<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1998
REGISTRATION NO. 333-37071
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EPI TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7389 34-1824770
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification
Incorporation or Organization) Classification Code Number)
Number)
</TABLE>
810 CHICAGO STREET
TOLEDO, OHIO 43611
(419) 727-0495
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
REAL P. REMILLARD
810 CHICAGO STREET
TOLEDO, OHIO 43611
(419) 727-0495
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Lawrence M. Bell, Esq. James Martin Kaplan, Esq.
Ira C. Kaplan, Esq. Zimet, Haines, Friedman & Kaplan
Benesch, Friedlander, Coplan & Aronoff 460 Park Avenue
LLP
2300 BP America Building New York, New York 10022
200 Public Square
Cleveland, Ohio 44114
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /X/
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS,
FILED AS PART OF REGISTRATION STATEMENT,
OF INFORMATION REQUIRED BY FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER
IN FORM S-1 ITEM CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
- ------------ ------------------------------------------------- -------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.......... Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Front Cover Page; Risk Factors; Underwriting
6. Dilution......................................... Dilution
7. Selling Security Holders......................... Inapplicable
8. Plan of Distribution............................. Front Cover Page; Underwriting
9. Description of Securities to be Registered....... Dividend Policy; Description of Securities
10. Interests of Named Experts and Counsel........... Inapplicable
11. Information With Respect to the
Registrant...................................... Front Cover Page; Prospectus Summary; Use of
Proceeds; Dividend Policy; Capitalization;
Summary Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Stockholders;
Relationships Between the Company and Meridian;
Certain Other Relationships and Related
Transactions; Description of Securities; Shares
Eligible for Future Sale; Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Inapplicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
<TABLE>
<S> <C>
PRELIMINARY PROSPECTUS DATED JANUARY 22, 1998
[LOGO] SUBJECT TO COMPLETION
EPI TECHNOLOGIES, INC.
1,250,000 SHARES OF COMMON STOCK AND
1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
</TABLE>
This Prospectus relates to an offering ("Offering") by EPI Technologies,
Inc. (the "Company") of 1,250,000 shares of Common Stock, $.01 par value per
share ("Common Stock"), and 1,250,000 redeemable Common Stock purchase warrants
("Warrants"), through Duke & Co., Inc. (the "Underwriter"). The shares of Common
Stock and the Warrants may be purchased separately and will be transferable
immediately after issuance.
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at an exercise price of $5.50 per share, subject to adjustment in
certain events, for a period of three years commencing two years after the date
of this Prospectus. The Warrants are subject to redemption by the Company, after
obtaining the approval of the Underwriter, at $.10 per Warrant, at any time
commencing two years after the date of this Prospectus on at least 30 days prior
written notice to the holders of the Warrants, provided the closing bid
quotation of the Common Stock as reported on The Nasdaq Stock Market or the last
sales price if quoted on a national securities exchange equals or exceeds $8.25
per share, subject to certain adjustments, on each of 20 consecutive trading
days following the second anniversary of the date of this Prospectus, and
provided that such consecutive trading days end on the third trading day prior
to the date on which the Company gives notice of redemption. The Warrants will
be exercisable until the close of business on the day immediately preceding the
date fixed for redemption. See "Description of Securities -- Warrants."
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that any such market for the
Common Stock or the Warrants will develop after the completion of this Offering,
or that, if developed, it will be sustained. It is anticipated that the initial
public offering price per share of the Common Stock will be $5.00 per share and
that the initial public offering price of the Warrants will be $.10 per Warrant.
The offering price of the Common Stock and the Warrants and the initial
exercise price and other terms of the Warrants were established by negotiations
between the Company and the Underwriter and do not necessarily bear any direct
relationship to the Company's assets, operating results, book value per share or
other generally accepted criteria of value. See "Underwriting." The Company has
applied for quotation of the Common Stock and the Warrants on The Nasdaq
SmallCap Market ("Nasdaq") under the trading symbols "EPIC" and "EPICW,"
respectively. Application has also been made to list the Common Stock and the
Warrants on the Boston Stock Exchange under the trading symbols "EPI" and
"EPIW," respectively. Prior to this Offering, all of the Common Stock has been
owned by Meridian National Corporation ("Meridian") and certain investors. As a
result of this Offering, Meridian's beneficial ownership of the Common Stock
will be reduced from 80% to 40% (or 37.2% if the Underwriter's Overallotment
Option (defined below) is exercised in full). See "Principal Stockholders" and
"Relationships Between the Company and Meridian."
FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN THE COMPANY AND
IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK FACTORS" (PAGE 9) AND "DILUTION" (PAGE
22).
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share....................................... $5.00 $.50 $4.50
Per Warrant..................................... $.10 $.01 $.09
Total (3)....................................... $6,375,000 $637,500 $5,737,500
</TABLE>
(FOOTNOTES APPEAR ON P. 2)
The Common Stock and the Warrants are being offered by the Underwriter,
subject to prior sale, when, as and if delivered to the Underwriter and subject
to the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves the right, pursuant to the terms of the
Underwriting Agreement, to withdraw, cancel or modify this Offering, and to
reject any order in whole or in part. It is expected that delivery of
certificates will be made against payment therefor at the offices of the
Underwriter, 909 Third Avenue, New York, New York 10022, on or about
, 1998.
[LOGO]
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(1) Does not include additional compensation to the Underwriter consisting of:
(a) a non-accountable expense allowance equal to 3% of the gross proceeds
from this Offering, $25,000 of which has been paid by the Company; and (b) a
warrant (the "Underwriter's Warrant") entitling the Underwriter to purchase
up to 125,000 shares of Common Stock and 125,000 Warrants, at a price of
$6.00 per share of Common Stock and $.12 per Warrant for a period of four
years commencing one year after the date of this Prospectus. The Company
also has agreed under certain circumstances to pay to the Underwriter a
warrant solicitation fee of 5% of the exercise price for each Warrant
exercised and to pay the Underwriter a fee (equal to 5% of the first $5
million of transaction consideration, 4% of the next $1 million of
transaction consideration, 3% of the next $1 million of transaction
consideration, 2% of the next $1 million of transaction consideration and 1%
of all transaction consideration thereafter) in the event that the
Underwriter originates a financing, merger, acquisition, joint venture or
other transaction to which the Company is a party. The Company has agreed to
indemnify the Underwriter against certain liabilities, including those
arising under the Securities Act of 1933, as amended (the "Securities Act").
See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriter, but
before payment of (a) the Underwriter's non-accountable expense allowance
($191,250, or $219,938 if the Underwriter's Overallotment Option is
exercised in full), and (b) the other expenses of this Offering (estimated
to aggregate $390,000). See "Underwriting."
(3) The Company has granted the Underwriter an option, exercisable for 45 days
after the completion of this Offering, to purchase from the Company up to an
additional 187,500 shares of Common Stock and 187,500 Warrants upon the same
terms and conditions solely for the purpose of covering overallotments, if
any (the "Underwriter's Overallotment Option"). If the Underwriter's
Overallotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$7,331,250, $733,125, and $6,598,125, respectively. See "Underwriting."
------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, commencing with
its fiscal year ending February 28, 1998, and will make available such other
periodic reports as the Company may deem to be appropriate or as may be required
by law. The Company has registered the Common Stock and the Warrants under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
commencing on the date of this Prospectus, will be subject to the reporting
requirements of the Exchange Act and will file proxy statements and other
information with the Commission.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE OR MAINTAIN THE PRICE OF THE COMMON STOCK AND WARRANTS AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION
MAY TAKE PLACE ON THE NASDAQ SMALLCAP MARKET. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
FOR NEW JERSEY INVESTORS
TO INVEST IN THESE SECURITIES, A NEW JERSEY RESIDENT MUST BE AN ACCREDITED
INVESTOR AS DEFINED AT RULE 501(a) OF REGULATION D, INCLUDING ONE OF THE
FOLLOWING:
(1)THE INVESTOR IS A NATURAL PERSON WHOSE INDIVIDUAL NET WORTH, OR
JOINT NET WORTH WITH THE INVESTOR'S SPOUSE AT THE TIME OF THE INVESTOR'S
PURCHASE, EXCEEDS $1,000,000;
(2)THE INVESTOR IS A NATURAL PERSON WHO HAD AN INDIVIDUAL INCOME IN
EXCESS OF $200,000 (OR $300,000 WITH SUCH PERSON'S SPOUSE) IN EACH OF THE TWO
MOST RECENT YEARS AND HAS A REASONABLE EXPECTATION OF REACHING THE SAME INCOME
LEVEL IN THE CURRENT YEAR.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MUST BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION (INCLUDING THE RISK FACTORS) AND FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, INFORMATION IN THIS PROSPECTUS, INCLUDING SHARE AND PER SHARE DATA,
ASSUMES (I) NO EXERCISE OF THE UNDERWRITER'S OVERALLOTMENT OPTION, THE WARRANTS
OR THE UNDERWRITER'S WARRANT, (II) A 10,000 TO ONE STOCK SPLIT WHICH WAS
EFFECTED IN AUGUST 1997 AND RESULTED IN THE COMPANY HAVING 1,250,000 SHARES OF
COMMON STOCK ISSUED AND OUTSTANDING, AND (III) AN INITIAL OFFERING PRICE OF
$5.00 PER SHARE OF COMMON STOCK AND $.10 PER WARRANT. THE COMPANY IS A HOLDING
COMPANY AND, UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO
THE "COMPANY" ARE TO THE COMPANY AND ITS CONSOLIDATED SUBSIDIARIES, INCLUDING
ENVIRONMENTAL PURIFICATION INDUSTRIES COMPANY, AN OHIO GENERAL PARTNERSHIP
("EPIC"), WHICH COMMENCED OPERATIONS IN 1991. REFERENCES HEREIN TO "FISCAL
1997", "FISCAL 1996" AND "FISCAL 1995" DESCRIBE THE COMPANY'S FISCAL YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995, RESPECTIVELY.
THE COMPANY
The Company is one of the first commercial paint waste recyclers in the
United States. Since 1991, EPIC has processed over 76,500,000 pounds of paint
waste through its recycling facility, including 12,900,000, 14,200,000 and
14,700,000 pounds of paint waste during the nine months ended November 30, 1997
and the years ended February 28, 1997 and February 29, 1996, respectively. The
Company estimates that the annual worldwide generation of paint waste exceeds
3.7 billion pounds, approximately 1.8 billion pounds of which are generated in
the United States. The Company processes hazardous and non-hazardous industrial
paint waste for its customers and creates a recycled product, EPI-PURE-TM-. In
addition to offering its customers an alternative that substantially eliminates
the "cradle to grave" disposal liability otherwise associated with the
generation of hazardous paint waste, the Company believes that the use of its
recycling technologies contributes to the protection of the environment,
conserves vital resources and offers a responsible solution to many of today's
paint waste disposal problems.
The Company uses two different systems to recycle paint waste: the patented
DryPure-TM- system, which generates a resultant dry powder (EPI-PURE-TM-) and
which the Company typically sells as a filler in the formulation of certain
building and construction products; and the Polymeric Recovery System, the
patented paint waste recycling technology which the Company finished installing
in its Toledo, Ohio facility in May 1997 and which is currently undergoing a
start-up phase of production. Along with increasing the Company's processing
capacity, the Polymeric Recovery System produces a recycled product
(EPI-MER-TM-), which the Company intends to sell as a lower cost replacement for
traditional, virgin materials used in formulated products. The Company is
currently marketing EPI-MER-TM- to approximately ten potential customers,
including those in the sealant, coating and adhesive industries.
Historically, the Company has generated in excess of 97% of its annual sales
revenue from the processing of paint waste. The Company has not generated
significant revenues from the sale of EPI-PURE-TM- because the materials which
EPI-PURE-TM- replaces as a filler are generally inexpensive and the DryPure-TM-
system generates a limited supply of EPI-PURE-TM-. The Company believes that
EPI-MER-TM- has a greater range of commercial applications than EPI-PURE-TM- and
that it can be sold at higher margins than EPI-PURE-TM-. For these reasons,
management believes that the Company's profitability is substantially dependent
on sales of EPI-MER-TM-. In addition, if the Company is successful in its
marketing of EPI-MER-TM-, the Company believes that revenue generated from sales
of EPI-MER-TM- will provide the Company with flexibility when pricing its paint
waste processing services. There can be no assurance that the Company will be
able to construct and operate the Polymeric Recovery System in a way that will
enable it to recycle paint waste in a commercially viable manner. Further,
although the Company believes that a commercial market exists for EPI-MER-TM-,
there can be no assurance that the Company will be able to market and sell
EPI-MER-TM- on a profitable basis or at all. See "Risk Factors -- Commercial
Viability of the Polymeric Recovery System" and "-- No Current Sales of EPI-
MER-TM-; Developing Market for a New Product."
The Company markets its paint waste recycling services to businesses that
have spray painting operations that collect paint overspray (wastes) in water
wash spray booths, which are typically used in industrial spray painting
operations. The Company's marketing activities are concentrated in the Midwest
region of the United States where over 80% of its revenues are generated, with
the majority of annual revenues derived from customers in the automotive
assembly business. The Company's customers generally are environmentally
conscientious and by maintaining stringent quality controls, the Company has
established a reputation in the industry of addressing these customer needs.
Generally, the Company's target market for selling EPI-MER-TM- is different from
the customers for which the Company currently recycles paint waste or
3
<PAGE>
to which the Company sells EPI-PURE-TM-. Accordingly, the Company will be
required to develop a new market and relationships with new customers prior to
generating substantial sales of EPI-MER-TM-. The Company intends to use its
current sales force to market and sell EPI-MER-TM-.
Since the Company began marketing its services in 1991, the major barrier to
successfully selling the Company's services has been the cost of the Company's
recycling services compared to the cost of the two main disposal alternatives,
landfilling and incineration. Using the Company's licensed technologies, paint
waste generators pay two to four times more to recycle paint waste as compared
to landfilling and incineration. The major difference between the Company's
services and the disposal alternatives is that the disposal alternatives pose
the potential for significant, long-term costs. The Company believes many
generators of hazardous and non-hazardous paint waste are willing to pay the
higher cost of recycling to substantially eliminate the generators' exposure to
potential, long-term costs associated with the disposal alternatives. For
example, by recycling hazardous paint waste, which during the Company's last two
fiscal years have represented approximately 15% of the Company's annual sales,
businesses avoid liability as a "potential responsible party" at the landfill
where their paint waste or incinerated ash is disposed and which may be declared
a Superfund clean-up site. In addition, generators of non-hazardous paint waste
avoid the expense associated with establishing that they did not contribute to
the contamination of a landfill in the event that they are named as a "potential
responsible party" with respect to the contamination. Further, the Company's
customers substantially avoid the potentially adverse impact of changing
environmental laws and regulations. Over the past five years, the Company has
been successful in convincing many paint waste generators to select the
environmentally sound alternative of the Company's recycling services which
substantially eliminates their potential long-term liability. The Company's
business is dependent upon certain patented technologies licensed from two
separate, non-affiliated companies, one of which, Haden Environmental
Corporation ("Haden Environmental"), is a direct competitor of the Company. See
"Risk Factors -- Dependence on Licensed Technology" and "-- Competition."
The Company's current business strategy is to grow its business by
commercializing the Polymeric Recovery System technology through the following
steps: (i) developing a market for and selling EPI-MER-TM- for use as a lower
cost replacement for traditional, virgin materials used in formulated products;
(ii) the construction, ownership and operation of up to five customized
Polymeric Recovery Systems on-site at large automotive assembly plants in the
United States ("on-site facilities"); and (iii) the construction of a second
facility using the Polymeric Recovery System in the Southeast region of the
United States to serve the market of small and medium size automotive assembly
plants which individually generate lesser amounts of paint waste. The Company
has submitted proposals for on-site facilities to three automotive assembly
plants, two of which are present customers of the Company. However, the Company
has no current commitments for the installation of any on-site facilities. The
Company believes that as a result of the implementation of its business strategy
to commercialize the Polymeric Recovery System (a) certain generators of paint
waste will now be able to purchase and use materials that incorporate
EPI-MER-TM- in the manufacture of their finished products, and (b) on-site
facilities using the Polymeric Recovery System will decrease the price barrier
for the Company's services by eliminating the cost borne by paint waste
generators to transport paint waste to the Company's Toledo, Ohio facility. See
"Risk Factors -- Capital Requirements; Potential Unavailability of Additional
Financing" and "Business -- Marketing Strategy; Proposed Expansion Program."
