with all applicable Environmental Laws pertaining to
all of the properties and assets of ATEC and its Subsidiaries (including the
ATEC Leased Premises and the properties formerly owned or leased by ATEC or its
Subsidiaries and the use and ownership hereof, and to their businesses and
operations. No violation by ATEC or its Subsidiaries is being alleged or
threatened or has at any time been alleged or threatened of any applicable
Environmental Law relating to any of its respective properties and assets
(including the ATEC Leased Premises and the properties formerly owned or leased
by ATEC or its Subsidiaries).
10
2.22.2 ATEC and its Subsidiaries are currently, and have at all times
been, in possession of, and in material compliance with, all permits and
authorizations required pursuant to any applicable Environmental Law.
2.22.3 Neither ATEC, its Subsidiaries, nor any other Person
(including any tenant or subtenant) has caused or taken any action that will
result in, and ATEC and its Subsidiaries are not subject to, any liability or
obligation on the part of ATEC or its Subsidiaries relating to (a) the
environmental conditions on, under, or about the ATEC Leased Premises (or other
properties or assets formerly owned, leased, operated or used by ATEC or its
Subsidiaries), including, without limitation, the air, soil and groundwater
conditions at such or (b) the past or present use, management, handling,
transport, treatment, generation, storage, disposal, discharge, emission, or
release of any Hazardous Materials.
2.22.4 Neither ATEC, nor its Subsidiaries are subject to any
outstanding order from, or contractual or other obligation with, any
governmental authority or other Person in respect of which they may be required
to incur costs arising from the release or threatened release of a Hazardous
Material.
2.23 Stock Options. Within ninety (90) days of the Closing, all of the stock
options and warrants listed in Schedule 2.2.4, with the exception of the stock
options and warrants listed below, will expire or be exercised pursuant to the
terms of the applicable stock option agreement and/or plan:
Stock Options
-------------
O-1, O-4, O-6, O-7, O-8, O-9, O-10, O-13, O-15, O-17, O-18, O-19, O-20, O-21,
O-22, O-24, O-28, O-29, O-30, O-31, O-40, O-72, O-74, O-75, O-91, O-93, O-94,
0-95, O-123, O-157, O-159, O-180, O-190, O-216, O-218, O-219, O-224, O-230,
O-232, O-251, O-288, O-289, O-310, 336, 370, 371, 382, 383, 388, 389, 397, 402,
435, 437, 439, 457
Warrants
--------
Total
Shares Purchase Issue Exercise Exp.
NAME OF HOLDER Issued Price Total Date Date Date
Phillip Getter 8,750 3.5 30,625 10/7/1998 10/8/1998 10/7/2003
Gayathri Menikdiwela 2,500 3.5 8,750 10/7/1998 10/8/1998 10/7/2003
PRIME CHARTER 113,750 3.5 398,125 10/7/1998 10/8/1998 10/7/2003
2.24 Accrued Expenses. The following ATEC accrued expenses are not likely to
become payable and a write-off of such liabilities would be consistent with
GAAP: Anderson Realty in the amount of $156,130, Steinbock litigation in the
amount of $39,100, Legett & Platt in the amount of $1,240 and Prudential in the
amount of $23,000.
11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INTERPHARM AND THE
SHAREHOLDERS
Except as otherwise indicated in the Schedules (which Schedules shall
be arranged in paragraphs corresponding to the numbered and letter paragraphs
contained herein and which have previously been provided to ATEC) annexed
hereto, Interpharm and the Shareholders, jointly and severally, represent and
warrant to ATEC as follows:
3.1 Organization and Qualification. Interpharm is a corporation duly
organized, validly existing and in good standing under the laws of New York and
has the requisite corporate power and authority to carry on its business as it
is now being conducted. Interpharm is duly qualified as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of the properties owned or leased by it, or the nature of its activities, is
such that qualification as a foreign corporation in that jurisdiction is
required by law.
3.2 Due Authorization. This Agreement has been duly and validly executed
and delivered by Interpharm and its Shareholders and constitutes a valid and
binding Agreement enforceable in accordance with its terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to or affecting creditors generally. Interpharm has all requisite
corporate power and authority to enter into this Agreement and to carry out the
Transaction contemplated hereby, and its doing so has been duly and sufficiently
authorized by all necessary corporate or other action of Interpharm or any of
the Shareholders.
3.3 Capitalization. Interpharm is authorized by its Articles of
Incorporation to issue:
3.3.1 10,000,000 shares of $.001 par value per share common stock,
4,000,000 shares of which are duly and validly issued and
outstanding, fully paid, and non-assessable;
3.3.2 1,000,000 shares of $.001 par value per share preferred stock,
none of which are duly and validly issued and outstanding,
fully paid, and non-assessable.
Other than as set forth above, Interpharm does not have any authority to issue
any other capital stock or other security. There are no outstanding options,
contracts, commitments, warrants, preemptive rights, agreements or any rights of
any character affecting or relating in any manner to the issuance of any
Interpharm capital stock or other securities or entitling any person or entity
to acquire Interpharm capital stock or other securities of Interpharm, and no
authorization therefor has been given. There are no outstanding contractual or
other rights or obligations to or of Interpharm, any Shareholder or any other
Person to repurchase redeem or otherwise acquire any outstanding shares or other
equity interest of Interpharm or restricting the ability to vote or transfer
such shares or other equity interest.
12
3.4 Interpharm Stock Ownership. The Interpharm Common Stock consists of an
aggregate of 4,000,000 shares of $.001 par value per share common stock, all of
which is owned, beneficially and of record, by the Interpharm Common Holders in
the respective amounts set forth in 3.4. Each of the Shareholders has good,
absolute, and marketable title to their Interpharm Stock. The Shareholders have
the complete and unrestricted right, power and authority to sell, transfer and
assign their Interpharm Stock pursuant to this Agreement. The delivery of the
Interpharm Stock to ATEC as herein contemplated will vest in ATEC good, absolute
and marketable title to all of the issued and outstanding shares of the
Interpharm Stock, free and clear of all liens, claims, encumbrances, and
restrictions of every kind, except those restrictions imposed by applicable
securities laws.
3.5 No Subsidiaries. Interpharm has no Subsidiaries nor owns any securities
of or equity interest in any Person, except that Interpharm owns a 50% interest
in Saturn Chemicals, LLC, a New York limited liability company.
3.6 Absence of Breach; No Consents. The execution, delivery, and
performance of this Agreement, and the performance by Interpharm and the
Shareholders of their obligations hereunder, do not nor will with the giving of
notice or passage of time or both:
3.6.1 conflict with or result in a breach of any of the provisions
of Interpharm's Certificate of Incorporation or Bylaws;
3.6.2 contravene any law, ordinance, rule, or regulation of any
State or Commonwealth or political subdivision of either or of the United
States, or contravene any order, writ, judgment, injunction, decree,
determination, or award of any court or other authority having jurisdiction, or
cause the suspension or revocation of any authorization, consent, approval, or
license, presently in effect, which affects or binds, Interpharm or any of its
Shareholders or any of its or their material properties, except in any such case
where such contravention will not have a Material Adverse Effect;
3.6.3 except as set forth in Schedule 3.6, conflict with, result in
termination of, contravene, constitute a default under, give to others any
rights of termination or cancellation of, or accelerate the performance required
by or maturity of, result in the creation of any lien or loss of any rights, or
result in a material breach of or default under any material indenture, loan,
credit agreement, mortgage, deed of trust, note, bond, franchise, lease,
contract or any other agreement or instrument binding upon Interpharm, or to
which the property or business of Interpharm is subject; or
3.6.4 require the authorization, consent, approval, or license of,
or the submission of any notice, report or other filing with, any third party,
including any governmental agency.
13
3.7 Taxes.
3.7.1 Since 1998, Interpharm has filed all Tax Returns which it is
required to file under all applicable laws; all such Tax Returns are true and
accurate and have been prepared in compliance with all applicable laws;
Interpharm has paid all Taxes due and owing by it (whether or not such Taxes are
required to be shown on a Tax Return) and has withheld and paid over to the
appropriate taxing authorities all Taxes which it is required to withhold from
amounts paid or owing by it to any employee, stockholder, creditor or other
third party.
3.7.2 No claim has been made by a taxing authority in a jurisdiction
where Interpharm does not file Tax Returns that it is or may be subject to
taxation by the jurisdiction. There are no foreign, federal, state or local tax
audits or administrative or judicial proceedings pending or being conducted with
respect to Interpharm; no information related to Tax matters has been requested
by any foreign, federal, state or local taxing authority. To the best knowledge
of Interpharm and the Shareholders, there are no material unresolved questions
or claims concerning the Tax liability of Interpharm.
3.7.3 Interpharm has not (a) waived any statute of limitations; (b)
agreed to any extension of the period for assessment or collection; or (c)
executed or filed any power of attorney with resect to any Taxes, which waiver,
agreement or power of attorney is currently in force.
3.8 Litigation.
3.8.1 No investigation or review by any governmental entity with
respect to Interpharm is pending or, to the best of the knowledge of Interpharm,
threatened, nor has any governmental entity indicated to Interpharm an intention
to conduct the same, and
3.8.2 Other than as set forth in Schedule 3.8, there is no action,
suit, or proceeding pending or, to the best of the knowledge of Interpharm,
threatened against or affecting Interpharm at law or in equity, or before any
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality.
3.9 Investment Representations.
3.9.1 Acquisition for Own Account. The Consideration to be received
by the Shareholders hereunder, will be acquired for investment for each such
Shareholder's own account, not as a nominee or agent, and not with a view to the
public resale or distribution thereof, and each Shareholder has no present
intention of selling, granting any participation in, or otherwise distributing
the same.
3.9.2 Accredited Investor Status. Each Shareholder is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated under the
1933 Act. Each Shareholder's residence is set forth in Schedule A.
3.9.3 Restricted Securities. The Shareholders understand the
Consideration, and the Common Stock into which the Preferred Stock is
convertible are characterized as "restricted securities" under the 1933 Act
inasmuch as they are being acquired from ATEC in a transaction not involving a
14
public offering and that under the 1933 Act and applicable regulations
thereunder such securities may be resold without registration under the 1933 Act
only in certain limited circumstances. In this connection, the Shareholders
represent that they are familiar with Rule 144 promulgated under the 1933 Act,
and understand the resale limitations imposed thereby and by the 1933 Act.
3.9.4 Legend. The Shareholders understand that the certificates
representing Consideration, and the Common Stock into which the Preferred Stock
is convertible, when delivered to the Shareholders, may have appropriate orders
restricting transfer placed against them on the records of the transfer agent
for such securities, and may have placed upon them the following, or similar
legend:
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933. THEY MAY NOT BE TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF UNLESS THE TRANSFEROR FIRST
SATISFIES THE ISSUER THAT THE PROPOSED TRANSFER, IN THE
MANNER PROPOSED, DOES NOT VIOLATE THE REGISTRATION
REQUIREMENTS OF SAID ACT.
Each Shareholder agrees not to attempt any transfer of any such securities
without first complying with the substance of said legend, and agrees that an
opinion of counsel, a no-action letter of the SEC, or equivalent evidence may be
required for removal of the legend.
3.9.5 Additional Representations. Each Shareholder acknowledges that
the Consideration and the Common Stock into which the Preferred Stock is
convertible has not been registered under the 1933 Act and that such securities
may not be resold unless it is subsequently registered or an exemption form such
registration is available. In addition, each Shareholder acknowledges that (a)
such Shareholder has been granted the opportunity to ask questions of, and
receive answers from, representatives of ATEC concerning ATEC and the terms and
conditions of the acquisition of the Consideration and to obtain any additional
information such Shareholder deems necessary; (b) such Shareholder's knowledge
and experience in financial business matters is such that such Shareholder is
capable of evaluating the merits and risks of the investment in the
Consideration; and (c) such Shareholder has carefully reviewed the terms and
provisions of this Agreement and has evaluated the restrictions and obligations
contained herein.
3.10 Title to Property and Related Matters. Interpharm has good and
marketable title to, or has legally sufficient rights to use, all of its
properties, assets, rights, claims and contracts of every kind, character and
description owned or held by Interpharm, whether real, personal or mixed,
tangible or intangible, of any kind or character, free and clear of any liens or
encumbrances. Interpharm has maintained all assets material to its business in
good repair, working order and operating condition, subject only to wear and
tear, and all such assets are adequate and suitable for the purposes for which
they are presently being used and they conform in all material respects with
applicable law. Such assets constitute all of the properties and assets
necessary for the conduct of, or otherwise material to, the business of
Interpharm.
15
3.11 Disclosure. To the best of Interpharm's and the Shareholders'
knowledge, no representation, warranty or statement by them in this Agreement,
or in any exhibit, schedule, statement or certificate furnished to ATEC pursuant
to this Agreement, when read as a whole, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
made herein, in light of the circumstances under which they were made, not
misleading.
3.12 Certificate of Incorporation; Bylaws; Minute Books. True and complete
copies of the Certificate of Incorporation and Bylaws (or comparable
organizational documents) of Interpharm, as amended to and including the date
hereof, have been delivered to ATEC. Interpharm is not in violation of any
provision of its Certificate of Incorporation or is in material violation of its
Bylaws (or comparable organizational documents). Interpharm's minute books,
stock books and stock transfer records, true and complete copies of which have
been delivered to ATEC, contain true and complete records of all issuances and
transfers of capital stock of Interpharm, and contain a materially complete
summary of all meetings, consents, proceedings and other formal actions of
directors and stockholders since January 1, 1995.
3.13 Financial Statements. Interpharm and the Shareholders have previously
furnished to ATEC copies of unaudited financial statements of Interpharm
(including year-end balance sheets, statements of operations, statements of
shareholders' equity and statements of cash flows) for at and as of December 31,
2001 and December 31, 2000, each of which has been reviewed by Marcum &
Kliegman, LLP.
3.13.1 The financial statements referred to in Section 3.13
(collectively, the "Financial Statements") are true and complete in all material
respects with respect to each item therein, and have been prepared in accordance
with GAAP applied on a consistent basis from period to period, except such
change required by change in GAAP and reviewed by the certified public
accountants of Interpharm. The Financial Statements fairly present the financial
condition of Interpharm in all material respects at the respective dates thereof
and the results of operations of Interpharm for the periods then ended.
3.14 Liabilities. With the exception of the credit arrangements and loans
set forth in Schedule 3.16, Interpharm does not have any Liabilities, except (a)
to the extent reflected in, or reserved against on the face of its December 31,
2001 balance sheet and (b) for Liabilities that have been incurred after
December 31, 2001 in the ordinary course of business consistent with past
practices.
3.15 Absence of Certain Changes. There has not been, since December 31, 2001
any Material Adverse Change with respect to the business, assets, results of
operations, prospects or condition (financial or otherwise) of Interpharm.
Without limiting the foregoing, since December 31, 2001, Interpharm has not:
16
3.15.1 sold or agreed to sell any material asset;
3.15.2 granted or committed to grant any bonus, commission
or other form of incentive compensation or increased or committed to increase
the compensation or fees payable to or in respect to any of its employees,
directors, officers, sales representatives, independent contractors, agents,
consultants or Affiliates of Interpharm;
3.15.3 suffered the loss of any key employee or key
independent contractor or, other than in the ordinary course of business,
consistent with past practice, retained any new key employee or key independent
contractor;
3.15.4 encountered any labor union organization activity,
had any actual or threatened employee strikes, work stoppage, slowdowns or
lockouts, or had any material change in its relations with its employees;
3.15.5 suffered any changes in relations with, or any losses
of a supplier or customers that could reasonably be expected, in the aggregate,
to result in a Material Adverse Effect;
3.15.6 incurred any indebtedness or created any lien, pledge
or encumbrance on any of its assets;
3.15.7 made any loans to any Person;
3.15.8 failed to maintain accounts receivable, accounts
payable, inventory and other working capital accounts in accordance with past
practice;
3.15.9 declared, made, set aside or paid any dividend,
distribution, or payment on, or any purchase or redemption of, any shares of any
class of its capital stock;
3.15.10 entered into any transactions with any Affiliate of
Interpharm;
3.15.11 issued or sold any shares of any class of its capital
stock, or any securities convertible into or exchangeable for any such shares;
3.15.12 except as set forth in Schedule 3.15.12 [amendment
for authorization of preferred stock], amended the certificate of incorporation
or bylaws of Interpharm;
3.15.13 made any material change (for book or Tax purposes)
in any method of accounting or accounting practices;
3.15.14 settled any litigation, claim or proceeding relating
to the business of Interpharm with the exception of claims or litigation covered
under applicable insurance policies; or
3.15.15 entered into any material transaction not in the
ordinary course of business or agreed or committed (whether or not in writing)
to do any of the foregoing.
17
3.16 Contracts. Schedule 3.16 contains a list of the following contracts,
agreements, licenses and leases or commitments therefor to which Interpharm is a
party or by which any of the assets of Interpharm are bound (such contracts,
agreements, licenses, leases and commitments so listed on Schedule 3.16 are
collectively, the "Contracts"):
(a) mortgages, indentures, security agreements and other
agreements and instruments relating to the borrowing of money, or any extension
of credit or which impose any lien or encumbrance on any assets of Interpharm;
(b) real property leases and leases of any type of personal
property involving aggregate payments over the remaining term of such lease in
excess of $10,000;
(c) material agreements involving bailment off equipment or
any other real or personal property;
(d) employment, consulting, agency, retention, severance,
confidentiality, non-competition, non-solicitation, change in control or similar
agreements relating to or for the benefit of any (1) current or future employee,
director, officer, sales representative, independent contractor, agent,
consultant or Affiliate of Interpharm, or (2) any former employee, director,
officer, sales representative, independent contractor, agent, consultant or
Affiliate of Interpharm, if any term of such agreement has or will have effect
or application on or after the date hereof;
(e) maintenance and service agreements involving aggregate
payments over the remaining term thereof in excess of $10,000;
(f) collective bargaining, labor, union and other similar
agreements;
(g) contracts of insurance, including any contracts of
insurance insuring against claims which arose during the past six (6) years;
(h) agreements, orders or commitments for the purchase of
materials, supplies, or other services, in any case, having an unexpired term of
more than 12 months or involving aggregate payments in excess of $10,000;
(i) Intellectual Property Licenses (as defined below);
(j) agreements or commitments for construction or acquisition
of fixed assets or other capital expenditures;
(k) brokerage or finder's agreements;
(l) partnership, joint venture or other arrangements or
agreements involving a sharing of profits or expenses;
18
(m) contracts or binding commitments to sell, lease or
otherwise dispose of any asset having a value in excess of $40,000;
(n) contracts or binding commitments with any of the
Shareholders, any Affiliate of Interpharm or any director, officer or employee
of Interpharm;
(o) contracts or binding commitments limiting the freedom of
Interpharm to compete in any line of business or in any geographical area or
with any Person; and
(p) other agreements, contracts and binding commitments or
series of related agreements, contracts and binding commitments which, in any
case, involve payments or receipts of more than $15,000 over the life of such
agreements, contracts and binding commitments.
3.16.1 True Copies Provided. Interpharm and the Shareholders have
delivered to ATEC complete and correct copies of all written Contracts listed on
Schedule 3.16 and a complete and correct description of all of the material
terms of all oral Contracts listed on Schedule 3.16, in each case together with
a complete and correct copy or description, as the case may be, of all
amendments thereto.
3.16.2 No Default; Valid and Enforceable. Except as set forth in
Schedule 3.16, to the knowledge of Interpharm and the Shareholders, it has
performed the obligations required to be performed by it to date and is not in
material default, or alleged to be in material default, under any such Contract,
and to the knowledge of Interpharm and the Shareholders, there exists no event,
condition or occurrence which, after notice or lapse of time, or both, would
constitute such a default. All such Contracts are valid, in full force and
effect and enforceable against Interpharm and, to the knowledge of Interpharm
and the Shareholders, the other parties thereto in accordance with their
respective terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting creditors' rights generally or
is subject to the availability of equitable remedies.
3.17 Real Property. Interpharm does not own any real property. Schedule 3.17
lists all real property leased by Interpharm (the "Leased Premises"; the leases
relating to the Leased Premises, collectively, the "Real Property Leases").
Except for the Leased Premises, no real property is used or occupied by
Interpharm. Interpharm (a) has the exclusive rights to use and occupy the Leased
Premises; and (b) enjoys peaceful and undisturbed possession of the Leased
Premises. Interpharm's use of the Leased Premises and the improvements installed
by or on behalf of it upon the Leased Premises conform in all material respects
to all restrictive covenants, conditions and easements, and building,
subdivision and similar codes and all applicable laws, and neither Interpharm
nor any of the Shareholders has received any notice of any material violation or
claimed violation of any such restrictive covenants, conditions or easements, or
building, subdivision or similar codes and all applicable laws. There exists no
writ, injunction, decree, order or judgment, or pending litigation, nor, to the
knowledge of Interpharm or any Shareholder, any threatened litigation, relating
to the ownership, use, lease, occupancy or operation of any of the Leased
Premises. The improvements on the Leased Premises are in good working condition
and repair, ordinary wear and tear excepted.
19
3.18 Governmental Approvals and Authorizations; Compliance with Laws. All
approvals, permits, qualifications, authorizations, licenses, franchises,
consents, orders, registrations or other approvals (collectively, the
"Governmental Approvals") of all governmental authorities which are required in
order to permit Interpharm to carry on its business have been obtained and are
in full force and effect. There has been no material violation, cancellation,
suspension, revocation or default of any Governmental Approval or any notice of
violation, cancellation, suspension, revocation, default or dispute affecting
any Governmental Approval, and, to the knowledge of Interpharm or any
Shareholder, no basis exists for any such action, including, without limitation,
as a result of the consummation of the transactions contemplated by this
Agreement. Interpharm is not in conflict with or in violation or breach of or
default under (and, to the knowledge of Interpharm or any Shareholder, there
exists no event that, with notice or passage of time or both, would constitute a
conflict, violation, breach or default with, of or under) any applicable law.
Neither Interpharm nor any Shareholder has received any written notice, or to
the knowledge of Interpharm or any Shareholder, any other notice alleging any
such conflict, violation, breach or default.
3.19 Intellectual Property.
3.19.1 Schedule 3.19 sets forth a complete and correct list of all
Intellectual Property (as defined below) that is owned by Interpharm (the "Owned
Intellectual Property"), except for any such Owned Intellectual Property that
does not constitute an issued patent or pending patent application, a trademark
registration or pending trademark application or a registered copyright and is
not otherwise material to the conduct of Interpharm business. Schedule 3.19 also
sets forth a complete and correct list of all written or oral licenses and
arrangements (i) pursuant to which the use by any Person of Intellectual
Property is permitted by Interpharm and (ii) pursuant to which the use by
Interpharm of Intellectual Property is permitted by any Person (collectively,
the "Intellectual Property Licenses"). The Owned Intellectual Property and the
Intellectual Property subject to the Intellectual Property Licenses constitute
all Intellectual Property used or held for use in connection with, necessary for
the conduct of, or otherwise material to Interpharm's business. After the
Closing, Interpharm will have the right to use all Intellectual Property that is
subject to an Intellectual Property License and will own all Owned Intellectual
Property, free from any liens.
3.19.2 The conduct of Interpharm's Business does not infringe the
rights of any Person in respect of any Intellectual Property. None of the Owned
Intellectual Property is being infringed by third parties. There is no claim or
demand of any Person pertaining to, or any proceeding which is pending or, to
the knowledge of Interpharm or any Shareholder, threatened, that challenges the
rights of Interpharm in respect of any Owned Intellectual Property or
Intellectual Property License. No Owned Intellectual Property or Intellectual
Property License is subject to any outstanding order, ruling, decree, judgment
or stipulation by or with any court, tribunal, arbitrator or other governmental
authority. The Owned Intellectual Property has been duly registered with, filed
in or issued by, as the case may be, the United States Patent and Trademark
20
Office and United States Copyright Office or other filing offices, domestic or
foreign, to the extent necessary or desirable to ensure full protection under
any Applicable Law, and the same remain in full force and effect.
3.20 Employees, Labor Matters.
3.20.1 Interpharm is not a party to or bound by any collective
bargaining or other labor agreement, and there are no labor unions or other
organizations representing, purporting to represent or attempting to represent
any employees employed by Interpharm.
3.20.2 There has not occurred or been threatened any strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of Interpharm. There are no
labor disputes currently subject to any grievance procedure, arbitration or
litigation and there is no representation petition pending or threatened with
respect to any employee of Interpharm, and Interpharm has complied with all
applicable laws pertaining to the employment or termination of employment of its
employees, including, without limitation, to the extent applicable, the National
Labor Relations Act, as amended, Title VII of the Civil Rights Act of 1991, as
amended, the Occupational Safety and Health Act, Executive Order 11246, the Fair
Labor Standard Act of 1973, the Americans with Disabilities Act, the Age
Discrimination in Employment Act, as amended, the Department of Transportation
regulations, and all other such applicable laws relating to labor relations,
equal employment opportunities, fair employment practices, mandatory random drug
and alcohol testing, prohibited discrimination or distinction and other similar
employment activities, except for any failure so to comply that, individually
and in the aggregate, could not have or result in any material liability or
obligation on the part of Interpharm or, following the Closing, ATEC or any of
its Affiliates.
3.21 Employee Benefit Plans and Related Matters; ERISA.
3.21.1 Employee Benefit Plans. Schedule 3.21.1 sets forth a complete
and correct list of each "employee benefit plan", as such term is defined in
section 3(3) of ERISA, whether or not subject to ERISA, and each bonus,
incentive or deferred compensation, severance, termination, retention, change of
control, stock option, stock appreciation, stock purchase, phantom stock or
other equity-based, performance or other employee or retiree benefit or
compensation plan, program, arrangement, agreement, policy or understanding,
whether written or unwritten, that provides or may provide benefits or
compensation in respect of any employee or independent contractor or under which
any employee or independent contractor is or may become eligible to participate
or derive a benefit and that is or has been maintained or established by
Interpharm or any trade or business, whether or not incorporated, which,
together with Interpharm, is or would have been at any date of determination
occurring within the preceding six years, treated as a single employer under
section 414 of the Code, (such other trades and businesses hereinafter referred
to as the "Related Persons"), or to which Interpharm or any Related Person
contributes or is or has been obligated or required to contribute or with
respect to which Interpharm or any Related Person may have any liability or
obligation (collectively, the "Plans"). With respect to each such Plan,
Interpharm and Shareholders have made available to ATEC complete and correct
copies of (i) such Plan, if written, or a description of such Plan if not
written, and (ii) to the extent applicable to such Plan, all trust agreements,
21
insurance contracts or other funding arrangements, the two most recent actuarial
and trust reports, the two most recent Forms 5500 required to have been filed
with the IRS and all schedules thereto, the most recent IRS determination
letter, all current summary plan descriptions, all material communications
received from or sent to the IRS, the Pension Benefit Guaranty Corporation or
the Department of Labor (including a written description of any material oral
communication), any actuarial study of any post-employment life or medical
benefits provided under any such Plan, if any, statements or other
communications regarding withdrawal or other multiemployer plan liabilities, if
any, and all amendments and modifications to any such document. Interpharm has
not communicated to any employee or any independent contractor any intention or
commitment to modify any Plan or to establish or implement any other employee,
retiree or independent contractor benefit or compensation plan or arrangement.
3.21.2 Qualification. Each Plan intended to be qualified under
section 401(a) of the Code, and the trust (if any) forming a part thereof, has
received a favorable determination letter from the IRS as to its qualification
under the Code and to the effect that each such trust is exempt from taxation
under section 501(a) of the Code, and, nothing has occurred since the date of
such determination letter and no condition exists that could adversely affect
such qualification or tax-exempt status. No Plan intended to be qualified under
section 401(a) of the Code, or any trust forming a part thereof, is currently,
or within the preceding six years has been, the subject of audit, examination or
inquiry by the IRS, the Pension Benefit Guaranty Corporation or the Department
of Labor.
3.21.3 Compliance; Liability.
(a) Neither Interpharm nor any Related Person would be liable
for any material amount pursuant to section 4062, 4063 or 4064 of ERISA if any
Plan that is subject to Title IV of ERISA (a "Title IV Plan") were to terminate
as of the date hereof. As of the last day of the most recently ended fiscal year
of each Title IV Plan, the "projected benefit obligations" (within the meaning
of the Financial Accounting Standards Board Statement No. 87) under each such
Plan did not exceed the fair market value of the assets of each such Plan
allocable to such "projected benefit obligations" determined on the basis of the
actuarial assumptions contained in the actuarial report prepared for such fiscal
year of each such Plan, each of which assumptions is reasonable, and the present
value of the "benefit liabilities" (within the meaning of, and determined in
accordance with, Title IV of ERISA) under such Plan does not exceed the "current
value" (within the meaning of section 3(26) of ERISA) of the assets of such Plan
allocable to such benefit liabilities, determined on the basis of the actuarial
assumptions required to be used in valuing pension liabilities upon plan
termination.
(b) Each Plan that is subject to the minimum funding standards
of ERISA or the Code satisfies such standards under sections 412 and 302 of the
Code and ERISA, respectively, and no such Plan has incurred an "accumulated
funding deficiency" within the meaning of such sections, whether or not waived.
22
(c) Neither Interpharm nor any Related Person has been
involved in any transaction that could cause Interpharm, any such Related Person
or, following the Closing, ATEC or any of its Affiliates, to be subject to
liability under section 4069 or 4212 of ERISA. Neither Interpharm nor any
Related Person has incurred (either directly or indirectly, including as a
result of an indemnification obligation) any liability under or pursuant to
Title I or IV of ERISA or the penalty, excise Tax or joint and several liability
provisions of the Code relating to employee benefit plans and no event,
transaction or condition has occurred or exists that could result in any such
liability to Interpharm, any Related Person or, following the Closing, ATEC or
any of its Affiliates. All contributions and premiums required to have been paid
or accrued by Interpharm and each Related Person to any employee benefit plan
(within the meaning of section 3(3) of ERISA) (including each Plan) under the
terms of any such plan or its related trust, insurance contract or other funding
arrangement, or pursuant to any applicable law (including ERISA and the Code) or
collective bargaining agreement have been paid within the earliest time
prescribed by any such plan, agreement or applicable law.
(d) Each of the Plans has been operated and administered in
all respects in compliance with its terms, all applicable laws and all
applicable collective bargaining agreements, except for any failures so to
comply that, individually and in the aggregate, could not have or result in a
material liability or obligation on the part of Interpharm or, following the
Closing, ATEC or any of its Affiliates. There are no material pending or to the
knowledge of Interpharm or the Shareholders, threatened claims by or on behalf
of any of the Plans, by any employee or independent contractor or otherwise
involving any such Plan or the assets of any Plan (other than routine claims for
benefits, all of which have been fully reserved for on the regularly prepared
consolidated balance sheets of Interpharm).
(e) No Plan is a "multiemployer plan" within the meaning of
section 4001(a)(3) of ERISA. Neither Interpharm nor any Related Person has,
within the preceding six years, withdrawn in a complete or partial withdrawal
from any multiemployer plan (within the meaning of section 4001(a)(3) of ERISA)
or incurred any contingent liability under section 4204 of ERISA. No Plan is a
"multiple employer plan" within the meaning of section 4063 or 4064 of ERISA.
(f) No employee is or will become entitled to post-employment
benefits of any kind by reason of employment with Interpharm, including, without
limitation, death or medical benefits (whether or not insured), other than (i)
coverage mandated by section 4980B of the Code or (b) retirement benefits
payable under any Plan qualified under section 401 (a) of the Code. The
consummation of the transactions contemplated by this Agreement will not result
in an increase in the amount of compensation or benefits or the acceleration of
the vesting or timing of payment of any compensation or benefits payable to or
in respect of any employee or independent contractor. No payment or benefit
which has been, or as a result of the consummation of the transactions
contemplated by this Agreement (either alone or upon the occurrence of any
additional or subsequent events) will be required to be, made by Interpharm or,
to the knowledge of Interpharm or any Shareholder, by ATEC in respect of any
employee of Interpharm has failed or will fail to be deductible by such entity
pursuant to section 280G of the Code or has resulted or will result in the
imposition of any excise tax pursuant to section 280G or 4999 of the Code.
23
3.22 Receivables. To the knowledge of Interpharm and the Shareholders,
except to the extent expressly reserved against in the December 31, 2001 balance
sheet, the receivables reflected in such balance sheet were, and will be, good
and collectible, free and clear of any liens, and have and shall have arisen
only from bona fide transactions in the ordinary course of business.
3.23 Business Relations.
3.23.1 Schedule 3.23 sets forth for the period November, 2001 through
November, 2002 (a) the names of the 9 largest customers of Interpharm (based on
the aggregate value of services or goods ordered from Interpharm by such
customers during each such period) and (b) the amount for which each such
customer was invoiced during each such period. Interpharm has not received any
written, and to the knowledge of Interpharm or any Shareholder, any other
notice, and neither Interpharm nor any Shareholder has any reason to believe
that any such customer (i) has ceased, or will cease, to use the services or
goods of Interpharm, (ii) has materially reduced, or will materially reduce, the
use of the services or goods of Interpharm or (iii) has sought, or is seeking,
to materially reduce the price it will pay for the services or goods of
Interpharm. Within the last three years, Interpharm has not been solicited to
provide, nor has it offered to provide, any consideration of any kind to any
Person in order to maintain or obtain an agreement under which Interpharm would
provide services or goods (other than consideration provided for under the terms
of the executed agreement to provide such services).
3.23.2 Interpharm has not received any written, or to the knowledge
of Interpharm or any Shareholder, any other notice, and neither Interpharm nor
any Shareholder has any reason to believe that any Person with whom Interpharm
does business will not continue to do business with Interpharm after the Closing
Date on terms and conditions substantially the same as those prevailing during
the past 12 months. Interpharm and the Shareholders believe that Interpharm's
relations with Persons material to the conduct of Interpharm's business are
good.
