SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MAY 30, 2003
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INTERPHARM HOLDINGS, INC.
(Exact name of Registrant as specified in charter)
Delaware 0-22710 13-3673965
(State or other jurisdic- (Commission (IRS Employer
tion of incorporation) File Number) Identification No.)
69 Mall Drive, Commack, New York 11725
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 543-2800
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Atec Group, Inc.
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITIONS AND DISPOSITIONS
On May 30, 2003, Atec Group, Inc., a Delaware corporation ("Atec"),
completed the previously announced sale of its computer operations to Baar
Group, Inc. ("Baar"), which also assumed substantially all of Atec's
liabilities. The owners of Baar are the following former members of Atec's
management: Ashok Rametra, Balwinder ("B.J.") Singh Bathla, Rajnish Rametra, and
Arvin Gulati. Ashok Rametra and Rajnish Rametra are brothers of Surinder
Rametra, Atec's former Chairman. On the same day, Atec also completed the
previously announced acquisition of all the capital stock of Interpharm, Inc., a
New York corporation, making it a wholly owned subsidiary, and changed its name
to Interpharm Holdings, Inc. (the "Company"). Interpharm, Inc. is a manufacturer
and distributor of generic pharmaceuticals based in Long Island, New York.
The previous owners of the Interpharm, Inc. capital stock are Raj
Sutaria, Mona Rametra, Ravi Sutaria, and Perry Sutaria. Mona Rametra is the
daughter-in-law of Surinder Rametra, Atec's former Chairman and a member of its
Board. Surinder Rametra is also a member of the Company's current Board of
Directors. Mona Rametra is also the daughter of Dr. Maganlal K. Sutaria, the
Chairman of the Board of the Company. Although Dr. Sutaria did not own any
Interpharm, Inc. stock, his other two children (i.e. Mona Rametra's brothers)
and his nephew, Ravi Sutaria, owned the balance of Interpharm, Inc.'s common
stock. Ravi Sutaria is the son of Bhupatlal K. Sutaria, the Company's President
and a member of its Board of Directors.
In consideration for the sale of the Atec computer operations to
Baar, the Company received proceeds of approximately $2.7 million, and Baar
assumed approximately $2.6 million in liabilities. The proceeds consisted of
promissory notes in the aggregate amount of $1.75 million and cash of
approximately $.9 million. This figure is based upon a base purchase price of
$4,278,184, less $569,332 in closing adjustments.
In exchange for the capital stock of Interpharm, Inc., the Company
issued the Interpharm, Inc. shareholders 6,151,178 shares of the Company's
Common Stock and 2,050,393 shares of the Company's new Series K Convertible
Preferred Stock. A complete description of the Series K Stock may be found in
the Company's definitive proxy materials filed with the Securities and Exchange
Commission (the "SEC") on May 2, 2003.
A complete description of the terms of the Baar transaction and the
acquisition of Interpharm, Inc., are contained in the Company proxy materials
filed with the SEC on May 2, 2003, and the Baar and Interpharm, Inc. agreements
annexed thereto.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On June 9, 2003, the Company dismissed Weinick Sanders Leventhal &
Co., LLP ("WSLCO") as its independent accountant. WSLCO had been previously
engaged as the principal accountant to audit the Company's financial statements.
The reason for the termination was that the Company recently acquired
Interpharm, Inc., which is its primary business unit and which has been audited
by the firm of Marcum & Kleigman LLP. The Company believes that it is in its
best interests to have Marcum & Kleigman LLP continue to work with Interpharm.
-2-
WSLCO's report on the Company's financial statements for the past two
years did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by the Company's
Board of Directors and approved by the Audit Committee of the Company's Board of
Directors.
During the Company's two most recent fiscal years, and the subsequent
interim periods, prior to June 9, 2003, there were no disagreements with WSLCO
on any matter of accounting principles or practices, financial statement
disclosure, auditing scope, or procedure, which disagreements, if not resolved
to the satisfaction of WSLCO, would have caused it to make reference to the
subject matter of the disagreement in connection with its reports.