Meridian, a publicly-traded holding company located in Toledo, Ohio with
businesses in steel distribution and processing operations, formed the Company
under Delaware law in February 1996 as a subsidiary to hold all of the
outstanding stock and partnership interests of National Purification, Inc., an
Ohio corporation ("NPI"), and MEPI Corp., an Ohio corporation ("MEPI"), the sole
general partners of EPIC. In November 1996, the Company issued shares of Common
Stock representing an aggregate 20% interest in the Company for $600,000 to
three non-affiliated investors (the "Minority Stockholders"). Prior to the
completion of this Offering, the Company will issue shares of cumulative
dividend paying preferred stock, $.01 par value per share, to Meridian
("Meridian Preferred Stock") in exchange for certain outstanding indebtedness of
the Company to Meridian. The Company estimates that it will owe Meridian
approximately $4,020,000 immediately prior to the completion of this Offering,
of which $2,000,000 will be exchanged for 1,000,000 shares of Meridian Preferred
Stock, approximately $1,530,000 will be contributed to the capital of the
Company and $490,000 will be repaid to Meridian from the net proceeds of this
Offering. To the extent that the amount of debt exchanged by Meridian for the
Meridian Preferred Stock exceeds the fair market value of such Meridian
Preferred Stock, such excess shall be treated as a contribution by Meridian to
the Company's capital. See "Relationships Between the Company and Meridian --
Meridian Preferred Stock." As a result of this Offering, Meridian's beneficial
ownership of the Common Stock will be reduced from 80% to 40% (or 37.2% if the
Underwriter's Overallotment Option is exercised in full). See "Risk Factors --
Absence of Additional Financial Support from Meridian," "-- Control by Meridian"
and "Relationships Between the Company and Meridian."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED............ 1,250,000 shares of Common Stock and 1,250,000 Warrants.
Each Warrant entitles the registered holder thereof to
purchase one share of Common Stock. The Common Stock and the
Warrants will be separately tradeable and transferable
immediately upon issuance. See "Description of Securities"
and "Underwriting."
OFFERING PRICE................ $5.00 per share of Common Stock and $.10 per Warrant.
COMMON STOCK OUTSTANDING:
PRIOR TO THIS OFFERING...... 1,250,000 shares of Common Stock
AFTER THIS OFFERING (1)..... 2,500,000 shares of Common Stock
WARRANTS OUTSTANDING:
PRIOR TO THIS OFFERING...... (a) 150,000 warrants issued to the Minority Stockholders
(the "Minority Stockholder Warrants"), and (b) 500,000
warrants issued to an investor in a private offering (the
"Bridge Warrants"). See "Description of Securities --
Minority Stockholder Warrants; Bridge Warrants."
AFTER THIS OFFERING (2)..... 1,900,000 Warrants
EXERCISE PRICE OF WARRANTS.... $5.50 per share, subject to adjustment in certain
circumstances. See "Description of Securities -- Warrants."
EXERCISE PERIOD OF WARRANTS... The period commencing , 1999 and expiring ,
2002 (five years after the date of this Prospectus).
REDEMPTION.................... Each Warrant entitles the registered holder thereof to
purchase one share of Common Stock at an exercise price of
$5.50 per share, subject to adjustment in certain events,
for a period of three years commencing two years after the
date of this Prospectus. The Warrants are subject to
redemption by the Company, after obtaining the approval of
the Underwriter, at $.10 per Warrant, at any time commencing
two years after the date of this Prospectus on at least 30
days prior written notice to the holders of the Warrants,
provided the closing bid quotation of the Common Stock as
reported on The Nasdaq Stock Market or the last sales price
if quoted on a national securities exchange equals or
exceeds $8.25 per share, subject to certain adjustments, on
each of 20 consecutive trading days following the second
anniversary of the date of this Prospectus, and provided
that such consecutive trading days end on the third trading
day prior to the date on which the Company gives notice of
redemption. The Warrants will be exercisable until the close
of business on the day immediately preceding the date fixed
for redemption. See "Description of Securities -- Warrants."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
USE OF PROCEEDS............... The Company plans to apply the net proceeds from this
Offering, estimated to aggregate $5,156,250, as follows:
approximately (i) $1,100,000 for the installation of up to
five customized on-site recycling systems; (ii) $600,000 for
the construction of a new facility using the Polymeric
Recovery System in the Southeast region of the United
States; (iii) $550,000 for the partial repayment and
refinancing of the Bank Debt (as hereinafter defined),
including a $50,000 loan closing fee; (iv) $490,000 for the
repayment of advances from Meridian; (v) $260,000 for
repayment of a subordinated cognovit promissory note,
including accrued interest (the "Bridge Note"); (vi)
$250,000 for U.S. EPA Part B permit approval costs; (vii)
$150,000 for improvements to the Polymeric Recovery System
at the Company's Toledo, Ohio facility; and (viii)
$1,756,250 for working capital and general corporate
purposes. See "Use of Proceeds" and "Business."
RISK FACTORS.................. The securities offered hereby involve a high degree of risk
and substantial immediate dilution to investors. See "Risk
Factors" and "Dilution."
PROPOSED NASDAQ SYMBOLS(3).... Common Stock -- "EPIC"
Warrants -- "EPICW"
PROPOSED BOSTON STOCK EXCHANGE
SYMBOLS(3)................... Common Stock -- "EPI"
Warrants -- "EPIW"
</TABLE>
- --------------
(1) Excludes (i) a maximum of 1,250,000 shares of Common Stock issuable upon
exercise of the Warrants offered hereby, (ii) a maximum of 500,000 shares of
Common Stock issuable upon exercise of the Bridge Warrants, (iii) a maximum
of 250,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrant (including Warrants underlying the Underwriter's
Warrant), (iv) an aggregate of 310,000 shares of Common Stock reserved for
issuance pursuant to options available for grant under the Company's stock
option plans, of which 285,000 have been granted effective upon the
completion of this Offering, and (v) a maximum of 150,000 shares of Common
Stock issuable upon exercise of the Minority Stockholder Warrants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Management -- Stock Option
Plans" and "Underwriting."
(2) Excludes (i) the Underwriter's Warrant, and (ii) a maximum of 125,000
Warrants issuable upon exercise of the Underwriter's Warrant.
(3) The Company has applied for listing of the Common Stock and Warrants on
Nasdaq and the Boston Stock Exchange. Although the Company expects the
shares of Common Stock and the Warrants to be approved for listing on Nasdaq
and the Boston Stock Exchange, such listings do not imply that an
established public trading market will develop therefor or, if developed,
that such market will be sustained. See "Risk Factors -- Determination of
Public Offering Price; No Assurance of Public Market."
------------------------
Unless the context otherwise requires, as used herein the term "Company"
means EPI Technologies, Inc. and its consolidated subsidiaries. The Company's
principal executive offices are located at 810 Chicago Street, Toledo, Ohio
43611 and its telephone number is (419) 727-0495.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary selected consolidated financial data set forth in the following
table has been derived from the Consolidated Financial Statements of the
Company. The statement of operations data for each of the three fiscal years
ended February 28, 1997 and balance sheet data as of February 28, 1997 and
February 29, 1996 are derived from the Consolidated Financial Statements of the
Company, which have been audited by Ernst & Young LLP, independent auditors, and
which are included elsewhere in this Prospectus. The data set forth below should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company, including the notes thereto,
and the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
----------------------------------------------------------
1997 1996 1995 1994 1993(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $3,417,070 $3,533,514 $3,459,107 $2,530,066 $1,390,695
Operating costs and expenses:
Costs of operations........................................ 2,307,086 2,196,322 2,023,815 1,496,040 999,447
Selling, general and administrative........................ 1,376,957 1,045,036 941,812 851,546 534,913
---------- ---------- ---------- ---------- ----------
3,684,043 3,241,358 2,965,627 2,347,586 1,534,360
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................................ (266,973) 292,156 493,480 182,480 (143,665)
Other income (expense):
Interest income............................................ 35,584 36,185 30,009 20,192 13,019
Cost of withdrawn registration............................. (275,908) -- -- -- --
Interest expense on external borrowings.................... (219,736) (243,683) (258,985) (272,304) (193,929)
Interest expense on advances from Meridian................. (218,103) (224,300) (186,918) (126,607) (117,318)
Equity in operations of affiliate.......................... -- -- -- -- (194,154)
---------- ---------- ---------- ---------- ----------
(678,163) (431,798) (415,894) (378,719) (492,382)
---------- ---------- ---------- ---------- ----------
Net income (loss) before extraordinary item.................. (945,136) (139,642) 77,586 (196,239) (636,047)
Extraordinary gain -- extinguishment of debt................. 329,279 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ (615,857) $ (139,642) $ 77,586 $ (196,239) $ (636,047)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Loss per common share: (2)
Loss before extraordinary gain............................. $ (0.75)
Extraordinary gain......................................... 0.26
----------
Net loss................................................... $ (0.49)
----------
----------
Pro forma loss per common share: (3)
Loss before extraordinary gain............................. $ (0.60)
----------
----------
BALANCE SHEET DATA:
Working capital (deficiency)................................. $(3,855,044) $(2,862,184) $(2,258,669) $(2,201,117) $(1,920,879)
Total assets................................................. 6,129,790 4,617,583 4,875,188 4,903,737 5,234,966
Property and equipment, net.................................. 3,603,035 1,650,415 1,754,582 1,940,295 1,947,801
Advances from Meridian....................................... 2,965,468 2,673,429 2,448,752 1,884,509 1,635,059
Long-term debt, less current portion......................... 3,983,701 3,395,472 3,997,208 4,517,317 4,948,355
Receivable from former partner, less current portion......... 1,031,875 1,358,625 1,651,875 1,925,625 2,178,125
Stockholders' equity (net capital deficiency):
Meridian Preferred Stock................................... -- -- -- -- --
Common stock............................................... 12,500 10,000 1 1 1
Paid-in capital............................................ 568,646 (9,900) 99 99 99
Deficit.................................................... (3,156,857) (2,541,000) (2,400,858) (2,478,444) (2,282,205)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficiency)...................... (2,575,711) (2,540,900) (2,400,758) (2,478,344) (2,282,105)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash dividends declared per common share..................... 0 0 0 0 0
OTHER OPERATING DATA:
Depreciation and amortization................................ $ 338,690 $ 254,586 $ 257,141 $ 249,580 $ 163,739
Capital expenditures......................................... 2,147,537 140,294 63,510 114,856 99,086
</TABLE>
- ------------------
N/A -- Not applicable.
(1) As described in note 4 of the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus, effective July 1, 1992, MEPI
joined NPI as the sole corporate general partners of EPIC. Prior to July 1,
1992, NPI accounted for its 50% investment in EPIC by the equity method of
accounting. Subsequent to July 1, 1992, NPI and MEPI consolidated EPIC into
their accounts.
(2) Loss per common share is computed using 1,250,000 shares of Common Stock.
For calculation purposes, the 250,000 shares of Common Stock issued to the
Minority Stockholders in November 1996 at a price below the $5.00 per share
proposed public offering price are considered to have been outstanding for
the entire period. The Bridge Warrants, which were issued in August 1997,
are not considered in the calculation of loss per common share because,
upon completion of this Offering, the Bridge Warrant exercise price will
automatically be adjusted to a price in excess of the $5.00 per share for
which shares of Common Stock are being sold in connection with this
Offering.
(3) Pro forma loss per common share is computed using historical earnings and
shares of Common Stock outstanding adjusted to (i) eliminate interest
charges on indebtedness expected to be repaid from the net proceeds of this
Offering, and (ii) reflect the number of shares of Common Stock to be sold
in this Offering in connection with the repayment of such indebtedness.
Accordingly, the Company's loss before extraordinary gain was reduced by
$86,017, which represents interest on (A) $490,000 of advances from
Meridian, and (B) $500,000 to be applied against the Bank Debt, each
expected to be repaid from the net proceeds of this Offering. For
calculation purposes, the weighted average outstanding shares of Common
Stock were increased by 182,000 shares of Common Stock, which represents
the number of shares of Common Stock to be sold in connection with this
Offering which are required to repay such advances from Meridian and such
Bank Debt.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA -- CONTINUED
NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
The summary selected consolidated financial data set forth in the following
table has been derived from the unaudited Condensed Consolidated Financial
Statements of the Company, including the notes thereto. The statement of
operations data for each of the nine months ended November 30, 1997 and 1996 and
balance sheet data as of November 30, 1997 are derived from the unaudited
Condensed Consolidated Financial Statements of the Company, which are included
elsewhere in this Prospectus. The data set forth below should be read in
conjunction with, and is qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the unaudited
Condensed Consolidated Financial Statements of the Company, including the notes
thereto, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
------------------------
1997 1996
NOVEMBER 30, ----------- -----------
1997
AS ADJUSTED(1)
--------------
(BALANCE SHEET
ONLY)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................... $ 2,792,236 $ 2,581,636
Operating costs and expenses:
Costs of operations............................................................... 2,090,744 1,753,798
Selling, general and administrative............................................... 1,093,226 1,045,434
----------- -----------
3,183,970 2,799,232
----------- -----------
Loss from operations................................................................ (391,734) (217,596)
Other income (expense):
Interest income................................................................... 32,820 27,656
Interest expense on external borrowings........................................... (284,423) (171,360)
Interest expense on advances from Meridian........................................ (232,409) (173,370)
----------- -----------
(484,012) (317,074)
----------- -----------
Loss before extraordinary gain...................................................... (875,746) (534,670)
Extraordinary gain -- extinguishment of debt........................................ -- 329,279
----------- -----------
Net income (loss)................................................................... $ (875,746) $ (205,391)
----------- -----------
----------- -----------
Earning (loss) per common share: (2)
Loss before extraordinary gain.................................................... $ (0.70) $ (0.42)
Extraordinary gain................................................................ -- 0.26
----------- -----------
Net loss.......................................................................... $ (0.70) $ (0.16)
----------- -----------
----------- -----------
Pro forma loss per common share: (3)
Loss before extraordinary gain.................................................... $ (0.56) $ (0.33)
----------- -----------
----------- -----------
BALANCE SHEET DATA:
Working capital (deficiency)........................................................ $ 827,304 $(7,209,051) $(5,338,335)
Total assets........................................................................ 9,754,974 6,196,940 6,282,266
Property and equipment, net......................................................... 3,633,870 3,633,870 3,073,765
Advances from Meridian.............................................................. -- 3,698,762 1,976,981
Long-term debt, less current portion................................................ 2,871,113 1,501,113 2,296,836
Receivable from former partner, less current portion................................ 745,000 745,000 1,139,250
Stockholders' equity (net capital deficiency)....................................... 4,963,555 (3,401,457) (2,156,291)
Cash dividends declared per common share............................................ N/A -- --
OTHER OPERATING DATA:
Depreciation and amortization....................................................... $ 367,003 $ 227,989
Capital expenditures................................................................ 298,675 1,455,973
</TABLE>
- --------------------
N/A -- Not applicable.
(1) "As adjusted" amounts reflect (i) the receipt by the Company of the
estimated net proceeds from this Offering, (ii) the repayment of
approximately $490,000 of advances from Meridian, (iii) the exchange of
$2,000,000 of advances from Meridian for 1,000,000 shares of Meridian
Preferred Stock and the contribution by Meridian to the Company's capital of
the remaining debt owed to Meridian, (iv) the payment of $500,000 to be
applied against the Bank Debt along with a loan closing fee of $50,000, (v)
the refinancing of $1,598,000 of Bank Debt to long-term debt (current
portion $228,000), and (vi) the repayment of the Bridge Notes in the
principal amount of $250,000.
(2) Earnings (loss) per common share is computed using 1,250,000 shares of
Common Stock. For calculation purposes, the 250,000 shares of Common Stock
issued to the Minority Stockholders in November 1996 at a price below the
$5.00 per share proposed public offering price are considered to have been
outstanding for the entire period. The Bridge Warrants, which were issued in
August 1997, are not considered in the calculation of earnings (loss) per
common share because, upon completion of this Offering, the Bridge Warrant
exercise price will automatically be adjusted to a price in excess of the
$5.00 per share for which shares of Common Stock are being sold in
connection with this Offering.