3.24 Affiliate Transactions. Schedule 3.24 contains a list of all contracts,
agreements, transactions or commitments between any Shareholder, any former
shareholder of Interpharm, any officer, employee or director of Interpharm, any
family member of any of the foregoing or any other Affiliate of any of the
foregoing, on the one hand, and Interpharm, on the other hand, other than
compensation paid as part of an employment relationship for services rendered
(collectively, the "Affiliate Transactions"), that took place or were entered
into during the 24 months preceding the date of this Agreement or that will bind
Interpharm after the Closing.
3.25 Insurance. Schedule 3.25 contains a list of all insurance policies or
self-insurance agreements held or maintained by Interpharm relating to its
business or assets. Interpharm has delivered to ATEC complete and correct copies
of all such insurance policies, together with all riders and amendments thereto.
Such policies are in full force and effect and all premiums due thereon have
been paid. Interpharm has complied in all material respects with the terms and
provisions of such policies. No notice of termination or, since December 1,
2001, premium increase has been received under any of the policies. Interpharm
and the Shareholders believe that the insurance coverage provided by such
policies (including, without limitation, as to deductibles and self-insured
retentions) is adequate and suitable for Interpharm's business and assets.
24
3.26 Environmental Matters.
3.26.1 Interpharm is in material compliance and at all times has
complied in all material respects with all applicable Environmental Laws
pertaining to all of the properties and assets of Interpharm (including the
Leased Premises and the properties formerly owned or leased by Interpharm) and
the use and ownership hereof, and to its businesses and operations. No violation
by Interpharm is being alleged or threatened or has at any time been alleged or
threatened of any applicable Environmental Law relating to any of its respective
properties and assets (including the Leased Premises and the properties formerly
owned or leased by Interpharm) or the use or ownership thereof, or to its
respective businesses and operations.
3.26.2 Interpharm is currently, and has at all times been, in
possession of, and in material compliance with, all permits and authorizations
required pursuant to any applicable Environmental Law, or relating to the past
or present use, generation, management, handling, transport, treatment,
disposal, storage or release of Hazardous Materials.
3.26.3 Neither Interpharm, nor to the knowledge of Interpharm or any
Shareholder, any other Person (including any tenant or subtenant) has caused or
taken any action that will result in, and Interpharm is not subject to, any
liability or obligation on the part of Interpharm relating to (a) the
environmental conditions on, under, or about the Leased Premises (or other
properties or assets formerly owned, leased, operated or used by Interpharm),
including, without limitation, the air, soil and groundwater conditions at such
or (b) the past or present use, management, handling, transport, treatment,
generation, storage, disposal, discharge, emission, or release of any Hazardous
Materials.
3.26.4 Interpharm is not subject to any outstanding order from, or
contractual or other obligation with, any governmental authority or other Person
in respect of which Interpharm may be required to incur costs arising from the
release or threatened release of a Hazardous Material. Interpharm has not
entered into any contractual or other obligation (including indemnification
obligation) with any governmental authority or other Person pursuant to which
Interpharm has assumed responsibility for, either directly or indirectly, the
remediation of any condition arising from or relating to the release or
threatened release of Hazardous Materials.
3.26.5 Interpharm has disclosed and made available to ATEC all
information, including, without limitation, all studies, analyses and test
results, in the possession, custody or control of or otherwise known to any
Shareholder or Interpharm relating to (a) the environmental conditions on, under
or about the Leased Premises (or other properties or assets formerly owned,
leased, operated or used by Interpharm) and (b) any Hazardous Materials used,
managed, handled, transported, treated, generated, stored, discharged, emitted,
or otherwise released by Interpharm or any other Person on, under, about or from
the Leased Premises and the properties formerly owned, leased, operated or used
or otherwise in connection with the use or operation of any of the properties
and assets of Interpharm, or its respective businesses and operations.
25
ARTICLE IV
ATEC'S COVENANTS
4.1 Affirmative Covenants. Subject to the terms and conditions hereunder,
from the date hereof through the Closing Date, ATEC shall use its reasonable
efforts to take every action reasonably required in order to satisfy the
conditions to closing set forth in this Agreement and otherwise to ensure the
prompt and expedient consummation of the Transaction, and will exert all
reasonable efforts to cause the Transaction to be consummated, provided in all
instances that the representations and warranties of Interpharm and the
Shareholders in this Agreement are and remain true and accurate and that the
covenants and agreements of Interpharm and the Shareholders in this Agreement
are honored.
4.2 Access and Information. ATEC shall afford to Interpharm and the
Shareholders, and their accountants, counsel and other representatives,
reasonable access during normal business hours throughout the period prior to
the Closing to all of ATEC's properties, books, contracts, commitments, records
(including, but not limited to, tax returns), and personnel, and, during such
period, ATEC shall furnish promptly to Interpharm:
4.2.1 internal monthly financial statements when and as available,
and
4.2.2 all other information concerning its or any of its
Subsidiaries' business, properties, and personnel as Interpharm or its
Shareholders may reasonably request, but no investigation pursuant to this
Section 4.2 shall affect any representations or warranties of ATEC, or the
conditions to the obligations of ATEC to consummate the Transaction contained in
this Agreement. In the event of the termination of this Agreement, Interpharm
and its Shareholders will, and will cause their representatives to, deliver to
ATEC or destroy all documents, work papers and other material, and all copies
thereof, obtained by them or on their behalf from ATEC (or any Subsidiary) as a
result of this Agreement or in connection herewith, whether so obtained before
or after the execution hereof, and will hold in confidence all confidential
information that has been designated as such by the ATEC in writing or by
appropriate and obvious notation, and will not use any such confidential
information except in connection with the Transaction, until such time as such
information is otherwise publicly available. Interpharm and the Shareholders
shall assert their rights hereunder in such manner as to minimize interference
with the business of ATEC.
4.3 No Solicitation. From the date of the execution of this Agreement to
(a) the Closing or (b) the termination of this Agreement in accordance with
Article VIII, ATEC and its respective Subsidiaries, and those acting on behalf
of any of them will not, and ATEC will use its best efforts to cause its
officers, employees, agents, and representatives (including any investment
banker or finder) not, directly or indirectly, to solicit, encourage, or
initiate any discussions with, or negotiate or otherwise deal with, or provide
26
any information to, any person or entity other than Interpharm and the
Shareholders and Interpharm's officers, employees, and agents, concerning any
merger, acquisition of ATEC, or similar transaction involving the ATEC or any
Subsidiary or division of ATEC or any sale of any of its capital stock of ATEC
(collectively, "Acquisition Proposals"), with the exception of a management
buyout pursuant to which certain of ATEC's current management will purchase
ATEC's current business operations and assets and assume or extinguish
substantially all of its liabilities, including each obligation in each
agreements and plans listed in Schedules 2.6 (other than item #1) and 2.10
(other than items 1, 2, 13, 24, 27 and 28) (the "Management Buyout"), on terms
acceptable solely to ATEC in its sole discretion and exclusive discretion. None
of the foregoing shall prohibit providing information to others in a manner in
keeping with the ordinary conduct of ATEC's business, or providing information
to government authorities.
4.3.1 Nothing contained in this Agreement shall prohibit ATEC (i)
from complying with Rule 14e-2 and Rule 14d-9 under the Exchange Act with
respect to a bona fide tender offer or exchange offer, (ii) from making any
disclosure of an Acquisition Proposal to its stockholders or otherwise if its
Board of Directors concludes in good faith, after consultation with its outside
legal counsel, that such disclosure is necessary under applicable law or the
failure to make such disclosure would be inconsistent with its fiduciary duties
to its stockholders under applicable law or (iii) from participating in
negotiations or discussions with or furnishing information to any person in
connection with an Acquisition Proposal not solicited after the date hereof in
breach of Section 4.3 above and which is submitted in writing by such person to
the Board of Directors of ATEC, after the date of this Agreement; provided,
however, that prior to participating in any such discussions or negotiations or
furnishing any information, within five (5) business days after its receipt of
the Acquisition Proposal, the Board of Directors of ATEC shall have concluded in
good faith, after consultation with its outside legal counsel and financial
advisors, that such Acquisition Proposal is reasonably likely to lead to a
Superior Proposal and, after consultation with its outside legal counsel, that
failure to participate in such negotiations or discussions or furnishing such
information would be inconsistent with its fiduciary duties to the stockholders
of Parent or the Company, as the case may be, under applicable law. ATEC shall
(i) promptly notify Interpharm and the Shareholders (but in no event later than
two (2) business days thereafter) if any Acquisition Proposal or inquiries
regarding a potential Acquisition Proposal are received by, any information with
respect to an Acquisition Proposal or a potential Acquisition Proposal is
requested from, or any discussions or negotiations with respect to an
Acquisition Proposal or a potential Acquisition Proposal are sought to be
initiated or continued with, it or any of its representatives indicating, in
connection with such notice, the name of the person or entity involved and a
copy of any such Acquisition Proposal, with the intent of enabling such other
party to make a matching offer so that the Transactions contemplated hereby may
be effected.
4.3.2 Prior to the Closing Time, in the event the Board of Directors
of ATEC by majority vote of its members, determines in good faith that it has
received a Superior Proposal and determines in good faith that consummating the
Transaction would be inconsistent with its fiduciary duties to ATEC, under
applicable law, ATEC and its Board of Directors may (i) withdraw, modify or
change the Board of Directors' approval or recommendation of this Agreement or
27
the Transaction, (ii) approve or recommend such Superior Proposal to its
stockholders, (iii) terminate this Agreement and (iv) publicly announce the
Board of Directors' intention to do any or all of the foregoing.
4.4 Conduct of Business Pending the Transaction. ATEC covenants and agrees
with Interpharm and the Shareholders that, prior to the consummation of the
Transaction or the termination of this Agreement pursuant to its terms, unless
Interpharm and the Shareholders shall otherwise consent in writing, which
consent shall not be unreasonably withheld or delayed, and except as otherwise
contemplated by this Agreement, ATEC will comply with each of the following:
4.4.1 its business shall be conducted only in the ordinary and usual
course, other than the Management Buyout;
4.4.2 it shall not (a) amend its Articles of Incorporation or
Bylaws, or (b) split, combine, or reclassify any of its outstanding securities
or declare, set aside, or pay any dividend or other distribution on or make or
agree or commit to make any exchange for or redemption of any such securities
payable in cash, stock, or property;
4.4.3 it shall not (a) issue or agree to issue any additional shares
of, or rights of any kind to acquire any shares of its capital stock of any
class, except issuances pursuant to the exercise of stock options, warrants or
convertible securities outstanding on the date of this Agreement, or (b) enter
into any contract, agreement, commitment, or arrangement with respect to any of
the foregoing;
4.4.4 it shall not create, incur, or assume any long-term or
short-term indebtedness for money borrowed or make any capital expenditures or
commitment for capital expenditures, other than in the ordinary course of
business and other than the Management Buyout;
4.4.5 except as provided in Schedule 4.4.5, it shall not (a) adopt,
enter into, or amend any bonus, profit-sharing, compensation, stock option,
warrant, pension, retirement, deferred compensation, employment, severance,
termination, or other employee benefit plan, agreement, trust fund, or
arrangement for the benefit or welfare of any officer, director or employee, or
(b) agree to any material (in relation to historical compensation) increase in
the compensation payable or to become payable to, or any increase in the
contractual term of employment of, any officer, director, or employee;
4.4.6 neither it nor any of its Subsidiaries shall enter into, any
material contract, agreement, commitment, or understanding binding ATEC, other
than in the ordinary course of business and consistent with past practices;
4.4.7 it will not hold any meetings of its Board of Directors, or
any committee thereof, or of its stockholders, without inviting a representative
selected by Interpharm and its Shareholders to attend the same (although ATEC
may require that such representative absent himself or herself during that
portion of any such meeting that pertains to issues arising under this
Agreement, the Transaction or an Acquisition Proposal);
28
4.4.8 it will continue properly and promptly to file when due all
federal, state, local, foreign, and other tax returns, reports, and declarations
required to be filed by it, and will pay, or make full and adequate provision
for the payment of, all taxes and governmental charges due from or payable by
it;
4.4.9 it will continue to properly and promptly file when due all
reports due to be filed with the SEC pursuant to Sections 13 or 15 of the
Exchange Act;
4.4.10 it will comply with all laws and regulations applicable to it
and its operations; and
4.4.11 it will maintain in full force and effect its insurance
coverage presently in effect.
4.5 Cooperation. ATEC will use its reasonable efforts to cooperate with
Interpharm and its Shareholders and their counsel, accountants and agents in
carrying out the transactions contemplated by this Agreement and in delivering
all documents and instruments deemed reasonably necessary or useful by
Interpharm or its Shareholders.
4.6 Expenses. Except as set forth herein, whether or not the Transaction is
consummated, all costs and expenses incurred by ATEC in connection with this
Agreement and the Transaction contemplated hereby shall be paid by ATEC.
4.7 Publicity. Prior to the Closing any written public statements by ATEC
pertaining to this Agreement or the Transaction shall be submitted to Interpharm
for review and approval prior to release by ATEC, and shall be released only in
a form approved by Interpharm, provided, however, that such review and approval
shall not be required of statements by ATEC if prior review and approval would
prevent the timely and accurate dissemination of such statement as required to
comply, in the reasonable judgment of ATEC's counsel, with any applicable law,
rule, or policy.
4.8 Updating of Exhibits and Disclosure Documents. ATEC shall notify
Interpharm of any changes, additions or events which may cause any change in or
addition to any Schedules delivered by it under this Agreement, promptly after
the occurrence of the same and at the Closing by the delivery of updates of all
Schedules. No notification made pursuant to this Section shall be deemed to cure
any breach of any representation or warranty made in this Agreement unless
Interpharm and the Shareholders specifically agree thereto in writing. Nor shall
any such notification be considered to constitute or give rise to a waiver by
Interpharm or the Shareholders of any condition set forth in this Agreement.
4.9 MEX Listing. ATEC shall use its reasonable best efforts to maintain
the eligibility of its Common Stock for listing on the AMEX.
4.10 Management Buyout. ATEC shall use its best efforts to complete the
Management Buyout.
29
ARTICLE V
COVENANTS OF INTERPHARM AND THE SHAREHOLDERS
5.1 Affirmative Covenants. From the date hereof through the Closing Date,
Interpharm and the Shareholders will take every action reasonably required of it
to satisfy the conditions to closing set forth in this Agreement and otherwise
to ensure the prompt and expedient consummation of the Transaction, and will
exert all reasonable efforts to cause the Transaction to be consummated,
provided in all instances that the representations and warranties of ATEC in
this Agreement are and remain true and accurate and that the covenants and
agreements of ATEC in this Agreement are honored.
5.2 Access and Information. Interpharm and the Shareholders shall afford to
ATEC and to ATEC's accountants, counsel and other representatives reasonable
access during normal business hours throughout the period prior to the Closing
to all of Interpharm's properties, books, contracts, commitments, records
(including, but not limited to, tax returns), and personnel, and, during such
period, Interpharm and the Shareholders shall furnish promptly to ATEC:
5.2.1 internal monthly financial statements when and as available,
and
5.2.2 all other information concerning Interpharm's business,
properties, and personnel as ATEC may reasonably request, but no investigation
pursuant to this Section 5.2 shall affect any representations or warranties of
Interpharm and the Shareholders, or the conditions to their obligations to
consummate the Transaction contained in this Agreement. In the event of the
termination of this Agreement, ATEC will, and will cause its representatives to,
deliver to Interpharm and the Shareholders or destroy all documents, work papers
and other material, and all copies thereof, obtained by it or on its behalf from
Interpharm and the Shareholders as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof, and will
hold in confidence all confidential information that has been designated as such
by Interpharm or the Shareholders in writing or by appropriate and obvious
notation, and will not use any such confidential information except in
connection with the Transaction, until such time as such information is
otherwise publicly available. ATEC and its representatives shall assert their
rights hereunder in such manner as to minimize interference with the business of
Interpharm.
5.3 No Solicitation. From the date of the execution of this Agreement to
(a) the Closing or (b) the termination of this Agreement in accordance with
Article VIII, Interpharm and the Shareholders, and those acting on behalf of any
of them will not, and Interpharm and the Shareholders will use their best
efforts to cause their officers, employees, agents, and representatives
(including any investment banker or finder) not, directly or indirectly, to
solicit, encourage, or initiate any discussions with, or negotiate or otherwise
deal with, or provide any information to, any person or entity other than ATEC
and ATEC's officers, employees, and agents, concerning any merger, acquisition
of Interpharm, Interpharm capital stock and the Interpharm shares held by the
Shareholder, or similar transaction involving Interpharm or the Shareholders or
division of Interpharm or any sale of any of its capital stock of Interpharm.
Interpharm and the Shareholders will notify ATEC immediately (but in no event
later than two (2) business days thereafter) upon receipt of any inquiry, offer
or proposal relating to any of the foregoing. None of the foregoing shall
30
prohibit providing information to others in a manner in keeping with the
ordinary conduct of Interpharm's and the Shareholders' business, or providing
information to government authorities.
5.4 Conduct of Business Pending the Transaction. Interpharm covenants and
agrees with ATEC that, prior to the consummation of the Transaction or the
termination of this Agreement pursuant to its terms, unless ATEC shall otherwise
consent in writing, which consent shall not be unreasonably withheld or delayed,
and except as otherwise contemplated by this Agreement, Interpharm will comply
with each of the following:
5.4.1 its business shall be conducted only in the ordinary and usual
course, and it shall use reasonable efforts to keep intact its business
organizations and goodwill, keep available the services of its officers and
employees and maintain good relationships with suppliers, lenders, creditors,
distributors, employees, customers, and others having business or financial
relationships with it;
5.4.2 it shall not (a) amend its Articles of Incorporation or
Bylaws, or (b) split, combine, or reclassify any of its outstanding securities
or declare, set aside, or pay any dividend or other distribution on or make or
agree or commit to make any exchange for or redemption of any such securities
payable in cash, stock, or property;
5.4.3 it shall not (a) issue or agree to issue any additional shares
of, or rights of any kind to acquire any shares of, its capital stock of any
class, or (b) enter into any contract, agreement, commitment, or arrangement
with respect to any of the foregoing;
5.4.4 it shall not create, incur, or assume any long-term or
short-term indebtedness for money borrowed or make any capital expenditures or
commitment for capital expenditures, except in the ordinary course of business
and consistent with past practice;
5.4.5 it will continue properly and promptly to file when due all
federal, state, local, foreign, and other tax returns, reports, and declarations
required to be filed by it, and will pay, or make full and adequate provision
for the payment of, all taxes and governmental charges due from or payable by
it;
5.4.6 it will not hold any meetings of its Board of Directors, or
any committee thereof, or of its shareholders, without inviting a representative
selected by ATEC to attend the same (although Interpharm may request that such
representative absent himself or herself during that portion of any such meeting
that pertains to issues arising under this Agreement);
5.4.7 it shall not (a) adopt, enter into, or amend any bonus,
profit-sharing, compensation, stock option, warrant, pension, retirement,
deferred compensation, employment, severance, termination, or other employee
benefit plan, agreement, trust fund, or arrangement for the benefit or welfare
of any officer, director or employee, or (b) agree to any material (in relation
to historical compensation) increase in the compensation payable or to become
payable to, or any increase in the contractual term of employment of, any
officer, director, or employee;
31
5.4.8 neither it nor any of its Subsidiaries shall enter into, any
material contract, agreement, commitment, or understanding binding ATEC, other
than in the ordinary course of business and consistent with past practices;
5.4.9 it will maintain in full force and effect its insurance
coverage presently in effect; and
5.4.10 it will comply with all laws and regulations applicable to it
and its operations.
5.5 Cooperation. Interpharm and its Shareholders will cooperate with ATEC
and its counsel, accountants and agents in every way in carrying out the
transactions contemplated by this Agreement and in delivering all documents and
instruments deemed reasonably necessary or useful by ATEC. Without limiting the
generality of the foregoing, Interpharm and its Shareholders agree to cooperate
fully with ATEC and its authorized representatives and to execute and deliver or
cause to be executed and delivered at all reasonable times and places such
additional instruments and documents as ATEC may reasonably request for purposes
of carrying out the intent and purpose of this Agreement, including without
limitation, in connection with the preparation and filing of any filings
required under any Federal, state, county, local or municipal law relating to
the Transaction contemplated herein.
5.6 Expenses. Except as set forth herein, whether or not the Transaction is
consummated, all costs and expenses incurred by Interpharm and the Shareholders
in connection with this Agreement and the Transaction shall be paid by them.
5.7 Publicity. Prior to the Closing, neither Interpharm, nor the
Shareholders shall release any public statements pertaining to this Agreement or
the Transaction.
5.8 Updating of Exhibits and Disclosure Documents. Interpharm or the
Shareholders shall notify ATEC of any changes, additions, or events which may
cause any change in or addition to any Schedules delivered by them under this
Agreement promptly after the occurrence of the same and again at the Closing by
delivery of appropriate updates to ATEC. No such notification made pursuant to
this Section shall be deemed to cure any breach of any representation or
warranty made in this Agreement unless ATEC specifically agree thereto in
writing. Nor shall any such notification be considered to constitute or give
rise to a waiver by ATEC of any condition set forth in this Agreement.
5.9 Financial Statements. Interpharm shall cause an audit of its financial
statements for the fiscal years ended December 31, 2001 and December 31, 2000 be
completed.
ARTICLE VI
CONDITIONS TO CLOSING
6.1 Conditions to Obligation of Interpharm and the Shareholders. The
obligation of Interpharm and the Shareholders to effect the Transaction shall be
subject to the fulfillment at or prior to the Closing of the following
conditions, unless Interpharm and the Shareholders shall waive such fulfillment:
32
6.1.1 This Agreement and the transactions contemplated hereby shall
have received all approvals, consents, authorizations, and waivers from
governmental and other regulatory agencies and other third parties (including
lenders, holders of debt securities, and lessors) required to consummate the
Transaction;
6.1.2 There shall not be in effect a preliminary or permanent
injunction or other order by any federal or state court which prohibits the
consummation of the Transaction;
6.1.3 ATEC shall have performed in all material respects each of its
agreements and obligations contained in this Agreement and required to be
performed on or prior to the Closing and shall have complied with all material
requirements, rules, and regulations of all regulatory authorities having
jurisdiction relating to the Transaction;
6.1.4 No material adverse change shall, in the reasonable judgment
of Interpharm and the Shareholders, have taken place in the business or
condition (financial or otherwise) of ATEC since the date of ATEC's September
30, 2002 balance sheet, other than those that result from the changes permitted
by, and transactions contemplated by, this Agreement;
6.1.5 The representations and warranties of ATEC set forth in this
Agreement shall be true in all material respects as of the date of this
Agreement and, except in such respects as, in the reasonable judgment of
Interpharm and the Shareholders, do not materially and adversely affect the
business or condition (financial or otherwise) of ATEC, as of the Closing Time
as if made as of such time;
6.1.6 The number of shares of Common Stock of ATEC issued and
outstanding shall not be more than 12,000,000;
6.1.7 ATEC shall have completed the Management Buyout resulting on
ATEC having no more than $650,000 in total liabilities as of the Closing Date;
6.1.8 ATEC shall have not less than $3.7 million in total
shareholders' equity, as of the Closing Date, with at least $1.25 million in
cash, as well as other assets consisting of notes and other obligations due in
less than three years;
6.1.9 ATEC shall have filed the Certificate of Designations, Rights
and Preferences of the Preferred Stock annexed as Schedule 1.1.1.2 with Delaware
Secretary of State;
6.1.10 ATEC shall have received a fairness opinion in connection with
the Management Buyout that shall be reasonably satisfactory to Interpharm and
the Shareholders' counsel;
6.1.11 ATEC shall have received a fairness opinion as to the
Transaction that shall be reasonably satisfactory to Interpharm and the
Shareholders' counsel;
33
6.1.12 Interpharm and the Shareholders shall have received from ATEC
an officer's certificate, executed by the Chief Executive Officer and the Chief
Financial Officer of ATEC (in their capacities as such) dated the Closing Date,
as to the satisfaction of the conditions in sub-paragraphs 6.1.1 through 6.1.9
above;
6.1.13 Interpharm and the Shareholders shall have received, on and as
of the Closing Date, (a) an opinion of counsel to ATEC, in form and substance
satisfactory to Interpharm and the Shareholders' counsel and (b) such other
closing documents and instruments Interpharm and the Shareholders shall
reasonably request, in each case reasonably satisfactory in form and substance
to Interpharm and the Shareholders' and their counsel;
6.1.15 The Transaction and the Management Buyout shall have been
approved by the ATEC stockholders;
6.1.16 ATEC shall have delivered to Interpharm the written
resignations of the following members of its Board of Directors, in their roles
as Directors only: Balwinder Singh Bathla, James Charles and Ashok Rametra;
6.1.17 ATEC shall have entered into employment agreements, reasonably
satisfactory to Interpharm, with:
6.1.17.1 Surinder Rametra to serve as an officer of ATEC
for a term of at least three years following the Closing Date at an annual
salary not to exceed $150,000 which shall include a personal guarantee
satisfactory to Interpharm; and
6.1.17.2 James Charles to serve as the chief financial
officer of ATEC for a term of at least two years at an annual salary not to
exceed $80,000 per year;
6.1.18 ATEC shall have entered into a Registration Rights Agreement
with the Shareholders in the form annexed hereto as Exhibit 1.1.4;
6.1.19 ATEC shall have settled its litigation with Royal Sun Alliance
set forth in Schedule 2.9; and
6.2 Conditions to Obligation of ATEC. The obligation of ATEC to effect the
Transaction shall be subject to the fulfillment at or prior to the Closing of
the following conditions, unless the ATEC shall waive such fulfillment:
6.2.1 This Agreement and the Transaction shall have received all
approvals, consents, authorizations, and waivers from governmental and other
regulatory agencies and other third parties (including lenders, holders of debt
securities, lessors, and stockholders) required by law to consummate the
Transaction;
6.2.2 There shall not be in effect a preliminary or permanent
injunction or other order by any federal or state authority which prohibits the
consummation of the Transaction.
34
6.2.3 Interpharm and the Shareholders shall have performed in all
material respects their agreements and obligations contained in this Agreement
required to be performed on or prior to the Closing;
6.2.4 No material adverse change shall, in the reasonable judgment
of ATEC, have taken place in the business or condition (financial or otherwise)
of Interpharm, other than those that result from the changes permitted by, and
transactions contemplated by, this Agreement;
6.2.5 The representations and warranties of Interpharm and the
Shareholders set forth in this Agreement shall be true in all material respects
as of the date of this Agreement and, except in such respects as, in the
reasonable judgment of ATEC, do not materially and adversely affect the business
or condition (financial or otherwise) of Interpharm, as of the Closing Date as
if made as of such time;
6.2.6 The Interpharm Financials provided to ATEC in accordance with
Section 7.2 shall not have materially changed or been adjusted from the
Financial Statements referred to in Section 3.13 as to any specific item or the
financial statements taken as a whole.
6.2.7 There shall be no more than 4,000,000 shares of Interpharm
Common Stock outstanding and no shares of Interpharm preferred stock
outstanding;
6.2.8 ATEC shall have received any necessary stockholder approval in
connection with the Management Buyout and the Transactions contemplated herein;
6.2.9 ATEC shall have received, on and as of the Closing Date, (a)
an opinion of counsel to Interpharm and the Shareholders, in form and substance
satisfactory to counsel to ATEC and (b) such other closing documents and
instruments as ATEC shall reasonably request, in each case reasonably
satisfactory in form and substance to ATEC and its counsel;
6.2.10 ATEC shall have received from Interpharm an officer's
certificate, executed by the Chief Executive Officer and the Chief Financial
Officer of Interpharm, dated the Closing Date, as to the satisfaction of the
conditions in sub-paragraphs 6.2.1 through 6.2.7 above;
6.2.11 ATEC shall have received, free and clear of all liens, pledges
or encumbrances, certificates representing all of the issued and outstanding
shares of the capital stock of Interpharm; and
6.2.12 ATEC shall have received a fairness opinion as to the
Transaction contemplated herein reasonably satisfactory to ATEC.
35
ARTICLE VII
MEETING OF STOCKHOLDERS
7.1 Meeting of Stockholders. ATEC agrees that, as soon as practicable after
the execution of this Agreement, it will use its reasonable efforts to obtain
the approval of its stockholders of the Transaction contemplated herein and the
Management Buyout. In connection with such approval, ATEC shall (a) prepare and
file with the SEC a proxy statement and/or information statement (collectively,
the "Proxy Statement"), as the case may be, as required by law, (b) respond to
any comments thereon by the SEC in a prompt manner, (c) establish a record date
for stockholders entitled to vote on the Transaction contemplated herein and the
Management Buyout, (d) comply with applicable legal requirements under state law
and the Exchange Act regarding the giving of notice as to such record date, (e)
mail a notice of the meeting (if required), Proxy Statement and form of proxy to
stockholders (if required), and (f) in all other respects use its reasonable
best efforts to take all action required by law to authorize the consummation of
the Transaction and Management Buyout.
7.2 Interpharm Financial Statements. Interpharm agrees that, as soon as
practicable after the execution of this Agreement, it shall deliver to ATEC for
inclusion in the Proxy Statement:
7.2.1 Interpharm audited financial statements for its fiscal years
ended December 31, 1999 (if required by the Exchange Act), December 31, 2000 and
December 31, 2001 and reviewed financial statements for the interim period ended
September 30, 2002 which comply in all respects with GAAP and Regulation S-X
under the Securities Act (the "Interpharm Financials"); and
7.2.2 a certification from Interpharm's Chief Executive Officer and
Principal Financial Officer that, to the best of their knowledge, the Interpharm
Financials (i) fairly present, in all material respects, the financial
condition, results of operations and cash flows of Interpharm as of, and for,
the periods presented therein; (ii) were prepared in accordance with GAAP; and
(iii) fully comply with the requirements of Section 13(a) or 15(d) of the
Exchange Act. In addition, Interpharm shall provide to ATEC a certification, as
to the financial statements listed in this paragraph 7.2.2 only, in the form
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as if it
were a reporting company.
7.3 Proxy Statement. ATEC represents and covenants that the Proxy
Statement, with the exception of the Interpharm Financials and any other
information provided by Interpharm or any of the Shareholders, including,
without limitation, the contents thereof, and the timing and manner of use
thereof, will comply with all requirements of the Exchange Act and of any state
law applicable thereto, and, without limiting the foregoing, will not, at the
time the Proxy Statement is mailed to stockholders, contain any untrue statement
of a material fact regarding ATEC or omit to state any material fact necessary
to make the statements regarding ATEC therein, in light of the circumstances
under which they are made, not misleading.
36
ARTICLE XIII
TERMINATION, AMENDMENT, WAIVER
8.1 Termination. This Agreement and the Transaction may be terminated at
any time prior to the Closing, whether before or after any approval by
stockholders:
8.1.1 By mutual consent of the ATEC, Interpharm and the
Shareholders;
8.1.2 By Interpharm and the Shareholders, upon written notice to
ATEC, if the conditions set forth in Section 6.1 were not, or cannot reasonably
be, satisfied on or before February 1, 2003 unless the failure of any such
condition is the result of the material breach of this Agreement by Interpharm
or the Shareholders;
8.1.3 By ATEC, upon written notice to Interpharm and the
Shareholders, if the conditions set forth in Section 6.2 were not, or cannot
reasonably be, satisfied on or before February 1, 2003 unless the failure of any
such condition is the result of the material breach of this Agreement by ATEC;
8.1.4 By Interpharm and the Shareholders, if there was a material
breach in any representation, warranty, covenant, agreement or obligation of
ATEC hereunder and such breach (provided it is curable and ATEC promptly
commences its effort to cure) shall not have been remedied on or before February
1, 2003;
8.1.5 By ATEC, if there was a material breach in any representation,
warranty, covenant, agreement or obligation of Interpharm or a Shareholder
hereunder and such breach (provided it is curable and Interpharm and the
Shareholders promptly commences its effort to cure) shall not have been remedied
on or before February 1, 2003; or
8.1.6 By ATEC, in accordance with Section 4.3.2.; provided, however,
that in the event of a termination pursuant to Section 4.3.2, ATEC shall pay all
of the costs and expenses, including reasonable attorney's fees, incurred by
Interpharm and the Shareholders, through the date of such termination.
8.1.7 Effect of Termination. If this Agreement is terminated
pursuant to this Section 8.1, such termination shall be without liability of any
Party, or any shareholder, member, partner, director, officer, employee, agent,
consultant or representative of such Party, to any other Parties to this
Agreement, provided that if such termination shall result from the breach (a) by
ATEC or (b) by Interpharm or any of the Shareholder, of the representations,
warranties or covenants of such Party contained in this Agreement, (a) ATEC or
(b) Interpharm and the Shareholder (jointly and severally), as the case may be,
shall pay to the other Party a termination fee equal to $500,000 plus the costs
and expenses (including reasonable counsel fees) sustained or incurred by the
other Party.
8.2 Amendment. This Agreement may be amended in a writing signed by the
Parties hereto at any time, but after the Transaction has been approved by the
stockholders of ATEC, no amendment shall be made which materially and adversely
affects the rights of ATEC or its stockholders without the further approval of
such stockholders.
37
8.3 Waiver. At any time prior to the Closing Date, any Party, and in the
case of ATEC or Interpharm by action taken by their respective Boards of
Directors, may:
8.3.1 extend the time for the performance of any of the obligations
or other acts of the other Parties hereto;
8.3.2 waive any inaccuracies in the representations and warranties
of the other Parties contained herein or in any document delivered pursuant
hereto; or
8.3.3 waive compliance by the other Parties with any of the
agreements or conditions contained herein.
Any agreement on the part of a Party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such Party.