On June 11, 2003, the Company retained Marcum & Kleigman LLP as its
new independent accountant. Marcum & Kleigman LLP is located at 130 Crossways
Park Drive, Woodbury, New York 11797.
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE.
On May 30, 2003, Interpharm Holdings, Inc. issued the press release
annexed hereto as Exhibit 99.1 and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
INTERPHARM, INC. AND SUBSIDIARY
CONTENTS
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PAGE
ITEM 7(A) FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets F-1-F-2
Condensed Consolidated Statements of Income F-3
Condensed Consolidated Statements of Comprehensive Income F-4
Condensed Consolidated Statements of Cash Flows F-5-F-6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS F-7-F-14
ITEM 7(B) PROFORMA FINANCIAL INFORMATION
Introduction to Unaudited Condensed Consolidated Balance Sheet F-15
Unaudited Proforma Condensed Consolidated Balance Sheet
at March 31, 2003 F-16
Proforma Balance Sheet Adjustments F-17-F-18
Unaudited Proforma Earnings Per Share Data F-18-F-19
INTERPHARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
(Unaudited) (Audited)
March 31, December 31,
2003 2002
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CURRENT ASSETS
Cash and cash equivalents $ 218,697 $ 105,789
Marketable securities, at fair market value 41,328 35,993
Accounts receivable, less allowance for doubtful
accounts of $47,776 in 2003 and 2002 5,043,363 4,158,141
Inventories 3,293,917 3,389,099
Prepaid expenses and other current assets 116,978 71,478
Deferred tax asset 60,500 60,000
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Total Current Assets 8,774,783 7,820,500
Property and equipment, net 3,392,113 3,358,968
Deferred tax asset -- 7,500
Security deposits 11,379 11,379
Deferred acquisition costs 103,564 --
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TOTAL ASSETS $12,281,839 $11,198,347
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-1
INTERPHARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited) (Audited)
March 31, December 31,
2003 2002
-------------------------------
CURRENT LIABILITIES
Line of credit, bank $ 2,064,793 $ 964,793
Current maturities of bank notes payable 237,482 263,383
Accounts payable, accrued expenses, and other
current liabilities 3,543,632 4,014,525
Due to related party 345,563 304,750
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Total Current Liabilities 6,191,470 5,547,451
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OTHER LIABILITIES
Bank notes payable, less current maturities 289,317 335,754
Due to related party 3,000,000 3,000,000
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Total Other Liabilities 3,289,317 3,335,754
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TOTAL LIABILITIES 9,480,787 8,883,205
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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 income (loss) 4,445 (890)
Retained earnings (accumulated deficit) 426,607 (53,968)
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TOTAL STOCKHOLDERS' EQUITY 2,801,052 2,315,142
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 12,281,839 $ 11,198,347
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
INTERPHARM, INC.AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended March 31, 2003 and 2002
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2003 2002
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SALES, Net $ 7,191,002 $ 5,888,788
COST OF SALES (including $102,000 of related party
rent expense during the three months ended
March 31, 2003 and 2002) 5,824,712 4,802,487
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GROSS PROFIT 1,366,290 1,086,301
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OPERATING EXPENSES
Selling, general and administrative expenses 502,552 445,385
Related party rent expense 18,000 18,000
Research and development 43,450 --
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TOTAL OPERATING EXPENSES 564,002 463,385
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OPERATING INCOME 802,288 622,916
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OTHER EXPENSES
Related party interest expense (40,812) (47,032)
Interest expense (28,451) (26,495)
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TOTAL OTHER EXPENSES (69,263) (73,527)
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INCOME BEFORE INCOME TAXES 733,025 549,389
INCOME TAXES 252,450 177,900
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NET INCOME $ 480,575 $ 371,489
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
INTERPHARM, INC.AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED)
For the Three Months Ended March 31, 2003 and 2002
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2003 2002
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NET INCOME $ 480,575 $ 371,489
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on marketable securities, net 5,335 (367)
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TOTAL COMPREHENSIVE INCOME $ 485,910 $ 371,122
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
INTERPHARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 2003 and 2002
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 480,575 $ 371,489
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Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 152,448 100,730
Deferred tax expense 7,000 28,000
Accrued interest on related party loans 40,813 35,032
Changes in operating assets and liabilities:
Accounts receivable (885,222) (499,180)
Inventories 95,182 (527,495)
Prepaid expenses and other current assets (45,500) 26,133
Accounts payable, accrued expenses and other
current liabilities (470,893) 874,224
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TOTAL ADJUSTMENTS (1,106,172) 37,444