(3) Pro forma loss per common share is computed using historical earnings and
shares of Common Stock outstanding adjusted to (i) eliminate interest
charges on indebtedness expected to be repaid from the net proceeds of this
Offering, and (ii) reflect the number of shares of Common Stock to be sold
in this Offering in connection with the repayment of such indebtedness.
Accordingly, the Company's loss before extraordinary gain was reduced by
$72,309 and $62,821 for the nine months ended November 30, 1997 and 1996,
respectively, which represents interest on (A) $490,000 of advances from
Meridian, and (B) $500,000 to be applied against the Bank Debt, each
expected to be repaid from the net proceeds of this Offering. For
calculation purposes, the weighted average outstanding shares of Common
Stock were increased by 198,000 shares of Common Stock and 176,686 shares of
Common Stock for the nine months ended November 30, 1997 and 1996,
respectively, which represents the number of shares of Common Stock to be
sold in connection with this Offering which are required to repay such
advances from Meridian and such Bank Debt.
8
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE CERTAIN RISKS. EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN,
THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY:
1. ACCUMULATED NET LOSSES; WORKING CAPITAL DEFICIENCY; ANTICIPATED FUTURE
LOSSES; NEGATIVE NET WORTH. At November 30, 1997, the Company had accumulated
losses of $4,033,000 and negative net worth of $3,401,000, which include losses
incurred while 50% of the partnership interests of EPIC were owned by another
company, and had a working capital deficiency of $7,209,000. Excluding advances
from Meridian which will be converted to Meridian Preferred Stock, contributed
by Meridian to the capital of the Company prior to the completion of this
Offering or repaid from the net proceeds of this Offering, the working capital
deficiency at November 30, 1997 would have been $3,510,000. The Company has
experienced operating losses during the nine months ended November 30, 1997 and
recognized net losses in five of its six years of operations. The Company
expects such losses to continue until it generates significant sales of
EPI-MER-TM-, the recycled product produced by the Polymeric Recovery System.
Accordingly, management believes that the Company's profitability is
substantially dependent on sales of EPI-MER-TM-. Further, the Company believes
that the DryPure-TM- system, its current paint waste processing system, as
designed, will not generate significant future profits for the Company. There
can be no assurance that the Company will be profitable in the future. See " --
No Current Sales of EPI-MER-TM-; Developing Market for a New Product" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2. ABSENCE OF ADDITIONAL FINANCIAL SUPPORT FROM MERIDIAN. Since its
inception, the Company has been dependent on Meridian for substantial financial
support, as well as for various services. Meridian does not intend to continue
to provide additional financial support to the Company following this Offering.
However, Meridian will remain a guarantor of (i) one-half of the Company's
obligations under a mortgage note (the "Mortgage Note") to the Toledo Lucas
County (Ohio) Port Authority which had an outstanding principal balance of
$2,235,000 at November 30, 1997, and (ii) the Company's obligations under an
employment agreement between the Company and Bruce F. Maison, President and
Chief Executive Officer of the Company. In the event that Meridian should ever
become insolvent or declare bankruptcy, the entire balance of the Mortgage Note
will become due and payable. Accordingly, the Company is substantially dependent
on the continuation of Meridian as a going concern. Meridian has a working
capital deficiency and has incurred losses in four of its last five years.
3. COMMERCIAL VIABILITY OF THE POLYMERIC RECOVERY SYSTEM. The Company
constructed and installed the Polymeric Recovery System under a license
agreement with Aster, Inc., a privately held company ("Aster"). The installed
Polymeric Recovery System is currently undergoing a start-up phase of
production. There can be no assurance that the Company's Polymeric Recovery
System at its Toledo, Ohio facility will be commercially viable or that the
Company will be able to sell, construct and operate the customized on-site
facilities. Additionally, the Company estimates that the first customized
on-site facility will be developed within the next two years and that two years
will be required to construct and develop the second facility using the
Polymeric Recovery System in the Southeast region of the United States. There
are no current commitments for installation of on-site facilities and the
Company has not selected a site in the Southeast region of the United States or
developed plans for the construction of the second facility. Furthermore, the
Company is dependent on the technical services of the inventor of the Polymeric
Recovery System, the loss of which during the start-up phase of the Polymeric
Recovery System at the Company's Toledo, Ohio facility could have a material
adverse effect on the Company's ability to operate the Polymeric Recovery System
in a commercially viable manner. Failure of the Company to successfully market
the Polymeric Recovery System would have a material adverse effect on the future
prospects and growth of the Company. See "Use of Proceeds" and "Business."
4. NO CURRENT SALES OF EPI-MER-TM-; DEVELOPING MARKET FOR A NEW
PRODUCT. Management believes that the Company's profitability is substantially
dependent on sales of EPI-MER-TM-. The Company believes that EPI-MER-TM- can be
used to formulate a broader range of materials than EPI-PURE-TM-, the recycled
product
9
<PAGE>
produced by the DryPure-TM- system, including adhesives, sealants, caulks,
cements, coatings and other related products. Generally, the Company's target
market for selling EPI-MER-TM- is different from the customers for which the
Company recycles paint waste or to which the Company sells EPI-PURE-TM-.
Accordingly, the Company will be required to develop a new market and
relationship with new customers prior to generating substantial sales of
EPI-MER-TM-. In addition, in order to generate sales of EPI-MER-TM-, (i) the
recycled product must meet the same performance characteristics as the material
it replaces, (ii) it must be priced competitively relative to the material
EPI-MER-TM- is replacing and other alternatives which exist for the Company's
prospective customer, and (iii) the Company must be able to produce sufficient
quantities of EPI-MER-TM- to satisfy the customer's processing requirements. To
date, the Company has not sold any EPI-MER-TM-. Although the Company believes a
commercial market exists for EPI-MER-TM-, there can be no assurance that the
Company will be able to successfully market and sell EPI-MER-TM- on a profitable
basis or at all. See "Business -- Recycled Product Market," "-- Marketing
Strategy; Proposed Expansion Program" and "-- Description of Processes."
5. DEPENDENCE ON LICENSED TECHNOLOGY. The Company's business depends on
the use of certain patented technologies licensed from Aster and Haden
Environmental. Although the Company is not aware of any claims challenging the
validity of the patents licensed to the Company by Aster and Haden
Environmental, there can be no assurance that a patent infringement claim will
not be filed and successfully pursued against either Aster or Haden
Environmental. If such a claim is successfully pursued against either licensor,
the Company could lose its rights to use the licensed technology. A successful
patent infringement claim against either Aster or Haden Environmental could have
a material adverse effect on the financial condition, operations and liquidity
of the Company. See "Business -- Technology Licenses."
6. MANAGEMENT'S BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately
$1,756,250, or 34.1%, of the estimated $5,156,250 net proceeds from this
Offering will be used for working capital and other general corporate purposes.
Accordingly, the Company will have broad discretion as to the application of
such proceeds without prior stockholder approval. In addition, the Company does
not expect to spend approximately $1,950,000, or 37.8% of the estimated net
proceeds from this Offering, which are designated for specific projects as
described in "Use of Proceeds", within the next year. Further, management of the
Company has broad discretion to adjust the application and allocation of the net
proceeds from this Offering, including funds received upon exercise of the
Warrants, to address changed circumstances and take advantage of future business
opportunities. By reason of these factors, the success of the Company will be
substantially dependent upon the discretion and judgment of management of the
Company with respect to the application and allocation of the net proceeds from
this Offering. See "Use of Proceeds."
7. CONTROL BY MERIDIAN. On completion of this Offering, Meridian will
beneficially own, in the aggregate, 40% (or 37.2% if the Underwriter's
Overallotment Option is exercised in full) of the then issued and outstanding
shares of Common Stock. Accordingly, Meridian will be in a position to
significantly influence the election of the Company's directors and other
stockholder actions, including certain fundamental corporate transactions such
as a merger or sale of substantially all the assets of the Company. In addition,
Meridian's control could have the effect of depressing the market price of the
Company's securities because it could adversely affect the ability of other
stockholders to effect changes in management of the Company. See "Management,"
"Relationships Between the Company and Meridian," and "Principal Stockholders."
8. PENDING INVESTIGATION OF THE UNDERWRITER. The Underwriter is aware that
the Securities and Exchange Commission is conducting an investigation concerning
certain of the Underwriter's trading practices and mark-ups in connection with
two prior public offerings underwritten by the Underwriter. According to the
Securities and Exchange Commission, this investigation "should not be construed
as an indication by the Commission or its staff that any violation of law has
occurred, nor as a reflection upon any person, entity or security." From time to
time, the Underwriter has also received requests for information and documents
from various other authorities in connection with its business activities. The
Underwriter has complied with, or is in the process of complying with, all such
requests and is fully cooperating with such authorities. There can be no
assurance that any investigation or inquiry will not adversely and materially
affect this Offering or subsequent trading in the Common Stock and/or Warrants
of the Company. See "Underwriting."
10
<PAGE>
9. UNDERWRITER'S LIMITED UNDERWRITING EXPERIENCE. While certain of the
officers of the Underwriter have significant experience in corporate financing
and the underwriting of securities, the Underwriter has previously underwritten
only five public offerings. Accordingly, there can be no assurance that the
Underwriter's limited public offering experience will not affect this Offering
of the Common Stock and Warrants and subsequent development of a trading market,
if any, in such securities.
10. COMPETITION. Approximately 99% of all paint waste in the United States
is disposed of through either landfilling or incineration, both of which
generally offer substantially lower costs to generators of paint waste.
Landfilling and incineration are provided by national, regional and local
companies, many of which have substantially greater resources than the Company.
The Company's competitive advantage over landfilling and incineration is
dependent on current stringent environmental regulatory laws and regulations. In
the event of a relaxation of these environmental regulations, the Company could
lose its competitive advantage which would have a material adverse effect on the
financial condition, operations and liquidity of the Company. Additionally, the
Company's business is dependent on the continued use of water wash spray booths
by companies that have spray painting operations. The introduction of new
technology that replaces water wash spray booths would have a material adverse
effect on the financial condition, operations and liquidity of the Company. See
"Business -- Competition."
The Company is aware of three other companies, Haden Environmental, Salem
Environmental Services and Nortru, a division of Philip Environmental Services,
that compete directly with the Company in the paint waste recycling business.
These competitors have substantially greater financial, marketing and other
resources than the Company. There can be no assurance that one of the Company's
competitors or a new competitor will not develop a method of recycling paint
waste which is less expensive than recycling utilizing the Polymeric Recovery
System or the DryPure-TM- system. Additionally, there can be no assurance that
large industrial customers or other waste management companies will not attempt
to develop their own methods of recycling or otherwise minimizing, treating or
disposing of paint wastes. See "Business -- Customers and Marketing" and "--
Competition."
Management believes that currently there are no recycled products similar to
EPI-MER-TM- which are sold as a lower cost replacement for traditional, virgin
materials used in formulated products. However, no assurances can be given that
current suppliers of traditional, virgin materials which would be replaced by
EPI-MER-TM- will not lower their prices to compete with EPI-MER-TM-. In
addition, no assurances can be given that companies with substantially greater
resources than the Company will not enter the replacement market for
traditional, virgin materials in formulated products. See "Business --
Competition."
11. LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR ON-SITE FACILITIES. The
Company intends to target the automotive market for the sale of on-site
facilities, which represents approximately 10% of the total United States paint
waste market. The Company believes that only 34 of the 68 automotive assembly
plants in the United States generate sufficient paint waste to justify the
purchase of a Polymeric Recovery System. This limited number of potential
customers may negatively impact the Company's ability to sell on-site
facilities. There can be no assurance that the Company will be able to sell,
finance and operate on-site Polymeric Recovery Systems. The failure to generate
such sales could have a material adverse effect on the financial condition,
operations and liquidity of the Company. See "Business -- Paint Waste Processing
Market."
12. ENVIRONMENTAL REGULATIONS. The Company's business currently consists
of the recycling of paint waste. Each aspect of this business is subject to
significant federal, state and local environmental regulations. Based upon
current laws and regulations, the Company believes that its policies, practices
and procedures substantially comply with current applicable environmental laws
and regulations. However, the Company will be subject to other state
environmental laws and regulations when it installs on-site facilities outside
the State of Ohio and develops the second paint waste processing facility in the
Southeast region of the United States. No assurances can be given that such
other state environmental laws or regulations or that future changes in
environmental laws, regulations, or interpretations currently applicable to the
Company or changes in the nature of the Company's operations will not have a
material adverse effect on the financial condition, operations and liquidity of
the Company. See "Business -- Environmental Standards and Government
Regulation."
11
<PAGE>
13. LACK OF BOARD COMMITTEES AND MORE THAN ONE INDEPENDENT DIRECTOR. The
Company's Board of Directors currently consists of four directors, only one of
whom is independent. The Company has agreed for a period of three years after
the completion of this Offering to use its best efforts to elect to the Board a
nominee designated by the Underwriter who is reasonably acceptable to the
Company. The Underwriter has not yet designated a nominee to the Board. In
addition, although the Board intends to establish an independent audit committee
and compensation committee upon the completion of this Offering, the Board
currently does not have such committees. See "Management -- Executive Officers
and Directors."
14. IMPACT OF DENIAL OF U.S. EPA PERMIT. In July 1994, the Company
submitted an application with the U.S. Environmental Protection Agency (the
"U.S. EPA") for an operating permit identified as a "Part B" permit, which, as a
processor of hazardous paint waste, the Company is required to obtain. In
connection with its Part B permit application, the Company has requested
authorization to store hazardous paint waste which will enhance its operating
efficiencies. The Company is operating under interim status until a final
determination on its application for a Part B permit is made by the U.S. EPA.
Historically, the U.S. EPA has taken several years to review submitted
applications for permits of this type. There can be no assurance that the U.S.
EPA will issue a Part B permit to the Company, or, if such a permit is issued,
whether the operational and control conditions of the permit will allow the
Company to continue operations in a profitable manner. The U.S. EPA's denial of
a Part B permit could materially adversely impact the Company's relations with
its customers. Additionally, the Company estimates that the testing requirements
necessary to demonstrate compliance with the U.S. EPA's standards for approval
of a Part B permit or capital expenditures necessary to eliminate the need for a
Part B permit will cost approximately $250,000. Although the Company continually
evaluates its alternatives in the event that its application for a Part B permit
is denied, denial of such a permit could have a material adverse effect on the
financial condition, operations and liquidity of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Business -- Development of the Paint Waste
Recycling Business" and "-- Environmental Standards and Government Regulation."
15. DEPENDENCE ON THE AUTOMOTIVE INDUSTRY AND CERTAIN CUSTOMERS. Sales to
companies involved in the automotive industry, which is directly impacted by
overall economic cycles, represent approximately 75% of the Company's annual
sales revenue. Accordingly, the Company is substantially dependent on the
continued success of the automotive industry and an economic downturn which
adversely affects the automotive industry likely would have a direct negative
impact on the Company's results of operations. In addition, although
approximately 55% of the Company's customers (representing approximately 82% of
the Company's current sales volume) have been customers of the Company since
1994, substantially all of the Company's business is generated from individual
purchase orders, which define the price for which the Company will process paint
waste and the quality of the paint waste to be supplied by the customer but
which do not require the customer to send any paint waste to the Company.
Further, for the fiscal year ended February 28, 1997, two of the Company's
customers, ARK, Inc. (American Recycling of Kentucky) and Subaru-Isuzu
Automotive, Inc., aggregated approximately 34.9% of the Company's sales revenue.
The loss of either of these customers could have a materially adverse effect on
the Company's results of operations. See "Business -- Customers and Marketing."
16. CAPITAL REQUIREMENTS; POTENTIAL UNAVAILABILITY OF ADDITIONAL
FINANCING. The Company intends to use a significant portion of the net proceeds
from this Offering to implement a portion of its proposed expansion program. The
Company plans to seek a substantial amount of additional financing through
industrial development revenue bonds from government sources (or, in the event
that industrial development revenue bond financing is not available on favorable
economic terms, from conventional financing sources) to fund the balance of its
proposed expansion program not covered by the net proceeds from this Offering.