ARTICLE IX
INDEMNITY
Officers' and Directors' Insurance and Indemnity. Following the Closing, and for
a period of at least three (3) years thereafter, Interpharm agrees to maintain
in full force and effect current policies providing insurance to the current
officers and directors of ATEC for their errors, omissions, and similar sources
of potential liability and current policies of ATEC as to indemnification of
such persons against liability for actions or inactions in their capacity as
officers or directors of ATEC, or their actions on behalf of ATEC or its
Subsidiaries.
ARTICLE X
GENERAL PROVISIONS
10.1 Arbitration. In the event that there shall be a dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, the
Transaction, any document referred to herein or related to the subject matter
hereof, the Parties agrees that such dispute shall be submitted to binding
arbitration in New York City, under the auspices of, and pursuant to the rules
of, the American Arbitration Association as then in effect, or such other
procedures as the Parties may agree to at the time, before a tribunal of three
arbitrators, one of which shall be selected by each of the Parties to the
dispute and the third of which shall be selected by the two arbitrators so
selected. Any award issued as a result of such arbitration shall be final and
binding between the Parties, and shall be enforceable by any court having
jurisdiction over the Party against whom enforcement is sought.
10.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, faxed, mailed by
registered or certified mail (return receipt requested) or delivered by
independent next business day delivery service to the Parties at the following
38
addresses (or at such other address for a Party as shall be specified by like
notice given at least five (5) business days prior thereto:
If to ATEC:
Mr. James Charles
Mr. Surinder Rametra
ATEC Group, Inc.
69 Mall Drive
Commack, New York 11725
Facsimile: 631-543-3780
With a copy to:
Peter Silverman, Esq.
Silverman Sclar Byrne Shin & Byrne P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Facsimile: 212-779-8858
If to Interpharm or the Shareholders:
Dr. Maganlal Sutaria
Mr. Bob Sutaria
Interpharm, Inc.
75 Adams Avenue
Hauppauge, New York 11788
Facsimile: 631-952-9587
With a copy to:
Darren Ofsink, Esq.
Guzov, Swiedler & Ofsink, LLC
600 Madison Avenue, 22nd Floor
New York, New York 10022
Facsimile: 212-688-7273
Any such notice or communication shall be deemed to have been given (a) if by
personal delivery, on the day after such delivery; (b) if by certified or
registered mail, on the fifth day after the mailing thereof; (c) if by next-day
or overnight deliver, on the day delivered; or (d) if by fax, on the next day
following the day on which such fax was sent, provided that a copy is also sent
by certified or registered mail.
39
10.3 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.4 Survival of Representations and Warranties. The representations,
warranties, covenants, and agreements of the Parties contained herein shall
survive the Closing for two years, except that the representations and
warranties made (a) under Sections 2.8 and 3.7 and, to the extent they relate to
Tax and ERISA matters, Sections 2.12 and 3.21 shall continue to survive and
remain in effect through the date 30 days after the expiration of the statute of
limitations applicable to the subject matter thereof, including all extensions
and waivers thereof, and (b) under Section 3.4 shall survive and remain in
effect indefinitely.
10.5 Miscellaneous. This Agreement:
10.5.1 constitutes the entire agreement and supersedes all other
prior agreements and understandings, both written and oral, between the Parties,
with respect to the subject matter hereof, except as specifically provided
otherwise or referred to herein, so that no such external or separate agreements
relating to the subject matter of this Agreement shall have any effect or be
binding, unless the same is referred to specifically in this Agreement or is
executed by the Parties after the date hereof;
10.5.2 is not intended to confer upon any other person, other than to
the Parties hereto and their respective heirs, successors and permitted assigns,
any rights or remedies hereunder;
10.5.3 shall not be assigned by operation of law or otherwise;
10.5.4 shall be governed in all respects, including validity,
interpretation and effect, by the internal laws of the State of New York,
without regard to the principles of conflict of laws thereof, provided, the
corporate laws of the State of Delaware shall govern all issues concerning the
relative rights of ATEC and its stockholders; and
10.5.5 shall be binding upon and shall inure to the benefit of the
Parties hereto and their respective successors, assigns, heirs and legal
representatives;
10.6 Counterparts. This Agreement may be executed in two or more
counterparts which together shall constitute a single agreement.
10.7 Finders. The Parties hereby acknowledge that Munish Rametra, Avreo
Vuono, James Rose and Konrad Kim acted as finders with respect to the
Transaction and shall be entitled to $100,000, in total, payable by ATEC within
three business days after the Closing as a finder's fee.
40
10.8 Severability. If any provision, including any phrase, sentence, clause,
section or subsection, of this Agreement is invalid, inoperative or
unenforceable for any reason, such provision shall be valid and enforceable to
the fullest extent permitted by law and such circumstances shall not have the
effect of rendering such provision in question invalid, inoperative or
unenforceable in any other case or circumstance, or of rendering any other
provision herein contained invalid, inoperative or unenforceable to any extent
whatsoever.
10.9 Confidentiality. All information furnished by the Parties in connection
with the Transaction contemplated hereby shall be used solely for the purpose of
evaluating the Transaction and shall be treated as the sole property of the
Party delivering the information until consummation of the Transaction and
shall, in all respects, be subject to the Confidentiality Agreement previously
entered into between the Parties. [need copy of Confidentiality Agreement]
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement
to be signed on the date first written above by their respective officers
thereunto duly authorized.
ATEC GROUP, INC. INTERPHARM, INC.
By: /s/ JAMES CHARLES By: /s/ MAGANLAL K. SUTARIA
----------------------------- -----------------------------
James Charles Maganlal K. Sutaria
Chief Financial Officer Chairman
INTERPHARM SHAREHOLDERS:
/s/ MAGANLAL K. SUTARIA
---------------------------
Maganlal K. Sutaria
/s/ RAJ SUTARIA
---------------------------
Raj Sutaria
/s/ PERRY SUTARIA
---------------------------
Perry Sutaria
/s/ RAVI SUTARIA
---------------------------
Ravi Sutaria
/s/ MONA RAMETRA
---------------------------
Mona Rametra
41
Annex A
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"1933 Act" means the Securities Act of 1933, as amended, as of the Closing Date.
"Affiliate" of a Person means a Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by, or is under common control
with the first Person. "Control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management policies of a Person, whether
through the ownership of voting securities, by contract, as trustee or executor,
or otherwise. For purposes of this Agreement, each of the Shareholders and each
member of each Shareholders' immediate family shall be deemed to be an Affiliate
of Interpharm.
"Affiliate Transactions" is defined in Section 3.24
"AMEX" means the American Stock Exchange.
"Acquisition Proposals" is defined in Section 4.3.
"Closing" is defined in Section 1.2.
"Closing Date" is defined in Section 1.5.
"Closing Time" is defined in Section 1.5.
"Code" means the Internal Revenue Code of 1986, as amended, and related rules
and regulations thereunder.
"Common Stock" is defined in the recitals to this Agreement.
"Common Stock Consideration" is defined in Section 1.1.1.
"Consideration" is defined in Section 1.3.
"Contracts" is defined in Section 3.16.
"Environmental Laws" means any foreign, federal, state or local law, statute,
regulation, rule, ordinance, decree, or any other requirement of law (including
common law) regulating or relating to the protection of human health and safety
or the environment, including, but not limited to, laws relating to releases or
threatened releases of Hazardous Materials into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Execution Date" is defined in Section 4.1.
42
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Statements" is defined in Section 3.13.1.
"Fully Diluted Basis" means that all shares of the relevant class of stock that
are issuable upon exercise of outstanding warrants, options or other rights to
acquire such stock, and/or upon conversion of outstanding convertible debt or
equity instruments are deemed to be outstanding on the Closing Date for purposes
of determining the exchange ratio. Notwithstanding the foregoing, the shares of
Interpharm Common Stock issuable upon conversion of the Interpharm Preferred
Stock shall not be deemed to be outstanding on the Closing Date for purposes of
determining the exchange ratio for the Interpharm Common Stock
"GAAP" means United States generally accepted accounting principles
"Governmental Approvals" is defined in Section 3.18.
"Hazardous Materials" means any substance or material that is classified or
regulated as "hazardous" or "toxic" pursuant to any Environmental Law,
including, without limitation, asbestos, polychlorinated biphenyls, petroleum
products or byproducts, and urea-formaldehyde insulation.
"Intellectual Property" means United States and foreign trademarks, service
marks, trade names, trade dress, copyrights, and similar rights, including
registrations and applications to register or renew the registration of any of
the foregoing, United States and foreign letters patent and patent applications,
and inventions, processes, designs, formulae, trade secrets, know-how,
confidential information, computer software, Internet domain names, data and
documentation, and all similar intellectual property rights, tangible
embodiments of any of the foregoing (in any medium including electronic media),
and licenses of any of the foregoing.
"Intellectual Property Licenses" is defined in Section 3.19.1.
"Interpharm Common Holders" is defined in the recitals to this Agreement.
"Interpharm Common Stock" is defined in the recitals to this Agreement.
"Interpharm Financials" is defined in Section 7.2.1.
"Interpharm Preferred Holders" is defined in the recitals to this Agreement.
"Interpharm Preferred Stock" is defined in the recitals to this Agreement.
"Interpharm Stock" is defined in the recitals to this Agreement.
"Investment Letters" is defined in Section 2.14.2.
43
"IRS" means the Internal Revenue Service.
"Leased Premises" is defined in Section 3.17.
"Liabilities" means obligations, whether known or unknown, contingent or
absolute, recorded on its books or not, arising or resulting in any way from
facts, events, agreements, obligations or occurrences that existed or transpired
at a prior point in time, or resulted from the passage of time.
"Management Buyout" is defined in Section 4.3.
"Material Adverse Effect" or "Material Adverse Change" means with respect to any
Person, any event, change, circumstance or effect that is or is reasonably
likely to be materially adverse to (a) the business, financial condition or
results of operations of such Person and its Subsidiaries taken as a whole; or
(b) the ability of such entity to consummate the Transaction contemplated by
this Agreement.
"Owned Intellectual Property" is defined in Section 3.19.1.
"Pension Plan" shall mean a pension plan or employee pension benefit plan, as
defined in Section 3(2) of ERISA and regulations adopted under ERISA or such
other law, modifying, amending, interpreting, or otherwise affecting the
application of such provision, either in general or as applied to the nature or
circumstances of a particular entity that is a party to, or is affected by or is
involved in the Transaction and with respect to which entity the use of the term
in this Agreement, or in the particular location in this Agreement, is relevant.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group.
"Plans" is defined in Section 3.21.1.
"Preferred Stock" is defined in the recitals to this Agreement.
"Preferred Stock Consideration" is defined in Section 1.1.2.
"Proxy Statement" is defined in Section 7.1.
"Real Property Leases" is defined in Section 3.17.
"Related Persons" is defined in Section 3.21.1.
"SEC" means the Securities and Exchange Commission.
"Shareholders" is defined in the recitals to this Agreement.
44
"Subsidiary" means each corporation or other Person in which a Person owns or
controls, directly or indirectly, capital stock or other equity interests
representing more than 50% of the outstanding voting stock or other equity
interests.
"Superior Proposal" means a proposal with respect to any of the transactions
described in the definition of Acquisition Proposal which the Board of Directors
shall have concluded in good faith after receiving advice from its outside legal
counsel and financial advisor, (i) is reasonably likely to be completed, taking
into account all legal, financial, regulatory and other aspects of the
Acquisition Proposal and the person making the proposal, (ii) if consummated,
would result in a transaction more favorable to the stockholders of the ATEC
from a financial point of view than the Transaction contemplated by this
Agreement (taking into account any and all modifications proposed by Interpharm
and the Shareholders) and (iii) is fully financed (or, based on a good faith
determination of the Board of Directors, is readily financeable).
"Tax" or "Taxes" means federal, state, county, local, foreign or other income,
gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, estimated and other taxes of any
kind whatsoever (including, without limitation, deficiencies, penalties,
additions to tax and interest attributable thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with respect to
Taxes, including any schedules attached thereto and including any amendment
thereof.
"Transaction" is defined in Section 1.1.
"Welfare Plan" means a welfare plan or an employee welfare benefit plan as
defined in Section 3(1) of ERISA and regulations adopted under ERISA or such
other law, modifying, amending, interpreting, or otherwise affecting the
application of such provision, either in general or as applied to the nature or
circumstances of a particular entity that is a party to, or is affected by or is
involved in the Transaction and with respect to which entity the use of the term
in this Agreement, or in the particular location in this Agreement, is relevant.
45
Exhibit 1.1.1.2
Form of Certificate of Designations
-----------------------------------
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES K CONVERTIBLE PREFERRED STOCK
OF
ATEC GROUP, INC.
ATEC Group, Inc. (the "Company"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify,
that, pursuant to authority conferred upon the Board of Directors of the Company
by the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock, par
value $.01 per share, and (ii) providing for the designations, preferences and
relative participating, optional or other rights, and the qualifications,
limitations or restrictions, thereof, of Three Million (3,000,0000) shares of
Series K Convertible Preferred Stock of the Company as follows:
RESOLVED, that the Company is authorized to issue three million (3,000,000)
shares of Series K convertible Preferred Stock (the "Series K"), par value $.01
per share, which shall have the following powers, designations, preferences and
other special rights:
1. Dividends. Each share of the Series K shall be entitled to receive
dividends to the same extent and in the same amounts as each of the shares of
$.01 par value per share common stock ("Common Stock") of the Company.
2. Conversion. Each share of Series K shall be converted in accordance
with this Section 2 into the number of shares of Common Stock equal to the then
effective Conversion Ratio (as defined below).
a. Conversion Trigger. The shares of Series K shall not become
convertible unless and until such date (the "Trigger Date") that any of the
following conditions has been met: the Company is: (i) deemed by the American
Stock Exchange, Inc. ("AMEX") to be in compliance with the applicable AMEX
listing standards, (ii) deemed by another exchange to be in compliance with any
such other applicable exchange listing standards, in the event the Company's
securities are listed on an exchange other than AMEX and is not listed on AMEX;
or (iii) no longer listed on AMEX, the Nasdaq National Market, Nasdaq SmallCap
Market or New York Stock Exchange; provided, in the event any of the events
described in clauses (i), (ii) and (iii) of this paragraph 2.a shall occur prior
to the first anniversary of the Initial Issuance Date, then the Trigger Date
shall be deemed to be the first anniversary date of the Initial Issuance Date.
The term "Initial Issuance Date" shall mean the first date on which the Company
issues shares of Series K pursuant to the Exchange Agreement (as defined below).
46
b. Conversion Ratio. On the Trigger Date all of the shares of the
Series K shall be convertible into an aggregate total number (the "Aggregate
Conversion Amount") of shares of Common Stock pursuant to the following formula:
Aggregate Conversion Amount = 4 x (COP - P - T) - T
For purposes of this formula:
COP means the Company Outstanding Common Stock (as defined below).
---
P means the number of all shares of Common Stock issued by the Company
- pursuant to any agreements or obligations which arose after the
"Closing Date" (as such term is defined in the Capital Stock Exchange
Agreement, among the Company, Interpharm, Inc. and the shareholders of
Interpharm, Inc., dated November 25, 2002 (the "Exchange Agreement")),
which shares exclude Common Stock issued pursuant to the Exchange
Agreement, up to and including the Trigger Date.
T means the number of shares of Common Stock issued to the Interpharm,
- Inc. shareholders pursuant to the Exchange Agreement.
The "Company Outstanding Common Stock" shall mean the sum of (a) the number of
shares of Common Stock issued and outstanding on the Trigger Date and (b) the
number of shares of Common Stock that are issuable upon the conversion of all
issued and outstanding shares of Series A, Series B, Series C and Series J
preferred stock of the Company, such number to be calculated as if all of the
issued and outstanding shares of Series A, Series B, Series C and Series J that
are issued and outstanding on the Triggering Date had been converted on the day
immediately preceding the Triggering Date, provided, in determining the number
of shares of Common Stock that are issuable upon the conversion of any shares of
Series A preferred stock, any adjustment to the Conversion Ratio (as defined in
the Certificate of Designations of the Series A preferred stock, filed with the
Secretary of State of Delaware on February 17, 2003 ("the Series A Certificate
of Designations")) of the Series A preferred stock due to the issuance of Common
Stock or options, rights or warrants for Common Stock, pursuant to any
obligation which arose after the Initial Issuance Date, for a consideration less
than the "Adjustment Price" (as defined in the Series A Certificate of
Designations), shall not be taken into effect.
The term "Conversion Ratio" shall mean the Aggregate Conversion Amount divided
by the number of Series K shares issued and outstanding on the date any share of
Series K is first issued, subject to adjustment as provided herein.
c. Conversion. Beginning on the Trigger Date, and each year
thereafter, on the anniversary of the Trigger Date (each a "Conversion Date"),
one seventh of the total number of shares of Series K issued and outstanding as
of the Trigger Date shall automatically convert into shares of Common Stock with
no further action by the record holders ("Holders") thereof (an "Annual
Conversion") until all of the issued and outstanding shares of Series K are
converted. In the event that an Anti-Dilutive Conversion (as defined below) has
occurred, the number of shares of Series K to be converted in each and every
Annual Conversion following such Anti-Dilutive Conversion shall be adjusted to
equal the total number of Series K shares issued and outstanding as of such
Conversion Date divided by the difference between seven (7) minus the total
number of Annual Conversions which have occurred prior to such Anti-Dilution
Conversion. Upon each conversion, the Common Stock shall be distributed to the
Holders in proportion to their Series K shareholdings. At least thirty (30) days
prior to any Annual Conversion, the Company shall provide notice of the
conversion to the Holders who shall then, as soon as practicable, surrender the
original certificates representing the shares Series K being converted to the
Company at its principal office, duly endorsed to the Company or in blank. The
Company will, as soon as practicable thereafter, issue and deliver at the office
or place to such Holder, or to his or her nominee or nominees, certificates for
the number of full shares of Common Stock to which he or she shall be entitled
as aforesaid. If the number of shares of Series K represented by the certificate
47
submitted for conversion is greater than the number of shares of Series K being
converted, then the Company shall, as soon as practicable, issue and deliver to
the Holder a new certificate representing the number of shares of Series K not
converted. Shares of Series K shall be deemed to have been converted as of the
close of business on the applicable Conversion Date, and the person or persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such Common Stock as of the
close of business on such date.
In the event, at any time after the Trigger Date, the Holders beneficially own,
in the aggregate, less than 51% of the Company's issued and outstanding Common
Stock, all of the Holders may jointly request, by written notice to the Company
(the "Anti-Dilutive Conversion Request"), that such number of any remaining
issued and outstanding shares of Series K be converted to the extent as is
necessary such that the Holders shall beneficially own, in the aggregate, 51% of
the Company's issued and outstanding Common Stock (an "Anti-Dilutive
Conversion"). The Anti-Dilutive Conversion Request shall state the total number
of Common Stock beneficially owned by each Holder, together with the original
certificates representing the shares of Series K being converted. Upon each
conversion, the Common Stock shall be distributed to the Holders in proportion
to their Series K shareholdings. Upon receipt of an Anti-Dilutive Conversion
Request, the Company shall, as soon as practicable, issue and deliver at the
office or place to each Holder, or to his or her nominee or nominees,
certificates for the number of full shares of Common Stock to which he or she
shall be entitled as aforesaid. If the number of shares of Series K represented
by the certificate submitted for conversion is greater than the number of shares
of Series K being converted, then the Company shall, as soon as practicable,
issue and deliver to the Holder a new certificate representing the number of
shares of Series K not converted. Shares of Series K shall be deemed to have
been converted as of the close of business on the date the Company receives the
Anti-Dilutive Conversion Request, and the person or persons entitled to receive
the Common Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such Common Stock as of the close of business on
such date.
Each certificate of shares of Series K shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW
THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY
THIS CERTIFICATE INCLUDING SECTION 2 THEREOF. THE NUMBER OF
PREFERRED SHARES REPRESENTED BY THIS CERIFICATE MAY BE LESS
THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEROF
PURSUANT TO SECTION 2 OF THE CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS.
d. Adjustment of the Conversion Ratio. The Conversion Ratio in
effect at any time shall be subject to adjustment as follows:
(i) In case the Company shall (A) subdivide its
outstanding shares of Common Stock, (B) combine its outstanding shares
of Common Stock into a smaller number of shares, or (C) issue by
48
reclassification of its Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing Company) any shares of its capital stock,
the Conversion Ratio in effect at the time of the effective date of
such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any share of the Series
K surrendered for conversation after such time shall be entitled to
receive the kind and amount of shares which he or she would have owned
or have been entitled to receive had such share of Series K been
converted immediately prior to such time. Such adjustment shall be made
successively whenever any event listed above shall occur.
(ii) In case the Company shall offer to the holders of
shares of its Common Stock any rights, options or warrants entitling
them to subscribe for or purchase (A) shares of its Common Stock, (B)
any assets of the Company, (C) any securities of the Company, other
than its Common Stock, or of any other Company or (D) any rights,
options or warrants entitling them to subscribe for or to purchase any
of the foregoing securities, whether or not such rights, options or
warrants are immediately exercisable (hereinafter collectively called a
"Distribution on Common Stock"), the Company shall offer, upon such
terms offered to the holders of shares of Common Stock, to the holders
of the Series K the Distribution on Common Stock to which they would
have been entitled if they had converted the Series K shares
immediately prior to the record date for the purpose of determining the
shareholders entitled to receive such Distribution on Common Stock.
(iii) In case of any consolidation or merger of the Company
with or into any other company (other than a consolidation or merger in
which the Company is the continuing Company), or in case of any sale or
transfer of all or substantially all of the assets of the Company, the
holder of each share of the Series K shall after such consolidation,
merger, sale or transfer have the right to convert such share of Series
K into the kind and amount of shares of stock and other securities and
property which such Holder would have been entitled to receive upon
such consolidation, merger, sale or transfer if he or she had held the
Common Stock issuable upon the conversion of such share of Series K
immediately prior to such consolidation, merger, sale or transfer,
regardless of whether the Trigger Date has occurred.
(iv) In the event that at any time, as a result of an
adjustment made pursuant to this paragraph (d), the holder of any share
of the Preferred Stock surrendered for conversion shall become entitled
to receive any securities other than shares of Common Stock, thereafter
the amount of such other securities so receivable upon conversion of
any share of the Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in this paragraph (d).
(v) No adjustment in the Conversion Ratio shall be
required unless such adjustment would require a change of at least 1%;
provided, however, that any adjustments which by reason of this
49
paragraph (v) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
(vi) Whenever the Conversion Ratio is adjusted the Company
shall promptly cause a notice to be mailed to the holders of the Series
K setting forth the adjusted Conversion Ratio.
(vii) No fractional shares or scrip representing fractional
shares of Common Stock shall be issued upon conversion of the Series K.
Instead, any fractional share of Common Stock which would otherwise be
issuable upon conversion of the Series K (or specified portions
thereof) shall be rounded up to the nearest whole share.
e. In case:
(i) the Company shall authorize the distribution to all holders of
its Common Stock of evidences of its indebtedness or assets (other
than dividends or other distributions paid out of earned surplus);
or
(ii)the Company shall authorize the granting to the holders of its
Common Stock of rights to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(iii) of any reclassification of the Common Stock (other than a
subdivision or combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which the Company is
a party and for which approval of any stockholders of the Company
is required, or of the sale or transfer of all or substantially
all of the assets of the Company or of Interpharm, Inc.; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in each case, the Company shall cause to be mailed, first class
postage prepaid, to the holders of record of the outstanding shares of
Series K, at least 10 days prior to the applicable record date
hereinafter specified, a notice stating (A) the date on which a record
is to be taken for the purpose of such distribution or rights, or, if a
record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such distribution or rights are to be
determined, or (B) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it
is expected that holders of Common Stock of record shall be entitled to
exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up. In the case of a
merger, sale or transfer of substantially all of the assets of the
Company or of Interpharm, Inc. , each share of Series K shall
automatically convert into Common Stock, with no further action by the
50
Holders, immediately prior to the date on which any of the foregoing
events becomes effective and regardless of whether the Trigger Date has
occurred.
f. The Company will at all times reserve, keep available and be
prepared to issue, free from any preemptive rights, out of its authorized but
unissued Common Stock, solely for the purpose of effecting conversion of the
Series K, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding Series K. The Company shall from time to time, in
accordance with the laws of the Delaware, endeavor to amend its Certificate of
Incorporation to increase the authorized amount of its Common Stock if the
remaining number of unissued shares of Common Stock shall be not sufficient to
permit the conversion of all Series K shares. The Company shall, if any shares
of Common Stock required to be reserved for issuance upon conversion of Series K
pursuant to this section requires registration with or approval of any
governmental authority under any Federal or state law before such shares may be
issued upon such conversion, endeavor to cause such shares to be so registered
or approved as expeditiously as possible.
g. The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
shares of Series K pursuant hereto. The Company shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issue or transfer and delivery of shares of Common Stock in a name other than
that in which the shares of the Series K so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax or has established to
the satisfaction of the Company that such tax has been paid.
h. Upon any conversion of shares of Series K under this Section
3, the shares so converted shall have the status of authorized and unissued
shares of preferred stock, and the number of shares of preferred stock that the
Company shall have authority to issue shall not be decreased by the conversion
of shares of Series K.
3. Liquidation rights. In the event of any liquidation or dissolution or
winding up of the Company, voluntary or involuntary, the holders of the Series K
shall be entitled to receive, subject to the rights of any other class of stock
which ranks senior to the Series K as to distribution of assets on liquidation,
but before any distribution is made on any class of stock ranking junior to the
Series K as to the payment of dividends or the distribution of assets, the sum
of $7.50 per share.
4. Voting Rights. With respect to all matters upon which the Company's
stockholders shall vote, the Holders of the Series K shall vote together as a
single class with the holders of the Common Stock, each Holder being entitled to
one vote per share on all such matters.
5. Limitations Upon Disposition. The Series K shares issuable pursuant to
this Certificate and the shares of Common Stock issuable upon conversion of such
Series K shares (collectively the "Shares"), if not registered by the Company
under the Securities Act of 1933 (the "Act"), may not be sold or offered for
sale in the absence of an effective registration statement as to the Shares
51
under the Act, or an opinion of counsel satisfactory to the Company that such
registration statement is not required. The above restrictions in this Section 5
shall be contained in a legend to be placed upon each of the Series K share
certificates at the time of distribution of the Shares and stop transfer order
may be placed on such Shares by the Company.
6. Additional Rights. So long as any Series K shares remain outstanding,
the Company shall not, without first obtaining the approval by vote or written
consent of all Holders, (i) alter or change the powers, preferences, privileges,
or rights of the Series K shares, (ii) amend the provisions of this paragraph or
(iii) create any new series or class of shares having preferences prior to, or
in parity with or superior to the Series K shares as to voting or liquidation
preference.
7. Replacement. Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of any certificate evidencing one or more shares of Series K, and in
the case of loss, theft or destruction, of any indemnification undertaking by
the holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of such certificate, the Company at its expense will
execute and deliver in lieu of such certificate, a new certificate of like kind,
representing the number of shares of Series K which shall have been represented
by such lost, stolen, destroyed, or mutilated certificate.
8. Notice. Whenever notice is required to be given pursuant to this
Certificate of Designations, unless otherwise provided herein, such notice shall
be given in accordance with Section 10.2 of the Exchange Agreement.
N WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by _________________, its President, as of ___ day of
_________, 2003.
ATEC GROUP, INC.
By: /s/
------------------------------
Name:
Title: President
52
Exhibit 1.1.4
Form of Registration Rights Agreement
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
entered into as of November 25, 2002, by and among ATEC GROUP, INC., a Delaware
corporation (the "Company") and RAJ SUTARIA ("Raj"), MONA RAMETRA ("Mona"), RAVI
SUTARIA ("Ravi") and, PERRY SUTARIA ("Perry")(collectively, Raj, Mona, Ravi and
Perry are referred to herein as the "Shareholders").
WHEREAS, the Company and the Shareholders are parties to a Capital
Stock Exchange Agreement dated November 25, 2002 (the "Exchange Agreement"); and
WHEREAS, The Exchange Agreement provides that the Shareholders shall be
granted registration rights as more fully set forth herein.
NOW THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement:
1.1 Conversion Shares. The term "Conversion Shares" shall mean
Ordinary Shares issuable upon conversion of the Preferred Stock.
1.2 Form S-3. The term "Form S-3" mean such forms under the
Securities Act as are in effect on the date hereof, such other forms available
to a registrant similar to the Company or any successor registration forms under
the Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
1.3 Holder. The term "Holder" means any of the Shareholders who
hold Registrable Securities, as well as any person or entity which received
common stock, or preferred stock pursuant to the Exchange Agreement that have
not been sold to the public or pursuant to Rule 144 promulgated under the
Securities Act, or any assignee of record of such Registrable Securities to whom
rights under such Sections have been duly assigned in accordance with this
Agreement.
1.4 Ordinary Shares. The term "Ordinary Shares" means shares of
the $.01 par value per share common stock of the Company.
53
1.5 Preferred Stock. The term "Preferred Stock" shall mean the
Company's preferred shares issued to the Shareholders pursuant to the Exchange
Agreement.
1.6 Registration Expenses. The term "Registration Expenses" means
all expenses incurred by the Company in complying with this Agreement,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, blue sky fees and
expenses, the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company) and the expenses of
Underwriters customarily paid by similarly situated companies in connection with
underwritten offerings of equity securities to the public, excluding any such
fees, commissions and underwriting discounts based on the proceeds of sales of
Registrable Securities by selling Holders. With respect to expenses incurred in
connection with this Agreement, "Registration Expenses" shall include reasonable
fees and disbursements of a single special counsel for the Holders.
1.7 Registrable Securities. The term "Registrable Securities"
means (1) all Ordinary Shares of the Company issued pursuant to the Exchange
Agreement to any of the Holders; (2) any Ordinary Shares of the Company issued
or issuable upon conversion of the Preferred Stock; or (3) a dividend or other
distribution with respect to, or in exchange for or in replacement of, all such
Ordinary Shares described in clauses (1) or (2) of this subsection; excluding in
all cases, however, any Registrable Securities sold by a person in a transaction
in which rights under this Agreement are not assigned in accordance with this
Agreement or any Registrable Securities sold to the public or sold pursuant to
Rule 144 promulgated under the Securities Act.
1.7.1 Registrable Securities Then Outstanding. The number
of shares of "Registrable Securities then outstanding" shall mean the number of
Ordinary Shares which are Registrable Securities and are then issued and
outstanding or (2) are then issuable pursuant to the conversion of then
outstanding Preferred Stock.
1.7.1.1 Registration. The terms "register,"
"registration" and "registered" refer to a registration effected by preparing
and filing a registration statement in compliance with the Securities Act, and
the declaration or ordering of effectiveness of such registration statement.
1.7.1.2 Registration Statement. The term
"Registration Statement" means any registration statement under the Securities
Act for purposes of effecting a public offering of securities of the Company
1.8 SEC. The term "SEC" shall mean the Securities and Exchange
Commission.
1.9 Securities Act. The term "Securities Act" means the Securities
Act of 1933, as amended as of the date of this Agreement.
1.10 Underwriter. The term "Underwriter" shall mean a dealer, as
defined under the Securities Act,, which has agreed to offer the Company's
securities to the public.
54
1.10.1 Managing Underwriter. The term "Managing Underwriter"
shall mean the Underwriter or Underwriters in an Underwriting which have primary
responsibility for the Underwriting.
1.11 Underwriting. The term "Underwriting" shall mean a
registration in which the Company's securities are either sold to an Underwriter
for reoffering to the public or sold to the public by an Underwriter.
2. Demand Registration.
2.1 Request by Holders. If the Company shall receive, at any time
after the date of this Agreement, a written request from the Holders of at least
thirty three percent (33%) of the Registrable Securities then outstanding that
the Company file a Registration Statement, covering the registration of
Registrable Securities, then the Company shall, within twenty (20) days after
the receipt of such written request, give written notice of such request
("Request Notice") to all Holders, and effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities which
Holders request to be registered and included in such registration by written
notice given by such Holders to the Company within twenty (20) days after
receipt of the Request Notice, subject only to the limitations of this
Agreement; provided that the Registrable Securities requested by all Holders to
be registered pursuant to such request must either (i) be at least thirty three
percent (33%) of all Registrable Securities then outstanding or (ii) have an
anticipated aggregate public offering price (before any underwriting discounts
and commissions) of not less than $1,000,000.
2.2 Underwriting. If the Holders initiating the registration
request under this Section 2 (the "Initiating Holders") intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
then they shall so advise the Company as a part of their request made pursuant
to this Section 2 and the Company shall include such information in the written
notice referred to in subsection 2.1. In such event, the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an Underwriting agreement in
customary form with the Managing Underwriter or Underwriters selected for such
underwriting by the Holders holding more than fifty percent (50%) of the
Registrable Securities to be underwritten; provided that any such Underwriting
agreement shall not impair the indemnification rights of the Holders granted
under this Agreement; and provided further, that the representations and
warranties given by, and the other agreement on the part of, the Company to and
for the benefit of the Underwriter(s) shall also be made to and for the benefit
of the Holders; and provided further, that the Company shall ensure that no
Underwriter(s) requires any Holder to make any representations or warranties to,
or agreements with, any Underwriter(s) in a Registration other than customary
representations, warranties and agreements relating to such Holder's free
55
and unencumbered title to the Registrable Securities and authority to enter into
the underwriting agreement. Notwithstanding any other provision of this Section
2, if the Underwriter(s) advise(s) the Company in writing that marketing factors
require a limitation of the number of securities to be underwritten then the
Company shall so advise all Holders of Registrable Securities that would
otherwise be registered and underwritten pursuant hereto, and the number of
Registrable Securities that may be included in the underwriting shall be reduced
as required by the Underwriter(s) and the Company will include in such
registration (i) first, the maximum number of Registrable Securities requested
to be included therein, pro rata among the respective Holders thereof on the
basis of the amount of Registrable Securities requested to be included in such
registration by each such Holder, and (ii) second, the maximum amount of other
securities requested to be included therein (including any by the Company), pro
rata among the holders of such other securities on the basis of the number of
shares requested to be included in such registration by each such holder. Any
Registrable Securities excluded and withdrawn from such underwriting shall be
withdrawn from the registration. For any Holder that is a partnership or
corporation, the partners, retired partners and shareholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "Holder," and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder," as defined in this
sentence.