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NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (625,597) 408,933
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities -- (19,011)
Purchases of property and equipment (185,593) (260,601)
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NET CASH USED IN
INVESTING ACTIVITIES (185,593) (279,612)
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CASH FLOWS FROM FINANCING ACTIVITIES
Deferred acquisition costs (103,564) --
Proceeds from line of credit, bank 1,100,000 --
Repayments of bank notes payable (72,338) (59,736)
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES $ 924,098 $ (59,736)
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
INTERPHARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED), Continued
For the Three Months Ended March 31, 2003 and 2002
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2003 2002
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NET INCREASE IN CASH AND
CASH EQUIVALENTS $112,908 $ 69,585
CASH AND CASH EQUIVALENTS - Beginning 105,789 583,858
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CASH AND CASH EQUIVALENTS - Ending $218,697 $653,443
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $171,157 $ 38,504
Income Taxes $293,516 $160,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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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.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and should be read in
conjunction with Interpharm, Inc. and Subsidiary's audited financial
information included in the definitive proxy statement filed by Atec
Group, Inc. ("Atec"), a publicly held company, on May 2, 2003.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Such
adjustments are of a normal recurring nature. Operating results for the
three months ended March 31, 2003 and 2002 are not necessarily
indicative of the results that may be expected for any other period or
for a full fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed 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 into 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 condensed consolidated financial
statements (see Note 7).
F-7
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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
provisions and credits have been recorded as a reduction of sales in the
condensed 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 the raw
material from other suppliers. Pursuant to Emerging Issues Task Force
No. 99-19, "Reporting Revenue Gross as Principal Versus Net as 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 three months ended March 31, 2003
and 2002, the Company purchased raw materials from the supplier totaling
$942,462 and $1,675,875, respectively and sold finished goods to such
supplier totaling and $2,720,616 and $2,632,667, respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis)
or market value and consist of raw materials, work in progress and
finished goods. For interim financial statements, inventories are
calculated using a gross profit percentage submitted by management (see
Note 2).
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.
FISCAL YEAR
The Company is changing its fiscal year end from December 31st to June
30th.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("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
F-8
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
NEW ACCOUNTING PRONOUNCEMENTS, continued
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 adoption of the initial recognition requirements of FIN 45
did not have an impact on the condensed consolidated financial position
or results of operations.
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
condensed consolidated results of operations and financial condition.
In April 2003, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." The statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under FAS 133. FAS 149 is effective for contracts entered
into or modified after June 30, 2003 except for the provisions that were
cleared by the FASB in prior pronouncements. The Company does not expect
the adoption of this standard to have a material impact on the condensed
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 affects the issuer's accounting for three
types of freestanding financial instruments.
o Mandatorily redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
F-9
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
NEW ACCOUNTING PRONOUNCEMENTS, continued
o Instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets; includes put
options and forward purchase contracts.
o Obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers' shares.
SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. Most of the
guidance in SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The Company has not yet completed its analysis of SFAS No. 150;
however, it believes that it is currently substantially in compliance
with the requirements of SFAS No. 150.
NOTE 2 - INVENTORIES
Inventories consist of the following:
(Unaudited) (Audited)
March 31, December 31,
2003 2002
------------------------------
Finished goods $ 263,563 $ 271,306
Work in process 1,656,840 1,705,087
Raw materials 1,162,703 1,195,903
Packaging materials 210,811 216,803
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Total $3,293,917 $3,389,099
========== ==========
At March 31, 2003, the Company allocated the components of inventory
based on each components respective weighted percentage to total
inventory as of December 31, 2002.
NOTE 3 - BANK DEBT
The Company has a credit facility agreement with a bank consisting of a
$2,300,000 secured line of credit (which was increased to $2,500,000 in
June 2003) and a $1,500,000 non-revolving secured facility for equipment
purchases referred to as bank notes. 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.