The Company has no current commitments or arrangements for such financing and
there can be no assurance that such financing will be available or, if
available, that it will be available on acceptable terms. Accordingly, all
aspects of the Company's proposed expansion program are contingent upon
obtaining external financing. In the event that the Company is unable to obtain
appropriate industrial development
12
<PAGE>
revenue bond financing or other conventional financing, the Company will be
unable to complete its proposed expansion program. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business."
17. DEBT SERVICE; BENEFITS OF OFFERING TO INSIDERS. The Company will be
dependent on cash on hand and cash flow from operations to repay its
indebtedness. The Mortgage Note had a principal balance of $2,235,000 at
November 30, 1997. Haden Purification, Inc. ("Haden Purification") has assumed
liability for one-half of the remaining principal, interest and fee payments due
under the Mortgage Note. Additionally, at November 30, 1997, the Company owed
$2,098,000 pursuant to three promissory notes (the "Bank Debt") executed by the
Company in favor of National Bank of Canada (the "Senior Lender"). The Senior
Lender has agreed upon the completion of this Offering to refinance the Bank
Debt upon receiving a $500,000 principal payment and a $50,000 loan closing fee
from the net proceeds of this Offering. If the Company is unable to meet its
debt service obligations, the Company will be required to restructure its debt
or seek additional debt or equity financing. There can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. Additionally, in the event that Haden
Purification defaults on the debt it assumed, the Company will be liable for
repayment of the entire outstanding Mortgage Note, which would have a materially
adverse impact on the financial condition and liquidity of the Company. Further,
although the Senior Lender has agreed to refinance the Bank Debt in connection
with the closing of this Offering, no assurance can be given that such
refinancing will occur. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
In connection with the refinancing of the Bank Debt, the Senior Lender has
agreed that (i) Meridian will no longer be required to be a co-signer, (ii) the
Chairman of the Board of Directors, Chief Executive Officer and President of
Meridian, who is also Chairman of the Company's Board, will be released from his
personal guaranty of the Bank Debt, and (iii) MNP Corporation, which owns 6.7%
of the outstanding shares of Common Stock, will be released from its guaranty of
$750,000 of the Bank Debt. See "Management -- Employment Contract,"
"Relationships Between the Company and Meridian" and "Certain Other
Relationships and Related Transactions."
18. ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are subject to
redemption by the Company, after obtaining the approval of the Underwriter, at
$.10 per Warrant, at any time commencing two years after the date of this
Prospectus on at least 30 days prior written notice to the holders of the
Warrants, provided the closing bid quotation of the Common Stock as reported on
The Nasdaq Stock Market or the last sales price if quoted on a national
securities exchange equals or exceeds $8.25 per share, subject to certain
adjustments, on each of 20 consecutive trading days following the second
anniversary of the date of this Prospectus, and provided that such consecutive
trading days end on the third trading day prior to the date on which the Company
gives notice of redemption. Upon the giving of such notice of redemption,
holders of the Warrants will lose their right to exercise the Warrants, except
during the notice of redemption period. Upon the receipt of a notice of
redemption of the Warrants, the holders thereof would be required to (i)
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, (ii) sell the Warrants at the then market
price, if any, when they might otherwise wish to hold the Warrants, or (iii)
accept the redemption price which could be substantially less than the market
value of the Warrants at the time of redemption. See "Description of Securities
- -- Warrants."
19. EFFECT OF OFFERING ON TAX NET OPERATING LOSSES. The consummation of
this Offering will result in an "ownership change" of the Company within the
meaning of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended
(the "Code"). Consequently, the Company's ability to use its net operating loss
carryforwards and "pre-change" deductions, losses and tax credits to offset
income generated subsequent to this Offering will generally be subject to an
annual limitation equal to the value of the Company's equity immediately before
this Offering (which will generally be reduced by any capital contributions made
to the Company or any of its subsidiaries during the two-year period immediately
before the change date) multiplied by the then applicable long-term tax exempt
rate applicable to ownership changes occurring during the month this Offering
occurs. See "Certain Federal Income Tax Considerations -- Ownership Change and
Limitation of Losses, Credits and Deductions."
13
<PAGE>
20. DEPENDENCE ON KEY PERSONNEL. The Company's success is highly dependent
on the efforts and abilities of Bruce F. Maison, its President and Chief
Executive Officer. Mr. Maison is a party to an employment agreement with the
Company and the Company carries key man life insurance on Mr. Maison. The loss
of the services of Mr. Maison could have a material adverse effect on the
financial condition, operations and liquidity of the Company. See "Management."
21. ANTI-TAKEOVER PROVISIONS. The Company's Second Restated Certificate of
Incorporation provides that the Company's stockholders may not change the number
of directors and classifies the Board. In addition, the affirmative vote of
two-thirds of the outstanding shares of voting stock issued by the Company is
required to remove a director from office. These provisions may have the effect
of deterring or delaying certain transactions in which its stockholders might
otherwise receive a premium for their shares over the then current market
prices, and may limit the ability of its stockholders to approve transactions
that they may deem to be in their best interests. In addition, the Board has the
authority to fix the rights and preferences of and issue shares of the Company's
Preferred Stock, which may have the effect of delaying or preventing a change in
control of the Company without action by its stockholders. See "Management,"
"Description of Securities -- Preferred Stock," and "-- Certain Provisions of
Delaware Law and of the Company's Second Restated Certificate of Incorporation
and By-laws."
22. DILUTION. Investors purchasing shares of Common Stock in this Offering
will incur immediate and substantial dilution in the net tangible book value per
share of the Common Stock from the initial public offering price as compared to
the increase in net tangible book value per share that will accrue to the
existing stockholders. Such dilution is estimated to be $3.93 per share (or
approximately 79%), based on certain assumptions. See "Dilution."
23. ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on the
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The payment of dividends by the Company on the Common Stock
will depend on its earnings and financial condition and such other factors as
the Board may consider relevant. The Company currently intends to retain its
earnings to assist in financing the development of its business. In addition,
the Company must pay all accrued and unpaid dividends on the Meridian Preferred
Stock prior to declaring or paying any dividends on the Common Stock. Further,
the terms of the additional financing that the Company plans to seek to fund a
significant portion of its proposed expansion program may contain covenants that
limit the Company's ability to pay dividends on shares of Common Stock. See "--
Capital Requirements; Potential Unavailability of Additional Financing,"
"Dividend Policy" and "Relationships Between the Company and Meridian--Meridian
Preferred Stock."
24. DETERMINATION OF PUBLIC OFFERING PRICE; NO ASSURANCE OF PUBLIC
MARKET. Prior to this Offering, there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering price of
the Common Stock and the Warrants and the exercise price and other terms of the
Warrants were determined by negotiations between the Company and the Underwriter
and do not necessarily bear any relationship to the Company's assets, operating
results, book value per share or other generally accepted criteria of value. The
offering price of the Common Stock and the Warrants, as well as the exercise
price of the Warrants, should not be construed as indicative of their value.
Furthermore, there can be no assurance that an active public market for the
Common Stock or the Warrants will develop after this Offering or that, if
developed, it will be sustained. As a result, purchasers of the Common Stock and
the Warrants will be exposed to a risk of decline in the market price and
liquidity of the Common Stock and the Warrants after this Offering. See
"Underwriting."
25. INSURANCE AND POTENTIAL LIABILITY. The Company maintains commercial
general liability insurance, including insurance relating to pollution legal
liability ($1,000,000 per occurrence and $2,000,000 total), and
personal/advertising injury and product liability insurance ($1,000,000 per
occurrence and in total). In addition, the Company is covered by an umbrella
insurance policy maintained by Meridian that provides an aggregate of
$10,000,000 of coverage relating to personal injury and product liability for
Meridian and its subsidiaries. After the completion of this Offering, the
Company will obtain its own insurance policies, including an umbrella insurance
policy covering the Company and its subsidiaries which will provide an aggregate
of $5,000,000 in coverage. The Company considers the coverage provided by its
current policies
14
<PAGE>
and those policies which will be obtained after the completion of this Offering
to be adequate and customary for its industry. Nevertheless, a partially or
completely uninsured claim against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the financial condition,
operations and liquidity of the Company. In addition, a substantial claim
against Meridian or one of its other subsidiaries will limit the umbrella
insurance protection available to the Company. Further, the insurance policies
the Company will obtain after the completion of this Offering will likely be
more expensive than the policies which currently insure the Company.
26. SHARES ELIGIBLE FOR FUTURE SALE. Although the Company has agreed,
without the prior written consent of the Underwriter, except for certain
circumstances, not to sell or issue any equity securities or sell or grant any
options, warrants or rights to purchase any equity securities issued by the
Company for a period of three years after the completion of the Offering, no
assurance can be given as to the effect, if any, that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will have
on the market price of the Common Stock from time to time. Sales of substantial
amounts of Common Stock (including shares issued upon the exercise of warrants
or stock options), or the possibility that such sales could occur, could
adversely affect the market price of the Common Stock and could also impair the
Company's ability to raise capital through an offering of its equity securities
in the future. Upon the completion of this Offering, the Company will have
outstanding 2,500,000 shares of Common Stock (2,687,500 shares of Common Stock
if the Underwriter's Overallotment Option is exercised in full). The 1,250,000
shares of Common Stock and 1,250,000 Warrants sold in this Offering (1,437,500
shares of Common Stock and 1,437,500 Warrants if the Underwriter's Overallotment
Option is exercised in full) and the 1,250,000 shares of Common Stock issuable
upon exercise of the Warrants (1,437,500 shares of Common Stock if the
Underwriter's Overallotment Option is exercised in full) will be freely
tradeable without restrictions under the Securities Act, except for any shares
purchased by an "affiliate" of the Company (as that term is defined in the rules
and regulations under the Securities Act) that will be subject to the resale
limitations of Rule 144 under the Securities Act. The 1,000,000 shares of Common
Stock owned by Meridian, 125,000 shares of Common Stock issuable to the
Underwriter pursuant to the Underwriter's Warrant, the 150,000 Minority
Stockholder Warrants, the 500,000 Bridge Warrants and 125,000 warrants issuable
to the Underwriter pursuant to the Underwriter's Warrant (along with the 775,000
shares of Common Stock issuable upon exercise of such warrants), which are or
will be outstanding upon the completion of this Offering are or will be treated
as "restricted securities" for purposes of Rule 144. Therefore, such warrants
and shares of Common Stock may not be resold in a public distribution except in
compliance with the registration requirements of the Securities Act, or an
exemption therefrom, or pursuant to Rule 144 under the Securities Act. See
"Shares Eligible for Future Sale."
In addition to the restrictions under the Securities Act, except for
Meridian (which has agreed to a three year lock-up period), each director,
officer, Minority Stockholder and the holder of the Bridge Warrants has entered
into an agreement with the Underwriter pursuant to which he, she or it has
agreed not to sell or otherwise transfer any securities of the Company for a two
year period following the completion of this Offering without the prior consent
of the Underwriter, provided, however, that the foregoing limitations shall be
for a one year period with respect to the sale or transfer of the Minority
Stockholder Warrants and the Bridge Warrants. See "Relationships Between the
Company and Meridian."
27. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's
Second Restated Certificate of Incorporation authorizes the issuance of an
aggregate of 2,500,000 shares of "blank check" Preferred Stock (as hereinafter
defined), with designations, rights and preferences determined from time to time
by the Board. Accordingly, the Board is empowered, without further stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. The 1,000,000 shares of Meridian
Preferred Stock will be the only shares of Preferred Stock outstanding upon the
completion of this Offering. Except for the Meridian Preferred Stock, the
Company will not issue any shares of Preferred Stock to its officers, directors
or affiliates except on terms similar to those offered to all the Company's
existing stockholders or to new stockholders or as may be approved by a majority
of the independent, disinterested directors on the Board who have access, at the
Company's expense, to the Company's counsel or independent counsel. Although the
Company has no current plans to issue any additional shares of Preferred Stock,
in the event of
15
<PAGE>
issuance, the Preferred Stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company. There can be no assurance that shares of Preferred Stock will not be
issued at some time in the future in addition to the shares of Meridian
Preferred Stock. See "Relationships Between the Company and Meridian -- Stock
Ownership" and "Description of Securities -- Preferred Stock."
28. POSSIBLE DELISTING AND RISK OF PENNY STOCK. The Common Stock and
Warrants will be quoted on Nasdaq and the Boston Stock Exchange, both of which
require the satisfaction of certain maintenance criteria in order to continue
the listing of the Common Stock and Warrants. There can be no assurance that the
Company will continue to satisfy such maintenance criteria following this
Offering. If the Company is unable to satisfy such criteria in the future, the
Common Stock and the Warrants may be delisted from trading on Nasdaq and the
Boston Stock Exchange, as the case may be. If the Common Stock and the Warrants
were to be delisted from trading on both Nasdaq and the Boston Stock Exchange,
trading, if any, would thereafter be conducted in the over-the-counter market in
the so-called "pink sheets" or on the "Electronic Bulletin Board" of the
National Association of Securities Dealers, Inc., and consequently an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Regulations enacted by the
Commission generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on Nasdaq or a national securities
exchange and any equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000 if such issuer has been in continuous operation
for three years or more, (ii) net tangible assets of at least $5,000,000 if such
issuer has been in continuous operation for less than three years, or (iii)
average annual revenue of at least $6,000,000 if such issuer has been in
continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if the Company's securities are not quoted on Nasdaq or the
Boston Stock Exchange, or the Company does not meet the other exceptions to the
penny stock regulations cited above, trading in the Company's securities could
be covered by Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and
non-exchange listed securities. Under such rule, broker/dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities also are exempt from this rule if the market price is at
least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and thus
the ability of purchasers of the Company's securities to sell their securities
in the secondary market.
29. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Prospectus
contains forward-looking statements including statements regarding, among other
items, the Company's business strategies, continued growth in the Company's
markets, and anticipated trends in the Company's business and the industry in
which it operates. The words "believe," "expect," "anticipate," "intends,"
"forecast," "project," and similar expressions identify forward-looking
statements. Such forward-looking statements are based upon the Company's
expectations and are subject to a number of risks and uncertainties, many of
which are beyond the Company's control. Actual results could differ materially
from such forward-looking statements, as a result of the factors described under
this "Risk Factors" section and elsewhere herein, including among others,
regulatory or economic influences. In light of these risks and uncertainties,
there can be no assurance that any forward-looking information contained in this
Prospectus will in fact transpire or prove to be accurate. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
section.
16
<PAGE>
30. EFFECT OF ISSUANCE OF COMMON STOCK ON EXERCISE OF WARRANTS AND OPTIONS;
POSSIBLE ISSUANCE OF ADDITIONAL OPTIONS. Immediately after this Offering,
assuming exercise of the Underwriter's Overallotment Option in full, the Company
will have outstanding options and warrants to purchase an aggregate of up to
2,660,000 shares of Common Stock, including the Warrants and the Underwriter's
Warrant (including the Warrants issuable upon the exercise of the Underwriter's
Warrant). Unless registered for sale, any shares of Common Stock acquired upon
the exercise of such warrants or options would be "restricted securities" for
purposes of Rule 144, subject to a one-year holding period (which commences when
shares are issued upon exercise of a warrant or option), volume and other resale
restrictions of Rule 144. The Company has agreed to use its reasonable efforts
to file and maintain, so long as the Warrants are exercisable, a current
Registration Statement with the Commission relating to the Warrants and the
shares of Common Stock underlying the Warrants. In addition, the Underwriter has
certain demand and "piggyback" registration rights with respect to the shares of
Common Stock underlying the Underwriter's Warrant (and the Warrants underlying
the Underwriter's Warrant) and the holders of the Minority Stockholder Warrants
and the holder of the Bridge Warrants have certain "piggyback" registration
rights with respect to the shares of Common Stock underlying the Minority
Stockholder Warrants and the Bridge Warrants, respectively.
The exercise of such warrants or options and the sale of the underlying
shares of Common Stock (or even the potential of such exercise or sale) may have
a depressive effect on the market price of the Company's securities. The
exercise of the options and warrants also may have a dilutive effect on the
interests of investors in this Offering. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected because the holders of the outstanding warrants and options can be
expected to exercise them, to the extent they are able to, at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the warrants and options.