2.3 Maximum Number of Demand Registrations. The Company is
obligated to effect only two (2) such registrations pursuant to this Section 2.
2.4 Deferral. Notwithstanding the foregoing, if the Company shall
furnish to the Holders requesting the filing of a Registration Statement
pursuant to this Section 2, a certificate signed by the President or Chief
Executive Officer of the Company stating that in the good faith judgment of the
board of directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such Registration Statement to be filed and it
is therefore essential to defer the filing of such Registration Statement, then
the Company shall have the right to defer such filing for a period of not more
than sixty (60) days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right more than once in
any twelve (12) month period; and provided further, that during such sixty (60)
day period the Company shall not file a registration statement with respect to
the public offering of securities of the Company or any other selling
shareholder.
2.4 Expenses. All Registration Expenses incurred in connection
with a registration pursuant to this Agreement, shall be borne by the Company.
Each Holder participating in a registration pursuant to this Agreement shall
bear such Holder's proportionate share (based on the total number of shares sold
in such registration other than for the account of the Company) of all
discounts, commissions or other amounts payable to Underwriters in connection
with such offering.
56
3. Piggyback Registrations.
3.1 Notice by Company. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to filing any
Registration Statement (including, but not limited to, Registration Statements
relating to secondary offerings of securities of the Company, but excluding
Registration Statements relating to any employee benefit plan or a corporate
reorganization) and will afford each such Holder an opportunity to include in
such Registration Statement all or any part of the Registrable Securities then
held by such Holder. Each Holder desiring to include in any such Registration
Statement all or any part of the Registrable Securities held by such Holder
shall, within twenty (20) days after receipt of the above-described notice from
the Company, so notify the Company in writing, and in such notice shall inform
the Company of the number of Registrable Securities such Holder wishes to
include in such Registration Statement. The Company thereupon will use its best
efforts as a part of its filing of such Registration Statement to effect the
registration under the Securities Act of all Registrable Securities which the
Company has been so requested to register by the Holder, to the extent required
to permit the disposition of the Registrable Securities so to be registered. If
a Holder decides not to include all of its Registrable Securities in any
Registration Statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent Registration Statement or Registration Statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
3.2 Underwriting. If a Registration Statement under which the
Company gives notice under this Section 3 is for an underwritten offering, then
the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the Managing Underwriter or Underwriter(s) selected for such underwriting;
provided that any such underwriting agreement shall not impair the
indemnification rights of the Holders granted under this Agreement; and provided
further, that the representations and warranties given by, and the other
agreements on the part of, the Company to and for the benefit of the
Underwriter(s) shall also be made to and for the benefit of the Investor; and
provided further, that the Company shall ensure that no Underwriter(s) requires
any Holder to make any representations or warranties to, or agreements with, any
Underwriter(s) in a Registration other than customary representations,
warranties and agreements relating to such Holder's title to the Registrable
Securities and authority to enter into the underwriting agreement.
Notwithstanding any other provision of this Agreement, if the Managing
Underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the Managing
Underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such Registration Statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder. If
57
any Holder disapproves of the terms of any such underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company and the
Underwriter, delivered at least twenty (20) days prior to the effective date of
the Registration Statement. Any Registrable Securities excluded or withdrawn
from such underwriting shall be excluded and withdrawn from the registration.
For any Holder that is a partnership or corporation, the partners, retired
partners and shareholders of such Holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "Holder," and any pro rata
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.
3.3 Expenses. All Registration Expenses incurred in connection
with a registration pursuant to this Section 3 shall be borne by the Company.
4. Registration on Form S-3. With respect to all Registration Statements
filed pursuant to this Agreement, the Company shall use its best efforts to
qualify for registration on Form S-3 any comparable or successor form or forms.
5. Obligations of the Company. Whenever required to effect the
Registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
5.1 Prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use reasonable, diligent efforts to
cause such Registration Statement to become effective, and, upon the request of
the Holders of more than fifty percent (50%) of the Registrable Securities
registered thereunder, keep such Registration Statement effective for up to one
hundred eighty (180) days or, if earlier, until the Holder or Holders have
completed the distribution related thereto.
5.2 Prepare and file with the SEC such amendments and supplements
to such Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement.
5.3 Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act and such other documents as they may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by them that
are included in such registration.
5.4 Otherwise use its best efforts to comply with the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
any other applicable rules and regulations of the SEC, and make available to the
securities holders; as soon as reasonably practicable, an earning statement
covering the period of at least twelve (12) months after the effective date of
such Registration Statement, which earning statement shall satisfy Section 10(a)
of the Securities Act.
58
5.5 Use reasonable, diligent efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders.
5.6 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the Managing Underwriter(s) of such offering.
5.7 Notify each Holder of Registrable Securities covered by such
Registration Statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the request of each Holder prepare and furnish to such Holder a
reasonable number of copies of a supplement to or amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing.
5.8 Furnish, at the request of any Holder requesting registration
of Registrable Securities, on the date that such Registrable Securities are
delivered to the Underwriters for sale, if such securities are being sold
through Underwriters, or, if such securities are not being sold through
Underwriters, on the date that the Registration Statement with respect to such
securities becomes effective, (1) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to Underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the Underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (2) a "comfort"
letter dated as of such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to Underwriters in an underwritten public offering
and reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the Underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
5.9 Use its best efforts to list such Registrable Securities on
each securities exchange on which any equity security of the Company is then
listed, if such securities are already so listed, or, if the Company does not
have a class of equity securities listed on a United States securities exchange,
apply for qualification and use its best efforts to qualify Registrable
Securities being registered for inclusion on the National Market System/NASD or
the American Stock Exchange.
59
6. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be reasonably required by the Company to
timely effect the registration of their Registrable Securities.
7. Delay of Registration. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
8. Indemnification. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
8.1 By the Company. To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, the partners, officers, directors
and control persons of each Holder, any Underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or Underwriter within the meaning of the Securities Act or the Exchange
Act against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or any
other securities or other law of any jurisdiction, common law or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, "Violations" and, individually, a
"Violation"):
8.1.1 any untrue statement or alleged untrue statement of a
material fact contained in or incorporated by reference in any Registration
Statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto or any document incorporated by
reference therein;
8.1.2 the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or
8.1.3 any violation or alleged violation by the Company of
the Securities Act, the Exchange Act, or any other securities or other law of
any jurisdiction, common law or otherwise, or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any such other laws, in connection
with the offering covered by such Registration Statement;
and
the Company will reimburse each such Holder, partner, officer or director,
Underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this Section 8 shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
60
with such registration by such Holder, partner, officer, director, Underwriter
or controlling person of such Holder. Notwithstanding the foregoing, the Company
shall not be required to indemnify or hold harmless any Holder insofar as any
Violation arises out of or is based on information furnished in writing to the
Company by or on behalf of that Holder
8.2 By Selling Holders. To the extent permitted by law, each
selling Holder, severally and not jointly, will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement, each person, if any, who controls the Company within the
meaning of the Securities Act, any Underwriter and any other Holder selling
securities under such Registration Statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities (joint or several) to which the Company or any
such director, officer, controlling person, Underwriter or other such Holder,
partner or director, officer or controlling person of such other Holder may
become subject under the Securities Act, the Exchange Act or any other
securities or other law of any jurisdiction, common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration; and each such Holder will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, Underwriter or other Holder, partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 8.2
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld.
8.3 Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of its
liability to the indemnified party under this Section 8 only if and to the
extent it is prejudicial to its ability to defend such action, and the omission
to so deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than under
this Section 8. In no event shall any indemnity under this Section 8 exceed the
net proceeds received by such Holder in the registered offering out of which
such violation arises.
61
8.4 Defect Eliminated in Final Prospectus. The foregoing indemnity
agreements of the Company and the Holders are subject to the condition that,
insofar as they relate to any Violation made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the SEC at the
time the Registration Statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus"), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
8.5. Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act, in any case in which
either (1) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that Section 8 provides for
indemnification in such case, or (2) contribution under the Securities Act may
be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under Section 8;
then, and in each such case, the Company and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold under the
Registration Statement bears to the public offering price of all securities
offered by and sold under such Registration Statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
that, in any such case, (A) no such Holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered and sold by such Holder pursuant to such Registration Statement; and (B)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
8.6 Survival; Release. The obligations of the Company and Holders
under this Section 8 shall survive the completion of any offering of Registrable
Securities in a Registration Statement, and otherwise. No indemnifying party, in
the defense of any such claim or litigation, shall, except with the consent of
each indemnified party, consent to entry of any judgment or enter into any
settlement which admits fault on behalf of the indemnified party or which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
62
9. Termination of the Company's Obligations. The Company shall have no
obligations pursuant to this Agreement with respect to (a) any request or
requests for registration made by any Holder pursuant to Section 2 or 3 of this
Agreement on a date more than ten (10) years after the date of this Agreement or
(b) any Registrable Securities proposed to be sold by a Holder in a registration
pursuant to this Agreement if, in the opinion of counsel to the Company, all
such Registrable Securities proposed to be sold by a Holder may be sold without
registration under the Securities Act pursuant to Rule 144(k) under the
Securities Act.
10. Rule 144 Reporting. With a view to making available to the Holders the
benefits of certain rules and regulations of the SEC which may permit the sale
of the Registrable Securities to the public without registration, the Company
agrees to use its best efforts to:
10.1 commencing on the date of this Agreement, make and keep public
information available, as those terms are understood and defined in SEC Rule 144
or any similar or analogous rule promulgated under the Securities Act, at all
times after the effective date of the first registration filed by the Company
for an offering of its securities to the general public;
10.2. File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act;
10.3 So long as a Holder owns any Registrable Securities, furnish
to such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any time after it has become subject
to such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as a Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.
11. General Provisions
11.1 Notices. Any and all notices required or permitted to be given
to a party pursuant to the provisions of this Agreement will be in writing and
will be effective and deemed to provide such party sufficient notice under this
Agreement on the earliest of the following: (i) at the time of personal
delivery, if delivery is in person; (ii) at the time of transmission by
facsimile, addressed to the other party at its facsimile number specified herein
(or hereafter modified by subsequent notice to the parties hereto), with
confirmation of receipt made by both telephone and printed confirmation sheet
verifying successful transmission of the facsimile; (iii) one (1) business day
after deposit with an express overnight courier for deliveries within a country,
or three (3) business days after such deposit for international deliveries or
(iv) three (3) business days after deposit in mail by certified mail (return
receipt requested) or equivalent for deliveries within a country.
63
All notices for international delivery will be sent by facsimile or by
express courier. All notices not delivered personally or by facsimile will be
sent with postage and/or other charges prepaid and properly addressed to the
party to be notified at the address or facsimile number indicated for such
party:
in the case of the Company, at
c/o Chief Executive Officer
75 Adams Avenue
Hauppauge, New York 11788
in the case of the Shareholders, at
c/o Interpharm, Inc.
75 Adams Avenue
Hauppauge, New York 11788
Facsimile: 631-952-9587
or at such other address or facsimile number as such other party may designate
by giving ten (10) days advance written notice by one of the indicated means of
notice herein to the other party hereto. Notices by facsimile shall be machine
verified as received.
Any party hereto (and such party's permitted assigns) may by notice so
given change its address for future notices hereunder. Notice shall conclusively
be deemed to have been given in the manner set forth above.
11.2 Entire Agreement. This Agreement constitutes and contains the
entire agreement and understanding of the parties with respect to the subject
matter hereof and supersedes any and all prior negotiations, correspondence,
agreements, understandings, duties or obligations between the parties respecting
the subject matter hereof.
11.3 Governing Law; Jurisdiction. This Agreement shall be governed
by and construed exclusively in accordance with the internal laws of the State
of New York, without giving effect to any choice of law rule that would cause
the application of the laws of any jurisdiction other than the internal laws of
the State of New York to the rights and duties of the parties. The parties
hereto consent to the non-exclusive jurisdiction of any New York State or
Federal court sitting in the City of New York and any appellate court from any
thereof in any action or proceeding arising out of or relating to this
Agreement.
11.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, then such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
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11.5 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.
11.6 Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
11.7 Successors And Assigns. The provisions of this Agreement shall
inure to the benefit of, and shall be binding upon, the successors and permitted
assigns of the parties hereto, except that the Company may not assign or
transfer any of its rights or obligations under this Agreement.
11.8 Captions. The captions to sections of this Agreement have been
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
11.9 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
11.10 Costs And Attorneys' Fees. In the event that any action, suit
or other proceeding is instituted by any party hereto against any other party
hereto concerning or arising out of this Agreement or any transaction
contemplated hereunder, the prevailing party shall recover all of such party's
costs and attorneys' fees incurred in each such action, suit or other
proceeding, including any and all appeals or petitions therefrom.
11.11 Adjustments for Share Splits, Etc. Wherever in this Agreement
there is a reference to a specific number of Ordinary Shares or preferred shares
of the Company of any class or series, then, upon the occurrence of any
subdivision, combination or share dividend of such class or series of shares,
the specific number of shares so referenced in this Agreement shall
automatically be proportionally adjusted to reflect the affect on the
outstanding shares of such class or series of shares by such subdivision,
combination or share dividend.
65
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first written above.
ATEC GROUP, INC.
By: /s/ JAMES CHARLES
-------------------------------
James Charles
Chief Financial Officer
/s/ RAJ SUTARIA
-----------------------------
Raj Sutaria
/s/ PERRY SUTARIA
-----------------------------
Perry Sutaria
/s/ RAVI SUTARIA
-----------------------------
Ravi Sutaria
/s/ MONA RAMETRA
-----------------------------
Mona Rametra
66
AMENDMENT
---------
THIS AMENDMENT (the "Amendment") is made and entered into as of
February 4, 2003, by and among ATEC Group, Inc., a Delaware corporation
("ATEC"), and INTERPHARM INC., a New York Corporation ("Interpharm"), and RAJ
SUTARIA ("Raj"), MONA RAMETRA ("Mona"), RAVI SUTARIA ("Ravi") and PERRY SUTARIA
("Perry")(collectively the "Parties"). Certain capitalized and other terms used
in this Agreement are defined in the November 25, 2002 Capital Stock Exchange
Agreement (the "Agreement") among the Parties.
W I T N E S S E T H :
WHEREAS, there were certain omissions from the Agreement which the
Parties intended to include;
WHEREAS, the Parties wish to amend the Agreement to reflect their
intentions; and
WHEREAS, the Agreement provides that the closing of the transactions
contemplated therein will close on or before February 1, 2003, and the parties
wish to extend the date on which the closing is to take place;
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
---------
AMENDMENT
---------
1. Amendment to Exhibit 1.1.1.2 of the Agreement. Schedule 1.1.1.2
of the Agreement shall be deleted and Exhibit 1.1.1.2 to this Amendment shall be
substituted therefor.
2. Amendment to Section 1.5 of the Agreement. Section 1.5 of the
Agreement is amended in its entirety and replaced with the following:
1.5 Closing. The Closing hereunder shall take place
at the offices of Interpharm, at 75 Adams Avenue,
Hauppauge, New York 11788, or at such other place as
the Parties may agree upon, on a date to be set by the
Parties. The date and time on which the closing occurs
shall be the Closing Date and Closing Time,
respectiely.
3. Amendment to Section 8.1.2 of the Agreement. Section 8.1.2 of the
Agreement is amended in its entirety and replaced with the following:
8.1.2 By Interpharm and the Shareholders, upon written notice to
ATEC, if the conditions set forth in Section 6.1 were not, or
cannot reasonably be, satisfied on or before the Closing Date
unless the failure of any such condition is the result of the
material breach of this Agreement by Interpharm or the
Shareholders;
4. Amendment to Section 8.1.3 of the Agreement. Section 8.1.3 of the
Agreement is amended in its entirety and replaced with the following:
8.1.3 By ATEC, upon written notice to Interpharm and the
Shareholders, if the conditions set forth in Section 6.2 were
not, or cannot reasonably be, satisfied on or before the Closing
Date unless the failure of any such condition is the result of
the material breach of this Agreement by ATEC;
5. Amendment to Section 8.1.4 of the Agreement. Section 8.1.4 of the
Agreement is amended in its entirety and replaced with the following:
8.1.4 By Interpharm and the Shareholders, if there was a
material breach in any representation, warranty, covenant,
agreement or obligation of ATEC hereunder and such breach
(provided it is curable and ATEC promptly commences its effort to
cure) shall have not been remedied on or before the Closing Time.
6. Amendment to Section 8.1.5 of the Agreement. Section 8.1.5 of the
Agreement is amended in its entirety and replaced with the following:
8.1.4 By ATEC, if there was a material breach in any
representation, warranty, covenant, agreement or obligation of
Interpharm or a Shareholder hereunder and such breach (provided
it is curable and Interpharm and the Shareholders promptly
commences their effort to cure) shall have not been remedied on
or before the Closing Time.
ARTICLE II
----------
MISCELLANEOUS
-------------
1. Amendments. The terms and provisions set forth in this
Amendment shall modify and supercede all inconsistent terms and provisions set
forth in the Agreement. The parties agree that the Agreement, as amended hereby,
shall continue to be legal, valid, binding and enforceable in accordance with
its terms.
2. Survival of Representations and Warranties. All representations
and warranties made in the Lease shall survive the execution and delivery of
this Amendment.
3. Headings. The section headings contained in this Amendment are
for purposes of convenience only, and shall in no way bear upon the construction
or interpretation of this Amendment.
2
4. Entire Agreement. The Agreement, as amended hereby, constitutes
the entire agreement between the parties hereto and supersedes all prior
agreements, understandings and arrangements, oral or written, between the
parties hereto with respect to the subject matter hereof.
5. Modification and Waiver. This Amendment may not be modified or
amended except by an instrument or instruments in writing signed by the parties
hereto. No waiver of any of the provisions of this Amendment shall be deemed, or
shall constitute, a waiver of any other provisions, whether or not similar. No
waiver shall be binding unless executed in writing by the party making the
waiver.
6. Counterparts. This Amendment may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
7. Severability. The provisions of this Amendment are severable,
and the invalidity of any provision shall not affect the validity of any other
provisions.
8. Binding Effect. This Amendment shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns.
9. Governing Law. This Amendment, its validity, interpretation and
performance shall be governed by and construed in accordance with the internal
laws of the State of New York without giving effect to the conflict of laws
provisions thereof.
IN WITNESS WHEREOF, this Amendment has been executed and is effective
as of the date first above-written.
INTERPHARM, INC. ATEC GROUP, INC.
By: /s/ DR. MAGANLAL K. SUTARIA By: /s/ JAMES CHARLES
--------------------------------- ---------------------------------
Dr. Maganlal K. Sutaria James Charles
Chief Executive Officer Chief Financial Officer
/s/ RAJ SUTARIA /s/ MONA RAMETRA
------------------------------------- -------------------------------------
Raj Sutaria Mona Rametra
/s/ PERRY SUTARIA
-------------------------------------
Perry Sutaria
/s/ RAVI SUTARIA
-------------------------------------
Ravi Sutaria
3
Exhibit 1.1.1.2
Form of Certificate of Designations
-----------------------------------
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES K CONVERTIBLE PREFERRED STOCK
OF
ATEC GROUP, INC.
ATEC Group, Inc. (the "Company"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify,
that, pursuant to authority conferred upon the Board of Directors of the Company
by the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock, par
value $.01 per share, and (ii) providing for the designations, preferences and
relative participating, optional or other rights, and the qualifications,
limitations or restrictions, thereof, of Three Million (3,000,0000) shares of
Series K Convertible Preferred Stock of the Company as follows:
RESOLVED, that the Company is authorized to issue three million (3,000,000)
shares of Series K Convertible Preferred Stock (the "Series K"), par value $.01
per share, which shall have the following powers, designations, preferences and
other special rights:
1. Dividends. Each share of the Series K shall be entitled to receive
dividends to the same extent and in the same amounts as each of the shares of
$.01 par value per share common stock ("Common Stock") of the Company.
2. Conversion. Each share of Series K shall be converted in accordance
with this Section 2 into the number of shares of Common Stock equal to the then
effective Conversion Ratio (as defined below).
a. Conversion Trigger. The shares of Series K shall not become
convertible unless and until such date (the "Trigger Date") that any of the
following conditions has been met: the Company is: (i) deemed by the American
Stock Exchange, Inc. ("AMEX") to be in compliance with the applicable AMEX
listing standards, (ii) deemed by another exchange to be in compliance with any
such other applicable exchange listing standards, in the event the Company's
securities are listed on an exchange other than AMEX and is not listed on AMEX;
or (iii) no longer listed on AMEX, the Nasdaq National Market, Nasdaq SmallCap
Market or New York Stock Exchange; provided, in the event any of the events
described in clauses (i), (ii) and (iii) of this paragraph 2.a shall occur prior
to the first anniversary of the Initial Issuance Date, then the Trigger Date
shall be deemed to be the first anniversary date of the Initial Issuance Date.
The term "Initial Issuance Date" shall mean the first date on which the Company
issues shares of Series K pursuant to the Exchange Agreement (as defined below).
4
b. Conversion Ratio. On the Trigger Date all of the shares of the
Series K shall be convertible into an aggregate total number (the "Aggregate
Conversion Amount") of shares of Common Stock pursuant to the following formula:
Aggregate Conversion Amount = 4 x (COP - P - T) - T
For purposes of this formula:
COP means the Company Outstanding Common Stock (as defined below).
---
P means the number of all shares of Common Stock issued by the Company
- pursuant to any agreements or obligations which arose after the "Closing
Date" (as such term is defined in the Capital Stock Exchange Agreement,
among the Company, Interpharm, Inc. and the shareholders of Interpharm,
Inc., dated November 25, 2002 (the "Exchange Agreement")), which shares
exclude Common Stock issued pursuant to the Exchange Agreement, up to and
including the Trigger Date.
T means the number of shares of Common Stock issued to the Interpharm, Inc.
- shareholders pursuant to the Exchange Agreement.
The "Company Outstanding Common Stock" shall mean the sum of (a) the number of
shares of Common Stock issued and outstanding on the Trigger Date and (b) the
number of shares of Common Stock that are issuable upon the conversion of all
issued and outstanding shares of Series A, Series B, Series C and Series J
preferred stock of the Company, such number to be calculated as if all of the
issued and outstanding shares of Series A, Series B, Series C and Series J that
are issued and outstanding on the Triggering Date had been converted on the day
immediately preceding the Triggering Date, provided, in determining the number
of shares of Common Stock that are issuable upon the conversion of any shares of
Series A preferred stock, any adjustment to the Conversion Ratio (as defined in
the Certificate of Designations of the Series A preferred stock, filed with the
Secretary of State of Delaware on February 17, 2003 ("the Series A Certificate
of Designations")) of the Series A preferred stock due to the issuance of Common
Stock or options, rights or warrants for Common Stock, pursuant to any
obligation which arose after the Initial Issuance Date, for a consideration less
than the "Adjustment Price" (as defined in the Series A Certificate of
Designations), shall not be taken into effect.
The term "Conversion Ratio" shall mean the Aggregate Conversion Amount divided
by the number of Series K shares issued and outstanding on the date any share of
Series K is first issued, subject to adjustment as provided herein.
c. Conversion. Beginning on the Trigger Date, and each year
thereafter, on the anniversary of the Trigger Date (each a "Conversion Date"),
one seventh of the total number of shares of Series K issued and outstanding as
of the Trigger Date shall automatically convert into shares of Common Stock with
no further action by the record holders ("Holders") thereof (an "Annual
Conversion") until all of the issued and outstanding shares of Series K are
converted. In the event that an Anti-Dilutive Conversion (as defined below) has
occurred, the number of shares of Series K to be converted in each and every
Annual Conversion following such Anti-Dilutive Conversion shall be adjusted to
5
equal the total number of Series K shares issued and outstanding as of such
Conversion Date divided by the difference between seven (7) minus the total
number of Annual Conversions which have occurred prior to such Anti-Dilution
Conversion. Upon each conversion, the Common Stock shall be distributed to the
Holders in proportion to their Series K shareholdings. At least thirty (30) days
prior to any Annual Conversion, the Company shall provide notice of the
conversion to the Holders who shall then, as soon as practicable, surrender the
original certificates representing the shares Series K being converted to the
Company at its principal office, duly endorsed to the Company or in blank. The
Company will, as soon as practicable thereafter, issue and deliver at the office
or place to such Holder, or to his or her nominee or nominees, certificates for
the number of full shares of Common Stock to which he or she shall be entitled
as aforesaid. If the number of shares of Series K represented by the certificate
submitted for conversion is greater than the number of shares of Series K being
converted, then the Company shall, as soon as practicable, issue and deliver to
the Holder a new certificate representing the number of shares of Series K not
converted. Shares of Series K shall be deemed to have been converted as of the
close of business on the applicable Conversion Date, and the person or persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such Common Stock as of the
close of business on such date.
In the event, at any time after the Trigger Date, the Holders beneficially own,
in the aggregate, less than 51% of the Company's issued and outstanding Common
Stock, all of the Holders may jointly request, by written notice to the Company
(the "Anti-Dilutive Conversion Request"), that such number of any remaining
issued and outstanding shares of Series K be converted to the extent as is
necessary such that the Holders shall beneficially own, in the aggregate, 51% of
the Company's issued and outstanding Common Stock (an "Anti-Dilutive
Conversion"). The Anti-Dilutive Conversion Request shall state the total number
of Common Stock beneficially owned by each Holder, together with the original
certificates representing the shares of Series K being converted. Upon each
conversion, the Common Stock shall be distributed to the Holders in proportion
to their Series K shareholdings. Upon receipt of an Anti-Dilutive Conversion
Request, the Company shall, as soon as practicable, issue and deliver at the
office or place to each Holder, or to his or her nominee or nominees,
certificates for the number of full shares of Common Stock to which he or she
shall be entitled as aforesaid. If the number of shares of Series K represented
by the certificate submitted for conversion is greater than the number of shares
of Series K being converted, then the Company shall, as soon as practicable,
issue and deliver to the Holder a new certificate representing the number of
shares of Series K not converted. Shares of Series K shall be deemed to have
been converted as of the close of business on the date the Company receives the
Anti-Dilutive Conversion Request, and the person or persons entitled to receive
the Common Stock issuable upon conversion shall be treated for all purposes as
the record holder or holders of such Common Stock as of the close of business on
such date.
Each certificate of shares of Series K shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW
THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY
THIS CERTIFICATE INCLUDING SECTION 2 THEREOF. THE NUMBER OF
PREFERRED SHARES REPRESENTED BY THIS CERIFICATE MAY BE LESS
THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEROF
PURSUANT TO SECTION 2 OF THE CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS.
6
d. Adjustment of the Conversion Ratio. The Conversion Ratio in
effect at any time shall be subject to adjustment as follows:
(i) In case the Company shall (A) subdivide its outstanding
shares of Common Stock, (B) combine its outstanding shares of Common
Stock into a smaller number of shares, or (C) issue by reclassification
of its Common Stock (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing
Company) any shares of its capital stock, the Conversion Ratio in
effect at the time of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so
that the holder of any share of the Series K surrendered for
conversation after such time shall be entitled to receive the kind and
amount of shares which he or she would have owned or have been entitled
to receive had such share of Series K been converted immediately prior
to such time. Such adjustment shall be made successively whenever any
event listed above shall occur.
(ii) In case the Company shall offer to the holders of shares
of its Common Stock any rights, options or warrants entitling them to
subscribe for or purchase (A) shares of its Common Stock, (B) any
assets of the Company, (C) any securities of the Company, other than
its Common Stock, or of any other Company or (D) any rights, options or
warrants entitling them to subscribe for or to purchase any of the
foregoing securities, whether or not such rights, options or warrants
are immediately exercisable (hereinafter collectively called a
"Distribution on Common Stock"), the Company shall offer, upon such
terms offered to the holders of shares of Common Stock, to the holders
of the Series K the Distribution on Common Stock to which they would
have been entitled if they had converted the Series K shares
immediately prior to the record date for the purpose of determining the
shareholders entitled to receive such Distribution on Common Stock.
(iii) In case of any consolidation or merger of the Company with
or into any other company (other than a consolidation or merger in
which the Company is the continuing Company), or in case of any sale or
transfer of all or substantially all of the assets of the Company, the
holder of each share of the Series K shall after such consolidation,
merger, sale or transfer have the right to convert such share of Series
K into the kind and amount of shares of stock and other securities and
property which such Holder would have been entitled to receive upon
such consolidation, merger, sale or transfer if he or she had held the
Common Stock issuable upon the conversion of such share of Series K
immediately prior to such consolidation, merger, sale or transfer,
regardless of whether the Trigger Date has occurred.
(iv) In the event that at any time, as a result of an
adjustment made pursuant to this paragraph (d), the holder of any share
of the Preferred Stock surrendered for conversion shall become entitled
7
to receive any securities other than shares of Common Stock, thereafter
the amount of such other securities so receivable upon conversion of
any share of the Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in this paragraph (d).
(v) No adjustment in the Conversion Ratio shall be required
unless such adjustment would require a change of at least 1%; provided,
however, that any adjustments which by reason of this paragraph (v) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment.
(vi) Whenever the Conversion Ratio is adjusted the Company
shall promptly cause a notice to be mailed to the holders of the Series
K setting forth the adjusted Conversion Ratio.
(vii) No fractional shares or scrip representing fractional
shares of Common Stock shall be issued upon conversion of the Series K.
Instead, any fractional share of Common Stock which would otherwise be
issuable upon conversion of the Series K (or specified portions
thereof) shall be rounded up to the nearest whole share.
e. In case:
(i) the Company shall authorize the distribution to all holders
of its Common Stock of evidences of its indebtedness or assets
(other than dividends or other distributions paid out of earned
surplus); or
(ii)the Company shall authorize the granting to the holders of
its Common Stock of rights to subscribe for or purchase any
shares of capital stock of any class or of any other rights; or
(iii) of any reclassification of the Common Stock (other than a
subdivision or combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which the Company is
a party and for which approval of any stockholders of the Company
is required, or of the sale or transfer of all or substantially
all of the assets of the Company or of Interpharm, Inc.; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in each case, the Company shall cause to be mailed, first class
postage prepaid, to the holders of record of the outstanding shares of
Series K, at least 10 days prior to the applicable record date
hereinafter specified, a notice stating (A) the date on which a record
is to be taken for the purpose of such distribution or rights, or, if a
record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such distribution or rights are to be
determined, or (B) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it
is expected that holders of Common Stock of record shall be entitled to
8
exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up. In the case of a
merger, sale or transfer of substantially all of the assets of the
Company or of Interpharm, Inc. , each share of Series K shall
automatically convert into Common Stock, with no further action by the
Holders, immediately prior to the date on which any of the foregoing
events becomes effective and regardless of whether the Trigger Date has
occurred.
f. The Company will at all times reserve, keep available and be
prepared to issue, free from any preemptive rights, out of its authorized but
unissued Common Stock, solely for the purpose of effecting conversion of the
Series K, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding Series K. The Company shall from time to time, in
accordance with the laws of the Delaware, endeavor to amend its Certificate of
Incorporation to increase the authorized amount of its Common Stock if the
remaining number of unissued shares of Common Stock shall be not sufficient to
permit the conversion of all Series K shares. The Company shall, if any shares
of Common Stock required to be reserved for issuance upon conversion of Series K
pursuant to this section requires registration with or approval of any
governmental authority under any Federal or state law before such shares may be
issued upon such conversion, endeavor to cause such shares to be so registered
or approved as expeditiously as possible.
g. The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
shares of Series K pursuant hereto. The Company shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issue or transfer and delivery of shares of Common Stock in a name other than
that in which the shares of the Series K so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax or has established to
the satisfaction of the Company that such tax has been paid.
h. Upon any conversion of shares of Series K under this Section 3,
the shares so converted shall have the status of authorized and unissued shares
of preferred stock, and the number of shares of preferred stock that the Company
shall have authority to issue shall not be decreased by the conversion of shares
of Series K.
3. Liquidation rights. In the event of any liquidation or dissolution or
winding up of the Company, voluntary or involuntary, the holders of the Series K
shall be entitled to receive, subject to the rights of any other class of stock
which ranks senior to the Series K as to distribution of assets on liquidation,
but before any distribution is made on any class of stock ranking junior to the
Series K as to the payment of dividends or the distribution of assets, the sum
of $7.50 per share.
4. Voting Rights. With respect to all matters upon which the Company's
stockholders shall vote, the Holders of the Series K shall vote together as a
single class with the holders of the Common Stock, each Holder being entitled to
one vote per share on all such matters.
9
5. Limitations Upon Disposition. The Series K shares issuable pursuant to
this Certificate and the shares of Common Stock issuable upon conversion of such
Series K shares (collectively the "Shares"), if not registered by the Company
under the Securities Act of 1933 (the "Act"), may not be sold or offered for
sale in the absence of an effective registration statement as to the Shares
under the Act, or an opinion of counsel satisfactory to the Company that such
registration statement is not required. The above restrictions in this Section 5
shall be contained in a legend to be placed upon each of the Series K share
certificates at the time of distribution of the Shares and stop transfer order
may be placed on such Shares by the Company.
6. Additional Rights. So long as any Series K shares remain outstanding,
the Company shall not, without first obtaining the approval by vote or written
consent of all Holders, (i) alter or change the powers, preferences, privileges,
or rights of the Series K shares, (ii) amend the provisions of this paragraph or
(iii) create any new series or class of shares having preferences prior to, or
in parity with or superior to the Series K shares as to voting or liquidation
preference.