F-10
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 4 - 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 condensed
consolidated financial statements for any amounts that may be due from
or to the Company, as a result of the resolution of these matters.
NOTE 5 - 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.
F-11
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 5 - 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
$3,295,000 as of March 31, 2003. 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 one of the Company's
stockholders and its chairman, bear interest at a rate of 5% per annum.
Approximately $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.
NOTE 6 - ECONOMIC DEPENDENCY
MAJOR CUSTOMERS
The Company had the following customer concentrations as of March 31,
2003 and for the three months ended March 31, 2003 and 2002,
respectively:
Sales - Percent of Revenue Accounts Receivable
2003 2002 2003
------------------------------------------------------------------------
Customer A 37.8% 44.7% $2,391,350
Customer B 15.9% 20.4% 968,865
Customer C 10.1% 6.3% 361,623
MAJOR SUPPLIERS
The Company purchased materials from two suppliers totaling
approximately 62% and 65% of the Company's total purchases during the
three months ended March 31, 2003 and 2002, respectively. At March 31,
2003 amounts due to these suppliers, included in accounts payable,
was approximately $2,076,000.
F-12
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 7 - SUBSEQUENT EVENTS
On May 30, 2003, the Company's stockholders exchanged all of their
shares of Company common stock, for shares of Atec Common Stock and
Series K Convertible Preferred Stock ("Series K"), which totaled
approximately 48% of Atec's voting securities after the transaction was
consummated as follows: (i) 75% of the voting securities are Atec Common
Stock, and (ii) 25% of the voting securities are 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 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.
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 transaction
and such transaction will be treated as a recapitalization of the
Company. The total number of shares of Atec Common Stock outstanding at
closing was 8,536,328, accordingly, Interpharm stockholders received
6,151,178 shares of Atec Common Stock and 2,050,393 shares of Series K
stock. This share exchange has been given retroactive application in the
pro forma earnings per share
F-13
INTERPHARM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 7 - SUBSEQUENT EVENTS, continued
PRO FORMA EARNINGS PER SHARE, continued
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 three months ended March 31, 2003
and 2002 is as follows:
2003 2002
------------------------
Numerator:
Net income $480,575 $371,489
Net income attributable to preferred stockholders 120,143 92,872
-------- ---------
Numerator for pro forma basic EPS 360,432 278,617
Effect of dilutive securities:
Net income attributable to preferred stockholders 120,143 92,872
-------- ---------
Numerator for pro forma diluted EPS $480,575 $371,489
======== ========
Denominator:
Denominator for basic EPS
Weighted average shares outstanding 6,151,178 6,151,178
Effect of dilutive securities:
Convertible Series K preferred stock 28,443,887 28,443,887
---------- ----------
Denominator for pro forma diluted EPS 34,595,065 34,595,065
========== ==========
Pro forma basic EPS $.06 $.05
Pro forma diluted EPS $.01 $.01
TRANSFER OF SUBSIDIARY
On June 6, 2003, the minority owner of the Company's 50% owned
Subsidiary transferred its interest to the Company.
F-14
PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet, as of
March 31, 2003, is based on the historical financial statements of Interpharm
Holdings, Inc. and Subsidiaries (f/k/a Atec Group, Inc.) ("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
March 31, 2003. The acquisition of Interpharm will be accounted for as a reverse
merger in the form of a recapitalization of Interpharm. The pro forma statements
of operations have not been provided since the pro forma statements of
operations would be substantially identical to the historical statements of
operations of Interpharm.
The unaudited pro forma condensed consolidated 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/A for the year ended June
30, 2002 and in its quarterly report on Form 10-Q for the quarter ended March
31, 2003 and with the historical financial statements of Interpharm included
elsewhere herein and filed as part of Atec's Definitive Proxy statement dated
May 1, 2003. The unaudited pro forma condensed consolidated balance sheet is not
necessarily indicative of the Company's consolidated financial position that
would have been achieved had the Management Buy-Out and the acquisition been
consummated at March 31, 2003.