See "Management -- Stock Option Plans," "Description of Securities" and
"Underwriting."
31. DEPRESSIVE EFFECT OF THE MERIDIAN PREFERRED STOCK. The Meridian
Preferred Stock has dividend and liquidation preferences over the Common Stock.
Dividends paid or accrued on the Meridian Preferred Stock will be deducted from
the net income of the Company in determining income per share attributable to
the Common Stock, which could negatively impact the market value. See
"Description of Securities -- Preferred Stock."
32. NECESSITY OF FUTURE REGISTRATION OF WARRANTS AND STATE BLUE SKY
REGISTRATION; EXERCISE OF WARRANTS. The Warrants will trade separately upon the
completion of this Offering. Although the Warrants will not knowingly be sold to
purchasers in jurisdictions in which the Warrants are not registered, qualified
for sale or exempt, purchasers may buy Warrants in the after-market or may move
to jurisdictions in which the Warrants and the Common Stock underlying the
Warrants are not so registered or qualified or exempt. In this event, the
Company would be unable lawfully to issue Common Stock to those persons desiring
to exercise their Warrants (and the Warrants will not be exercisable by those
persons) unless and until the Warrants and the underlying Common Stock are
registered or qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such registration or qualification requirements
exists in such jurisdictions. There can be no assurance that the Company will be
able to effect any such required registration or qualification.
The Warrants will not be exercisable unless the Company maintains a current
Registration Statement on file with the Commission either by filing
post-effective amendments to the Registration Statement of which this Prospectus
is a part or by filing a new registration statement with respect to the exercise
of the Warrants. The Company has agreed to use its reasonable efforts to file
and maintain, while the Warrants are exercisable, a current registration
statement with the Commission relating to the Warrants and the shares of Common
Stock underlying the Warrants. However, there can be no assurance that it will
do so or that the Warrants or such underlying Common Stock will be or continue
to be so registered.
The value of the Warrants could be adversely affected if a then current
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not available pursuant to an effective registration
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<PAGE>
statement or if such Common Stock is not registered or qualified for sale or
exempt from registration or qualification in the jurisdictions in which the
holders of Warrants reside. See "Description of Securities -- Warrants."
33. LIMITATION ON LIABILITY OF DIRECTORS FOR MONETARY DAMAGES. The
Company's Second Restated Certificate of Incorporation contains a provision
limiting, to the fullest extent permitted by Delaware law, personal liability of
the Company's directors for monetary damages for breach of fiduciary duty. By
virtue of this provision, under current Delaware law, a director of the Company
will not be personally liable for monetary damages for breach of his fiduciary
duty as a director, except for liability for (i) any breach of his duty of
loyalty to the Company or to its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) dividends or stock purchases or redemptions that are unlawful under
Delaware law, and (iv) any transaction from which a director derives an improper
personal benefit. See "Management -- Limitation on Directors' Liability;
Indemnification; Insurance."
34. UNDERWRITER MARKET MAKING ACTIVITIES. In order to facilitate this
Offering, the Underwriter may engage in transactions that stabilize, maintain or
otherwise affect the prices of the Common Stock and Warrants. Specifically, the
Underwriter may overallot in connection with this Offering, creating a short
position in the Common Stock and/or Warrants for its own account. In addition,
to cover overallotments or to stabilize the price of the Common Stock and
Warrants, the Underwriters may bid for, and purchase, shares of Common Stock and
Warrants in the open market. The Underwriter may also reclaim selling
concessions allowed to a dealer for distributing the Common Stock and Warrants
in this Offering, if the Underwriter repurchases previously distributed Common
Stock and Warrants in transaction to cover short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Common Stock and Warrants above independent market levels.
The Underwriter is not required to engage in these activities, and may end any
of these activities at any time. See "Underwriting."
35. UNDERWRITER'S INFLUENCE ON THE MARKET. A significant number of shares
of Common Stock and Warrants offered hereby may be sold to customers of the
Underwriter. Such customers subsequently may engage in transactions for the sale
or purchase of such securities through or with the Underwriter. Although it has
no obligation to do so, the Underwriter intends to engage in market-making
activities or solicited broker's activities with respect to the purchase or sale
of Common Stock and Warrants on Nasdaq or other over-the-counter market where
such securities will trade. However, no assurance can be given that the
Underwriter will continue to participate as a market maker in the securities of
the Company or that other broker/dealers will make a market in such securities.
The Underwriter also has the right to act as the Company's exclusive agent in
connection with any future solicitation of warrantholders to exercise their
Warrants. Unless granted an exemption by the Commission under the applicable
Exchange Act rules and regulations, the Underwriter will be prohibited from
engaging in any market-making activities or solicited brokerage activities with
regard to the Company's securities during a period prior to the commencement of
any such solicitation and ending on the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
the Underwriter may have to receive a fee for the exercise of the Warrants
following such solicitation. As a result, the Underwriter and soliciting
broker/dealers may be unable to continue to make a market in the Company's
securities during certain periods while the exercise of the Warrants is being
solicited. Such a limitation, while in effect, could impair the liquidity and
market price of the Company's securities. See "Underwriting."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
and Warrants, after deduction of underwriting discounts and estimated offering
expenses, are estimated to aggregate $5,156,250 (or $5,986,000 if the
Underwriter's Overallotment Option is exercised in full), assuming an initial
public offering price of $5.00 per share of Common Stock and $.10 per Warrant.
The Company anticipates that the net proceeds from this Offering will be used as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE
APPROXIMATE OF NET
AMOUNT PROCEEDS
------------ ------------
<S> <C> <C>
Five customer on-site processing equipment installations (1).......................... $ 1,100,000 21.33%
Southeast U.S. facility and equipment expansion (2)................................... 600,000 11.64%
Repayment of the Bank Debt (3)........................................................ 500,000 9.70%
Bank Debt loan closing fee (3)........................................................ 50,000 0.97%
Repayment of advances from Meridian (4)............................................... 490,000 9.50%
Repayment of Bridge Note, including interest (5)...................................... 260,000 5.04%
U.S. EPA Part B permit approval costs................................................. 250,000 4.85%
Polymeric Recovery System improvements................................................ 150,000 2.91%
Working capital (6)................................................................... 1,756,250 34.06%
------------ ------------
$ 5,156,250 100.00%
------------ ------------
------------ ------------
</TABLE>
- --------------
(1) The Company intends, if it receives sufficient customer orders, to purchase
and install processing equipment at up to five customer plant facilities.
Management currently estimates that the first customized on-site facility
will be developed within the next year and that the cost of constructing and
installing five customer on-site processing equipment installations will be
approximately $5,000,000 (exclusive of start-up costs). The Company plans to
obtain the remaining approximately $3,900,000 through industrial development
revenue bond financing or, in the event that industrial development revenue
bond financing is not available on favorable terms, from conventional
financing sources. See "Risk Factors -- Capital Requirements; Potential
Unavailability of Additional Financing," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- General" and "-- Marketing Strategy."
(2) The Company intends to build a second paint waste processing facility in the
Southeast region of the United States. Management currently estimates that
this new facility including equipment will cost approximately $3,000,000
(exclusive of start-up costs) and will be developed by the end of 1999. The
Company plans to obtain the remaining approximately $2,400,000 through
industrial development revenue bond financing or, in the event that
industrial development revenue bond financing is not available on favorable
terms, from conventional financing sources. See "Risk Factors -- Capital
Requirements; Potential Unavailability of Additional Financing,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- General" and
"-- Marketing Strategy."
(3) The principal balance on the Bank Debt incurred by the Company to finance
the expansion of the Company's paint waste recycling operation in Toledo,
Ohio, was $2,098,000 at November 30, 1997. The Senior Lender has agreed upon
the completion of this Offering to refinance the Bank Debt upon receiving a
$500,000 principal payment and a $50,000 loan closing fee from the net
proceeds of this Offering. The refinanced Bank Debt will mature in five
years and provide for a seven-year monthly amortization schedule at the
annual rate of the Senior Lender's prime rate plus 1%. The Senior Lender has
also agreed that upon the completion of this Offering the present guarantors
of the Bank Debt and Meridian would not be obligated to the Senior Lender
under the terms of the refinancing. The Senior Lender will require a
$750,000 compensating cash balance be maintained with the Senior Lender
after the refinancing.
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<PAGE>
(4) The Company estimates that it will owe Meridian approximately $4,020,000
immediately prior to the completion of this Offering, of which $2,000,000
will be exchanged for 1,000,000 shares of Meridian Preferred Stock and
approximately $1,530,000 will be contributed to the capital of the Company
as a capital contribution with respect to Meridian's Common Stock in the
Company. Meridian will receive, in addition to the Meridian Preferred Stock,
$490,000 from the net proceeds of this Offering for the repayment of
advances from Meridian to the Company. See "Relationships Between the
Company and Meridian -- Meridian Preferred Stock."
(5) The Bridge Note, which has an outstanding principal balance of $250,000, is
payable upon the completion of this Offering. The Bridge Note bears interest
at 10% per annum.
(6) The Company expects to use the balance of the net proceeds from this
Offering for working capital and general corporate purposes. Additionally,
the Senior Lender would require the Company to maintain a $750,000
compensating cash balance with the Senior Lender, pursuant to the terms of
the refinanced Bank Debt.
------------------------
The foregoing uses of proceeds are estimates only and there could be
significant variations in the anticipated uses of the net proceeds due to
changes in business or economic circumstances. Accordingly, the Company reserves
the right to reallocate the foregoing uses of proceeds depending upon any such
change of circumstances.
The Company anticipates that the net proceeds from this Offering, together
with projected cash flow from operations and proceeds from anticipated
industrial development revenue bond financing or other conventional financing,
will be sufficient to fund the Company's operations and planned expansion
program for at least the next three years. If the Company's assumptions change
or prove to be inaccurate or the net proceeds from this Offering prove to be
insufficient, the Company may be required to curtail its expansion activities or
seek additional financing. There can be no assurance that additional financing
will be available or, if available, that it will be available on terms
acceptable to the Company. In the event that the Company is unable to obtain
appropriate industrial development revenue bond financing or other conventional
financing, the Company will be unable to fund its proposed expansion program.
See "Management's Discussion and Analysis of Financial Condition and the Results
of Operations -- Liquidity and Capital Resources."
Pending specific application, the net proceeds from this Offering will be
invested in interest-bearing savings accounts, certificates of deposit, money
market accounts, United States government obligations or other short-term
interest-bearing obligations.
DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and it does not
anticipate that it will pay dividends or alter its dividend policy in the
foreseeable future. The payment of dividends by the Company on the Common Stock
will depend on its earnings and financial condition and such other factors as
the Board may consider relevant. The Company currently intends to retain any
earnings to assist in financing the development of its business. In addition,
the Company must pay all accrued and unpaid dividends on the Meridian Preferred
Stock prior to declaring or paying any dividends on the Common Stock. Further,
the terms of the additional financing that the Company plans to seek to fund a
significant portion of its proposed expansion program may contain covenants that
limit the Company's ability to pay dividends on shares of Common Stock. See
"Risk Factors -- Capital Requirements; Potential Unavailability of Additional
Financing", "-- Absence of Dividends" and "Relationships Between the Company and
Meridian -- Meridian Preferred Stock."
20
<PAGE>
CAPITALIZATION
The following table sets forth, as of November 30, 1997, (i) the actual
capitalization as derived from the Condensed Consolidated Financial Statements,
and (ii) the capitalization of the Company as adjusted to reflect (a) the
issuance and sale of 1,250,000 shares of Common Stock and 1,250,000 Warrants
pursuant to this Offering, (b) the repayment of $490,000 of advances from
Meridian, (c) the exchange of $2,000,000 of advances from Meridian for 1,000,000
shares of Meridian Preferred Stock and a capital contribution by Meridian to the
Company of the remaining debt owed to Meridian, and (d) the partial repayment of
$500,000 on the Bank Debt and the refinancing of the remaining Bank Debt of
$1,598,000 into long-term debt. The Meridian Preferred Stock bears a cumulative
dividend of 8% per annum, is non-voting and has a liquidation preference equal
to the amount of indebtedness exchanged by Meridian. Subject to certain
conditions, the Meridian Preferred Stock is redeemable, in whole or in part, at
its liquidation value of $2.00 per share at the option of the Company after five
years from the date of completion of this Offering. The number of shares of
Meridian Preferred Stock issued by the Company equals the amount of debt
exchanged by Meridian divided by the $2.00 per share liquidation value. The
Company estimates a fair value of $1.10 per share of the Meridian Preferred
Stock based on a discount rate of approximately 18% and assuming redemption over
a ten-year period commencing five years after the date of issuance. The amount
of debt contributed by Meridian to the Company as a capital contribution with
respect to its Common Stock in the Company and the difference between the amount
of debt exchanged ($2,000,000) and the estimated fair value of the shares of
Meridian Preferred Stock ($1,100,000) are reflected in the "As Adjusted" amount
of "Capital in excess of par value." This table should be read in conjunction
with the Consolidated Financial Statements, including notes thereto, and the
unaudited Condensed Consolidated Financial Statements included elsewhere in this
Prospectus. See "Use of Proceeds," "Relationships Between the Company and
Meridian" and "Description of Securities -- Preferred Stock."
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED
------------ -------------
<S> <C> <C>
Advances from Meridian............................................................... $ 3,698,762 $ --
Long-term debt due within one year (1)............................................... 3,096,748 976,748
Long-term debt, net of current portion............................................... 1,501,113 2,871,113
Stockholders' equity (net capital deficiency):
Meridian Preferred Stock, $.01 par value; zero shares authorized, none issued and
outstanding (2,500,000 shares authorized, 1,000,000 issued and outstanding at an
estimated fair value of $1.10 per share, as adjusted)............................. -- 1,100,000
Common Stock: $.01 par value; 20,000,000 shares authorized; 1,250,000 issued and
outstanding, (2,500,000 issued and outstanding, as adjusted)...................... 12,500 25,000
Capital in excess of par value..................................................... 618,647 7,871,159
Deficit............................................................................ (4,032,604) (4,032,604)
------------ -------------
Total stockholders' equity (net capital deficiency).................................. (3,401,457) 4,963,555
------------ -------------
Total capitalization................................................................. $ 4,895,166 $ 8,811,416
------------ -------------
------------ -------------
</TABLE>
- --------------
(1) During the Company's fiscal year ended February 28, 1997, the Company
arranged financing totaling $2,350,000 with the Senior Lender. The proceeds
have been primarily used to finance an expansion of the Company's paint
waste recycling operation, which commenced operations in May 1997, and to
repay existing obligations. The Senior Lender has agreed upon completion of
this Offering to refinance the Bank Debt upon receiving a $500,000 principal
payment and a $50,000 loan closing fee from the net proceeds of this
Offering. The refinanced Bank Debt will mature in five years and provide for
a seven-year monthly amortization schedule at the annual rate of the Senior
Lender's prime rate plus 1%. The Senior Lender has also agreed that the
present guarantors of the Bank Debt and Meridian will not be obligated to
the Senior Lender under the terms of the refinancing. The Senior Lender will
require that a $750,000 compensating cash balance be maintained with the
Senior Lender after the refinancing. See "Relationships Between the Company
and Meridian" and "Certain Other Relationships and Related Transactions."