7. Replacement. Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of any certificate evidencing one or more shares of Series K, and in
the case of loss, theft or destruction, of any indemnification undertaking by
the holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of such certificate, the Company at its expense will
execute and deliver in lieu of such certificate, a new certificate of like kind,
representing the number of shares of Series K which shall have been represented
by such lost, stolen, destroyed, or mutilated certificate.
8. Notice. Whenever notice is required to be given pursuant to this
Certificate of Designations, unless otherwise provided herein, such notice shall
be given in accordance with Section 10.2 of the Exchange Agreement.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by _________________, its President, as of ___ day of
_________, 2003.
ATEC GROUP, INC.
By: _____________________________________
Name:
Title: President
10
APPENDIX B
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
INTERPHARM, INC. AND SUBSIDIARY
CONTENTS
--------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT F-1
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Income F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Comprehensive Income F-6
Consolidated Statements of Cash Flows F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-23
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
Interpharm, Inc and Subsidiary
We have audited the accompanying consolidated balance sheets of Interpharm, Inc.
and Subsidiary (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, comprehensive income
and cash flows for each of the years in the three year period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Interpharm, Inc.
and Subsidiary as of December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ MARCUM & KLIEGMAN LLP
February 20, 2003, except for Note 11 as to which the date is March 30, 2003
Woodbury, New York
F-1
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
ASSETS
------
2002 2001
------------ ------------
CURRENT ASSETS
--------------
Cash and cash equivalents $ 105,789 $ 583,858
Marketable securities, at fair market value 35,993 20,316
Accounts receivable, less allowance for doubtful
accounts of $47,776 in 2002 and 2001 4,158,141 3,896,723
Inventories 3,389,099 2,169,114
Prepaid expenses and other current assets 71,478 147,673
Deferred tax asset 60,000 51,500
------------ ------------
Total Current Assets 7,820,500 6,869,184
Property and equipment, net 3,358,968 2,669,744
Deferred tax asset 7,500 95,500
Security deposits 11,379 11,379
------------ ------------
TOTAL ASSETS $ 11,198,347 $ 9,645,807
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
2002 2001
------------ ------------
CURRENT LIABILITIES
-------------------
Line of credit, bank $ 964,793 $ 943,000
Current maturities of bank notes payable 263,383 244,112
Accounts payable, accrued expenses, and other
liabilities 4,014,525 2,674,812
Due to related parties 304,750 924,346
------------ ------------
Total Current Liabilities 5,547,451 4,786,270
------------ ------------
OTHER LIABILITIES
-----------------
Bank notes payable, less current maturities 335,754 591,480
Due to related parties 3,000,000 3,000,000
------------ ------------
Total Other Liabilities 3,335,754 3,591,480
------------ ------------
TOTAL LIABILITIES 8,883,205 8,377,750
------------ ------------
COMMITMENTS AND CONTINGENCIES
-----------------------------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.001 par value, 10,000,000 shares
authorized, 4,000,000 shares issued and outstanding 4,000 4,000
Additional paid-in capital 2,366,000 2,366,000
Accumulated other comprehensive (loss) income (890) 2,444
Accumulated deficit (53,968) (1,104,387)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,315,142 1,268,057
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 11,198,347 $ 9,645,807
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
SALES, Net $ 24,312,245 $ 18,435,446 $ 11,391,326
-----
COST OF SALES (including $408,000, $399,500 and
$270,640 of related party rent expense in 2002, 2001
and 2000, respectively) 20,048,892 14,939,725 9,181,985
------------ ------------ ------------
GROSS PROFIT 4,263,353 3,495,721 2,209,341
------------ ------------ ------------
OPERATING EXPENSES
------------------
Selling, general and administrative expenses 2,135,906 1,966,098 1,298,303
Loss on disposal of property and equipment -- 313,166 --
Related party rent expense 72,000 70,500 47,760
Research and development 211,450 110,000 --
------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,419,356 2,459,764 1,346,063
------------ ------------ ------------
OPERATING INCOME 1,843,997 1,035,957 863,278
------------ ------------ ------------
OTHER INCOME (EXPENSES)
----------------------
Related party interest expense (188,125) (188,126) (188,126)
Interest expense (102,103) (119,434) (123,325)
Interest income 63 452 3,568
------------ ------------ ------------
TOTAL OTHER EXPENSES (290,165) (307,108) (307,883)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,553,832 728,849 555,395
INCOME TAXES 503,413 214,284 217,631
------------ ------------ ------------ ------------
NET INCOME $ 1,050,419 $ 514,565 $ 337,764
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTERPHARM, INC. AND SUBISIDARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------------- Paid-in Comprehensive Accumulated
Shares Amount Capital Income/(Loss) Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - January 1, 2000 4,000,000 $ 4,000 $ 2,366,000 $ (10,747) $(1,956,716) $ 402,537
-------
Unrealized loss on marketable securities, net -- -- -- (3,781) -- (3,781)
Net income -- -- -- -- 337,764 337,764
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - December 31, 2000 4,000,000 4,000 2,366,000 (14,528) (1,618,952) 736,520
-------
Unrealized gain on marketable securities, net -- -- -- 16,972 -- 16,972
Net income -- -- -- -- 514,565 514,565
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - December 31, 2001 4,000,000 4,000 2,366,000 2,444 (1,104,387) 1,268,057
-------
Unrealized loss on marketable securities, net -- -- -- (3,334) -- (3,334)
Net income -- -- -- -- 1,050,419 1,050,419
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - December 31, 2002 4,000,000 $ 4,000 $ 2,366,000 $ (890) $ (53,968) $ 2,315,142
------- =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
NET INCOME $ 1,050,419 $ 514,565 $ 337,764
----------
OTHER COMPREHENSIVE INCOME
--------------------------
Unrealized (loss) gain on marketable securities, net (3,334) 16,972 (3,781)
----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME $ 1,047,085 $ 531,537 $ 333,983
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $ 1,050,419 $ 514,565 $ 337,764
----------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 494,986 378,208 405,254
Deferred tax expense (benefit) 79,500 (32,000) (26,200)
Accrued interest on related party loans 188,125 188,126 188,126
Provision for doubtful accounts -- 20,826 26,950
Loss on disposal of property and equipment -- 313,166 --
Changes in operating assets and liabilities:
Accounts receivable (261,418) (2,224,564) (127,311)
Inventories (1,219,985) 439,690 (838,594)
Prepaid expenses and other current assets 76,195 (13,305) 17,041
Accounts payable, accrued expenses and other
current liabilities 1,339,713 1,321,631 370,263
----------- ----------- -----------
TOTAL ADJUSTMENTS 697,116 391,778 15,529
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,747,535 906,343 353,293
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Purchase of marketable securities (19,011) -- --
Purchases of property and equipment (1,184,210) (964,259) (175,583)
----------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (1,203,221) (964,259) (175,583)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Proceeds from line of credit, bank 21,793 -- 8,000
Proceeds from bank notes payable -- 644,000 --
Repayments of bank notes payable (236,455) (215,002) (108,337)
Repayments of related party loans (807,721) (214,500) --
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES $(1,022,383) $ 214,498 $ (100,337)
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
INTERPHARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (478,069) $ 156,582 $ 77,373
CASH AND CASH EQUIVALENTS - Beginning 583,858 427,276 349,903
------------------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 105,789 $ 583,858 $ 427,276
------------------------- =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-------------------------------------------------
Cash paid during the years for:
Interest $ 412,230 $ 332,135 $ 120,186
Income Taxes $ 405,047 $ 184,905 $ 41,580
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
------------------------------------------
Nature of Business
------------------
Interpharm, Inc. and Subsidiary (the "Company") is in the business of
developing and manufacturing both prescription strength and
over-the-counter generic drugs for wholesale distribution throughout
the United States. The majority of the Company's sales have been
derived from sales of Ibuprofen tablets in both over-the-counter and
prescription strength.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Interpharm, Inc. and its 50% owned Subsidiary (the "Subsidiary"); the
Subsidiary purchases and supplies certain raw materials to Interpharm,
Inc. The Company allocated a proportionate share of the Subsidiary's
losses to the minority owner until such losses reduced the amount of
minority interest to zero. Since the minority owner of the Subsidiary
is not responsible to fund any losses beyond its initial investments,
the Company did not allocate any additional losses to the minority
owner. All significant intercompany transactions and balances have been
eliminated in consolidation.
Pursuant to an agreement with the minority owner of the Subsidiary, the
Company has the right to perform the following actions on a unilateral
basis without the approval of the minority owner of the Subsidiary: (i)
purchase and sell, or otherwise dispose of all of the assets of the
Subsidiary, (ii) negotiate all terms of asset purchases with third
party vendors, (iii) establish the selling price of products sold by
the Subsidiary to the Company, (iv) establish banking relationships and
borrow monies from financial institutions, and (v) enter employment
agreements, and other contractual arrangements, for the benefit of the
Subsidiary. Based on the above rights, the Company has deemed that it
controls the Subsidiary, and therefore, has included the Subsidiary
operations in the accompanying consolidated financial statements.
Revenue Recognition
-------------------
The Company recognizes revenue upon the shipment of product. The
Company records a provision for allowances, returns and other sales
credits based upon a review of specific accounts and historical
experience. Such provision for allowances, returns and credits has been
recorded as a reduction of sales in the consolidated statements of
income.
The Company purchases raw materials from a supplier, which are
manufactured into finished goods and sold back to such supplier as well
as to other customers. The Company can, and does, purchase raw
materials from other suppliers. Pursuant to Emerging Issues Task Force
No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent", the Company recorded sales to, and purchases from, this
supplier on a gross basis. Sales and purchases were recorded on a gross
basis since the Company (i) has a risk of loss associated with the raw
materials purchased, (ii) converts the raw material into a finished
product based upon Company developed specifications, (iii) has other
sources of supply of the raw material, and (iv) has credit risk related
to the sale of such product to the supplier. For the years ended
December 31, 2002, 2001 and 2000, the Company purchased raw materials
from the supplier totaling $5,528,000, $2,213,000 and $1,725,000,
respectively and sold finished goods to such supplier totaling
$9,467,000, $3,601,000 and $--, during the years ended December 31,
2002, 2001 and 2000, respectively.
F-9
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
Inventories
-----------
Inventories are valued at the lower of cost (first-in, first-out basis)
or market value. Losses from the write-down of damaged, nonusable, or
otherwise nonsalable, inventories are recorded in the period in which
they occur.
Property and Equipment
----------------------
Property and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred; costs of major additions and
betterments are capitalized. When property and equipment is sold or
otherwise disposed of, the cost and related accumulated depreciation is
eliminated from the accounts and any resulting gain or loss is
reflected in income.
Depreciation and Amortization
-----------------------------
Depreciation is provided for on the straight-line method over the
estimated useful lives of the related assets. The cost of leasehold
improvements is amortized over the lesser of the length of the related
leases or the estimated useful lives of the improvements.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or
less to be cash equivalents.
The Company has cash balances in a bank in excess of the maximum amount
insured by the FDIC at December 31, 2002 and 2001.
Comprehensive Income
--------------------
In accordance with Statement on Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", the Company reports
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income.
Use of Estimates in the Financial Statements
--------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-10
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine if impairment
exists, the Company compares the estimated future undiscounted cash
flows from the related long-lived assets to the net carrying amount of
such assets. Once it has been determined that an impairment exists, the
carrying value of the asset is adjusted to fair value. Factors
considered in the determination of fair value include current operating
results, trends and the present value of estimated expected future cash
flows.
Income Taxes
------------
Deferred taxes represent the tax effects of differences between the
financial reporting and tax bases of the Company's assets and
liabilities at the enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company evaluates the
recoverability of deferred tax assets and establishes a valuation
allowance when it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Income tax expense
consists of the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
The Subsidiary is a limited liability company. For income tax purposes,
the Company records only its proportionate share of the Subsidiary's
taxable income or loss. The Company derives no income tax benefit or
incurs no income tax liability attributable to the minority owner's
proportionate share of the Subsidiary's taxable income or loss.
Marketable Securities
---------------------
Marketable securities, which are classified as "available for sale",
are valued at fair market value. Unrealized gains or losses are
recorded net of income taxes as accumulated other comprehensive income
or loss in stockholders' equity, whereas realized gains and losses are
recognized in the Company's consolidated statements of income using the
first-in, first- out method. Other than temporary declines in the value
of marketable securities are also recognized as a loss in the
consolidated statements of income.
Shipping Costs
--------------
The Company's shipping and handling costs are included under selling,
general and administrative expenses. For the years ended December 31,
2002, 2001 and 2000, shipping and handling costs approximated $370,000,
$248,000 and $203,000, respectively.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. For the years ended
December 31, 2002, 2001 and 2000 advertising costs approximated
$57,000, $50,000 and $17,000, respectively.
F-11
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
Research and Development
------------------------
Research and development is expensed as incurred.
Concentrations and Fair Value of Financial Instruments
------------------------------------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments
and accounts receivable. At December 31, 2002, the Company has cash
investments of approximately $852,000 at one bank. Concentrations of
credit risk with respect to accounts receivable are disclosed in Note
10. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its
customers. Unless otherwise disclosed, the fair value of financial
instruments approximates their recorded value.
Reclassification
----------------
Certain accounts in the prior years' financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year's financial statements. These reclassifications had
no effect on previously reported income.
Stock Based Compensation
------------------------
During 2002, 2001 and 2000, the Company had no stock-based
compensations plans, nor has the Company issued any options, warrants
or other similar types of compensatory equity instruments pursuant to
any other types of arrangements. Therefore, the Company is not subject
to disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure".
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 provides guidance on the
accounting for a business combination at the date a business
combination is completed. The statement requires the use of the
purchase method of accounting for all business combinations initiated
after June 30, 2001, thereby eliminating use of the
pooling-of-interests method. SFAS No. 142 provides guidance on how to
account for goodwill and intangible assets after an acquisition is
completed. The most substantive change is that goodwill will no longer
be amortized, but instead will be tested for impairment periodically.
This statement applies to existing goodwill and intangible assets,
beginning in 2002, and did not have a material impact on the
consolidated financial statements of the Company.
F-12
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
New Accounting Pronouncements, continued
-----------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
the accounting model for long-lived assets to be disposed of by sale
and resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or
in discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. It also broadens the
reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted SFAS No.144 in
2002. It did not have a material impact on the consolidated financial
statements of the Company.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related
income tax effect and eliminates an inconsistency between the
accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of this
standard did not have a material impact on the consolidated financial
statements of the Company.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Cost
Associated with Exit or Disposal Activities". The main provisions of
this statement address the recognition of liabilities associated with
an exit or disposal activity. The adoption of this statement did not
have a material impact on the consolidated financial statements of the
Company.
In November 2002, the FASB issued FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations
assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued
or modified after December 31, 2002. Adoption of the disclosure
requirements were effective for interim and annual periods ending after
December 15, 2002 and did not have a significant impact on the
consolidated financial statements of the Company. The Company does not
expect the adoption of the initial recognition requirements of FIN 45
to have a significant impact on its consolidated financial position or
results of operations.
F-13
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
------------------------------------------
New Accounting Pronouncements, continued
-----------------------------
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. The provisions of FIN 46 must be applied for the
first interim or annual period beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of FIN 46
will have on its consolidated results of operations and financial
condition.
NOTE 2 - Inventories
-----------
Inventories at December 31, 2002 and 2001 consist of the following:
2002 2001
------------ ------------
Finished goods $ 271,306 $ 172,660
Work in process 1,705,087 909,527
Raw materials 1,195,903 1,000,202
Packaging materials 216,803 86,725
------------ ------------
Total $ 3,389,099 $ 2,169,114
============ ============
During the fourth quarter of 2002, the Company incurred a $202,000 loss
from the write-down of damaged and unusable raw materials inventory.
F-14
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - Property and Equipment
----------------------
Property and equipment at December 31, 2002 and 2001 consists of the
following:
Estimated
2002 2001 Useful Lives
---------- ---------- ------------
Machinery and equipment $2,864,833 $1,893,446 5-7 Years
Furniture and fixtures 78,704 64,692 5 Years
Leasehold improvements 2,017,300 1,818,489 5-15 Years
---------- ----------
4,960,837 3,776,627
Less: accumulated depreciation
and amortization 1,601,869 1,106,883
---------- ----------
Property and Equipment, Net $3,358,968 $2,669,744
========== ==========
Depreciation and amortization expense for the years ended December 31,
2002, 2001 and 2000 was $494,986, $378,208 and $405,254, respectively.
NOTE 4 - Marketable Securities
---------------------
At December 31, 2002 and 2001, management has classified their equity
securities as available-for-sale securities, which are reported at fair
market value. The cost and fair value of marketable securities as of
December 31, 2002 and 2001 are as follows:
2002 2001
---------- ----------
Cost $ 36,883 $ 17,872
Unrealized (loss) gain (890) 2,444
---------- ----------
Fair market value $ 35,993 $ 20,316
========== ==========
F-15
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses as of December 31, 2002 and 2001
consist of the following:
December 31,
2002 2001
---------- ----------
Trade accounts payable $3,674,287 $2,423,579
Accrued expenses and other current liabilities 340,238 251,233
---------- ----------
Total $4,014,525 $2,674,812
========== ==========
NOTE 6 - Bank Debt
---------
The Company has a credit facility agreement with a bank consisting of a
$2,000,000 secured line of credit (Interpharm, Inc. for $1,500,000 and
the Subsidiary for $500,000) and a $1,500,000 non-revolving secured
facility for equipment purchases ("Equipment Purchase Line"). The
credit facility is collateralized by substantially all assets of the
Company and personally guaranteed by the Company's stockholders and a
relative of a stockholder. In addition, the Company must comply with
certain financial covenants. A summary of the outstanding balances at
December 31, 2002 and 2001 is as follows:
2002 2001
----------- -----------
Line of credit (1) $ 964,793 $ 943,000
Notes payable (2) 599,137 835,592
----------- -----------
Total $ 1,563,930 $ 1,778,592
=========== ===========
(1) The line of credit requires monthly interest payments at the
bank's prime rate (4.25% at December 31, 2002) plus 1/2% and is
due on demand. The line of credit is reviewed by the bank, at
least annually, and automatically expires unless extended in
writing. The line of credit is scheduled to be reviewed by
September 30, 2003.
(2) Each advance under the Equipment Purchase Line cannot exceed 90%
of the invoice amount of the new equipment. Each advance is
converted into a separate note that is fully amortizing in up to
60 equal monthly installments of principal and interest. Interest
on the notes payable is charged at the bank's prime rate plus
1/2%. At December 31, 2002, there were four separate notes
outstanding with current aggregate monthly installments totaling
$24,597. Such notes mature at various dates through July 2006.
F-16
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - Bank Debt, continued
---------
Maturities of the notes payable at December 31, 2002 are as follows:
For the Year
Ending December 31, Amount
------------------------- ------------
2003 $ 263,383
2004 149,975
2005 108,512
2006 77,267
----------
Total $ 599,137
==========
NOTE 7 - Related Party Transactions
--------------------------
Related Party Lease
-------------------
The Company leases its business premises ("Premises") from an entity
controlled by three stockholders of the Company under a noncancelable
lease expiring in October 2019. The Company is obligated to pay minimum
annual rent of $480,000, plus property taxes, insurance, maintenance
and other expenses related to the Premises.
Upon a change in ownership of the Company, and every three years
thereafter, the annual rent will be adjusted to fair market value, as
determined by an independent third party.
Future minimum rental payments under this operating lease as of
December 31, 2002 for each of the next five (5) years and in the
aggregate are as follows:
For the Year
Ending December 31, Amount
------------------------- ------------
2003 $ 480,000
2004 480,000
2005 480,000
2006 480,000
2007 480,000
Thereafter 5,680,000
----------
Total $8,080,000
==========
F-17
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Related Party Transactions, continued
--------------------------
Related Party Lease, continued
------------------------------
Such lease does not grant the Company the option to purchase the
Premises at any time during the lease term or at its termination, nor
will the Company share in any proceeds that may result from sale or
disposition of the Premises. Three of the stockholders of the Company
purchased the Premises by making cash payments in the amount of
$1,255,000 and by issuing $3,720,000 in mortgage notes. Repayment of
the mortgage notes has been guaranteed for the term of the mortgage
primarily by the three stockholders and secondarily by the Company. The
total amount due to the bank under the mortgages totaled approximately
$3,305,000 and $3,457,000 as of December 31, 2002 and 2001,
respectively. The terms of these mortgage notes extend through 2019.
The fair value of the Premises is in excess of the future amount of
payments that may be required pursuant to the terms of the guarantee.
Due to Related Parties
----------------------
These balances, representing advances made by three of the Company's
stockholders and its chairman, bear interest at a rate of 5% per annum.
$3,000,000 of these advances have a maturity date of January 1, 2012
and the balance of these advances have no definitive repayment terms.
Repayment of $3,000,000 of these advances are subordinated to the
Company's bank debt (See Note 6).
NOTE 8 - Income Taxes
------------
The income tax expense (benefit) is comprised of the following for the
years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---------- ---------- ----------
Current
Federal $ 404,663 $ 240,635 $ 232,963
State 19,250 5,649 10,868
---------- ---------- ----------
Total Current 423,913 246,284 243,831
---------- ---------- ----------
Deferred
Federal 67,100 4,000 300
State 12,400 (36,000) (26,500)
---------- ---------- ----------
Total Deferred 79,500 (32,000) (26,200)
---------- ---------- ----------
Income Tax Expense $ 503,413 $ 214,284 $ 217,631
========== ========== ==========
F-18
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Income Taxes, continued
------------
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
2002 2001 2000
---------- ---------- ----------
Statutory U.S. federal tax rate 34.0% 34.0% 34.0%
State taxes 1.2 1.2 2.0
Permanent differences (0.9) (0.6) 6.9
Change in valuation allowance (1.5) (4.4) (4.3)
Other (.4) (0.8) 0.6
---------- ---------- ----------
32.4% 29.4% 39.2%
========== ========== ==========
The components of deferred tax assets and liabilities consist of the
following:
2002 2001
---------- ----------
Deferred Tax Assets, Current portion
------------------------------------
Capitalized inventory $ 6,600 $ 3,500
Investment tax credits 30,000 48,000
Allowance and reserves 16,500 --
Other 6,900 --
---------- ----------
Deferred Tax Assets, current $ 60,000 $ 51,500
========== ==========
Deferred Tax Assets, Long-Term portion
--------------------------------------
Investment tax credits $ 270,000 $ 219,500
Loss in excess of Subsidiary basis -- 38,500
Accrued related party interest 34,700 --
---------- ----------
304,700 258,000
Valuation allowance (155,000) (151,000)
---------- ----------
Deferred Tax Assets, long-term 149,700 107,000
---------- ----------
Deferred Tax Liabilities, Long-Term portion
-------------------------------------------
Depreciation and amortization (142,200) (11,500)
---------- ----------
Deferred Tax Liabilities, long term (142,200) (11,500)
---------- ----------
Deferred Tax Assets, long-term, net 7,500 95,500
---------- ----------
Total Deferred Tax Assets, Net $ 67,500 $ 147,000
========== ==========
F-19
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Income Taxes, continued
------------
At December 31, 2002, the Company has approximately $300,000 of New
York State investment tax credit carryforwards, expiring in various
years through 2017. These carryforwards are available to reduce future
New York State income tax liabilities. A $155,000 reserve of the
deferred tax asset has been recorded at December 31, 2002 because the
Company does not anticipate utilizing all of these deferred tax assets.
NOTE 9 - Contingency
-----------
Legal Proceedings
-----------------
On or about January 31, 2002, Teresa Casey and Jerry Casey, as
plaintiffs, commenced a lawsuit against the Company, as defendant.
Plaintiffs allege that Teresa Casey was injured as a result of
ingesting guaifenesin/phenylpropanolamine of which the Company was the
designer, constructor, manufacturer, producer, marketer, seller and
distributor. Plaintiffs have alleged nine causes of action of product
liability, tort liability, negligence, breach of implied and express
warranties and violation of the Washington Consumer Protection Act.
Plaintiffs seek unspecified damages, attorney's fees, prejudgment
interest, punitive damages and such other relief as the court deems
just. The Company has denied the material allegations of the complaint,
believes it has meritorious defenses to the complaint and plans to
vigorously defend the action.
On or about August 13, 2002, the Company, as plaintiff, commenced a
lawsuit against General Star Indemnity Company, G.P. Insurance Agency,
Inc. and Mortsan General Agency, Inc., as defendants. The lawsuit arose
from General Star's refusal to cover or defend the Company under an
insurance policy with respect to the Casey action above. The Company
seeks a declaratory judgment that General Star is obligated to cover
and defend the action and seeks damages, costs and attorney's fees for
fraud misrepresentation and other claims.
It is reasonably possible that the Company may incur a liability as a
result of the resolution of these related matters. However, these
matters have not been resolved and the Company is not able to estimate
the potential loss or range of potential loss that may eventually
become due. Therefore no adjustments have been made in the consolidated
financial statements for any amounts that may be due from or to the
Company, as a result of the resolution of these matters.
F-20
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - Economic Dependency
-------------------
Major Customers
---------------
The Company had the following customer concentrations as of December
31, 2002 and 2001 and for each of the three years in the period ended
December 31, 2002:
Sales - Percent of Revenue Accounts Receivable
2002 2001 2000 2002 2001
---------- ---------- ---------- ---------- ----------
Customer A ** -- 19% * $ -- $ 771,363
Customer B 9% 22% 35% 179,415 562,722
Customer C 39% 20% * 2,691,230 2,114,747
Customer D * * 11% 227,456 176,548
* Sales to customers were less than 10%
** This customer is the minority owner of the Subsidiary.
Major Suppliers
---------------
The Company purchased materials from three suppliers totaling
approximately 59%, 65% and 53% of the Company's total purchases, during
the years ended December 31, 2002, 2001 and 2000, respectively. At
December 31, 2002 and 2001 amounts due to these suppliers included in
accounts payable, were $2,323,000 and $1,895,000, respectively.
NOTE 11 - Capital Stock Exchange Agreement
--------------------------------
On November 25, 2002, the Company and its stockholders entered into a
Capital Stock Exchange Agreement (the "Exchange Agreement") with Atec
Group, Inc. ("Atec"), a publicly held company. Pursuant to the Exchange
Agreement, the Company's stockholders will exchange all of their shares
of Company common stock, for shares of Atec Common Stock and Series K
Convertible Preferred Stock ("Series K"), which will total
approximately 48% of Atec's voting securities after the transaction is
consummated as follows: (i) 75% of the voting securities to be issued
will be Atec Common Stock, and (ii) 25% of the voting securities to be
issued will be the Atec Series K Stock.
Each share of Series K stock is entitled to one vote, voting as a class
with the holders of Atec Common Stock. It also is entitled to receive
dividends to the same extent and in the same amounts as Atec Common
Stock. The Series K Stock is convertible into shares of Atec Common
Stock, no sooner than one year after the closing of the acquisition,
upon the happening of any of the following events (the "Triggering
Events"): (i) Atec is deemed by AMEX to be in compliance with
applicable listing standards; (ii) deemed by another exchange to be in
compliance with its applicable listing standards in the event Atec's
securities are listed on such exchange; or (iii) Atec is no longer
F-21
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Capital Stock Exchange Agreement, continued
--------------------------------
listed on AMEX, the Nasdaq National Market or SmallCap Market, or the
New York Stock Exchange. Upon the occurrence of any of the above
Triggering Events, the Series K stock becomes convertible into an
aggregate total number of shares of Atec Common Stock in accordance
with a defined formula, which assumes the conversion of Atec Series A,
B, C and J convertible Preferred Stock into Atec Common Stock. The
Series A, B and C are voting securities. The net effect of the
conversion feature, which has been deemed to be a contingent event,
together with the shares of Atec Common Stock issued at closing, would
be to issue to Interpharm stockholders, Atec Common Stock totaling
approximately 80% of the total number of shares of Common Stock and
voting convertible preferred stock, outstanding as of the date of the
Triggering Event, after giving effect to the conversion, less shares of
Common Stock which may be issued between the date of the closing of the
acquisition and the date of the Triggering Event arising out of
obligations which arose after the date of closing.
Consummation of the Exchange Agreement is subject to various items,
including: (i) approval by Atec's stockholders, and (ii) a sale of
substantially all of Atec's assets (and assumption of liabilities) to
an entity owned by certain members of Atec's present management.
Pro Forma Earnings Per Share
----------------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per
Share". SFAS No. 128 requires the presentation of basic and diluted
Earnings Per Share ("EPS"). Basic EPS includes no dilution and is
computed by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS includes the potential dilution that could occur if
potentially convertible securities were converted.
For accounting purposes, the Company is the acquirer in the proposed
transaction and such transaction will be treated as a recapitalization
of the Company. As described above, the number of shares of Atec Common
Stock and Series K stock to be exchanged for the Interpharm common
stock is dependent upon the number of shares of Atec Common Stock
outstanding at closing. Assuming that the total number of shares of
Atec Common Stock outstanding at closing is 8,026,128 (based upon the
actual number of shares of Atec Common Stock outstanding as of March
30, 2003), Interpharm stockholders would receive 5,783,533 shares of
Atec Common Stock and 1,927,844 shares of Series K. This share exchange
has been given retroactive application in the pro forma earnings per
share calculation for all periods presented. Pursuant to SFAS No. 128
and EITF Topic D-95, the Company has used the two-class method to
calculate the effect of the participating Series K preferred stock on
the calculation of Basic EPS. The if-converted method has been used to
calculate the effect of the participating Series K preferred stock on
Diluted EPS. Pro forma Basic and Diluted EPS for the years ended
December 31, 2002, 2001 and 2000 is as follows:
F-22
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Capital Stock Exchange Agreement, continued
--------------------------------
2002 2001 2000
----------- ----------- -----------
Numerator:
Net income $ 1,050,419 $ 514,565 $ 337,764
Net income attributable to preferred stockholders 262,605 128,641 84,441
----------- ----------- -----------
Numerator for pro forma basic EPS 787,814 385,924 253,323
Effect of dilutive securities:
Net income attributable to preferred stockholders 262,605 128,641 84,441
----------- ----------- -----------
Numerator for pro forma diluted EPS $ 1,050,419 $ 514,565 $ 337,764
=========== =========== ===========
Denominator:
Denominator for basic EPS
Weighted average shares outstanding 5,783,533 5,783,533 5,783,533
Effect of dilutive securities:
Convertible Series K preferred stock 26,770,731 26,770,731 26,770,731
----------- ----------- -----------
Denominator for pro forma diluted EPS 32,554,264 32,554,264 32,554,264
=========== =========== ===========
Pro forma basic EPS $ .14 $ .07 $ .04
Pro forma diluted EPS $ .03 $ .02 $ .01
F-23
APPENDIX C
[vFinance Investments, Inc. Letterhead]
December 17, 2002
Board of Directors
ATEC Group, Inc.
69 Mall Drive
Commack, NY 11725
Gentlemen:
You have requested that we render our opinion as to the fairness, from
a financial point of view, to the shareholders of ATEC Group, Inc., a Delaware
corporation ("ATEC"), of the transaction (the "Transaction") whereby the Company
intends to acquire all of the shares of Interpharm, Inc. ( "Interpharm") from
the holders of Interpharm Common Stock through a Capital Stock Exchange
Agreement.
vFinance Investments, Inc. (the "Firm"), as part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We are familiar with ATEC
and its current operations, having conducted a due diligence review of ATEC in
connection with the rendering of this opinion and are familiar with Interpharm
and its current operations having conducted a complete due diligence review in
connection with the proposed Transaction.
In connection with the review and analysis performed to render our
opinion, among other things, we have:
i. Reviewed the periodic reports under Sections 13, 14, and 15(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), certain interim reports of ATEC, as well as
the financial statements prepared by the management of ATEC;
ii. Reviewed certain internal financial analyses for ATEC prepared
by its management;
iii. Held discussions with members of the senior management of ATEC
regarding the strategic rationale for, and potential benefits
of, the transaction and the past and current business
operations, financial condition and future prospects of the
company;
iv. Reviewed certain publicly available documents relating to
ATEC;
v. Reviewed internal detailed financial statements provided to us
by ATEC;
vi. Reviewed publicly available data and information for companies
which we have determined to be comparable to ATEC;
vii. Reviewed available research reports for companies which we
have determined to be comparable to ATEC;
viii. Reviewed the financial terms of other recent transactions
deemed similar.
ix. Conducted such other financial analyses and examinations and
considered such other financial, economic and market criteria
as we have determined to be appropriate for purposes of this
opinion.
x. Reviewed the Capital Stock Exchange Agreement between
Interpharm, Inc. and ATEC Group, Inc. dated November 25, 2002
and all accompanying schedules and exhibits including but not
limited to the certificate of designation, preferences and
rights of Series K Preferred Stock.
xi. Reviewed internal detailed financial statements provided to us
by Interpharm.
xii. Reviewed publicly available data and information for companies
that we have determined to be comparable to Interpharm.
xiii. Reviewed the Registration Rights Agreements between ATEC
Group, Inc. and the Interpharm Common holders.
We have relied upon the accuracy and completeness of all of the
financial and other information reviewed by us and have assumed such accuracy
and completeness for purposes of rendering this opinion. In that regard, we have
assumed with ATEC's consent that the financial forecasts provided by the
managements of ATEC has been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of the management of ATEC. Our
advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of ATEC in connection with
its consideration of the transaction.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion as of the date hereof that
the acquisition offer, based on a currently issued and outstanding 8,300,000
shares of ATEC Common Stock, ATEC Preferred Stock convertible into a maximum of
475,000 shares and at or in the money options convertible into 6,038,200 shares
of ATEC Common Stock, consisting of shares of ATEC Common Stock and shares of
newly designated
2
Series K Convertible Preferred Stock to be issued to Interpharm as per the
Capital Stock Exchange Agreement is fair, from a financial point of view, to
holders of the ATEC common stock.