On May 30, 2003, Atec completed a sale of its computer operations to Baar Group,
Inc. ("Baar"). In consideration for the sale, Baar assumed substantially all the
liabilities of Atec resulting in net proceeds of approximately $2,707,000 (the
"Management Buy-Out"). The purchase price was payable by delivery of (a) a $1
million promissory note payable within 12 months, (b) a $750,000 promissory note
payable over 36 months and (c) cash for the remainder of the purchase price. The
principals of Baar consist of former directors, officers, employees and/or
stockholders of Atec. The column labeled "Atec Group, Inc.- After Management
Buy-Out" in the pro forma condensed consolidated balance sheet reflects the Atec
financial position as if the Management Buy-Out were completed on March 31,
2003, prior to recording the affects of the Interpharm acquisition.
On the same day, Atec completed the previously announced acquisition of all of
the capital stock of Interpharm, Inc. in exchange for Atec common stock and a
new Series K Convertible Preferred Stock. Immediately following the exchange,
Interpharm stockholders owned 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 consolidated balance sheet. However, actual
amounts may differ from the pro forma amounts.
F-15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
(f/k/a ATEC GROUP,INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
INTERPHARM
ATEC GROUP, INC. HOLDINGS, INC.
ATEC GROUP, INC. AND SUBSIDIARIES AND SUBSIDIARIES
ATEC GROUP, INC. AND SUBSIDIARIES After Management INTERPHARM, INC. Post
AND SUBSIDIARIES Pro Forma Adjustments Buy-out AND SUBSIDIARY Pro Forma Acquisition
Historical Debt Credit Pro Forma Historical Adjustments Pro Forma
---------- ---- ------ --------- ---------- ----------- ---------
A S S E T S
Current assets:
Cash and cash equivalents $ 1,002,272 (1) $ 956,580 $ 1,958,852 $ 218,697 (4) ($ 200,000) $ 1,977,549
Note receivable-
current portion -- (1) 1,250,000 -- 1,250,000 -- 1,250,000
Marketable securities, -- -- 41,328 -- 41,328
Accounts receivable, net 3,940,999 -- (2) 3,940,999 -- 5,043,363 -- 5,043,363
Inventories 481,344 -- (2) 481,344 -- 3,293,917 -- 3,293,917
Deferred tax asset 401,493 -- (3) 401,493 60,500 (6) 300,000 761,993
Other current assets 807,725 -- (2) 807,725 -- 116,978 -- 116,978
-- -- -- -- --
------------ ---------- ------------ ----------- ----------- ---------- ------------
Total current assets 6,633,833 2,206,580 5,230,068 3,610,345 8,774,783 100,000 12,485,128
Property and equipment, net 188,140 -- (2) 176,140 12,000 3,392,113 -- 3,404,113
Note receivable -
noncurrent portion -- (1) 500,000 -- 500,000 -- -- 500,000
Other assets 74,368 -- (2) 39,368 35,000 11,379 -- 46,379
Deferred acquisition costs -- 103,564 (4) ( 103,564) --
Deferred tax asset -- -- -- -- -- (6) 1,000,000 1,000,000
------------ ---------- ------------ ----------- ----------- ---------- ------------
$ 6,896,341 $2,706,580 $ 5,445,576 $4,157,345 $12,281,839 $ 996,436 $17,435,620
============ ========== ============ ========== =========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 520,543 (2) $ 520,543 -- $ -- $ 2,064,793 -- $ 2,064,793
Accounts payable and
accrued expenses 1,712,194 (2) 1,712,194 -- -- 3,543,632 -- 3,543,632
Current maturities of
bank notes payable -- -- -- -- 237,482 -- 237,482
Due to related party -- -- -- -- 345,563 -- 345,563
Other current liabilities 381,931 (2) 352,396 -- 29,535 -- -- 29,535
------------ ---------- ------------ ----------- ----------- ---------- ------------
Total current
liabilities 2,614,668 2,585,133 -- 29,535 6,191,470 -- 6,221,005
------------ ---------- ------------ ----------- ----------- ---------- ------------
Other liabilities:
Bank notes payable,
less current maturities -- -- -- -- 289,317 -- 289,317
Due to related party -- -- -- -- 3,000,000 -- 3,000,000
------------ ---------- ------------ ----------- ----------- ---------- ------------
Total other
liabilities -- -- -- -- 3,289,317 -- 3,289,317
------------ ---------- ------------ ----------- ----------- ---------- ------------
TOTAL LIABILITIES 2,614,668 2,585,133 -- 29,535 9,480,787 -- 9,510,322
------------ ---------- ------------ ----------- ----------- ---------- ------------