21
<PAGE>
DILUTION
At November 30, 1997, the Company had a net tangible book value deficiency
of $3,699,000 or $(2.96) per outstanding share of Common Stock. Net tangible
book value per common share represents the Company's total tangible assets less
total liabilities and Meridian Preferred Stock, divided by the number of shares
of Common Stock outstanding, on a pro forma basis, after giving effect to the
10,000 to one stock split which was effected in August 1997. After giving effect
to (i) the receipt of the estimated net proceeds from the sale of the 1,250,000
shares of Common Stock and 1,250,000 Warrants in this Offering at assumed
offering prices of $5.00 per share of Common Stock and $.10 per Warrant (after
deducting the estimated offering expenses), and (ii) the contribution of
$1,209,000 by Meridian to the capital of the Company (based on the remaining
debt owed to Meridian at November 30, 1997 after deducting the repayment of
$490,000 of advances from Meridian from the net proceeds of this Offering and
the exchange of $2,000,000 of advances from Meridian for the 1,000,000 shares of
Meridian Preferred Stock), the pro forma net tangible book value of the Company
attributable to holders of Common Stock would have been approximately
$2,666,000, or approximately $1.07 per outstanding share of Common Stock. This
represents an immediate dilution of $3.93 per share, or 79%, to purchasers of
Common Stock in this Offering. The following table illustrates the per share
dilution to be incurred by the public investors in this Offering:
<TABLE>
<S> <C> <C>
Assumed initial offering price per share................................... $ 5.00
Net tangible book value deficiency per common share at November 30,
1997.................................................................... $ (2.96)
Increase per share attributable to shares offered hereby................. 4.03
---------
Pro forma net tangible book value per common share after this Offering..... 1.07
-----
Dilution of net tangible book value per common share to new investors...... $ 3.93(1)
-----
-----
</TABLE>
- --------------
(1) The computations set forth in this table assume that the Underwriter's
Overallotment Option is not exercised. If the Underwriter's Overallotment
Option is exercised in full, the pro forma net tangible book value of the
Company attributable to holders of Common Stock at November 30, 1997, as
adjusted for this Offering, would have been approximately $3,495,000 or
$1.30 per share of Common Stock and the dilution per share of Common Stock
to new investors would have been approximately $3.70. See "Underwriting."
------------------------
The following table compares the shares of Common Stock acquired by Meridian
and the Minority Stockholders through the date of this Prospectus, the total
cash consideration paid by Meridian and the Minority Stockholders and the
average cash price per share paid by Meridian and the Minority Stockholders to
the price to be paid by purchasers of shares of Common Stock in this Offering:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF OUTSTANDING TOTAL CASH PERCENTAGE OF AVERAGE CASH
COMMON SHARES OF CONSIDERATION TOTAL CASH PRICE PER SHARE
STOCK COMMON STOCK PAID CONSIDERATION OF COMMON STOCK
----------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Meridian............................. 1,000,000 40% $ 100 0% $ --
Minority Stockholders................ 250,000 10% $ 600,000 8.8% $ 2.40
New Investors........................ 1,250,000 50% $ 6,250,000 91.2% $ 5.00
----------- ------- ------------- ------------- -----
2,500,000 100.0% $ 6,850,100 100.0% $ 2.74
----------- ------- ------------- ------------- -----
----------- ------- ------------- ------------- -----
</TABLE>
22
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The summary selected consolidated financial data set forth in the following
table has been derived from the Consolidated Financial Statements of the
Company. The statement of operations data for each of the three fiscal years
ended February 28, 1997 and balance sheet data as of February 28, 1997 and
February 29, 1996 are derived from the Consolidated Financial Statements of the
Company, which have been audited by Ernst & Young LLP, independent auditors, and
which are included elsewhere in this Prospectus. The data set forth below should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company, including the notes thereto,
and the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
----------------------------------------------------------
1997 1996 1995 1994 1993(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................... $3,417,070 $3,533,514 $3,459,107 $2,530,066 $1,390,695
Operating costs and expenses:
Costs of operations........................................ 2,307,086 2,196,322 2,023,815 1,496,040 999,447
Selling, general and administrative........................ 1,376,957 1,045,036 941,812 851,546 534,913
---------- ---------- ---------- ---------- ----------
3,684,043 3,241,358 2,965,627 2,347,586 1,534,360
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................................ (266,973) 292,156 493,480 182,480 (143,665)
Other income (expense):
Interest income............................................ 35,584 36,185 30,009 20,192 13,019
Cost of withdrawn registration............................. (275,908) -- -- -- --
Interest expense on external borrowings.................... (219,736) (243,683) (258,985) (272,304) (193,929)
Interest expense on advances from Meridian................. (218,103) (224,300) (186,918) (126,607) (117,318)
Equity in operations of affiliate.......................... -- -- -- -- (194,154)
---------- ---------- ---------- ---------- ----------
(678,163) (431,798) (415,894) (378,719) (492,382)
---------- ---------- ---------- ---------- ----------
Net income (loss) before extraordinary item.................. (945,136) (139,642) 77,586 (196,239) (636,047)
Extraordinary gain -- extinguishment of debt................. 329,279 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ (615,857) $ (139,642) $ 77,586 $ (196,239) $ (636,047)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Loss per common share: (2)
Loss before extraordinary gain............................. $ (0.75)
Extraordinary gain......................................... 0.26
----------
----------
Net loss................................................... $ (0.49)
----------
----------
Pro forma loss per common share: (3)
Loss before extraordinary gain............................. $ (0.60)
----------
----------
BALANCE SHEET DATA:
Working capital (deficiency)................................. $(3,855,044) $(2,862,184) $(2,258,669) $(2,201,117) $(1,920,879)
Total assets................................................. 6,129,790 4,617,583 4,875,188 4,903,737 5,234,966
Property and equipment, net.................................. 3,603,035 1,650,415 1,754,582 1,940,295 1,947,801
Advances from Meridian....................................... 2,965,468 2,673,429 2,448,752 1,884,509 1,635,059
Long-term debt, less current portion......................... 3,983,701 3,395,472 3,997,208 4,517,317 4,948,355
----------
Receivable from former partner, less current portion......... 1,031,875 1,358,625 1,651,875 1,925,625 2,178,125
Stockholders' equity (net capital deficiency):
Meridian Preferred stock................................... -- -- -- -- --
Common stock............................................... 12,500 10,000 1 1 1
Paid-in capital............................................ 568,646 (9,900) 99 99 99
Deficit.................................................... (3,156,857) (2,541,000) (2,400,858) (2,478,444) (2,282,205)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficiency)...................... (2,575,711) (2,540,900) (2,400,758) (2,478,344) (2,282,105)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash dividends declared per common share..................... 0 0 0 0 0
OTHER OPERATING DATA:
Depreciation and amortization................................ $ 338,690 $ 254,586 $ 257,141 $ 249,580 $ 163,739
Capital expenditures......................................... 2,147,537 140,294 63,510 114,856 99,086
</TABLE>
- ------------------
N/A -- Not applicable.
(1) As described in note 4 of the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus, effective July 1, 1992, MEPI
joined NPI as the sole corporate general partners of EPIC. Prior to July 1,
1992, NPI accounted for its 50% investment in EPIC by the equity method of
accounting. Subsequent to July 1, 1992, NPI and MEPI consolidated EPIC into
their accounts.
(2) Loss per common share is computed using 1,250,000 shares of Common Stock.
For calculation purposes, the 250,000 shares of Common Stock issued to the
Minority Stockholders in November 1996 at a price below the $5.00 per share
proposed public offering price are considered to have been outstanding for
the entire period. The Bridge Warrants, which were issued in August 1997,
are not considered in the calculation of loss per common share because, upon
completion of this Offering, the Bridge warrant exercise price will
automatically be adjusted to a price in excess of the $5.00 per share for
which shares of Common Stock are being sold in connection with this
Offering.
(3) Pro forma loss per common share is computed using historical earnings and
shares of Common Stock outstanding adjusted to (i) eliminate interest
charges on indebtedness expected to be repaid from the net proceeds of this
Offering, and (ii) reflect the number of shares of Common Stock to be sold
in this Offering in connection with the repayment of such indebtedness.
Accordingly, the Company's loss before extraordinary gain was reduced by
$86,017, which represents interest on (A) $ 490,000 of advances from
Meridian, and (B) $500,000 to be applied against the Bank Debt, each
expected to be repaid from the net proceeds of this Offering. For
calculation purposes, the weighted average outstanding shares of Common
Stock were increased by 182,000 shares of Common Stock, which represents the
number of shares of Common Stock to be sold in connection with this Offering
which are required to repay such advances from Meridian and such Bank Debt.
23
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA -- CONTINUED
NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
The summary selected consolidated financial data set forth in the following
table has been derived from the unaudited Condensed Consolidated Financial
Statements of the Company, including the notes thereto. The statement of
operations data for each of the nine months ended November 30, 1997 and 1996 and
balance sheet data as of November 30, 1997 are derived from the unaudited
Condensed Consolidated Financial Statements of the Company, which are included
elsewhere in this Prospectus. The data set forth below should be read in
conjunction with, and is qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the unaudited
Condensed Consolidated Financial Statements of the Company, including the notes
thereto, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
----------------------
1997 1996
NOVEMBER 30, ---------- ----------
1997 AS
ADJUSTED (1)
------------
(BALANCE
SHEET ONLY)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................................. $2,792,236 $2,581,636
Operating costs and expenses:
Costs of operations..................................................... 2,090,744 1,753,798
Selling, general and administrative..................................... 1,093,226 1,045,434
---------- ----------
3,183,970 2,799,232
---------- ----------
Loss from operations...................................................... (391,734) (217,596)
Other income (expense):
Interest income......................................................... 32,820 27,656
Interest expense on external borrowings................................. (284,423) (171,360)
Interest expense on advances from Meridian.............................. (232,409) (173,370)
---------- ----------
(484,012) (317,074)
---------- ----------
Loss before extraordinary gain............................................ (875,746) (534,670)
Extraordinary gain--extinguishment of debt................................ -- 329,279
---------- ----------
Net income (loss)......................................................... $ (875,746) $ (205,391)
---------- ----------
---------- ----------
Earnings (loss) per common share (2):
Loss before extraordinary gain $ (0.70) $ (0.42)
Extraordinary gain...................................................... -- 0.26
---------- ----------
Net loss................................................................ $ (0.70) $ (0.16)
---------- ----------
---------- ----------
Pro forma loss per common share (3):
Loss before extraordinary gain.......................................... $ (0.56) $ (0.33)
---------- ----------
---------- ----------
BALANCE SHEET DATA:
Working capital (deficiency).............................................. $ 827,304 $(7,209,051) $(5,338,335)
Total assets.............................................................. 9,754,974 6,196,940 6,282,266
Property and equipment, net............................................... 3,633,870 3,633,870 3,073,765
Advances from Meridian.................................................... -- 3,698,762 1,976,981
Long-term debt, less current portion...................................... 2,871,113 1,501,113 2,296,836
Receivable from former partner, less current portion...................... 745,000 745,000 1,139,250
Stockholders' equity (net capital deficiency)............................. 4,963,555 (3,401,457) (2,156,291)
Cash dividends declared per common share.................................. N/A -- --
OTHER OPERATING DATA:
Depreciation and amortization............................................. $ 367,003 $ 227,989
Capital expenditures...................................................... 298,675 1,455,973
</TABLE>
- ------------------
N/A -- Not applicable.
(1) "As adjusted" amounts reflect (i) the receipt by the Company of the
estimated net proceeds from this Offering, (ii) the repayment of
approximately $490,000 of advances from Meridian, (iii) the exchange of
$2,000,000 of advances from Meridian for 1,000,000 shares of Meridian
Preferred Stock and the contribution by Meridian to the Company's capital of
the remaining debt owed to Meridian, (iv) the payment of $500,000 to be
applied against the Bank Debt along with a loan closing fee of $50,000, (v)
the refinancing of $1,598,000 of Bank Debt to long-term debt (current
portion $228,000), and (vi) the repayment of the Bridge Note in the
principal amount of $250,000.
(2) Earnings (loss) per common share is computed using 1,250,000 shares of
Common Stock. For calculation purposes, the 250,000 shares of Common Stock
issued to the Minority Stockholders in November 1996 at a price below the
$5.00 per share proposed public offering price are considered to have been
outstanding for the entire period. The Bridge Warrants, which were issued in
August 1997, are not considered in the calculation of earnings (loss) per
common share because, upon completion of this Offering, the Bridge Warrant
exercise price will automatically be adjusted to a price in excess of the
$5.00 per share for which shares of Common Stock are being sold in
connection with this Offering.
(3) Pro forma loss per common share is computed using historical earnings and
shares of Common Stock outstanding adjusted to (i) eliminate interest
charges on indebtedness expected to be repaid from the net proceeds of this
Offering, and (ii) reflect the number of shares of Common Stock to be sold
in this Offering in connection with the repayment of such indebtedness.
Accordingly, the Company's loss before extraordinary gain was reduced by
$72,309 and $62,821 for the nine months ended November 30, 1997 and 1996,
respectively, which represents interest on (A) $490,000 of advances from
Meridian and (B) $500,000 to be applied against the Bank Debt, each expected
to be be repaid from the net proceeds of this Offering. For calculation
purposes, the weighted average outstanding shares of Common Stock were
increased by 198,000 shares of Common Stock and 176,686 shares of Common
Stock for the nine months ended November 30, 1997 and 1996, respectively,
which represents the number of shares of Common Stock to be sold in
connection with this Offering which are required to repay such advances from
Meridian and such Bank Debt.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.
OVERVIEW
EPIC is a general partnership which was formed in September 1989 with two
partners, NPI (a wholly-owned subsidiary of Meridian) and Haden Purification, to
construct and own a paint waste recycling facility in Toledo, Ohio. Effective
July 1, 1992, Haden Purification terminated its partnership interest in EPIC and
the partnership agreement was amended to reflect the addition of MEPI (a
wholly-owned subsidiary of Meridian) as a general partner of EPIC. As a result
of this amendment, NPI and MEPI jointly own 100% of the partnership interests of
EPIC. Meridian formed the Company in February 1996 as a subsidiary to hold all
of the issued and outstanding stock and partnership interests of NPI, MEPI and
EPIC. In November 1996, the Company issued shares of Common Stock, representing
an aggregate 20% interest in the Company to the Minority Stockholders. See
"Business -- Corporate History."
From September 25, 1989 (inception) through February 28, 1991, the Company
was considered a development stage company during which its principal business
activities were constructing a paint waste recycling plant, hiring personnel and
commencing initial operations of the plant. During the next four fiscal years,
the Company increased its revenues and level of operations each fiscal year by
identifying generators of processible paint wastes and convincing them to use
the Company's environmentally sound services instead of using landfilling or
incineration. The Company's revenues increased from approximately $2,500,000 in
the fiscal year ended February 28, 1994 ("Fiscal 1994") to approximately
$3,500,000 in each of the fiscal years ended February 28, 1995 ("Fiscal 1995")
February 29, 1996 ("Fiscal 1996") and February 28, 1997 ("Fiscal 1997"). In
these last three fiscal years, the Company operated at or near its paint waste
processing capacity. The Company completed the installation of a $2,300,000
Polymeric Recovery System at its Toledo, Ohio facility in May 1997, which
provides a 50% capacity increase to the Company's existing paint waste
processing operations. See "Business."
Although the Company operated at capacity during the nine months ended
November 30, 1997 and the year ended February 28, 1997, the Company recognized
losses from operations of $391,734 and $266,973 for the periods then ended,
respectively. The Company believes that the DryPure-TM- system, its current
paint waste processing system, as designed, will not generate significant
profits for the Company. Accordingly, the Company completed the installation of
the Polymeric Recovery System, a new paint waste recycling technology, at its
Toledo, Ohio facility in May 1997. The Company is currently marketing
EPI-MER-TM-, the recycled product generated by the Polymeric Recovery System, to
approximately ten potential customers, including those in the sealant, coating
and adhesive industries.
Historically, the Company has generated in excess of 97% of its annual sales
revenue from the processing of paint waste. The Company has not generated
significant revenues from the sale of EPI-PURE-TM- because the materials which
EPI-PURE-TM- replaces as a filler are generally inexpensive and the DryPure-TM-
system generates a limited supply of EPI-PURE-TM-. The Company believes that
EPI-MER-TM- has a greater range of commercial applications than EPI-PURE-TM- and
that it can be sold at higher margins than EPI-PURE-TM-. For these reasons,
management believes that the Company's profitability is substantially dependent
on sales of EPI-MER-TM-. In addition, if the Company is successful in its
marketing of EPI-MER-TM-, the Company believes that the revenue generated from
sales of EPI-MER-TM- will provide the Company with flexibility when pricing its
paint waste processing services. The Company's current business strategy is to
grow its business by (i) developing a market for and selling EPI-MER-TM- for use
as a lower cost replacement for traditional, virgin materials used in formulated
products, (ii) the construction, ownership and operation of up to five
customized Polymeric Recovery Systems on-site at large automotive assembly
plants in the United States, and (iii) the construction of a second facility
using the Polymeric Recovery System in the Southeast region of the United States
to serve the market of small and medium size automotive assembly plants which
individually generate lesser amounts of paint waste.