This Opinion is furnished for your benefit and this opinion is not
intended to be and does not constitute a recommendation to any stockholder as to
how such stockholder should vote in connection with the proposed Transaction.
This Opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in this Opinion and our
engagement letter, and subject to the understanding that the obligations of the
Firm hereunder are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of the Firm shall be
subjected to any personal liability whatsoever to any person, nor will any such
claim be asserted by or on behalf of you or your affiliates.
We have tried to apply objective measures of value in rendering our
Opinion. You understand, however, that such a valuation necessarily is based on
some subjective interpretations of value. We understand that we are not
obligated to revise our opinion due to events and fluctuating economic
conditions occurring subsequent to the date of this Opinion.
We have been engaged to render an opinion as to whether the
consideration in the proposed transaction is fair, from a financial point of
view, to the shareholders of the Company, and will receive a fee in connection
with the delivery of this opinion, which is not contingent upon the consummation
of the Transaction.
We hereby consent to the use of this opinion in any public disclosure
of ATEC in which it is required by law, rule, or regulation to be disclosed.
Very Truly Yours,
VFINANCE INVESTMENTS, INC.
By: /s/
----------------------------
3
APPENDIX D
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ATEC GROUP, INC.
ATEC GROUP, INC. (the "Corporation"), a Corporation organized and
existing under and by virtue of the General Corporation law of the State of
Delaware, does hereby certify
1. Pursuant to Section 242 of the General Corporation Law, the Board
of Directors of the Company duly adopted a resolution setting forth a proposed
amendment of the Certificate of Incorporation of the Corporation, as follows:
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by striking out the whole of Article FIRST thereof and
inserting in lieu thereof a new Article FIRST to read in its entirety
as follows:
FIRST: The name of the corporation is Interpharm Holdings,
Inc. (the "Corporation").
2. That the said amendment has been duly adopted in accordance with
Section 242 and Section 222 of the General Corporation Law by the affirmative
vote of the holders of the majority of the stock of the Corporation.
IN WITNESS WHEREOF, said corporation has caused this Certificate to be
signed by ______________, its President and _______________, its Secretary, on
this _____________ day of ____________________.
---------------------------
, President
---------------------------
, Secretary
APPENDIX E
EXECUTION COPY
ASSET PURCHASE AGREEMENT
BETWEEN
BAAR GROUP, INC.
AND
ATEC GROUP, INC.
November 25, 2002
TABLE OF CONTENTS
1. DEFINITIONS...........................................................1
2. BASIC TRANSACTION.....................................................4
(a) Purchase and Sale of Assets................................4-5
(b) Assumption of Liabilities....................................5
(c) Purchase Price...............................................5
(d) The Closing..................................................5
(e) Deliveries at the Closing....................................5
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER..........................6
(a) Organization of the Seller...................................6
(b) Authorization of Transaction.................................6
(c) Noncontravention...........................................6-7
(d) Brokers' Fees................................................7
(e) Title to Assets..............................................7
(f) Subsidiaries.................................................7
(g) Financial Statements.........................................7
(h) Events Subsequent to Most Recent Fiscal Year End...........7-8
(i) Undisclosed Liabilities......................................8
(j) Legal Compliance.............................................8
(k) Tax Matters..................................................8
(l) Real Property................................................8
(m) Intellectual Property......................................8-9
(n) Inventory....................................................9
(o) Contracts.................................................9-10
(p) Notes and Accounts Receivable...............................10
(q) Powers of Attorney..........................................10
(r) Insurance...................................................10
(s) Litigation..................................................10
(t) Product Warranty.........................................10-11
(u) Employees...................................................11
(v) Employee Benefits........................................11-12
(w) Environment, Health, and Safety.............................12
(x) Disclosure..................................................12
(y) Investment..................................................12
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER..........................13
(a) Organization of the Buyer...................................13
(b) Authorization of Transaction................................13
(c) Noncontravention............................................13
(d) Brokers' Fees...............................................13
(e) Financial Condition.........................................13
(f) Seller's Representations and Warranties.....................13
ii
5. PRE-CLOSING COVENANTS.............................................13-14
(a) General.....................................................14
(b) Notices and Consents........................................14
(c) Operation of Business.......................................14
(d) Preservation of Business....................................14
(e) Full Access.................................................14
(f) Notice of Developments......................................14
6. CONDITIONS TO OBLIGATION TO CLOSE....................................14
(a) Conditions to Obligation of the Buyer....................14-15
(b) Conditions to Obligation of the Seller...................15-17
7. TERMINATION..........................................................17
(a) Termination of Agreement.................................17-18
(b) Effect of Termination.......................................18
8. MISCELLANEOUS........................................................18
(a) Survival of Representations and Warranties..................18
(b) Press Releases and Public Announcements.....................18
(c) No Third-Party Beneficiaries................................18
(d) Entire Agreement............................................18
(e) Succession and Assignment...................................18
(f) Counterparts................................................18
(g) Headings....................................................19
(h) Notices..................................................19-20
(i) Governing Law...............................................21
(j) Amendments and Waivers......................................21
(k) Severability................................................21
(l) Expenses....................................................21
(m) Construction.............................................21-22
(n) Incorporation of Exhibits and Schedules.....................22
(o) Limitations On Representations And Warranties...............22
(p) Cooperation Following The Closing...........................22
(q) Specific Performance........................................22
(r) Submission to Jurisdiction...............................22-23
(s) Employee Benefits Matters...................................23
(t) Bulk Transfer Laws..........................................23
Schedule 1= List of Acquired Assets
Schedule 2= List of Assumed Liabilities
Exhibit A= Form of Buyer 3 Year Note
Exhibit B= Form of Buyer 6 Month Note
Exhibit C= Form of Guarantee by Principals
Exhibit D= Form of Security Agreement
Exhibit E= Form of Bill of Sale and Assignments
Exhibit F= Form of Assumption
Exhibit G= Form of Side Agreements
Exhibit H= intentionally omitted
Exhibit I= Historical Financial Statements
Exhibit J= Form of Opinion of Counsel to the Seller \
Exhibit K= Form of Opinion of the counsel to Buyer
Disclosure Schedule = Exception to Representations and Warranties
-iii-
ASSET PURCHASE AGREEMENT
Agreement entered into as of November 25, 2002, by and between BAAR
GROUP, INC., a New York corporation (the "Buyer"), and ATEC GROUP, INC., a
Delaware corporation (the "Seller"). The Buyer and the Seller are referred to
individually herein as a "Party" and collectively herein as the "Parties."
This Agreement contemplates a transaction in which the Buyer will
purchase certain of the assets (and assume certain of the liabilities) of the
Seller in return for cash and the Buyer Note (the "Transaction").
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. Definitions.
"Acquired Assets" means all right, title, and interest in and to the
assets of the Seller set forth on Schedule 1.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Agreement" means this Asset Purchase Agreement.
"Assumed Liabilities" means the liabilities set forth on Schedule 2.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Buyer" has the meaning set forth in the preface above.
"Buyer 3 Year Note" has the meaning set forth in ss.2(c) below.
"Buyer 12 Month Note" has the meaning set forth in ss.2(c) below.
"Buyer Notes" shall mean the Buyer 3 Year Note and the Buyer 6 Month
Note.
"Cash" means cash and cash equivalents (including marketable securities
and short term investments) calculated in accordance with GAAP applied on a
basis consistent with the preparation of the Financial Statements.
"Closing" has the meaning set forth in ss.2(d) below.
1
"Closing Date" has the meaning set forth in ss.2(d) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Disclosure Schedule" has the meaning set forth in ss.3 below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan, or (d)
Employee Welfare Benefit Plan or material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec.
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec.
3(1).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Fairness Opinion" has the meaning set forth in ss.6(b)(iv) below.
"Financial Statement" has the meaning set forth in ss.3(g) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Guarantee" has the meaning set forth in ss.2(c) below.
"Included Personnel" has the meaning set forth in ss.3(u) below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
2
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium). Subject to Section
3(m)(i), all rights to the name "ATEC" remain with the Seller.
"Investment Banking Firm" has the meaning set forth in ss.6(b)(v)
below.
"Knowledge" means actual knowledge after reasonable investigation,
provided, the Knowledge of any of the Principals shall not be attributed to the
Seller or its directors, officers or employees. Knowledge of the Buyer shall be
deemed to include the Knowledge of the Principals.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Most Recent Balance Sheet" means the balance sheet contained within
the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in ss.3(g)
below.
"Most Recent Fiscal Year End" has the meaning set forth in ss.3(g)
below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Other Party" has the meaning set forth in ss.7(a)(ii) below.
"Party" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
3
"Principals" means the following persons who are stockholders of Buyer:
Ashok Rametra, B.J. Singh, Rajnish Rametra and Arvin Gulati.
"Purchase Price" has the meaning set forth in ss.2(c) below.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" has the meaning set forth in ss.2(c) below.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Seller" has the meaning set forth in the preface above.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Sec. 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Terminating Party" has the meaning set forth in ss.7(a)(ii) below.
"Transaction" has the meaning set forth in the preface above.
2. Basic Transaction.
(a) Purchase and Sale of Assets. On and subject to the terms and
conditions of this Agreement, the Buyer agrees to purchase
from the Seller, and the Seller agrees to sell, transfer,
convey, and deliver to the Buyer, all of the Acquired Assets
at the Closing for the consideration specified below in this
ss.2.
4
(b) Assumption of Liabilities. On and subject to the terms and
conditions of this Agreement, the Buyer agrees to assume and
become responsible for the Assumed Liabilities at the Closing.
The Buyer will not assume or have any responsibility, however,
with respect to any other obligation or Liability of the
Seller not included within the definition of Assumed
Liabilities.
(c) Purchase Price. The Buyer agrees to pay to the Seller at the
Closing $4,278,184 (the "Purchase Price"), subject to the
closing adjustments set forth below, by delivery of (i) its
promissory note (the "Buyer 3 Year Note") in the form of
Exhibit A attached hereto in the aggregate principal amount of
$750,000; (ii) its promissory note (the "Buyer 12 Month Note")
in the form of Exhibit B attached hereto in the aggregate
principal amount of $1,000,000; and (ii) cash for the balance
of the Purchase Price payable by wire transfer or delivery of
other immediately available funds. The Buyer 3 Year Note shall
bear an adjustable interest at the rate of one and a half
percent (1.5%) per annum in excess of the prime rate as
published by Citibank, from time to time, with all principal
and interest amortized over a three year period and payable in
equal monthly installments. The Buyer 12 Month Note shall bear
an adjustable interest at the rate of one and a half percent
(1.5%) per annum in excess of the prime rate as published by
Citibank, from time to time, with all principal and interest
amortized over a six month period and payable in equal monthly
installments. In addition, payment of all principal and
interest under each of the Buyer Notes shall be (i) guaranteed
by the Principals (other than B.J. Singh) and (ii) secured by
a security interest in substantially all of the assets of the
Buyer in accordance with a security agreement. The forms of
guarantee (the "Guarantee") and security agreement (the
"Security Agreement") are attached hereto as Exhibits C and D,
respectively.
The Purchase Price shall be adjusted at Closing, as follows:
(i) increased by an amount equal to thirty-four percent (34%)
of the income from operations from Albany, New York City and
New Jersey operations for the period commencing July 1, 2002
through and including the Closing Date; and (ii) reduced by an
amount equal to the expenses allocated to the Long Island, New
York operations (as agreed to between Seller and Buyer) for
the period commencing July 1, 2002 through and including the
Closing Date.
(d) The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices
of Silverman Sclar Byrne Shin & Byrne P.C. at 381 Park Avenue
South, New York, New York 10016, commencing at 9:00 a.m. local
time on the second business day following the satisfaction or
waiver of all conditions to the obligations of the Parties to
consummate the transactions contemplated hereby (other than
conditions with respect to actions the respective Parties will
take at the Closing itself) or such other date as the Parties
may mutually determine (the "Closing Date").
(e) Deliveries at the Closing. At the Closing: (i) the Seller will
deliver to the Buyer the various certificates, instruments,
and documents referred to in ss.6(a) below; (ii) the Buyer
will deliver to the Seller the various certificates,
5
instruments, and documents referred to in ss.6(b) below; (iii)
the Seller will execute, acknowledge (if appropriate), and
deliver to the Buyer (A) a bill of sale and assignments
(including, if applicable, Intellectual Property transfer
documents) in the form attached hereto as Exhibits E and (B)
such other instruments of sale, transfer, conveyance, and
assignment as the Buyer and its counsel reasonably may
request; (iv) the Buyer will execute, acknowledge (if
appropriate), and deliver to the Seller (A) an assumption in
the form attached hereto as Exhibit F and (B) such other
instruments of assumption as the Seller and its counsel
reasonably may request; Buyer will deliver to the Seller
agreements from the Principals who are employees of the Seller
to the effect that they acknowledge the termination of their
employment and employment agreements with the Seller and they
release the Sellers from any further obligations arising out
of such employment and employment agreements; (v) the Seller
and Buyer will execute and deliver to each other the side
agreements in the forms attached hereto as Exhibits G-1, G-2
and G-3; and (vi) the Buyer will deliver to the Seller the
consideration specified in ss.2(c) above.
3. Representations and Warranties of the Seller. The Seller represents and
warrants to the Buyer that to the Knowledge of the Seller, the statements
contained in this ss.3 are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then and
as though the Closing Date were substituted for the date of this Agreement
throughout this ss.3), except as set forth in the disclosure schedule
accompanying this Agreement and initialed by the Parties (the "Disclosure
Schedule"). The Disclosure Schedule will be arranged in paragraphs corresponding
to the lettered and numbered paragraphs contained in this ss.3.
(a) Organization of the Seller. The Seller is a corporation duly
organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation..
(b) Authorization of Transaction. Except for approval of the
stockholders of the Seller, which approval is a condition
precedent to the Closing of the Transaction, the Seller has
full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and, upon
approval of the stockholders of the Seller, to perform its
obligations hereunder. Without limiting the generality of the
foregoing, the board of directors of the Seller has duly
authorized the execution, delivery, and performance of this
Agreement by the Seller. This Agreement constitutes the valid
and legally binding obligation of the Seller, enforceable in
accordance with its terms and conditions, except as such
enforceability may be limited by general principals of equity
or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to or
affecting creditors generally.
(c) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the Transactions
(including the assignments and assumptions referred to in ss.2
above), will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental
agency, or court to which any of the Seller and its
Subsidiaries is subject or any provision of the charter or
6
bylaws of any of the Seller and its Subsidiaries or (ii)
conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require
any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which any of the Seller
and its Subsidiaries is a party or by which it is bound or to
which any of the Acquired Assets is subject (or result in the
imposition of any Security Interest upon any of the Acquired
Assets). None of the Seller and its Subsidiaries needs to give
any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement (including the
assignments and assumptions referred to in ss.2 above).
(d) Brokers' Fees. The Seller has not employed any broker or
finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with this Agreement
of the Transaction.
(e) Title to Assets. The Seller and its Subsidiaries have good and
marketable title to, or a valid leasehold interest in, the
Acquired Assets.
(f) Subsidiaries.ss.3(f) of the Disclosure Schedule sets forth for
each Subsidiary of the Seller its name and jurisdiction of
incorporation and the extent to which it owns any of the
Acquired Assets.
(g) Financial Statements. Attached hereto as Exhibit I are the
following financial statements (collectively the "Financial
Statements"): (i) audited consolidated balance sheets as of
June 30, 2002 and 2001 and statements of income, changes in
stockholders' equity, and cash flow for the fiscal years ended
June 30, 2002, 2001 and 2000 (June 30, 2002 being the "Most
Recent Fiscal Year End") for the Seller and its Subsidiaries;
and (ii) an unaudited consolidated balance sheet as of
September 30, 2002 and statements of income, changes in
stockholders' equity, and cash flow (the "Most Recent
Financial Statements") for the three and nine months ended
September 30, 2002 and 2001 for the Seller and its
Subsidiaries. The Financial Statements (including the Notes
thereto) have been prepared in accordance with GAAP applied on
a consistent basis throughout the periods covered thereby
(except such changes required by change in GAAP and approved
by the certified public accountants of ATEC), present fairly
the financial condition of the Seller and its Subsidiaries as
of such dates and the results of operations of the Seller and
its Subsidiaries for such periods, are correct and complete,
and are consistent with the books and records of the Seller
and its Subsidiaries (which books and records are correct and
complete); provided, however, that the Most Recent Financial
Statements are subject to normal year-end adjustments (which
will not be material individually or in the aggregate) and
lack complete footnote disclosures and other presentation
items.
(h) Events Subsequent to Most Recent Fiscal Year End. Since the
Most Recent Fiscal Year End, there has not been any material
adverse change in the business, financial condition,
operations, results of operations, or future prospects of any
of the Seller and its Subsidiaries that would materially
affect the Acquired Assets in an adverse manner.
7
(i) Undisclosed Liabilities. None of the Seller and its
Subsidiaries has any Liability that would materially affect
the Acquired Assets in an adverse manner (and to the best of
the Seller's Knowledge, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against any of them giving
rise to any Liability), except for (i) Liabilities set forth
in the Most Recent Balance Sheet (and/or in any notes
thereto); (ii) the Assumed Liabilities; and (iii) Liabilities
which have arisen after the date of the Most Recent Balance
Sheet in the Ordinary Course of Business (none of which
results from, arises out of, relates to, is in the nature of,
or was caused by any breach of contract, breach of warranty,
tort, infringement, or violation of law).
(j) Legal Compliance. Each of the Seller, its Subsidiaries, and
their respective Affiliates has complied with all applicable
laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder)
of federal, state, local, and foreign governments (and all
agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has
been filed or commenced against any of them alleging any
failure so to comply, for which the failure to so comply would
materially affect the Acquired Assets in an adverse manner.
(k) Tax Matters. There are no Security Interests on any of the
Acquired Assets that arose in connection with any failure (or
alleged failure) of the Seller to pay any Tax.
(l) Real Property. There is no real property included in the
Acquired Assets.
(m) Intellectual Property.
(i) The Seller and its Subsidiaries own or have the right
to use pursuant to license, sublicense, agreement, or
permission its Intellectual Property. All rights to
the names "ATEC" and "ATEC GROUP" and the logos
related thereto remain with the Seller until such
time as the Seller changes its name. Notwithstanding
the foregoing; until such time as the Seller changes
its name, the Seller shall license the foregoing
names and logos to the Buyer in perpetuity. If and
when the Seller changes its name, the foregoing names
and Logos shall transfer to the Buyer.
(ii) None of the Seller and its Subsidiaries has
interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual
Property rights of third parties, and none of the
directors and officers (and employees with
responsibility for Intellectual Property matters) of
the Seller and its Subsidiaries has received any
charge, complaint, claim, demand, or notice alleging
any such interference, infringement,
misappropriation, or violation (including any claim
that any of the Seller and its Subsidiaries must
license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge
of any of the directors and officers (and employees
with responsibility for Intellectual Property
matters) of the Seller and its Subsidiaries, no third
party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with
the Intellectual Property.
8
(iii) ss.3(m)(iii) of the Disclosure Schedule identifies
each license, agreement, or other permission which
any of the Seller and its Subsidiaries has granted to
any third party with respect to the Intellectual
Property.
(n) Inventory. The inventory of the Seller and its Subsidiaries is
valued at the lower of cost or market and consists of raw
materials and supplies, manufactured and purchased parts,
goods in process, and finished goods, all of which is
merchantable and fit for the purpose for which it was procured
or manufactured, and none of which is slow-moving, obsolete,
damaged, or defective.
(o) Contracts.ss.3(o) of the Disclosure Schedule lists the
following contracts and other agreements included in the
Acquired Assets to which any of the Seller and its
Subsidiaries is a party (collectively, the "Contracts"):
(i) any agreement (or group of related agreements) for
the lease of personal property to or from any Person
providing for lease payments in excess of $10,000 per
annum;
(ii) any agreement (or group of related agreements) for
the purchase or sale of raw materials, commodities,
supplies, products, or other personal property, or
for the furnishing or receipt of services, the
performance of which will extend over a period of
more than one year, result in a material loss to any
of the Seller and its Subsidiaries, or involve
consideration in excess of $10,000;
(iii) any agreement concerning a partnership or joint
venture;
(iv) any agreement concerning confidentiality or
noncompetition;
(v) any profit sharing, stock option, stock purchase,
stock appreciation, deferred compensation, severance,
or other material plan or arrangement for the benefit
of its current or former directors, officers, and
employees;
(vi) any collective bargaining agreement;
(vii) any agreement for the employment of any individual on
a full-time, part-time, consulting, or other basis
providing annual compensation in excess of $20,000 or
providing severance benefits;
(viii) any agreement under which it has advanced or loaned
any amount to any of its directors, officers, and
employees outside the Ordinary Course of Business;
(ix) any agreement under which the consequences of a
default or termination could have a material adverse
effect on any of the Acquired Assets; or
(x) any other agreement (or group of related agreements)
the performance of which involves consideration in
excess of $10,000.
9
The Seller has delivered to the Buyer a correct and complete copy of
each written agreement listed in ss.3(o) of the Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in ss.3(o) of the Disclosure Schedule. With respect
to each such agreement: (A) the agreement is legal, valid, binding, enforceable,
and in full force and effect; (B) the agreement will continue to be legal,
valid, binding, enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby (including
the assignments and assumptions referred to in ss.2 above); (C) no party is in
breach or default, and no event has occurred which with notice or lapse of time
would constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any provision
of the agreement.
(p) Notes and Accounts Receivable. All notes and accounts
receivable of the Seller and its Subsidiaries included in the
Acquired Assets are reflected properly on their books and
records, are valid receivables subject to no setoffs or
counterclaims, are current and collectible, and will be
collected in accordance with their terms at their recorded
amounts, subject only to the reserve for bad debts set forth
in the Most Recent Balance Sheet (and/or in any notes thereto)
as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of the Seller
and its Subsidiaries.
(q) Powers of Attorney. There are no outstanding powers of
attorney executed on behalf of any of the Seller and its
Subsidiaries related to or that affect the Acquired Assets.
(r) Insurance. There are no insurance policies or insurance
included in the Acquired Assets.
(s) Litigation. ss.3(s) of the Disclosure Schedule sets forth each
instance related to or that affects the Acquired Assets in
which any of the Seller and its Subsidiaries (i) is subject to
any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party or, to the Knowledge of any of
the directors and officers (and employees with responsibility
for litigation matters) of the Seller and its Subsidiaries, is
threatened to be made a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator. None
of the actions, suits, proceedings, hearings, and
investigations set forth in ss.3(s) of the Disclosure Schedule
could result in any material adverse change in the Acquired
Assets. None of the stockholders of the Seller and the
directors and officers (and employees with responsibility for
litigation matters) of the Seller and its Subsidiaries has any
reason to believe that any such action, suit, proceeding,
hearing, or investigation may be brought or threatened against
any of the Seller and its Subsidiaries.
(t) Product Warranty. To the extent included in the Acquired
Assets, each product manufactured, sold, leased, or delivered
by any of the Seller and its Subsidiaries has been in
conformity with all applicable contractual commitments and all
express and implied warranties, and none of the Seller and its
Subsidiaries has any Liability (and there is no Basis for any
present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any
10
of them giving rise to any Liability) for replacement or
repair thereof or other damages in connection therewith,
subject only to the reserve for product warranty claims set
forth in the Most Recent Balance Sheet (and/or in any notes
thereto) as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice
of the Seller and its Subsidiaries.
(u) Employees. To the Knowledge of any of the directors and
officers (and employees with responsibility for employment
matters) of the Seller and its Subsidiaries, no executive, key
employee, or group of employees whose employment and/or
consulting agreements are included in the Acquired Assets
(collectively, the "Included Personnel") has any plans to
terminate employment with any of the Seller and its
Subsidiaries. None of the Seller and its Subsidiaries is a
party to or bound by any collective bargaining agreement
covering any Included Personnel, nor has any of them
experienced any strikes, grievances, claims of unfair labor
practices, or other collective bargaining disputes related to
any Included Personnel. None of the Seller and its
Subsidiaries has committed any unfair labor practice with
regard to any Included Personnel. None of the directors and
officers (and employees with responsibility for employment
matters) of the Seller and its Subsidiaries has any Knowledge
of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to
any Included Personnel.
(v) Employee Benefits.
(i) ss.3(v) of the Disclosure Schedule lists each
Employee Benefit Plan that any of the Seller and its
Subsidiaries maintains or to which any of the Seller
and its Subsidiaries contributes that covers Included
Personnel.
(A) Each such Employee Benefit Plan (and,
insurance contract, or fund) complies in
form and in operation in all respects with
the applicable requirements of ERISA, the
Code, and other applicable laws.
(B) All required reports and descriptions
(including Form 5500 Annual Reports, Summary
Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed
appropriately with respect to each such
Employee Benefit Plan.
(C) All contributions (including all employer
contributions and employee salary reduction
contributions) which are due have been paid
to each such Employee Benefit Plan which is
an Employee Pension Benefit Plan and all
contributions for any period ending on or
before the Closing Date which are not yet
due have been paid to each such Employee
Pension Benefit Plan or accrued in
accordance with the past custom and practice
of the Seller and its Subsidiaries. All
premiums or other payments for all periods
ending on or before the Closing Date have
been paid with respect to each such Employee
Benefit Plan .
(D) Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan meets the
requirements of a "qualified plan" under
Code Sec. 401(a)
11
(E) The Seller has delivered to the Buyer
correct and complete copies of the plan
documents and summary plan descriptions, the
most recent determination letter received
from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all
related trust agreements, insurance
contracts, and other funding agreements
which implement each such Employee Benefit
Plan.
(ii) None of the Seller and its Subsidiaries maintains or
ever has maintained or contributes, ever has
contributed, or ever has been required to contribute
to any Employee Welfare Benefit Plan providing
medical, health, or life insurance or other
welfare-type benefits for current or future retired
or terminated employees, their spouses, or their
dependents (other than in accordance with Code Sec.
4980B).
(w) Environment, Health, and Safety. Each of the Seller, its
Subsidiaries, and their respective Affiliates has complied
with all Environmental, Health, and Safety Laws, and no
action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or
commenced against any of them alleging any failure so to
comply, for which the failure to so comply would materially
affect the Acquired Assets in an adverse manner.
(x) Disclosure. The representations and warranties contained in
this ss.3 do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements and information contained in this ss.3 not
misleading.
(y) Investment. The Seller (i) understands that the Buyer Notes
have not been, and will not be, registered under the
Securities Act, or under any state securities laws, and is
being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering
pursuant to section 4(2) of the Securities Act and applicable
state securities laws; (ii) is acquiring the Buyer Notes
solely for its own account for investment purposes, and not
with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain
information concerning the Buyer and has had the opportunity
to obtain additional information as desired in order to
evaluate the merits and the risks inherent in holding the
Buyer Notes, (v) is able to bear the economic risk and lack of
liquidity inherent in holding the Buyer Notes, and (vi) the
Seller acknowledges that the Buyer Notes shall bear a legend
in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
sold, hypothecated or otherwise transferred or disposed of in
the absence of such registration, unless an exemption from the
requirement of such registration is available under the
circumstances at the time obtaining and demonstrated by
opinion of counsel satisfactory to the Buyer."
4. Representations and Warranties of the Buyer. The Buyer represents and
warrants to the Seller that the statements contained in this ss.4 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
12
substituted for the date of this Agreement throughout this ss.4), except as set
forth in the Disclosure Schedule. The Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs contained in
this ss.4.
(a) Organization of the Buyer. The Buyer is a corporation duly
organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation.
(b) Authorization of Transaction. The Buyer has full power and
authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid
and legally binding obligation of the Buyer, enforceable in
accordance with its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions
contemplated hereby (including the assignments and assumptions
referred to in ss.2 above), will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Buyer
is subject or any provision of its charter or bylaws or (ii)
conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify, or cancel, or require
any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Buyer is a party
or by which it is bound or to which any of its assets is
subject. The Buyer does not need to give any notice to, make
any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order for
the Parties to consummate the transactions contemplated by
this Agreement (including the assignments and assumptions
referred to in ss.2 above).
(d) Brokers' Fees. Neither the Buyer nor any of the Principals has
employed any broker or finder or incurred any liability for
any brokerage fees, commissions or finder's fees in connection
this Agreement or the Transaction.
(e) Financial Condition. At Closing, the Buyer shall have cash of
at least $500,000 and no material liabilities.
(f) Seller's Representations and Warranties. To the Knowledge of
the Buyer, each and every representation and warranty of the
Seller contained in Section 3 of this Agreement and in the
Seller's Disclosure Statement is true, complete and correct in
all material respect.
5. Pre-Closing Covenants. The Parties agree as follows with respect to the
period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use its reasonable best
efforts to take all action and to do all things necessary,
proper, or advisable in order to consummate and make effective
the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set
forth in ss.7 below).
13
(b) Notices and Consents. The Seller and the Buyer will give (and
will cause each of the Seller's Subsidiaries to give) any
notices to third parties, and the Seller will use its
reasonable best efforts (and will cause each of its
Subsidiaries to use its reasonable best efforts) to obtain any
third party consents, that the Buyer reasonably may request in
connection with the matters referred to in ss.3(c) above. Each
of the Parties will (and the Seller will cause each of its
Subsidiaries to) give any notices to, make any filings with,
and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred
to in ss.3(c) and ss.4(c) above.
(c) Operation of Business. The Seller will not (and will not cause
or permit any of its Subsidiaries) to take action out of the
Ordinary Course of Business, if such action would materially
affect the Acquired Assets in an adverse manner.
(d) Preservation of Business. The Seller will keep (and will cause
each of its Subsidiaries to keep) its business and properties
substantially intact, including its present operations,
physical facilities, working conditions, and relationships
with lessors, licensors, suppliers, customers, and employees
except to the extent that keeping its business and properties
substantially intact does not materially affect the Acquired
Assets in an adverse manner.
(e) Full Access. The Seller will permit (and will cause each of
its Subsidiaries to permit) representatives of the Buyer to
have full access at all reasonable times, and in a manner so
as not to interfere with the normal business operations of the
Seller and its Subsidiaries, to all premises, properties,
personnel, books, records (including Tax records), contracts,
and documents of or pertaining to each of the Seller and its
Subsidiaries to the extent that such access reasonably relates
to the Buyer's due diligence investigation of the Acquired
Assets.
(f) Notice of Developments. Each Party will give prompt written
notice to the other Party of any material adverse development
causing a breach of any of its own representations and
warranties in ss.3 and ss.4 above. No disclosure by any Party
pursuant to this ss.5(f), however, shall be deemed to amend or
supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of the
Buyer to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions:
(i) the representations and warranties set forth inss.3
above shall be true and correct in all material
respects at and as of the Closing Date;
14
(ii) the Seller shall have performed and complied with all
of its covenants hereunder in all material respects
through the Closing;
(iii) the Seller and its Subsidiaries shall have procured
all of the third party consents specified inss.5(b)
above;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local,
or foreign jurisdiction wherein an unfavorable
injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B)
cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Buyer to own
the Acquired Assets;
(v) the Seller shall have delivered to the Buyer a
certificate to the effect that each of the conditions
specified above inss.6(a)(i)-(iv) is satisfied in all
respects;
(vi) the relevant parties shall have entered into side
agreement in form and substance as set forth in
Exhibit G-1 (agreement pursuant to which the Seller
licenses the "Atec Group" name and logo to the Buyer)
and the same shall be in full force and effect;
(vii) the Buyer shall have received from counsel to the
Seller an opinion in form and substance as set forth
in Exhibit J attached hereto, addressed to the Buyer,
and dated as of the Closing Date;
(viii) the Buyer shall have obtained a minimum of $500,000
in financing; and
(ix) all actions to be taken by the Seller in connection
with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments,
and other documents required to effect the
transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Buyer.
The Buyer may waive any condition specified in this ss.6(a) if it
executes a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Seller. The obligation of the
Seller to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions:
(i) the representations and warranties set forth inss.4
above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) the Buyer shall have performed and complied with all
of its covenants hereunder in all material respects
through the Closing;
(iii) the Buyer shall have delivered to the Seller
agreements from the Principals who are employees of
the Seller and from John Pakiam to the effect that
they acknowledge the termination of their employment
15
and employment agreements with the Seller and they
release the Seller from any further obligations
arising out of such employment and employment
agreements (including, but not limited to any rights
upon termination, or any unvested stock appreciation
rights, options, warrants or other rights to acquire
stock of the Seller);
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local,
or foreign jurisdiction wherein an unfavorable
injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B)
cause any of the transactions contemplated by this
Agreement to be rescinded following consummation (and
no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(v) The Seller's shall have obtained an opinion (the
"Fairness Opinion") from a recognized investment
banking firm or other firm experienced in business
appraisals (the "Investment Banking Firm") chosen by
a committee of its Board of Directors (a majority of
whose members are independent directors) to the
effect that the Purchase Price to be paid for the
Acquired Assets is fair;
(vi) the Seller's stockholders shall have approved this
Agreement and the Transactions in conformance with
the requirements of the Delaware General Corporation
Law and the rules of the American Stock Exchange;
(vii) the Seller shall have complied with all relevant
requirements of the American Stock Exchange and
determined that effectuation of the Transactions will
not result in the delisting of the Seller's
securities from the American Stock Exchange;
(viii) the Buyer shall have delivered to the Seller a
certificate to the effect that each of the conditions
specified above in ss.6(b)(i)-(iv) is satisfied in
all respects;
(ix) the relevant parties shall have entered into side
agreements in form and substance as set forth in (a)
Exhibit C (the Guarantees by each of the Principals);
(b) Exhibit D (the Security Agreement); (c) Exhibit
G-2 (agreement pursuant to which the Buyer agrees to
deliver 50% of the gross proceeds from the sale,
lease or other form of disposition of any interest in
or to any of the aforementioned Acquired Assets
effected during the one year period commencing upon
the Closing Date); and (d) Exhibit G-3 (agreement
pursuant to which the Buyer agrees to pay to Seller
certain New York State receivables upon receipt of
such receivables); and the same shall be in full
force and effect;
(x) the Buyer shall have delivered the consideration
specified in ss.2(c), including, but not limited to,
the Buyer 3 Year Note and the Buyer 12 Month Note;
(xi) the transaction by which all of the issued and
outstanding capital stock of Interpharm Inc., a New
York corporation, are exchanged for the capital stock
of the Seller shall have been consummated;
16
(xii) the Seller shall have received from counsel to the
Buyer an opinion in form and substance as set forth
in Exhibit K attached hereto, addressed to the
Seller, and dated as of the Closing Date;
(xiii) the Seller shall have entered into a Pledge and
Security Agreement with Alan Prefer wherein Alan
Prefer pledges 100,000 shares of common stock of
Buyer as security for the full performance of his
obligations under than certain promissory note dated
April 1, 2002, in the original principal amount of
$40,000, and
(xiv) all actions to be taken by the Buyer in connection
with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments,
and other documents required to effect the
transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Seller.