Stockholders' equity:
Preferred stock 806,913 -- -- 806,913 -- (4) 20,504 827,417
Common stock -
ATEC Group, Inc. 86,502 -- -- 86,502 -- (4) 61,512 148,014
Common stock -
Interpharm, Inc. -- -- -- -- 4,000 (4) (4,000) --
Additional paid-in capital 12,370,863 -- -- 12,370,863 2,366,000 (4) (381,580) 8,033,687
(5) (7,621,596)
(6) 1,300,000
Discount on preferred
stock (717,005) -- -- (717,005) -- -- (717,005)
Accumulated other
comprehensive loss -- -- -- -- 4,445 -- 4,445
Retained earnings
(accumulated deficit) (7,467,733) (2) 153,863 -- (7,621,596) 426,607 (5) 7,621,596 426,607
------------ ---------- ------------ ----------- ----------- ---------- ------------
5,079,540 153,863 -- 4,925,677 2,801,052 996,436 8,723,165
Less: Treasury stock
at cost (797,867) -- -- (797,867) -- -- (797,867)
------------ ---------- ------------ ----------- ----------- ---------- ------------
Total stockholders'
equity 4,281,673 153,863 -- 4,127,810 2,801,052 996,436 7,925,298
------------ ---------- ------------ ----------- ----------- ---------- ------------
$ 6,896,341 $2,738,996 $ -- $ 4,157,345 $12,281,839 $ 996,436 $17,435,620
============ ========== ============ ========== =========== ========== ============
F-16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET ADJUSTMENTS
March 31, 2003
(Unaudited)
(1) Record net proceeds, of $2,706,580 from the sale of the existing
business and various assets and assumption of various liabilities of
the Atec Group, Inc. ("Atec") as follows:
Cash $ 956,580
Notes receivable 1,750,000
------------
$ 2,706,580
============
Pursuant to the terms of the Asset Purchase Agreement between Baar
Group, Inc. and Atec Group, Inc., Baar Group, Inc. acquired
substantially all of the assets and assumed substantially all of the
liabilities of Atec for a net purchase price of $2,706,580. The pro
forma adjustments are calculated as of March 31, 2003. 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. Subsequent to the closing of the
transaction, in July 2003, Approximately $1,100,000 of the notes
receivable from Baar Group, Inc. was repaid.
(2) Eliminate assets, liabilities and record a net loss on sale of the computer
division:
Accounts Receivable $ 3,940,999
Inventories 481,344
Other Current Assets 807,725
Property and Equipment 176,140
Other Assets- non-current 39,368
Revolving Line of Credit (520,543)
Accounts Payable and
Accrued expenses (1,712,194)
Other Current Liabilities (352,396)
Accumulated deficit (153,863)
------------
$ 2,706,580
============
(3) The deferred tax asset of Atec, amounting to $401,493, will be retained
and available to reduce current taxes in future periods.
F-17
(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 (8,536,328) of Atec outstanding at the closing.
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. Atec issued 6,151,178 of common shares and 2,050,393 Series K
preferred shares in exchange for all of the outstanding common
shares (4,000,000) of Interpharm.
e. Interpharm will reclass $103,564 of deferred costs associated
with the acquisition and will incur an additional 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 $ 381,580
Common stock - Interpharm
(elimination of Interpharm common stock) $ 4,000
Common stock - Atec
(6,151,178 shares at $.01 par value) $ 61,512
Preferred stock - Atec
(2,050,393 shares at $.01 par value) $ 20,504
Cash (costs associated with transaction) $ 200,000
Deferred acquisition costs $ 103,564
(5) For accounting purposes, the acquisition transaction is being treated
as a reverse acquisition in the form of a recapitalization 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 $ 7,621,596
Accumulated deficit $ 7,621,596
(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
F-18
UNAUDITED PRO FORMA EARNINGS PER SHARE DATA
-------------------------------------------
Introduction
-------------
At May 30, 2003, Atec had the following capital structure:
o 8,536,328 shares of common stock 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 5,149,158 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. The number of
Common Stock shares issuable pursuant to the conversion provisions of the Series
K Stock is variable.