25
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED NOVEMBER
30, 1996
REVENUE AND COSTS OF OPERATIONS. Net sales for the nine months ended
November 30, 1997 increased $211,000, or 8.2%, over the net sales in the nine
months ended November 30, 1996 despite a decrease in sales revenue of $107,000
associated with sales of paint waste services processed at third party
facilities. The increase in net sales was primarily due to an increase in
average price charged customers of 4.3% for the nine months ended November 30,
1997 as compared to the nine months ended November 30, 1996. Prices charged to
customers vary depending upon the type of paint waste processed as well as the
amount of paint waste volume processed for a specific customer. In addition, the
start-up of the Polymeric Recovery System at the Company's Toledo, Ohio facility
added additional production capacity during the nine months ended November 30,
1997, thereby enabling the Company to process additional amounts of paint waste.
The Company has operated at or near full capacity for the past three fiscal
years. Costs of operations as a percentage of net sales amounted to 74.9% and
67.9% for the nine months ended November 30, 1997 and November 30, 1996,
respectively. This increase is due largely to the commencement of the start-up
period for the Polymeric Recovery System in May 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $48,000, or 4.6%, in the nine months ended
November 30, 1997 over those for the nine months ended November 30, 1996. This
increase was due to a $33,000 increase in amortization expense related to loan
costs on the Bank Debt along with an increase of $15,000 in payroll related
costs, primarily due to staffing increases in the sales department and
administrative areas needed to support the Polymeric Recovery System.
INTEREST EXPENSE. Interest expense for the nine months ended November 30,
1997 increased $172,000, or 49.9%, compared to the nine months ended November
30, 1996 due primarily to interest on the Bank Debt, $1,700,000 of which was
incurred in November 1996 to finance the $2,300,000 expansion of the Company's
Toledo plant. The Company had average outstanding indebtedness of $7,159,000 and
$4,988,000 during the nine months ended November 30, 1997 and 1996,
respectively. In addition, the Company incurred $25,000 in interest expense on
the Bridge Warrants, which were issued in August 1997, during the nine months
ended November 30, 1997. The difference between the $.05 selling price of the
Bridge Warrants and the $.10 selling price of the Warrants was amortized as
interest expense during the period. The Company also capitalized $36,000 of
interest costs incurred in the nine months ended November 30, 1997 in connection
with the expansion of the Company's plant in Toledo, Ohio.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUE AND COSTS OF OPERATIONS. Net sales decreased 3% in Fiscal 1997
compared to Fiscal 1996. This decrease is due primarily to a decrease in revenue
from sales of EPI-PURE-TM- and lower volumes of paint waste processed along with
a slight decrease in the average selling price charged customers for processing
paint waste. The Company has continued operating at or near capacity levels for
the past three fiscal years. The Company's cost of operations as a percentage of
net sales were 67.5% in Fiscal 1997 compared to 62.2% in Fiscal 1996. This
percentage increase in operating costs was primarily related to the expensing of
a throughput charge, which is based on the amount of paint waste processed
through the DryPure-TM- system, paid to Haden Purification. In prior years,
these throughput payments were applied to the Haden Purification note payable,
which was settled during Fiscal 1997. Total throughput charges expensed in
Fiscal 1997 were $59,000. In addition, the Company experienced higher utility
costs, which increased by $58,000 over the prior year due primarily to higher
average gas rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In Fiscal 1997, the Company's
selling, general and administrative expenses increased $332,000, or 32%. Payroll
related costs accounted for $237,000 of this increase. Approximately $93,000 of
the payroll increase is attributable to salaries and related expenses of
personnel who, during Fiscal 1996, were employed part-time by the Company and
part-time in a former operation of Meridian. During Fiscal 1997, these employees
were employed full-time by the Company. The remainder of the payroll increase is
due primarily to additional personnel costs required by the expansion project
and increases in other administrative costs related to staffing for the
development of the new Polymeric Recovery System business. Also included in the
increased administrative expenses in Fiscal 1997
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was $70,000 related to the amortization of loan costs incurred in Fiscal 1996.
These factors resulted in selling, general and administrative expenses
increasing to 40.3% of net sales in Fiscal 1997 from 29.6% of net sales in
Fiscal 1996.
INTEREST EXPENSE. Interest expense decreased $30,000 (or 6%) in Fiscal 1997
compared to Fiscal 1996. This decrease resulted from the compromise of the Haden
note payable, and from declining interest expense related to the Mortgage Note
as principal payments continue to decrease the outstanding Mortgage Note
balance. The impact on interest expense of the additional borrowings related to
the expansion of the Toledo, Ohio facility was negligible as interest of $56,000
related to the expansion project was capitalized during the construction phase
of the project.
INCOME TAXES. The Company had, as of February 28, 1997, net operating loss
carryforwards for federal tax purposes of approximately $2,624,000. These net
operating loss carryforwards, to the extent not utilized in Meridian's
consolidated federal income tax return for its taxable year ended February 28,
1997, will be available for the reduction of future federal income tax. The
Company's ability to utilize such net operating loss carryforwards will be
limited by Section 382 of the Code. The net operating loss carryforwards begin
expiring in fiscal 2005. See "Risk Factors -- Effect of Offering on Tax Net
Operating Losses" and "Certain Federal Income Tax Considerations -- Ownership
Change and Limitation of Losses, Credits and Deductions."
OTHER EXPENSES. The Company expensed $276,000 of costs related to an
attempted public offering of shares of Common Stock which were incurred in
Fiscal 1997. The registration statement filed by the Company in connection with
the proposed public offering was subsequently withdrawn by the Company.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUE AND COSTS OF OPERATIONS. Net sales increased 2% in Fiscal 1996
compared to Fiscal 1995. This modest sales increase was the result of the
Company operating at or near capacity for the past two fiscal years compared to
much larger revenue increases in prior periods. The Company's costs of
operations as a percentage of net sales were 62.2% in Fiscal 1996 compared to
58.5% in Fiscal 1995. This percentage increase in operating costs primarily
relates to an increase of $184,000 in fees paid in Fiscal 1996 to Aster for
processing paint waste at its Dayton, Ohio facility pursuant to a license
agreement between the Company and Aster, as well as increases in wages and
benefits. These operating cost increases were partially offset by a decrease in
DryPure-TM- powder processing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In Fiscal 1996, the Company's
selling, general and administrative expenses increased $103,000 (or 11%)
compared to Fiscal 1995 primarily due to increases in salaries, wages and
benefits.
INTEREST EXPENSE. Interest expense increased $22,000 (or 5%) in Fiscal 1996
compared to Fiscal 1995. This increase resulted from higher average outstanding
advances from Meridian during the period but was partially offset by a decrease
in interest expense related to the Mortgage Note due to principal payments
decreasing the outstanding Mortgage Note payable balance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency at November 30, 1997 increased to
approximately $7,209,000, an increase of $3,354,000 over the working capital
deficiency at February 28, 1997. This increase was a result of, in part, the
classification of the balloon payment due on the Bank Debt in March 1998 as a
current liability at November 30, 1997. The balloon payment, originally
scheduled to be $1,906,000, was classified as a long-term liability at February
28, 1997. The Company, with the Senior Lender's approval, deferred a payment of
$129,000 on the Bank Debt due in September 1997, increasing the balloon payment
due in March 1998 to $2,035,000. The Bank Debt was incurred to finance the
implementation of the Polymeric Recovery System at the Company's Toledo, Ohio
facility. Additionally, the funding of losses as well as capital expenditures of
approximately $271,000 related to the Polymeric Recovery System and the costs
related to this Offering have contributed to the increase in working capital
deficiency. Advances from Meridian increased $733,000 during the nine months
ended November 30, 1997 due primarily to expenditures incurred in connection
with the commencement of the start-up period for the Polymeric Recovery System,
and debt service requirements of $355,000, including interest of $166,000,
related to the Bank Debt.
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Historically the Company has satisfied its operating cash requirements through a
combination of (i) advances from Meridian, (ii) external borrowings, and (iii)
cash generated by operating activities. Net advances from Meridian amounted to
approximately $292,000 and $224,000 in Fiscal 1997 and Fiscal 1996,
respectively. Excluding the advances from Meridian, the Company would have had a
working capital deficiency of approximately $3,510,000 at November 30, 1997,
$890,000 at February 28, 1997 and $189,000 at February 29, 1996.
Cash generated from (used in) operating activities amounted to $54,000 for
the nine months ended November 30, 1997 and ($344,000), $230,000 and ($1,000)
for Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Included in net cash
provided by operating activities for the nine months ended November 30, 1997 and
used in operating activities for Fiscal 1997 was cash used due to losses before
extraordinary gain amounting to $876,000 for the nine months ended November 30,
1997, and $945,000 for Fiscal 1997. Contributing to the losses during these
periods were personnel costs, administrative costs, including amortization of
loan costs, and other costs related to the development and the start-up of the
new Polymeric Recovery System. Cash flow from operating activities also
fluctuates based on changes in operating assets and liabilities. Such changes
amounted to cash generated (used) of approximately $563,000 for the nine months
ended November 30, 1997 and $263,000, $116,000 and ($385,000) for Fiscal 1997,
Fiscal 1996 and Fiscal 1995 respectively. The increase during the nine months
ended November 30, 1997 was primarily due to increases in accounts payable and
accrued liabilities, which include costs incurred in connection with this
Offering and a $119,000 increase in deferred revenue. Costs related to a
proposed public offering which was not completed accounted for the increase in
accounts payable in Fiscal 1997. The costs associated with the proposed public
offering were expensed in Fiscal 1997. The large amount of cash used in Fiscal
1995 resulted primarily from an increase in accounts receivable of approximately
$307,000 as the Company's net sales grew to approximately $3,459,000 in Fiscal
1995 from approximately $2,530,000 in Fiscal 1994.
The Company's primary uses of cash are for the purchases of property and
equipment and for the repayment of long-term debt. Cash used for such purchases
and retirement of long-term debt amounted to $727,000 during the nine months
ended November 30, 1997 and $2,882,000, $428,000, and $434,000 in Fiscal 1997,
Fiscal 1996 and Fiscal 1995, respectively. The large amount of cash used for
these purposes in Fiscal 1997 was financed primarily by issuance of the Bank
Debt which was incurred primarily to finance the construction of the Polymeric
Recovery System at the Company's Toledo, Ohio facility.
On December 15, 1989 the Company issued the Mortgage Note to the
Toledo-Lucas County (Ohio) Port Authority. The Mortgage Note had a principal
balance of approximately $2,235,000 at November 30, 1997. Haden Purification has
assumed liability for one-half of the remaining principal, interest and fee
payments due under the Mortgage Note. Accordingly, the Company has recorded a
receivable of approximately $1,118,000 at November 30, 1997 for the portion of
the Mortgage Note assumed by Haden Purification even though the Company remains
liable for the entire outstanding Mortgage Note. The Mortgage Note bears
interest at 8 1/2%. The Company's monthly principal and interest payments on the
portion of the Mortgage Note not assumed by Haden Purification are $36,400.
Additionally, under the terms of the Mortgage Note at November 30, 1997,
approximately $310,000 of the Company's assets are held in a primary reserve
fund by a trustee to meet debt service requirements in certain circumstances.
Meridian is a guarantor of one-half of the outstanding Mortgage Note debt. In
the event that Haden Purification defaults on the debt it assumed, the Company
will be liable for repayment of the entire outstanding Mortgage Note, which
would have a materially adverse impact on the financial condition and liquidity
of the Company. See "Risk Factors -- Absence of Additional Financial Support
from Meridian" and "-- Debt Service; Benefits of Offering to Insiders."
On June 28, 1996, the Company executed a compromise agreement to, among
other things, settle a note issued to Haden Purification, which had a balance
due of $679,000, for $350,000 (the "Compromise Agreement"). The Company reported
the gain on early extinguishment of debt as an extraordinary gain.
During Fiscal 1997, the Company completed financing totaling $2,350,000 with
the Senior Lender. The proceeds have been used primarily to finance the
construction of the Polymeric Recovery System. The Bank Debt requires monthly
principal payments of $21,000. A final payment of $2,035,000 is due in March
1998. Meridian is a co-signer on the Bank Debt. In addition, $750,000 of the
Bank Debt is guaranteed by MNP Corporation, which owns 6.7% of the outstanding
shares of Common Stock, and the Chairman of the Board
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of Directors, President and Chief Executive Officer of Meridian, who is also the
Chairman of the Company's Board, has personally guaranteed the Bank Debt.
Substantially all of the property and equipment of the Company, which has a net
book value of $3,634,000 at November 30, 1997, has been assigned as collateral
to the Toledo-Lucas County (Ohio) Port Authority and the Senior Lender. See
"Relationships Between the Company and Meridian" and "Certain Other
Relationships and Related Transactions."
The Senior Lender has agreed upon the completion of this Offering to
refinance the Bank Debt upon receiving a $500,000 principal payment and a
$50,000 loan closing fee from the net proceeds of this Offering. The refinanced
Bank Debt will mature in five years and provide for a seven-year monthly
amortization schedule at the annual rate of the Senior Lender's prime rate plus
1%. In connection with the refinancing of the Bank Debt, (i) Meridian will no
longer be required to be a co-signer, (ii) the Chairman of the Board of
Directors, Chief Executive Officer and President of Meridian, who is also
Chairman of the Company's Board, will be released from his personal guaranty of
the Bank Debt, and (iii) MNP Corporation will be released from its guaranty of
$750,000 of the Bank Debt. The Senior Lender will require that a $750,000
compensating balance be maintained with the Senior Lender after the refinancing.
See "Relationships Between the Company and Meridian" and "Certain Other
Relationships and Related Transactions."
In November 1996, the Company issued shares of common stock representing an
aggregate 20% interest for $600,000 to the Minority Stockholders.
The Company is required to pay certain fees in connection with the
DryPure-TM- technology that the Company has licensed to process paint waste.
Under the terms of the Compromise Agreement with Haden Purification, the Company
is required to continue to pay Haden Environmental, through July 1, 1998, a
throughput charge of $10 per cubic yard of paint waste processed through the
DryPure-TM- system. At November 30, 1997, remaining throughput charges are
estimated to aggregate $66,000. The throughput charges will be reported as
operating expenses as incurred through June 30, 1998. Prior to the execution of
the Compromise Agreement, payments of the throughput charges were credited
toward amounts due under a note payable to Haden Purification. The Company is
also required to pay royalty fees to Aster based on pounds of paint waste
processed with the new technology. These fees will be payable upon successful
startup of the new equipment and sale of EPI-MER-TM-. The Aster license
agreement requires payment of royalties on a minimum processing level of
l,850,000 pounds of raw paint waste in the first year of production ($37,000),
3,700,000 pounds in the second year ($74,000), 5,000,000 pounds in the third
year ($l00,000), and 7,000,000 pounds for each year thereafter ($140,000). This
royalty rate decreases for annual processing in excess of 7,500,000 pounds.
Additionally, the Company will be required to pay Aster a royalty fee of $.04
per pound of EPI-MER-TM- sold, subject to adjustment if the Company is unable to
sell EPI-MER-TM- for a minimum of $.30 per pound. All royalty fees are subject
to an adjustment at the end of the third year of processing based on the
consumer price index.
The Company also pays hourly fees to Aster for technical and manufacturing
services. Total payments by the Company to Aster may not fall below a minimum of
$20,000 per month unless the Company provides Aster with six months advance
notice. At the end of the six month notice period, the Company's license for the
use of the technology would become non-exclusive.
In August 1997, the Company raised $275,000 through a private placement of
units consisting of the Bridge Note, which had an original principal balance of
$250,000, and 500,000 Bridge Warrants, which were sold for $.05 per Bridge
Warrant. The Bridge Note, which is unsecured, bears interest at a rate of 10%
per annum and is due upon the completion of this Offering. The Bridge Warrants
entitle the holder to purchase 500,000 shares of Common Stock. The Bridge
Warrants automatically convert upon the completion of this Offering to warrants
with the same terms as the Warrants.