The Seller may waive any condition specified in this ss.6(b) if it executes a
writing so stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(i) the Buyer and the Seller may terminate this Agreement
by mutual written consent at any time prior to the
Closing;
(ii) the Buyer or Seller (the "Terminating Party") may
terminate this Agreement by giving written notice to
the other party (the "Other Party") on or before the
30 days following the date of this Agreement,
provided, however, that should the Terminating Party
terminate this Agreement pursuant to this
ss.7(a)(ii), the Terminating Party shall pay to the
Other Party the Other Party's accountable expenses
associated with the Transaction up to a maximum of
$250,000;
(iii) the Buyer may terminate this Agreement by giving
written notice to the Seller at any time prior to the
Closing (A) in the event the Seller has breached any
material representation, warranty, or covenant
contained in this Agreement in any material respect,
the Buyer has notified the Seller of the breach, and
the breach has continued without cure for a period of
30 days after the notice of breach or (B) if the
Closing shall not have occurred on or before February
1, 2003, by reason of the failure of any condition
precedent under ss.6(a) hereof (unless the failure
results primarily from the Buyer itself breaching any
representation, warranty, or covenant contained in
this Agreement); and
(iv) the Seller may terminate this Agreement by giving
written notice to the Buyer at any time prior to the
Closing (A) in the event the Buyer has breached any
material representation, warranty, or covenant
contained in this Agreement in any material respect,
the Seller has notified the Buyer of the breach and
the breach has continued without cure for a period of
30 days after the notice of breach or (B) if the
Closing shall not have occurred on or before February
1, 2003, by reason of the failure of any condition
17
precedent under ss.6(b) hereof (unless the failure
results primarily from the Seller itself breaching
any representation, warranty, or covenant contained
in this Agreement).
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to ss.7(a) above, all rights and obligations of the
Parties hereunder shall terminate without any Liability of any
Party to any other Party (except for any Liability of any
Party then in breach).
8. Miscellaneous.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Parties contained in
this Agreement, or in any schedule, exhibit, document,
certificate or other instrument delivered by or on behalf of
the Parties pursuant to this Agreement shall survive the
Closing hereunder for a period of thirty-six (36) months after
the Closing Date; regardless of any investigation or
disclosure made by or on behalf of the Parties.
Notwithstanding the foregoing, if any schedule, exhibit,
document, certificate or other instrument delivered by or on
behalf of the Parties pursuant to this Agreement specifically
states a different survival period, such different survival
period shall govern with regard to that document.
(b) Press Releases and Public Announcements. No Party shall issue
any press release or make any public announcement relating to
the subject matter of this Agreement without the prior written
approval of the other Party; provided, however, that any Party
may make any public disclosure it believes in good faith is
required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the
disclosing Party will use its reasonable best efforts to
advise the other Party prior to making the disclosure.
(c) No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties
and their respective successors and permitted assigns.
(d) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement between
the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties,
written or oral, to the extent they related in any way to the
subject matter hereof.
(e) Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and
their respective successors and permitted assigns. No Party
may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written
approval of the other Party.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same
instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
18
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice,
request, demand, claim, or other communication hereunder shall
be deemed duly given if (and then three business days after)
it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended
recipient as set forth below:
19
If to the Seller:
Atec Group, Inc.
69 Mall Drive
Commack, New York 11725
Attn: Jim Charles
Phone: (631) 543-2800
Fax: (631) 543-3780
Copy to:
Peter Silverman, Esq.
Silverman Sclar Byrne Shin & Byrne P.C.
381 Park Avenue South
New York, New York 10016
Phone: (212) 779-8600
Fax: (212) 779-8858
If to the Buyer:
Baar Group, Inc.
1762 Central Avenue
Albany, New York 12205
Attn: Ashok Rametra
Phone: (518) 452-3700
Fax: (518) 452-3939
Copy to:
Murray S. Carr, Esq.
1683 Western Avenue
Albany, New York 12203
Phone: (518) 862-0662
Fax: (518) 862-0921
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
20
(i) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement
shall be governed by and construed in accordance with the
domestic laws of the State of New York without giving effect
to any choice or conflict of law provision or rule (whether of
the State of New York or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other
than the State of New York. Notwithstanding the foregoing, the
corporate laws of the state of Delaware shall govern all
issues concerning the relative rights of the Seller and its
stockholders.
(j) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing
and signed by the Buyer and the Seller. The Seller may consent
to any such amendment at any time prior to the Closing with
the prior authorization of its board of directors; provided,
however, that the Seller's ability to consent to any such
amendment effected after the stockholders of the Seller have
approved this Agreement will be subject to the restrictions
contained in the Delaware General Corporation Law. No waiver
by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not,
shall be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder
or affect in any way any rights arising by virtue of any prior
or subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction
shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Each of the Buyer, the Seller and its Subsidiaries
will bear his or its own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby. The Seller agrees
that none of its Subsidiaries has borne or will bear any of
the costs and expenses of the Seller (including any of their
legal fees and expenses) in connection with this Agreement or
any of the transactions contemplated hereby.
(m) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the
Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship
of any of the provisions of this Agreement. Any reference to
any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word
"including" shall mean including without limitation. Nothing
in the Disclosure Schedule shall be deemed adequate to
disclose an exception to a representation or warranty made
herein unless the Disclosure Schedule identifies the exception
with reasonable particularity and describes the relevant facts
in reasonable detail. Without limiting the generality of the
foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to
disclose an exception to a representation or warranty made
herein (unless the representation or warranty has to do with
the existence of the document or other item itself). The
21
Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance.
If any Party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating
to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not
detract from or mitigate the fact that the Party is in breach
of the first representation, warranty, or covenant.
(n) Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein
by reference and made a part hereof.
(o) Limitations On Representations And Warranties. Except for the
representations and warranties set forth in this Agreement,
the Acquired Assets are being sold "AS IS, WHERE IS, AND WITH
ALL FAULTS." EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET
FORTH IN THIS AGREEMENT, THE SELLER MAKES NO REPRESENTATIONS
OR WARRANTIES WHATSOEVER CONCERNING THE ASSUMED LIABILITIES,
THE AQUIRED ASSETS, OR ANY OTHER MATTER, EXPRESS OR IMPLIED,
ORAL, OR WRITTEN. THE SELLER HEREBY SPECIFICALLY DISCLAIMS THE
IMPLIED WARRANTY OF MERCHANTABILITY AND THE IMPLIED WARRANTY
OF FITNESS FOR A PARTICULAR PURPOSE.
(p) Cooperation Following The Closing. Following the Closing, the
Parties shall each deliver to the other such further
information and documents and shall execute and deliver to the
other such further instruments and agreements as the other
shall reasonably request to consummate or confirm the
Transactions provided for in this Agreement, to accomplish the
purpose of this Agreement or to assure to the other the
benefits of this Agreement.
(q) Specific Performance. Each of the Parties acknowledges and
agrees that the other Party would be damaged irreparably in
the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the Parties agrees that the
other Party shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over
the Parties and the matter (subject to the provisions set
forth in ss.8(p) below), in addition to any other remedy to
which it may be entitled, at law or in equity.
(r) Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in Albany,
New York, in any action or proceeding arising out of or
relating to this Agreement and agrees that all claims in
respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to
bring any action or proceeding arising out of or relating to
this Agreement in any other court. Each of the Parties waives
any defense of inconvenient forum to the maintenance of any
action or proceeding so brought and waives any bond, surety,
or other security that might be required of any other Party
with respect thereto. Any Party may make service on the other
Party by sending or delivering a copy of the process (i) to
22
the Party to be served at the address and in the manner
provided for the giving of notices in ss.8(h) above. Each
Party agrees that a final judgment in any action or proceeding
so brought shall be conclusive and may be enforced by suit on
the judgment or in any other manner provided by law or in
equity.
(s) Employee Benefits Matters. The Buyer will adopt and assume at
and as of the Closing each of the Employee Benefit Plans that
the Seller maintains and each trust, insurance contract,
annuity contract, or other funding -arrangement that the
Seller has established with respect thereto. The Buyer will
ensure that the Employee Benefit Plans treat employment with
any of the Seller and its Subsidiaries prior to the Closing
Date the same as employment with any of the Buyer and its
Subsidiaries from and after the Closing Date for purposes of
eligibility, vesting, and benefit accrual. The Seller will
transfer (or cause the plan administrators to transfer) at and
as of the Closing all of the corresponding assets associated
with the Employee Benefit Plans that the Buyer is adopting and
assuming.
(t) Bulk Transfer Laws. The Buyer acknowledges that the Seller
will not comply with the provisions of any bulk transfer laws
of any jurisdiction in connection with the transactions
contemplated by this Agreement.
* * * *
23
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
BUYER:
BAAR GROUP, INC.
By: /s/ ASHOK RAMETRA
-------------------------------
Title: President
------------------------
SELLER:
ATEC GROUP, INC.
By: /s/ JAMES J. CHARLES
-------------------------------
Title: VP Finance and CFO
------------------------
24
Schedule 1
ACQUIRED ASSETS
All of the Seller's and each of its subsidiaries' properties and assets,
personal, tangible and intangible, of every kind and wherever situated, which
are owned by the Seller or its subsidiaries or in which the Seller or its
subsidiaries has any right, title or interest, including, without limiting the
generality of the foregoing, their goodwill, franchises, telephone numbers,
permits, licenses, Acquired Intellectual Property, supplies, their commercial
papers, stocks, bonds and other investments, their accounts receivables, their
insurance policies, their causes of actions, judgments, claims and demands of
whatever nature, their tangible and intangible personal property of all kinds,
their deferred charges, advance payments, pre-paid items, claims for refunds,
rights of offset and credits of all kinds, all restrictive covenants and
obligations of present and former officers and employees and of individuals and
corporations, their accounts, general intangibles, returned and repossessed
goods, and rights as an unpaid vendor, secured party of licensor, their credit
balances, documents, instruments and other chooses in actions, their rights
under contracts, purchase orders, personal property, leases, joint venture
agreements or arrangements and other agreements, their files, papers and records
relating to the aforesaid properties and assets, their inventory, securities,
machinery, equipment, pre-paid expenses, work in process, contracts, tools,
dies, office furniture and equipment, product literature and customer records,
except the following:
1. Employment agreement of Surinder Rametra.
2. Employment agreement of Jim Charles.
3. Lease for the property located at 69 Mall Drive, Commack, New York
11725 (including the security deposit for such lease).
4. All machinery, equipment, fixtures, software, office furniture and
equipment and telephone numbers located at the Commack, New York
facility, including all leases, contracts, agreements and records
relating to the aforesaid assets and properties located at the Commack,
New York facility.
5. Assets and properties in the Merrill Lynch broker account.
6. All insurance policies, including any premium deposits, refunds or
rebates for such policy.
7. Retainer in the amount of $10,000 paid to Skadden Arps Slate Meagher &
Flom.
8. Retainer in the amount of $5,000 paid to Weinick Sanders Leventhal & Co
LLP.
9. New York State tax receivables in the amount of $71,730 as of June 30,
2002.
10. New York City MTA tax receivable in the amount of $5,153 as of June 30,
2002.
11. Minute book, stock records and similar organizational documents.
12. Captial Stock Exchange Agreement with Interpharm, Inc.
13. Promissory Note of Alan Prefer, dated April 1, 2002, in the original
principal amount of $40,000.
14. Intellectual Property other than the other than the Intellectual
Property relating to the Nexar division and, subject to Section 3(m)(i)
of the Agreement, the "ATEC" and "ATEC Group" name and logo .
15. Receivable from Alan Prefer in connection with the $14,378 settlement
paid by Seller in connection with garnishment by Alan Prefer's former
wife.
16. Pledge and Security Agreement between Alan Prefer and Atec Group, Inc.,
dated April 1, 2002.
17. 401(k) Plan.
18. ATEC Group, Inc. 2000 Flexible Stock Plan.
19. ATEC Group, Inc. 1997 Stock Option Plan.
20. Health Care Plan.
21. Dental Insurance.
22. Life Insurance policies.
23. Disability Insurance policies.
24. Any tax receivables, deferred taxes or tax credits, other than the tax
receivables of (a) Micro Computer Store, Inc. in the amount of $12,155
due from New York State and (b) Innovative Business Micros, Inc. in the
amount of $3,071 due from New York State.
25. Stipulation and Agreement of Settlement in the Manavazian class action
claim, including the Release, Indemnity and Settlement Agreement,
between the Seller and National Union fire Insurance Company of
Pittsburg, Pa
26. Capital stock of any of the Seller's Subsidiaries other than Micro
Computer Store, Inc. and Innovative Business Micros, Inc.
Schedule 2
ASSUMED LIABILITIES
All liabilities and obligations, (a) reflected in the Seller's balance sheet as
of June 30, 2002; (b) arising out of any claim asserted by Dean Bellaview; (c)
arising out of any claim asserted by AMC Computer Corp.; (d) whether known or
unknown, contingent or absolute, arising or accruing between the period of July
1, 2002 and the Closing Date; or (e) arising or resulting in any way out of an
Acquired Asset, including any agreement, lease, instrument or license assigned
to Buyer, accruing on or after the Closing Date, except the following:
1. Obligations arising out of the Capital Stock Exchange Agreement with
Interpharm, Inc.
2. The following accrued expenses:
a. Anderson Realty in the amount of $156,130
b. Steinbock litigation in the amount of $39,100
c. Legett & Platt in the amount of $1,240
d. Prudential in the amount of $23,000
3. Tax liabilities of Seller to the extent of any tax liability arising
out of the income from operations during the period of July 1, 2002 and
the Closing Date from the Seller's Albany, New York City and New Jersey
operations.
4. Any expenses and liabilities arising out of the Manavazian class action
claim.
Exhibit A
---------
The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
sold, hypothecated or otherwise transferred or disposed of in
the absence of such registration, unless an exemption from the
requirement of such registration is available under the
circumstances at the time obtaining and demonstrated by
opinion of counsel satisfactory to the Buyer.
No. 002
PROMISSORY NOTE
______, 2003 US $750,000
BAAR GROUP, INC.
PROMISSORY NOTE
FOR VALUE RECEIVED, BAAR GROUP, INC. (the "Company") promises to pay to
ATEC GROUP, INC. (the "Holder"), at the address of the Holder, or such other
place(s) as Holder shall direct, the principal sum of Seven Hundred Fifty
Thousand (US $750,000) Dollars in equal monthly installments of Twenty Thousand
Eight Hundred Thirty-Three ($20,833) Dollars, the first installment to be paid
one month from date, subsequent installments to be paid monthly thereafter;
together with interest, computed at the Interest Rate (as defined below) on the
unpaid balance of the principal sum outstanding from time to time, the first
payment of interest to be made on the expiration of one month from the date
hereof, subsequent payments to be made monthly thereafter until the indebtedness
evidenced by this Note is paid in full.
For purposes hereof, the term "Interest Rate" shall mean a rate of one
and a half percent (1.5%) per annum in excess of the Prime Rate. For purposes
hereof, the term "Prime Rate" shall mean the rate from time to time publicly
announced by Citibank, or its successors, as its prime rate, whether or not such
announced rate is the best rate available at such bank. The Interest Rate
payable hereunder shall increase or decrease by an amount equal to each increase
or decrease, respectively, in the Prime Rate, effective on the first day of the
month after any change in the Prime Rate is announced. The increase or decrease
shall be based on the Prime Rate in effect on the last day of the month in which
any such change occurs. Interest shall be calculated on the basis of a three
hundred sixty (360) day year and actual days elapsed.
This Note is issued under and pursuant to the Asset Purchase Agreement,
between the Company and the Holder, dated November 25, 2002 (the "Agreement"),
to which reference is herewith made. Unless otherwise defined herein, all
capitalized terms used herein shall have the meaning assigned there to in the
Agreement.
This Note is subject to the following additional provisions:
1. Usury. Nothing contained in this Note shall be deemed to
establish or require the payment of interest to the Holder at a rate in excess
of the maximum rate permitted by governing law. In the event that the rate of
interest required to be paid under the Note exceeds the maximum rate permitted
by governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing and any
amounts collected in excess of the permissible amount shall be deemed a payment
of principal.
2. Prepayment. The Company, at its option, from time to time,
prepay without premium or penalty, in whole or in part, the indebtedness
evidenced by this Note, provided, that each such payment is accompanied by
accrued interest on the amount of principal prepaid, calculated as of the date
of such prepayment.
3. Security. This Note is secured by the Collateral (as such term
is defined in the Security Agreement, between the Company and the Holder, dated
[______________], 2003, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced (the "Security
Agreement").
4. Events of Default. The following shall constitute an "Event of
Default":
a. The Company shall default in the payment of principal
or interest on this Note and such default continues
for a period of ten (10) days; or
b. The Company shall (1) admit in writing its inability
to pay its debts generally as they mature; (2) make
an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (3)
apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial
part of its property or business; or
c. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within sixty (60) days after such
appointment; or
d. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental
agency shall assume custody or control of all or any
substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty
(60) days thereafter; or
e. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be
dismissed within sixty (60) days after such
institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations
of, or default in answering a petition filed in any
such proceeding; or
2
f. Any representation or warranty in this Note, the
Buyer 6 Month Note, the Agreement, the Security
Agreement, the Guarantees and any other agreement,
documents and instruments now or at any time
hereafter executed and/or delivered by the Company or
any Principal in connection therewith, as the same
now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced
(collectively, the "Transactional Documents"), shall
when made or deemed made be false or misleading in
any material respect; or
g. The Company or any of the Principals revokes,
terminates or fails in any material respect to
perform any of the terms, covenants, conditions or
provisions of any of the Transactional Documents, and
in the case of a failure to perform, such failure is
not cured within thirty (30) days after receipt of
notice from Holder of such failure.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Note together with all unpaid interest and all other amounts payable hereunder,
immediately due and payable, without presentment, demand, protest or notice of
any kinds, all of which are hereby expressly waived, anything herein or in any
note or other instruments contained to the contrary notwithstanding, and the
Holder may immediately enforce any and all of the Holder's rights and remedies
provided herein or under the Transactional Documents, applicable law or
otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, and Holder in such
event shall be entitled to receive from the maker all expenses incurred in the
collection of this note and including reasonable attorneys fees.
6. Miscellaneous.
a. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of
New York.
b. Notices. Any notice required or permitted to be given
hereunder shall be given in accordance with Section
8(h) of the Agreement.
c. Severability. If any provision in this Note is
construed to be invalid, illegal or unenfoceable,
then the remaining provision shall not in any way be
affected thereby and shall be enforced without regard
thereto.
d. Parties in Interest. This Note shall bind the Company
and its successors and assigns.
3
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer hereunto duly authorized, as of the date first stated
above.
BAAR GROUP, INC.
By: /s/
---------------------------------
Name:
Title:
4
Exhibit B
---------
The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
sold, hypothecated or otherwise transferred or disposed of in
the absence of such registration, unless an exemption from the
requirement of such registration is available under the
circumstances at the time obtaining and demonstrated by
opinion of counsel satisfactory to the Buyer.
No. 001
PROMISSORY NOTE
______, 2003 US $1,000,000
BAAR GROUP, INC.
PROMISSORY NOTE
FOR VALUE RECEIVED, BAAR GROUP, INC. (the "Company") promises to pay to
ATEC GROUP, INC. (the "Holder"), at the address of the Holder, or such other
place(s) as Holder shall direct, the principal sum of One Million (US
$1,000,000) Dollars in equal monthly installments of Eighty-Three Thousand Three
Hundred Thirty-Three ($83,333) Dollars, the first installment to be paid one
month from date, subsequent installments to be paid monthly thereafter; together
with interest, computed at the Interest Rate (as defined below) on the unpaid
balance of the principal sum outstanding from time to time, the first payment of
interest to be made on the expiration of one month from the date hereof,
subsequent payments to be made monthly thereafter until the indebtedness
evidenced by this Note is paid in full.
For purposes hereof, the term "Interest Rate" shall mean a rate of one
and a half percent (1.5%) per annum in excess of the Prime Rate. For purposes
hereof, the term "Prime Rate" shall mean the rate from time to time publicly
announced by Citibank, or its successors, as its prime rate, whether or not such
announced rate is the best rate available at such bank. The Interest Rate
payable hereunder shall increase or decrease by an amount equal to each increase
or decrease, respectively, in the Prime Rate, effective on the first day of the
month after any change in the Prime Rate is announced. The increase or decrease
shall be based on the Prime Rate in effect on the last day of the month in which
any such change occurs. Interest shall be calculated on the basis of a three
hundred sixty (360) day year and actual days elapsed.
This Note is issued under and pursuant to the Asset Purchase Agreement,
between the Company and the Holder, dated November 25, 2002 (the "Agreement"),
to which reference is herewith made. Unless otherwise defined herein, all
capitalized terms used herein shall have the meaning assigned there to in the
Agreement.
This Note is subject to the following additional provisions:
1. Usury. Nothing contained in this Note shall be deemed to
establish or require the payment of interest to the Holder at a rate in excess
of the maximum rate permitted by governing law. In the event that the rate of
interest required to be paid under the Note exceeds the maximum rate permitted
by governing law, the rate of interest required to be paid thereunder shall be
automatically reduced to the maximum rate permitted under the governing and any
amounts collected in excess of the permissible amount shall be deemed a payment
of principal.
2. Prepayment. The Company, at its option, from time to time,
prepay without premium or penalty, in whole or in part, the indebtedness
evidenced by this Note, provided, that each such payment is accompanied by
accrued interest on the amount of principal prepaid, calculated as of the date
of such prepayment.
3. Security. This Note is secured by the Collateral (as such term
is defined in the Security Agreement, between the Company and the Holder, dated
[____________], 2003, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced (the "Security
Agreement").
4. Events of Default. The following shall constitute an "Event of
Default":
a. The Company shall default in the payment of principal
or interest on this Note and such default continues
for a period of ten (10) days; or
b. The Company shall (1) admit in writing its inability
to pay its debts generally as they mature; (2) make
an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (3)
apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial
part of its property or business; or
c. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within sixty (60) days after such
appointment; or
d. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental
agency shall assume custody or control of all or any
substantial portion of the properties or assets of
the Company and shall not be dismissed within sixty
(60) days thereafter; or
e. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be
dismissed within sixty (60) days after such
institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations
of, or default in answering a petition filed in any
such proceeding; or
2
f. Any representation or warranty in this Note, the
Buyer 3 Year Note, the Agreement, the Security
Agreement, the Guarantees and any other agreement,
documents and instruments now or at any time
hereafter executed and/or delivered by the Company or
any Principal in connection therewith, as the same
now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced
(collectively, the "Transactional Documents"), shall
when made or deemed made be false or misleading in
any material respect; or
g. The Company or any of the Principals revokes,
terminates or fails in any material respect to
perform any of the terms, covenants, conditions or
provisions of any of the Transactional Documents, and
in the case of a failure to perform, such failure is
not cured within thirty (30) days after receipt of
notice from Holder of such failure.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Note together with all unpaid interest and all other amounts payable hereunder,
immediately due and payable, without presentment, demand, protest or notice of
any kinds, all of which are hereby expressly waived, anything herein or in any
note or other instruments contained to the contrary notwithstanding, and the
Holder may immediately enforce any and all of the Holder's rights and remedies
provided herein or under the Transactional Documents, applicable law or
otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, and Holder in such
event shall be entitled to receive from the maker all expenses incurred in the
collection of this note and including reasonable attorneys fees.
6. Miscellaneous.
a. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of
New York.
b. Notices. Any notice required or permitted to be given
hereunder shall be given in accordance with Section
8(h) of the Agreement.
c. Severability. If any provision in this Note is
construed to be invalid, illegal or unenfoceable,
then the remaining provision shall not in any way be
affected thereby and shall be enforced without regard
thereto.
d. Parties in Interest. This Note shall bind the Company
and its successors and assigns.
3
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer hereunto duly authorized, as of the date first stated
above.
BAAR GROUP, INC.
By: /s/
---------------------------------
Name:
Title:
4
Exhibit C
---------
GURANTY OF PAYMENT
------------------
THIS GUARANTY OF PAYMENT made this ___________, 2003, by ASHOK RAMETRA,
RAJNISH RAMETRA and ARVIN GULATI (herein individually and jointly called the
"Guarantors") to ATEC GROUP, INC., a Delaware corporation ("ATEC").
RECITALS
BAAR Group, Inc. ("Borrower") has issued (a) a Promissory Note in the
original principal amount of $750,000 and (b) a Promissory Note in the original
principal amount of $1,000,0000 (collectively, the "Notes") in connection with
the purchase of certain assets of ATEC pursuant to the terms of an Asset
Purchase Agreement, between Borrower and ATEC, dated November 25, 2002 (the
"Agreement").
Due to the close business and financial relationships between the Borrower
and the Guarantors, in consideration of the benefits which will accrue to
Guarantors and as an inducement for and in consideration of ATEC making the
financial accommodations to Borrower pursuant to the Agreement, the Guarantors
agree and covenant with ATEC as follows:
1. Guaranty. The Guarantors hereby unconditionally and irrevocably
guarantee to ATEC the full and punctual payment and performance, when due
(whether by acceleration, declaration, extension or otherwise) of the following
(all of which are collectively referred to herein as the "Guaranteed
Obligations"), of all obligations, liabilities and indebtedness of any kind,
nature and description of the Borrower to ATEC, including, without limitation,
principal, interest, charges, fees and expenses arising under the Notes, whether
now existing or hereafter arising.
Notwithstanding anything to the contrary contained in this Guaranty, the
liability of (a) Ashok Rametra for the Guaranteed Obligations shall not exceed
fifty percent (50%) of the aggregate amount of all of the Guaranteed
Obligations; (b) (a) Rajnish Rametra for the Guaranteed Obligations shall not
exceed twenty-five percent (25%) of the aggregate amount of all of the
Guaranteed Obligations; and (c) Arvin Gulati for the Guaranteed Obligations
shall not exceed twenty-five percent (25%) of the aggregate amount of all of the
Guaranteed Obligations.
2. Representations and Warranties. The Guarantors represent and warrant to
ATEC that: (a) they have full power and authority to execute and deliver this
Guaranty and to incur the obligations provided for herein; (b) this Guaranty and
any other documents, instruments, or agreements made by them with respect to
this Guaranty are valid, enforceable, and binding in accordance with the terms
and covenants hereof and thereof; (c) they have a financial interest in the
Borrower; and (d) they have examined or have had an opportunity to examine the
Agreement and all instruments and documents related thereto.
3. Obligations Not Impaired. The Guarantors hereby consent that at any
time, or from time to time, and with or without consideration, ATEC may, without
notice to or further consent of the Guarantors and without in any manner
affecting, lessening, impairing, or releasing the liability and obligations of
the Guarantors under this Guaranty: (a) increase and decrease the rate of
interest under the Notes; (b) renew, extend, or change the time and terms of
payment and/or maturity of the Guaranteed Obligations; (c) receive additional
security and collateral for the payment of the Guaranteed Obligations; and (d)
sell, assign, release, surrender, exchange, settle, compromise, substitute,
subordinate, hypothecate, change, waive, or modify the Guaranteed Obligations.
4. Guaranty of Payment. This Guaranty is a guaranty of payment and not of
collectibility and is in no way conditioned or contingent upon any attempt to
collect from the Borrower or any other person primarily or secondarily liable
for the payment of the Guaranteed Obligations. The obligations and liabilities
of the Guarantors hereunder shall not be impaired, released, lessened, or
affected by any failure, delay, or omission of ATEC to enforce any right, power,
or remedy in respect of the Guaranteed Obligations or of the Agreement or to
realize upon any collateral or security provided for therein, or any waiver of
any such right, power, or remedy or of any default in respect of the Guaranteed
Obligations.
5. Waiver of Presentment, Demand, etc. The Guarantors hereby waive
presentment, demand for payment, dishonor, notice of nonpayment and of dishonor,
of the Guaranteed Obligations and any security and collateral for the payment
thereof, notice of the making of the Guaranteed Obligations or creation of the
Guaranteed Obligations, and notice of acceptance of this Guaranty.
6. Waiver of Subrogation. In the event the Guarantors shall at any time pay
any sum or sums on account of the Guaranteed Obligations or take any other
action in performance of their obligations and liabilities hereunder, the
Guarantors shall have no subrogation or other rights against ATEC.
7. Events of Default. The occurrence of one or more of the following events
(herein referred to as "event of default") shall constitute a default hereunder,
and all such events are individually and collectively included in the term
"default" as used herein: (a) if the Guarantors shall fail to promptly pay to
ATEC all sums due and payable to ATEC under and by reason of this Guaranty; (b)
if the Guarantors shall fail to duly perform, observe, or comply with any of the
terms and provisions of this Guaranty (other than payment of money) at the time
or times when performance, observance, or compliance therewith is required by
the terms hereof, and such failure shall continue for a period of 14 days; (c)
if any representation or warranty contained herein or made pursuant hereto shall
prove to have been false or incorrect in any material respect on the date as of
which made; (d) if an event of default as defined in the Notes should occur, and
such default shall continue for a period of fourteen (14) days after notice of
such default is made by ATEC to the Guarantors; or (e) if the Guarantors shall
make a general assignment for the benefit of creditors or shall admit in writing
their inability to pay debts as they become due, or shall file a voluntary
petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent, or
shall file any petition or answer seeking or consenting to, or acquiescing in,
any arrangement, composition, readjustment or similar relief under any present
or future statute, law, or regulation or shall file an answer or other pleading
admitting, or shall fail to deny, or contest, the material allegations of a
petition filed against them in any such proceeding, or shall seek or consent to
or acquiesce in the appointment of any trustee, receiver, or liquidator of the
Guarantors or any part of the property of the Guarantors.
8. Default. If any one or more events of default shall occur, then in any
such case, ATEC may at any time thereafter, at its option: (a) declare the full
amount guaranteed by the Guarantors hereunder to be due and payable whereupon
the same shall become immediately due and payable to ATEC, and (b) exercise any
other rights, remedies, and powers granted to it hereunder and by law.
2
9. Costs and Expenses. After default hereunder, the Guarantors shall pay to
ATEC on demand all costs and expenses (including, without limitation, reasonable
attorney's fees and expenses) incurred by or on behalf of ATEC in endeavoring to
collect or enforce this Guaranty.
10. Remedies Cumulative, etc. Each right, power, and remedy of ATEC as
provided for in this Guaranty, the Notes, the Agreement or in any instruments,
agreements and documents executed and delivered in conjunction therewith or now
or hereafter existing at law or in equity or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
or remedy provided for in this Guaranty, in the Notes, in the Agreement or in
any instruments, agreements and documents executed and delivered in conjunction
therewith or now or hereafter existing at law or in equity or by statute or
otherwise, and the exercise or beginning of the exercise by ATEC of any one or
more of such rights, powers or remedies shall not preclude the simultaneous or
later exercise by ATEC of any or all such other rights, powers, or remedies.
11. No Waiver, etc. Except as otherwise provided herein, no failure or
delay by ATEC to insist upon the strict performance of any term, condition,
covenant, or agreement of this Guaranty, the Notes, the Agreement or of any
instruments, agreements or documents executed and delivered in conjunction
therewith, or to exercise any right, power, or remedy consequent upon a breach
thereof, shall constitute a waiver of any such term, condition, covenant, or
agreement or of any such breach, or preclude ATEC from exercising any such
right, power, or remedy at any later time or times. By accepting payment after
the due date of any amount payable under this Guaranty, under the Notes, under
the Agreement or under any instruments, agreements or documents executed and
delivered in conjunction therewith, ATEC shall not be deemed to waive the right
either to require prompt payment when due of all other amounts payable under
this Guaranty, the Notes, the Agreement or under any instruments, agreements or
documents executed and delivered in conjunction therewith, or to declare a
default for failure to effect such prompt payment of any such other amount.
12. Right to Proceed. Except as otherwise expressly provided herein, ATEC
shall be under no obligation or requirement to prosecute collection from the
Borrower or from any other person or persons primarily or secondarily liable for
all or any part of the Guaranteed Obligations, or to enforce or exercise any of
its rights, remedies, or powers under the Notes, the Agreement or under any
documents, agreements or instruments executed and delivered in conjunction
therewith or resort to any security and collateral covered thereby before
proceeding against the Guarantors under this Guaranty. The liability and
obligations of the Guarantors hereunder are independent of any other guaranty or
guaranties at any time in effect with respect to any existing or future
liabilities and indebtedness of the Borrower to ATEC, and the liability and
obligations of the Guarantors hereunder may be enforced regardless of the
existence of any such other guaranty or guaranties.
13. Term of Guaranty. This Guaranty and all guaranties, covenants and
agreements of the Guarantors herein shall continue in full force and effect and
shall not be discharged or released until such time as the Guaranteed
Obligations shall have been paid in full.