The following table sets forth the computation of pro forma basic and diluted
EPS for the three months ended March 31, 2003 giving effect to the acquisition
of Interpharm by Atec as if the transaction (including the Management Buy-Out)
occurred on January 1, 2003.
Interpharm, Inc. Atec Group, Inc. Pro Forma
2003 (1) 2003 Adjustments Pro Forma
------------ ------------ ------------ ------------
Numerator:
Net income $ 480,575 $ -- $ -- $ 480,575
Net income attributable to Series K
preferred stockholders 120,143 -- (60,071)(2) 60,072
------------ ------------ ------------ ------------
Numerator for pro forma basic EPS 360,432 -- 60,071 420,503
Effect of dilutive securities:
Net income attributable to Series K
preferred Stockholders 120,143 -- (60,071)(2) 60,072
------------ ------------ ------------ ------------
Numerator for pro forma diluted EPS $ 480,575 $ -- $ -- $ 480,575
============ ============ ============ ============
Denominator:
Denominator for pro forma basic EPS
Weighted average shares outstanding 6,151,178 8,536,328 335,000 (3) 15,022,506
------------ ------------ ------------ ------------
Total Denominator for basic EPS 6,151,178 8,536,328 335,000 15,022,506
------------ ------------ ------------ ------------
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 28,443,887 -- 4,708,020(4) 33,151,907
Options - treasury stock method -- 842,005 -- 842,005
------------ ------------ ------------ ------------
Total common stock equivalents 28,443,887 954,443 4,708,020 34,106,350
------------ ------------ ------------ ------------
Denominator for pro forma diluted EPS 34,595,065 9,490,771 5,043,020 49,128,856
============ ============ ============ ============
Pro forma basic EPS $ 0.06 $ 0.03
============ ============
Pro forma diluted EPS $ 0.01 $ 0.01
============ ============
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) Additional shares to be issued related to costs associated with the
acquisition transaction.
(4) Gives effect to increase in the number of common shares issuable to Series
K holders assuming 335,000 shares were issued (see note 3) and 842,005
options were exercised prior to the Trigger Event.
F-19
ITEM 7(c) EXHIBITS
EXHIBIT NO. DESCRIPTION.
----------- -----------
2.1 Capital Stock Exchange Agreement, among ATEC, Interpharm, Raj
Sutaria, Mona Rametra, Ravi Sutaria, and Perry Sutaria, dated
November 25, 2002. (1)
2.2 Asset Purchase Agreement between ATEC and Baar Group, Inc.,
dated November 25, 2002. (2)
2.3 Amendment to the Capital Stock Exchange Agreement among ATEC,
Interpharm, Raj Sutaria, Mona Rametra, Ravi Sutaria, and Perry
Sutaria, dated February 4, 2003. (2)
16.1 June 9, 2003, letter from Interpharm Holdings, Inc. to Weinick
Sanders Leventhal & Co., LLP regarding a change in its certifying
accountant. (3)
16.2 June 11, 2003, letter from Weinick Sanders Leventhal & Co., LLP
regarding Interpharm Holdings, Inc.'s change in certifying
accountant. (3)
99.1 Press release of ATEC Group, Inc., dated May 30, 2003. (3)
(1) Incorporated by reference to the Company's Form 8-K dated November
26, 2002.
(2) Incorporated by reference to the Company's Definitive Proxy
Materials filed with the SEC on May 2, 2003.
(3) Incorporated by reference to the Company's Form 8-K filed with the
SEC on June 16, 2003.
-3-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERPHARM HOLDINGS, INC.
August 8, 2003 By: /S/ DR. MAGANLAL K. SUTARIA
------------------------------
Dr. Maganlal K. Sutaria
Chief Executive Officer
-4-