14. Assignment of Guaranty. ATEC may, without notice to, or consent of the
Guarantors, sell, assign, or transfer to any person or persons all or any part
of the Note, and each such person or persons shall have the right to enforce
3
this Guaranty as fully as ATEC, provided that ATEC shall continue to have the
unimpaired right to enforce this Guaranty as to so much of the Notes that it has
not sold, assigned, or transferred.
15. Notices. All notices and demands required under this Guaranty to be in
writing, shall be deemed to have been properly given if and when mailed by first
class certified mail, return receipt requested, postage prepaid, if to ATEC at
[________________________], to the attention of President, and if to the
Guarantors at the addresses set forth below hereto or at such other address as
the Guarantors or ATEC shall have furnished to the other in writing, and deemed
to have been given or made: if delivered in person, immediately upon delivery;
if by telex, telegram or facsimile transmission, immediately upon sending and
upon confirmation of receipt; if by nationally recognized overnight courier
service with instructions to deliver the next business day, one (1) business day
after sending; and if by certified mail, return receipt requested, five (5) days
after mailing.
16. Governing Law. This Guaranty shall be deemed effective only upon
delivery, and shall be governed in accordance with the laws of the New York.
17. Change, etc. Neither this Guaranty nor any term, condition, convenant
or agreement hereof may be changed, waived, discharged, or terminated orally,
but only by an instrument in writing by the party against whom enforcement of
the change, waiver, discharge, or termination is sought.
18. Terms Binding. All of the terms, conditions, stipulations, and
covenants of this Guaranty shall apply to and be binding upon the Guarantors and
their representatives, successors, and assigns, and shall inure to the benefit
of ATEC and its successors and assigns.
19. Gender, etc. Whenever used herein, the singular number shall include
the plural, the singular and the use of the masculine, feminine or neuter gender
shall include all genders. Whenever used herein, the word "person" or "persons"
shall mean and include a corporation, an association, a partnership, an
organization, a business, an individual, a government or political subdivision
or agency thereof, or an estate or trust.
20. Headings. The headings in this Guaranty are for convenience only, and
shall not limit or otherwise affect any of the terms hereof.
21. Counterparts. This Guaranty may be executed in any number of
counterparts, each of which shall be an original but all of which, together,
shall constitute one and the same instrument.
[SIGNATURE PAGES FOLLOW]
4
IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be
signed and delivered on the day and year first written above.
WITNESS: ASHOK RAMETRA
Name:
-------------------------- --------------------------------
Address:
-----------------------------
-----------------------------
WITNESS: RAJNISH RAMETRA
Name:
-------------------------- --------------------------------
Address:
-----------------------------
-----------------------------
WITNESS: ARVIN GULATI
Name:
-------------------------- --------------------------------
Address:
-----------------------------
-----------------------------
WITNESS: (spouse)
----------------------
Name:
-------------------------- --------------------------------
Address:
-----------------------------
-----------------------------
5
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of __________, 2003, before me personally came Ashok
Rametra to me known, to be the individual described in and which executed the
foregoing instrument.
---------------------------
Notary Public
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of __________, 2003, before me personally came Rajnish
Rametra to me known, to be the individual described in and which executed the
foregoing instrument.
---------------------------
Notary Public
STATE OF )
) ss.:
COUNTY OF )
On this ____ day of __________, 2003, before me personally came Arvin
Gulati to me known, to be the individual described in and which executed the
foregoing instrument.
---------------------------
Notary Public
6
Exhibit D
---------
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated [___________], 2003 (the "Security
Agreement"), is entered into by and between BAAR GROUP, INC., a New York
corporation (together with its successors and assigns, the "Company"), and ATEC
GROUP, INC., a Delaware corporation (together with its successors and assigns,
"Secured Party").
RECITALS
WHEREAS, the Company has issued to the Secured Party (a) a promissory
note, dated the date hereof, in the principal amount of Seven Hundred Fifty
Thousand Dollars (US $750,000); and (b) a promissory note, dated the date
hereof, in the principal amount of One Million Dollars (US $1,000,000)
(collectively, the "Notes"), as partial payment for the purchase of certain
assets of the Secured Party by the Company, pursuant to that certain Asset
Purchase Agreement, by and between the Company and the Secured Party, dated
November 25, 2002 (the "Agreement"); and
WHEREAS, the Company has duly authorized the execution, delivery and
performance of this Security Agreement;
NOW THEREFORE, in consideration of the premises and the covenants set
forth herein the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, capitalized terms defined in
the Agreement and not otherwise defined herein are used herein as so defined.
All terms defined in the UCC (defined below) and not otherwise defined herein or
in the Agreement shall have the meanings assigned to them in the UCC.
"Accounts" shall mean all present and future rights of the Company and
each Subsidiary to payment for goods sold or leased or for services rendered,
which are not evidenced by instructions or chattel paper, and whether or not
earned by performance.
"Affiliate" of any specified Person shall mean any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and" under common control with") shall mean, with respect to any
Person: (i) the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; (ii) in
the case of a corporation, beneficial ownership of 10% or more of any class of
Capital Stock of such Person; and (ii) in the case of an individual, (A) member
of such Person's immediate family (as defined in Instruction 2 of Item 404(a) of
Regulation S-K promulgated under the Securities Act of 1933, as amended, as in
effect on the date hereof), and (B) trusts, any trustee or beneficiary of which
is such Person or members of such Person's immediate family.
"Agreement" is defined in the recitals hereto.
"Capital Stock" shall mean (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participation, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interest (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Collateral" shall have the meaning assigned to it in Article II
hereof.
"Company" is defined in the recitals hereto.
"Equipment" shall mean all equipment in all of its forms of the Company
and any Subsidiary, wherever located, including all parts thereof and all
accessions, additions, attachments, improvements, substitutions and replacements
thereto and therefor.
"Event of Default" shall have the meaning assigned to it in Section 6.1
hereof.
"Inventory" shall mean all of the Company's and each Subsidiary's now
owned and hereafter existing or acquired inventory and other supplies used or
useful in the business of the Company and each Subsidiary wherever located.
"Liens" shall mean any mortgage, lien, pledge, change, security
interest or encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law.
"Notes" is defined in the recitals hereto.
"Obligations" means any principal, interest, premium, penalties, fees,
indemnifications, reimbursements, damages and other obligations and liabilities
of the Company under the Notes or this Security Agreement.
"Person" or "person" shall mean and include any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended) limited liability company, business trust, unincorporated
association, joint stock corporation, trust, joint venture or other entity or
any government or any agency or instrumentality or political subdivision
thereof.
2
"Records" shall mean all of the present and future books of account of
every kind or nature of the Company and each Subsidiary, purchase and sale
agreements, invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating to
the Collateral or any account debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the foregoing are stored (including any rights of the
Company or any Subsidiary with respect to the foregoing maintained with or by
any other Person).
"Secured Party" is defined in the recitals hereto.
"Subsidiary" shall mean with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other Subsidiaries
of such Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such person or (b) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination thereof).
"UCC" shall mean the Uniform Commercial Code as in effect from time to
time in the State of New York.
"Voting Stock" shall mean, with respect to any Person: (a) one or more
classes of the Capital Stock of such Person having general voting power to elect
at least a majority of the board of directors, managers, or trustees of such
Person (irrespective of whether or not at the time Capital Stock of any other
class or classes has or might have voting power by reason of the happening of
any contingency); and (b) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (a) of this definition.
ARTICLE II
GRANT OF SECURITY INTERESTS
2.1 Security Interest. As security for the prompt and complete
payment and performance in full of all the Obligations, the Company hereby
grants to the Secured Party, a security interest in and continuing lien on, all
of its right, title and interest in, to and under the following, in each case,
whether now owned or existing or hereafter acquired or arising, and wherever
located ("Collateral"):
(i) Accounts;
3
(ii) subject to the final paragraph of this Section 2.1, all
present and future contract rights, general intangibles (including, but not
limited to, tax and duty refunds, patents, trade secrets, trademarks, service
marks, copyrights, trade names, applications and registrations for the
foregoing, goodwill, processes, drawings, blueprints, customer lists, licenses,
whether as licensor or licensee, choses in action and other claims), chattel
paper, documents, instruments, letters of credit, bankers acceptances and
guaranties of the Company or any Subsidiary;
(iii) all present and future monies, securities, credit
balances, deposits, deposit accounts and other property of the Company or any
Subsidiary now or hereafter held or received by or in transit to any depository
or other institution from or for the account of the Company or any Subsidiary,
whether for safekeeping, pledge, custody, transmission, collection or otherwise,
and all present and future liens, security interests, rights, remedies, title
and interest in, to and in respect of Accounts and other Non-Security
Collateral, including, without limitation, (a) rights and remedies under or
relating to guaranties, contracts of suretyship, letters of credit and credit
and other insurance related to the Non-Security Collateral, (b) rights of
stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, (c) goods described in
invoices, documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Non-Security Collateral,
including, without limitation, returned, repossessed and reclaimed goods, and
(d) deposits by and property of account debtors or other persons securing the
obligations of account debtors;
(iv) Inventory;
(v) Records;
(vi) Equipment;
(vii) all of the Company's and any Subsidiary's other personal
property and rights of every kind and description and interests therein; and
(viii) all products and proceeds of the foregoing, in any
form, including without limitation, insurance proceeds and all claims against
third parties for loss or damage to or destruction of any or all of the
foregoing.
In no event shall the Secured Party's security interest in a
contract or agreement of the Company or any Subsidiary be deemed to be a present
assignment, transfer, conveyance, subletting or other disposition (an
"Assignment") of such contract or agreement to the Secured Party within the
meaning of any provision in such contract or agreement prohibiting, or requiring
any consent or establishing any other conditions for, an assignment thereof by
the Company or any Subsidiary. The Secured Party's security interest in each
contract or agreement of the Company or any Subsidiary shall attach form the
date hereof to all of the following, whether now existing or hereafter arising
or acquired: (i) all of the Company's and each Subsidiary's Accounts and general
intangibles for money due or to become due arising under such contract or
agreement; (ii) all proceeds paid or payable to the Company or any Subsidiary
from any sale, transfer or assignment of such contract or agreement and all
4
rights to receive such proceeds; and (iii) all other rights and interests of the
Company or any Subsidiary in, to and under such contract or agreement to the
fullest extent that attachment thereto would not be a violation of such contract
or agreement directly or indirectly entitling a party thereto (other than the
Company or any Subsidiary or Affiliate thereof) to a legally enforceable right
to terminate such contract or agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Secured Party, which
representations and warranties shall survive execution and delivery of this
Security Agreement, as follows:
3.1 Validity, Perfection and Priority. The security interests in
the Collateral granted to the Secured Party hereunder constitute valid and
continuing security interests in the Collateral.
3.2 Chief Executive Office. The chief executive office of the
Company and each Subsidiary is 1762 Central Avenue, Albany, New York 12205. The
originals of the Records are located at such chief executive office of the
Company. All Records are maintained at, and controlled and directed (including,
without limitation, for general accounting purposes) from the chief executive
office.
3.3 Basic Representations and Warranties. The Company is a
corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on the Company's financial condition,
results of operation or business or the rights of Secured Party in or to any of
the Collateral. The execution, delivery and performance of this Security
Agreement and the transactions contemplated hereunder are all within the
Company's corporate powers, have been duly authorized, are not in contravention
of law or the terms of the Company's certificate of incorporation, by-laws, or
other organizational documentation, or any indenture, agreement or undertaking
to which the Company is a party or by which the Company or its property are
bound and will not result in the creation or imposition of, or require or give
rise to any obligation to grant, any lien, security interest, charge or other
encumbrance upon any property of the Company. This Security Agreement
constitutes legal, valid and binding obligations of the Company, enforceable in
accordance with its terms, except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting
the enforcement of creditors rights generally, and by general principles of
equity (whether considered at law or in equity). The Company does not have any
Subsidiaries.
3.4 Priority of Liens; Title to Properties. The security interests
and liens granted to the Secured Party under this Security Agreement constitute
valid and perfected first priority liens and security interests in and upon the
Collateral. The Company has good and marketable title to all of its properties
and assets subject to no liens, mortgages, pledges, security interests,
encumbrances or charges of any kind, except those granted to Lender.
5
ARTICLE IV
COVENANTS
The Company covenants and agrees with the Secured Party that from and
after the date of this Security Agreement;
4.1 Further Assurances. The Company will from time to time at its
own expense, promptly execute, deliver, file and record all further instruments,
endorsements and other documents, and take such further action as the Secured
Party may deem necessary or desirable in obtaining the full benefits of this
Security Agreement and of the rights, remedies and powers herein granted,
including, without limitation, the following:
(i) the filing of any financing statements, in form acceptable
to the Secured Party under the Uniform Commercial Code in effect in any
jurisdiction with respect to the liens and security interests granted
hereby (and each of the Company and each Subsidiary hereby (x)
authorizes the Secured Party to file any such financing statement
without its respective signature to the extent permitted by applicable
law and (y) agrees that a photocopy or other reproduction of this
Security Agreement shall be sufficient as a financing statement and may
be filed in lieu of the original to the extent permitted by applicable
law); and
(ii) furnish to the Secured Party from time to time statements
and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as the Secured
Party may request, all in reasonable detail and in form satisfactory to
such requesting party.
4.2 Maintain Records. The Company will keep and maintain at its
own cost and expense satisfactory and complete records of the Collateral,
including, but not limited to, the originals of all documentation with respect
to all Accounts and records of all payments received and all credits granted on
the Accounts, and all other dealings therewith.
6
4.3 Maintenance of Existence.
(i) The Company shall at all times preserve, renew and keep in
full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect
all permits, licenses, trademarks, tradenames, approvals,
authorizations, leases and contracts necessary to carry on the business
as presently or proposed to be conducted.
(ii) The Company shall not change its name unless each of the
following conditions is satisfied: (a) Secured Party shall have
received not less than thirty (30) days prior written notice from the
Company of such proposed change in its corporate name, which notice
shall accurately set forth the new name; and (b) Secured Party shall
have received a copy of the amendment to the Certificate of
Incorporation of the Company providing for the name change certified by
the Secretary of State of the jurisdiction of incorporation or
organization of the Company as soon as it is available.
(iii) The Company shall not change its chief executive office
or its mailing address or organizational identification number (or if
it does not have one, shall not acquire one) unless the Secured Party
shall have received not less than thirty (30) days' prior written
notice from the Company of such proposed change, which notice shall set
forth such information with respect thereto as the Secured Party may
require and Secured Party shall have received such agreements as the
Secured Party may reasonably require in connection therewith. The
Company shall not change its type of organization, jurisdiction of
organization or other legal structure.
4.4 New Collateral Locations. The Company may open any new
location within the continental United States provided the Company (a) gives the
Secured Party thirty (30) days prior written notice of the opening of any such
new location which (i) is in a jurisdiction in which the Company does not
already have a place of business or operations or (ii) will be the chief
executive office or location of Records of the Company and (b) executes and
delivers, or causes to be executed and delivered, to the Secured Party such
agreements, documents, and instruments as the Secured Party may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including without limitation, UCC financing statements.
4.5 Insurance. The Company, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral and the Company's other property and assets against loss or damage
and all other insurance of the kinds and in the amounts customarily insured
against or carried by corporations of established reputation engaged in the same
or similar businesses and similarly situated. Said policies of insurance shall
be satisfactory to the Secured Party as to form, amount and insurer. The Company
shall furnish certificates, policies or endorsements to the Secured Party as
Secured Party shall require as proof of such. All policies shall provide for at
least thirty (30) days prior written notice to the Secured Party of any
cancellation or reduction of coverage and that the Secured Party may act as
attorney for the Company in obtaining, and at any time an Event of Default
exists or has occurred and is continuing, adjusting, settling, amending and
7
canceling such insurance. The Company shall cause the Secured Party to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies insofar as they relate to any
Collateral. At its option, the Secured Party may apply any insurance proceeds
received by the Secured Party at any time to the cost of repairs or replacement
of Collateral and/or to payment of the Obligations, whether or not then due, in
any order and in such manner as the Secured Party may determine or hold such
proceeds as cash collateral for the Obligations.
4.6 Sale of Assets; Consolidation; Merger; Dissolution; Etc. The
Company shall not directly or indirectly:
(i) merge into or with or consolidate with any other Person
or permit any other Person to merge into or with or consolidate with it
unless the Company is the surviving corporation, and no Event of
Default has occurred and is then continuing (after giving effect to
such merger or consolidation);
(ii) sell, transfer, or otherwise dispose of all or
substantially all of its assets;
(iii) form or acquire any Subsidiaries not in existence on the
date hereof (unless each such Subsidiary has complied with the
requirements set forth Section 7.10); or
(iv) wind up, liquidate or dissolve or
(v) agree to do any of the foregoing.
4.7 Encumbrances. The Company shall not create, incur, assume or
suffer to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including, without limitation, the Collateral, except: (a) liens and security
interests of the Secured Party; (b) liens securing the payment of taxes, either
not yet overdue or the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to the Company; (c)
non-consensual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of the Company's business to the extent: (i) such
liens secure indebtedness which is not overdue or (ii) such liens secure
indebtedness relating to claims or liabilities which are fully insured and being
defended at the sole cost and expense and at the sole risk of the insurer or
being contested in good faith by appropriate proceedings diligently pursued and
available to the Company; (d) zoning restrictions, easements, licenses,
covenants and other restrictions affecting the use of real property which do not
interfere in any material respect with the use of such real property or ordinary
conduct of the business of the Company as presently conducted thereon or
materially impair the value of the real property which may be subject thereto;
(e) liens incurred in the ordinary course of business to secure the performance
of statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature (exclusive of obligations constituting
indebtedness); (f) liens for any interest or title of a lessor under any
operating lease permitted to be incurred hereunder, provided that such liens do
not extend to any property or asset that is not property subject to such lease;
(g) liens to secure purchase money indebtedness provided, any lien securing such
indebtedness does not extend to or encumber any assets or property other than
the asset or property being acquired; and (h) liens permitted under Article V
hereof.
8
ARTICLE V
[intentionally omitted]
ARTICLE VI
REMEDIES; RIGHTS UPON DEFAULT
6.1 Event of Default. The occurrence or existence of any one or
more of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(i) (a) the Company fails to pay when due any of the
Obligations or (ii) the Company or any of the Guarantors (as defined in the
Guaranty of Payment, dated the dated hereof (the "Guaranty") fails to perform
any of the terms, covenants, conditions or provisions contained in this Security
Agreement, the Agreement, any of the Notes or the Guaranty to which it is a
party;
(ii) any representation, warranty or statement of fact made by
the Company or a Guarantor to in this Security Agreement, the Agreement, the
Notes, the Guaranty or any other agreement, schedule, confirmatory assignment or
otherwise shall when made or deemed made be false or misleading in any material
respect;
(iii) (a) any judgment for the payment of money is rendered
against Borrower or any Obligor in excess of $10,000 in the aggregate, which
judgments are not discharged, vacated, bonded, or stayed within a period of
thirty (60) days, or in any event later than five (5) days prior to the date of
any proposed sale thereunder;
(iv) the Company dissolves or suspends or discontinues doing
business;
(v) the Company makes an assignment for the benefit of
creditors, makes or sends notice of a bulk transfer or calls a meeting of its
creditors or principal creditors; or the Company becomes insolvent (however
defined or evidenced);
(vi) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against the Company or all or any part of its properties and
such petition or application is not dismissed within sixty (60) days after the
9
date of its filing or the Company shall file any answer admitting or not
contesting such petition or application or indicates its consent to,
acquiescence in or approval of, any such action or proceeding or the relief
requested is granted sooner; or
(vii) a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property.
6.2 Rights and Remedies Generally. (a) If an Event of Default
shall occur and be continuing, then and in every such case, the Secured Party
shall have all the rights of a secured party under the UCC, shall have all
rights now or hereafter existing under all other applicable laws, and, subject
to any mandatory requirements of applicable law then in effect, shall have all
the rights set forth in this Security Agreement and all the rights set forth
with respect to the Collateral or this Security Agreement in any other agreement
between the parties.
(b) If an Event of Default occurs and is continuing, the
Secured Party may, commence the taking of such actions toward collection or
enforcement of this Security Agreement and the Collateral (or any portion
thereof), including, without limitation, action toward foreclosure upon any
Collateral, as the Secured Party deems in their discretion to be appropriate.
6.3 Disposition of Collateral. The Secured Party will determine
the circumstances and manner in which the Collateral will be disposed of,
including, but not limited to, the determination of whether to foreclose on the
Collateral following an Event of Default. The Secured Party will give the
Company reasonable notice of the time and place of any public sale of the
Collateral or any part thereof or of the time after which any private sale or
any other intended disposition thereof is to be made. The Company agrees that
the requirements of reasonable notice to it shall be met if such notice is
mailed, postage prepaid to its address specified in Section 7.3 of this Security
Agreement (or such other address that the Company or any Subsidiary may provide
to the Secured Party in writing) at least ten (10) days before the time of any
public sale or after which any private sale may be made.
6.4 Proceeds. If an Event of Default shall occur and be
continuing, (i) all proceeds and distributions on the Collateral received by the
Company shall be held in trust for the Secured Party, segregated from other
funds of the Company in a separate deposit account containing only such proceeds
and distributions, and shall forthwith upon receipt thereof, be turned over to
the Secured Party in the same form received (appropriately indorsed or assigned
to the order of the Secured Party).
6.5 Recourse. The Company shall pay or remain liable for any
deficiency if the proceeds of any sale or other disposition of the Collateral
are insufficient to satisfy the Obligations.
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6.6 Expenses; Attorneys Fees. The Company shall pay or reimburse
the Secured Party for all its expenses in connection with the exercise of their
rights hereunder, including, without limitation, (i) all reasonable attorneys'
fees and legal expenses incurred by the Secured Party and (ii) all filing fees
and related expenses contemplated by Section 4.1 hereof. All such expenses shall
be secured hereby.
6.7 Limitation on Duties Regarding Preservation of Collateral.
(i) The Secured Party's sole duty with respect to the custody,
safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the UCC or otherwise, shall be to
deal with it in the same manner as the Secured Party deals with similar
property for its own account.
(ii) The Secured Party shall have no obligation to take any
steps to preserve rights against prior parties or any other rights
pertaining to any Collateral.
(iii) Neither the Secured Party nor any of its directors,
officers, employees or agents shall be liable for failure to demand,
collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligations to sell or
otherwise dispose of any Collateral upon the request of the Company,
any Subsidiary or otherwise.
6.8 Expense of Secured Party. The Company will upon demand pay to
the Secured Party the amount of any and all reasonable expenses, including the
reasonable fees and disbursements of its counsel, which the Secured Party may
incur in connection with
(i) the administration of this Security Agreement,
(ii) the custody, preservation, use or operation of, or the
sale of, collection from, or other realization upon any
of the Collateral, or
(iii) the exercise or enforcement of any of the rights of the
Secured Party.
ARTICLE VII
MISCELLANEOUS
7.1 Indemnity. The Company agrees to indemnify, reimburse and hold
the Secured Party and its officers, directors, employees, representatives and
agents ("Indemnitees") harmless from any and all liabilities, obligations,
losses, damages, penalties, claims, actions, judgments, suits, costs or expenses
or disbursements (including reasonable attorneys' fees and expenses) for
whatsoever kind or nature ("Losses") which may be imposed on, asserted against
or incurred by any of the Indemnitees in any way relating to or arising out of
this Security Agreement or the transactions contemplated hereby, except to the
extent that such Losses are caused by the gross negligence or willful misconduct
of such Indemnitees. The obligations the Company and each Subsidiary under this
Section shall be secured hereby and shall survive payment and performance or
discharge of the Obligations and the termination of this Security Agreement.
11
7.2 Governing Law. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAWS).
7.3 Notices. Except as otherwise expressly provided herein, all
notices, requests and demands to or upon the respective parties hereto to be
effective shall be in writing (including by telecopy, telex, or cable
communication), and shall be deemed to have been duly given or made when
delivered by hand, or five days after being deposited in the United States mail,
postage prepaid, or, in the case of telex notice, when sent, answer-back
received, or in the case of telecopy notice, when sent, or in the case of a
nationally recognized overnight courier service, one business day after delivery
to such courier service, addressed, in the case of each party hereto as follows:
if to the Company, BAAR Group Inc., [_____________________________], telecopy
number: [__________________]; if to the Secured Party, ATEC Group, Inc.,
[_________________________], telecopy number [_________________], Attention:
[______________]; or to such other address as may be designated by any party in
a written notice to the other party hereto.
7.4 Successors and Assigns. This Security Agreement shall be
binding upon and inure to the benefit of the Company and each Subsidiary, the
Secured Party, all future holders of the Obligations and their respective
successors and assigns, except that the Company and each Subsidiary may not
assign or transfer any of its rights or obligations under this Security
Agreement without the prior written consent of the Secured Party.
7.5 Waivers and Amendments. None of the terms or provisions of
this Security Agreement may be waived, amended, supplemented or otherwise
modified except in writing and approved by the Secured Party, and then such
waiver a consent shall be effective only in the specific instance and for the
specific purpose for which given.
7.6 No Waiver; Remedies Cumulative. No failure or delay on the
part of the Secured Party in exercising any right, power or privilege hereunder
and no course of dealing among the Company, each Subsidiary and the Secured
Party shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Secured Party of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Secured Party would otherwise have on any future occasion. The rights and
remedies herein expressly provided are cumulative and may be exercised singly or
concurrently and as often and in such order as the Secured Party deems expedient
and are not exclusive of any rights or remedies which the Secured Party would
otherwise have whether by security agreement or now or hereafter existing under
applicable law. No notice to or demand on the Company and each Subsidiary in any
case shall entitle the Company and each Subsidiary to any other or further
12
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Secured Party to any other or future action in any circumstances
without notice or demand.
7.7 Termination; Release. When the Obligations have been
indefeasibly paid and performed in full this Security Agreement shall terminate,
and the Secured Party, at the request and sole expense of the Company and each
Subsidiary, will excuse and deliver to the Company and each Subsidiary the
proper instruments (including UCC termination statements) acknowledging the
termination of this Security Agreement, and will duly assign, transfer and
deliver to the Company and each Subsidiary, without recourse, representation or
warranty of any kind whatsoever, such of the Collateral as may be in possession
of the Secured Party and has not theretofore been disposed of, applied or
released.
7.8 Headings Descriptive. The headings of the several sections and
subsections of this Security Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Security Agreement.
7.9 Severability. In case any provision in or obligation under
this Security Agreement or the Obligations shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
7.10 Additional Subsidiaries. Each new Subsidiary of the Company
shall, and the Company shall cause any such new Subsidiary to, become a party to
this Security Agreement by executing and delivering an addendum to this Security
Agreement.
7.11 Counterparts. This Security Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Security
Agreement by signing any such counterpart.
13
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
COMPANY
-------
BAAR GROUP INC.
By: /s/
------------------------------
Name:
-----------------------------
Title:
----------------------------
SECURED PARTY
-------------
ATEC GROUP, INC.
By: /s/
------------------------------
Name:
-----------------------------
Title:
----------------------------
14
ATEC GROUP, INC.
69 Mall Drive
Commack, New York 11725
February 4, 2003
Baar Group, Inc.
1762 Central Avenue
Albany, New York 12205
Re: First Amendment to Asset Purchase Agreement
-------------------------------------------
Ladies and Gentlemen:
We refer to the Asset Purchase Agreement (the "Agreement") dated
November 25, 2002 between Baar Group, Inc. (the "Buyer") and Atec Group, Inc.
(the "Seller"). Unless otherwise defined in this letter, all capitalized terms
used in this shall have the same meanings as set forth in the Agreement.
The Agreement provides that the Agreement may terminated by in the
event the conditions has not occurred by February 1, 2003. The Buyer and the
Seller have agreed that the Closing Date will be extended beyond on February 1,
2003.
Accordingly, the Buyer and the Seller agree as follows:
1. Amendment to Section 7(a)(iii). Section 7(a)(iii) of the Agreement
is amended in its entirety and replaced with the following:
(iii) the Buyer may terminate this Agreement by giving written
notice to the Seller at any time prior to the Closing (A) in
the event the Seller has breached any material representation,
warranty, or covenant contained in this Agreement in any
material respect, the Buyer has notified the Seller of the
breach, and the breach has continued without cure for a period
of 30 days after the notice of breach or (B) if the Closing
shall not have occurred on or before the Closing Date, by
reason of the failure of any condition precedent under ss.6(a)
hereof (unless the failure results primarily from the Buyer
itself breaching any representation, warranty, or covenant
contained in this Agreement); and
2. Amendment to Section 7(a)(iv). Section 7(a)(iv) of the Agreement is
amended in its entirety and replaced with the following:
(iv) the Seller may terminate this Agreement by giving written
notice to the Buyer at any time prior to the Closing (A) in
the event the Buyer has breached any material representation,
warranty, or covenant contained in this Agreement in any
material respect, the Seller has notified the Buyer of the
breach and the breach has continued without cure for a period
of 30 days after the notice of breach or (B) if the Closing
shall not have occurred on or before the Closing Date, by
reason of the failure of any condition precedent under ss.6(b)
hereof (unless the failure results primarily from the Seller
itself breaching any representation, warranty, or covenant
contained in this Agreement).
3. Governing Law. This letter shall be construed in accordance with and
governed by the laws of State of New York, without giving effect to any
conflicts of laws provisions of such State that would require the application of
the laws of a different jurisdiction.
4. Headings. The headings indicated herein are inserted for convenience
only and shall not be considered a part this letter, nor in any way limit the
construction or interpretation of this letter.
5. Continuing Agreement. Except as expressly set forth herein, all
terms, provisions and conditions of the Agreement shall continue in full force
and effect and shall remain enforceable and binding in accordance with their
terms.
6. Counterparts. This letter may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Please indicate the Buyer's agreement to the terms of this letter by
countersigning it in the space provided below and returning it to the Seller.
Very truly yours.
ATEC GROUP, INC.
By: /s/ James Charles
--------------------------------
Name: James Charles
Title: Chief Financial Officer
Accepted and Agreed:
-------------------
BAAR GROUP, INC.
By: /s/ Ashok Rametra
---------------------------------
Name: Ashok Rametra
Title: President
APPENDIX F
[vFinance Investments, Inc. Letterhead]
December 17, 2002
Board of Directors
Atec Group, Inc.
69 Mall Drive
Commack, NY 11725
Gentlemen:
You have requested that we render our opinion as to the fairness, from
a financial point of view, to the shareholders of ATEC Group, Inc., a Delaware
corporation ("ATEC"), of the transaction (the "Transaction") whereby the Company
intends to accept an offer for the legacy operating systems integration business
by current members of management in a privatization transaction.
vFinance Investments, Inc. (the "Firm"), as part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We are familiar with ATEC
and its current operations, having conducted a due diligence review of ATEC in
connection with the rendering of this opinion.
In connection with the review and analysis performed to render our
opinion, among other things, we have:
i. Reviewed the periodic reports under Sections 13, 14, and 15(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), certain interim reports of ATEC, as well as
the financial statements prepared by the management of ATEC;
ii. Reviewed certain internal financial analyses for ATEC prepared
by its management;
iii. Held discussions with members of the senior management of ATEC
regarding the strategic rationale for, and potential benefits
of, the transaction and the past and current business
operations, financial condition and future prospects of the
company;
iv. Reviewed certain publicly available documents relating to
ATEC;
v. Reviewed internal detailed financial statements provided to us
by ATEC;
vi. Reviewed publicly available data and information for companies
which we have determined to be comparable to ATEC;
vii. Reviewed available research reports for companies which we
have determined to be comparable to ATEC;
viii. Reviewed the financial terms of other recent similar
transactions; and
ix. Conducted such other financial analyses and examinations and
considered such other financial, economic and market criteria
as we have determined to be appropriate for purposes of this
opinion.
x. Reviewed the Asset Purchase Agreement between Baar Group, Inc.
and ATEC Group, Inc. dated November 25, 2002 and all
accompanying schedules and exhibits.
xi. Reviewed the Form of Notes, Guaranty of Payment and Security
Agreement to be issued by Baar Group, Inc.in conjunction with
the transaction.
We have relied upon the accuracy and completeness of all of the
financial and other information reviewed by us and have assumed such accuracy
and completeness for purposes of rendering this opinion. In that regard, we have
assumed with ATEC's consent that the financial forecasts provided by the
managements of ATEC has been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of the management of ATEC. Our
advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of ATEC in connection with
its consideration of the transaction.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion as of the date hereof that
the privitization transaction offer of $4,278,184 subject to closing adjustments
is fair, from a financial point of view, to holders of the ATEC Common Stock.
This Opinion is furnished for your benefit and this opinion is not
intended to be and does not constitute a recommendation to any stockholder as to
how such stockholder should vote in connection with the proposed Transaction.
This Opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in this Opinion and our
engagement letter, and subject to the understanding that the obligations of the
Firm hereunder are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling
2
person of the Firm shall be subjected to any personal liability whatsoever to
any person, nor will any such claim be asserted by or on behalf of you or your
affiliates.
We have tried to apply objective measures of value in rendering our
Opinion. You understand, however, that such a valuation necessarily is based on
some subjective interpretations of value. We understand that we are not
obligated to revise our opinion due to events and fluctuating economic
conditions occurring subsequent to the date of this Opinion.
We have been engaged to render an opinion as to whether the
consideration in the proposed transaction is fair, from a financial point of
view, to the shareholders of the Company, and will receive a fee in connection
with the delivery of this opinion, which is not contingent upon the consummation
of the Transaction.
We hereby consent to the use of this opinion in any public disclosure
of ATEC in which it is required by law, rule, or regulation to be disclosed.
Very Truly Yours,
VFINANCE INVESTMENTS, INC.
By: /s/
---------------------------------
3