During the past five years, the U.S. EPA has adopted a more pragmatic
approach toward the regulated environmental community. This approach includes
the use of cost/benefit analysis before implementing additional major levels of
regulation on industry. In practice, the U.S. EPA appears to have recognized
that it must be practical in balancing its mandate to provide vigilant
environmental protection while fostering economic growth. The Company currently
estimates that it will incur expenses of approximately $40,000 when the U.S. EPA
reviews and approves the Company's plan to comply with a consent decree entered
into between the Company and the U.S. EPA. Additionally, the Company estimates
that the testing requirements necessary to demonstrate compliance with the U.S.
EPA's standards for approval of a "Part B" permit, for which the Company has
filed an application, will cost approximately $250,000. The Part B Permit allows
a
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company to handle hazardous waste at a specific facility under the Federal
Resource Conservation Recovery Act ("RCRA"). In the event that the U.S. EPA
rejects the Company's application for a Part B permit, or if the Company decides
to modify its Toledo, Ohio facility to eliminate the need for a Part B permit,
the Company estimates that it will incur approximately $250,000 in capital
expenditures to design and implement necessary modifications. The Company
expects to incur both the $40,000 expense related to compliance with the consent
decree and the $250,000 expense in connection with the application for a Part B
permit or modifications of its Toledo, Ohio facility within the next two years.
The Company does not currently project that it will incur any other material
capital expenditures related to compliance with environmental regulations. See
"Risk Factors -- Impact of Denial of U.S. EPA Permit" and "Business --
Environmental Standards and Government Regulation."
The Company's expansion plans include the installation of six new
facilities, all utilizing the Polymeric Recovery System to recycle paint waste.
Of the six new facilities, five are planned to be on-site installations at
customers' facilities, and one is planned to be a stand-alone, regional facility
in the Southeast region of the United States. The Company estimates that the
aggregate cost of the six new facilities, which are planned to be constructed
over a two to three year period commencing in 1998, will be approximately
$8,000,000 and that approximately $6,300,000 of external financing will be
required to fund the construction of these facilities. The Company anticipates
that the net proceeds from this Offering, together with projected cash flow from
operations and proceeds from anticipated industrial development revenue bond
financing, or other conventional financing, will be sufficient to fund the
Company's operations and planned expansion program for the next three years. In
its projections, the Company assumed that it will be able to install the on-site
facilities and build the facility in the Southeast region of the United States
within the next three years. The Company also assumed that it will sell the
EPI-MER-TM- generated from the paint waste processed at these facilities at
prices ranging from 15 cents to 20 cents per pound. The Company anticipates that
it must sell EPI-MER-TM- at prices greater than 10 cents per pound to generate
positive cash flow. If (i) the Company's assumptions change or prove to be
inaccurate, (ii) the Company is unable to obtain sufficient financing to
complete its expansion program, or (iii) the net proceeds from this Offering
prove to be insufficient, the Company may be required to curtail its expansion
activities or seek additional financing through the sale of additional debt or
equity securities or borrowing from banks or other sources. There can be no
assurance that such financing would be available or, if available, that it will
be available on terms acceptable to the Company. See "Risk Factors -- Capital
Requirements; Potential Unavailability of Additional Financing" and "Use of
Proceeds."
The Company has agreed, for a period of three years after the completion of
this Offering, not to issue or sell any shares of Common Stock or other equity
securities or sell or grant options, warrants or rights to purchase any shares
of Common Stock or equity securities, without the prior written consent of the
Underwriter, except for (i) options to purchase up to 310,000 shares of Common
Stock, (ii) shares of Common Stock issuable upon exercise of such options, and
(iii) shares issuable upon exercise of any warrants outstanding on the date of
this Prospectus or to be outstanding upon the completion of this Offering as
described herein. Additionally, during such three year period, the Company may
issue securities in connection with an acquisition, merger or similar
transaction, provided that such securities are not registered under the
Securities Act and do not have registration rights prior to the later of (a)
twelve months after issuance, or (b) three years from the date of the completion
of this Offering. Further, the Company may issue options to purchase shares of
Common Stock to its employees, not exceeding 10% of the outstanding shares of
Common Stock on the second anniversary of the completion of this Offering,
during the period commencing on the second anniversary of such date and ending
on the fourth anniversary of such date. The Company has agreed that for a period
of three years after the completion of this Offering it will not file any
registration statement with the Commission with respect to equity securities
issued by the Company without the prior consent of the Underwriter. See
"Underwriting."
The use by the Company of a portion of the net proceeds from this Offering
to (i) repay $550,000 of the Bank Debt, which includes a $50,000 loan closing
fee, (ii) repay $490,000 of advances from Meridian, (iii) repay the $260,000
Bridge Note, including $10,000 of interest thereon, (iv) make capital
expenditures of $250,000 in connection with the U.S. EPA Part B permit approval,
and (v) make improvements for $150,000 to the Polymeric Recovery System at the
Company's Toledo, Ohio facility will not negatively impact the Company's ability
to pay its debts as they become due. See "Use of Proceeds."
No new accounting standards which have not yet been adopted by the Company
are expected to have a material effect on the financial statements of the
Company.
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BUSINESS
GENERAL
The Company is one of the first commercial paint waste recyclers in the
United States. Since 1991, EPIC has processed over 76,500,000 pounds of paint
waste through its recycling facility, including 12,900,000, 14,200,000 and
14,700,000 pounds of paint waste during the nine months ended November 30, 1997
and the years ended February 28, 1997 and February 29, 1996, respectively. The
Company estimates that the annual worldwide generation of paint waste exceeds
3.7 billion pounds, approximately 1.8 billion pounds of which are generated in
the United States. The Company processes hazardous and non-hazardous industrial
paint waste for its customers and creates a recycled product, EPI-PURE-TM-. In
addition to offering its customers an alternative that substantially eliminates
the "cradle to grave" disposal liability otherwise associated with the
generation of hazardous paint waste, the Company believes that the use of its
recycling technologies contributes to the protection of the environment,
conserves vital resources and offers a responsible solution to many of today's
paint waste disposal problems.
The Company uses two different systems to recycle paint waste: the patented
DryPureTM system, which generates a resultant dry powder (EPI-PURETM) and which
the Company typically sells as a filler in the formulation of certain building
and construction products; and the Polymeric Recovery System, the patented paint
waste recycling technology which the Company finished installing in its Toledo,
Ohio facility in May 1997 and which is currently undergoing a start-up phase of
production. Along with increasing the Company's processing capacity, the
Polymeric Recovery System produces a recycled product (EPI-MERTM), which the
Company intends to sell as a lower cost replacement for traditional, virgin
materials used in formulated products. The Company is currently marketing
EPI-MERTM to approximately ten potential customers, including those in the
sealant, coating and adhesive industries.
Historically, the Company has generated in excess of 97% of its annual sales
revenue from the processing of paint waste. The Company has not generated
significant revenues from the sale of EPI-PURE-TM- because the materials which
EPI-PURETM replaces as a filler are generally inexpensive and the DryPure-TM-
system generates a limited supply of EPI-PURE-TM-. The Company believes that
EPI-MER-TM- has a greater range of commercial applications than EPI-PURE-TM- and
that it can be sold at higher margins than EPI-PURE-TM-. For these reasons,
management believes that the Company's profitability is substantially dependent
on sales of EPI-MERTM. In addition, if the Company is successful in its
marketing of EPI-MERTM, the Company believes that the revenue generated from
sales of EPI-MERTM will provide the Company with flexibility when pricing its
paint waste processing services. There can be no assurance that the Company will
be able to construct and operate the Polymeric Recovery System in a way that
will enable it to recycle paint waste in a commercially viable manner. Further,
although the Company believes that a commercial market exists for EPI-MER-TM-,
there can be no assurance that the Company will be able to market and sell EPI-
MER-TM- on a profitable basis or at all. See "Risk Factors -- Commercial
Viability of the Polymeric Recovery System" and "-- No Current Sales of
EPI-MERTM; Developing Market for a New Product."
The Company markets its paint waste recycling services to businesses that
have spray painting operations that collect paint overspray (wastes) in water
wash spray booths, which are typically used in industrial spray painting
operations. The Company's marketing activities are concentrated in the Midwest
region of the United States where over 80% of its revenues are generated, with
the majority of annual revenues derived from customers in the automotive
assembly business. The Company's customers generally are environmentally
conscientious and by maintaining stringent quality controls, the Company has
established a reputation in the industry of addressing these customer needs.
Generally, the Company's target market for selling EPI-MERTM is different from
the customers for which the Company currently recycles paint waste or to which
the Company sells EPI-PURETM. Accordingly, the Company will be required to
develop a new market and relationships with new customers prior to generating
substantial sales of EPI-MERTM. The Company intends to use its current sales
force to market and sell EPI-MERTM.
Since the Company began marketing its services in 1991, the major barrier to
successfully selling the Company's services has been the cost of the Company's
recycling services compared to the cost of the two main disposal alternatives,
landfilling and incineration. Using the Company's licensed technologies, paint
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waste generators pay two to four times more to recycle paint waste as compared
to landfilling and incineration. The major difference between the Company's
services and the disposal alternatives is that the disposal alternatives pose
the potential for significant, long-term costs. The Company believes many
generators of hazardous and non-hazardous paint waste are willing to pay the
higher cost of recycling to substantially eliminate the generators' exposure to
potential, long-term costs associated with the disposal alternatives. For
example, by recycling hazardous paint waste, which during the Company's last two
fiscal years have represented approximately 15% of the Company's annual sales
revenue, businesses avoid liability as a "potential responsible party" at the
landfill where their paint waste or incinerated ash is disposed and which may be
declared a Superfund clean-up site. In addition, generators of non-hazardous
paint waste avoid the expense associated with establishing that they did not
contribute to the contamination of a landfill in the event that they are named
as a "potential responsible party" with respect to the contamination. Further,
the Company's customers substantially avoid the potentially adverse impact of
changing environmental laws and regulations. Over the past five years, the
Company has been successful in convincing many paint waste generators to select
the environmentally sound alternative of the Company's recycling services which
substantially eliminates their potential long-term liability. In addition, the
Company's business is dependent upon certain patented technologies licensed from
two separate, non-affiliated companies, one of which, Haden Environmental, is a
direct competitor of the Company. See "Risk Factors -- Dependence on Licensed
Technology" and "-- Competition."
The Company's current business strategy is to grow its business by
commercializing the Polymeric Recovery System technology through the following
steps: (i) developing a market for and selling EPI-MER-TM- for use as a lower
cost replacement for traditional, virgin materials used in formulated products;
(ii) the construction, ownership and operation of up to five customized
Polymeric Recovery System on-site at large automotive assembly plants in the
United States; and (iii) the construction of a second facility using the
Polymeric Recovery System in the Southeast region of the United States to serve
the market of small and medium size automotive assembly plants which
individually generate lesser amounts of paint waste. The Company has submitted
proposals for on-site facilities to three automotive assembly plants, two of
which are present customers of the Company. However, the Company has no current
commitments for the installation of any on-site facilities. The Company believes
that as a result of the implementation of its business strategy to commercialize
the Polymeric Recovery System (a) certain generators of paint waste will now be
able to purchase and use materials that incorporate EPI-MER-TM- in the
manufacture of their finished products, and (b) on-site facilities using the
Polymeric Recovery System will decrease the price barrier for the Company's
services by eliminating the cost borne by paint waste generators to transport
paint waste to the Company's Toledo, Ohio facility. See "Risk Factors -- Capital
Requirements; Potential Unavailability of Additional Financing" and "Business --
Marketing Strategy; Proposed Expansion Program."
DEVELOPMENT OF THE PAINT WASTE RECYCLING BUSINESS
Increased public awareness of the harmful effects on the environment and
public health due to the disposal of wastes has resulted in extensive federal,
state and local laws and regulations governing the handling and disposal of
waste products. These laws and regulations impose stringent standards on the
management of wastes and provide substantial liabilities for violators who fail
to comply with applicable regulatory requirements. Generators of hazardous
wastes such as hazardous paint waste are faced with continuing liability without
regard to fault for certain past and present disposal practices. Additionally,
in the event that a landfill is declared a Superfund clean-up site, generators
of paint waste that was disposed of in the landfill may be targeted as
"potentially responsible parties" and, as a result, incur significant litigation
expense defending themselves. Recycling, as opposed to other disposal
alternatives, greatly reduces, if not eliminates, the continuing liability of
the waste generator. In response to the federal, state and local regulatory
environment, a market has developed for companies with appropriate recycling
facilities and the expertise necessary to comply with existing regulatory
requirements.
Paint waste, because of its stickiness and leaching characteristics, is one
of the most difficult wastes to legally dispose of and therefore poses a
significant disposal problem for their generators. Approximately
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40% to 60% of the paint used in industrial spray painting processes becomes
waste that requires disposal or recycling. Currently, the only legal disposal
methods available for paint waste are landfilling and incineration.
Incineration of paint waste, which is generally at least twice as expensive
as landfill for the disposal of paint waste, involves (i) fuel blending, which
is the commingling of various waste streams into a fuel supplement for use as an
alternative fuel in the manufacture of cement or generation of energy, or (ii)
direct thermal destruction of waste streams, which results in the generation of
an ash residue which may contain heavy metals or other hazardous constituents.
Ash residue containing hazardous constituents can be legally disposed only in a
fully permitted hazardous waste landfills, thereby continuing the generator's
potential long-term liability connected with the disposal of hazardous waste. In
addition, ash generated by the incineration of non-hazardous paint waste may be
designated as potentially causing the contamination of a landfill, thereby
exposing the generator to expenses related to demonstrating that it was not
responsible for contamination.
Recycling of waste materials is considered by the U.S. EPA to be a desirable
means of reducing waste. According to the U.S. EPA's definition, recycle is a
broad term that includes "to use, reuse, or reclaim." A material is reclaimed if
it is processed to recover a useful product or if it is regenerated. When
customers send paint waste to the Company's facility, the Company reclaims the
paint waste by processing it to recover a useful product. The U.S. EPA
encourages this type of waste management because it preserves limited landfill
space. Avoiding the need to place hazardous paint waste in landfills also allows
generators to significantly reduce the threat of incurring liability under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as Superfund liability.
In early 1989, Meridian became aware of the magnitude of the disposal
problems facing generators of paint waste and learned of a then unique process
for the handling of this waste. The process, known as DryPure-TM- and patented
by Haden Environmental, heats the paint waste, driving off liquids and volatile
organic compounds, resulting in a dry, inert powder that represents a reduction
in the volume of paint waste by up to 90%.
Originally DryPure-TM- systems were sold directly to automotive
manufacturers which disposed of the resultant dry powder from the process in a
landfill. Meridian recognized that small and mid-size paint waste generators
presented a market for the DryPure-TM- system. In addition, Meridian began
exploring the possibility of selling the resultant dry powder, EPI-PURE-TM-, and
was successful in finding commercial applications for it as a filler in the
formulation of certain building and construction products. In order for the
Company's processes to be accepted as recycling under current federal and state
regulations, the processes (i) must recover a usable product and use the
reusable product for a commercial product, (ii) must use the waste as a
substitute for a commercial product, or (iii) the materials derived from the
waste must be used as an ingredient in an industrial process to make a product.
The waste or the materials derived from the waste cannot be burned to recover
its energy, or used to produce a fuel or used as a constituent in a fuel,
incinerated or disposed of in a landfill. Historically, the Company has
satisfied these requirements through sales of EPI-PURE-TM-. See "Risk Factors --
No Current Sales of EPI-MER-TM-; Developing Market for a New Product."
In 1989, as a result of Meridian's success in finding applications and
markets for EPI-PURE-TM-, Meridian and Haden Purification formed EPIC as a
general partnership for the purpose of constructing commercial facilities to
recycle paint waste. EPIC commenced commercial operations at its newly
constructed paint waste recycling facility in Toledo, Ohio in March 1991. In
1992, Haden Purification terminated its 50% partnership interest in EPIC and NPI
and MEPI, wholly-owned subsidiaries of Meridian, became the sole general
partners of EPIC.
In September 1995, EPIC entered into a license agreement with Aster which
developed a new paint waste recycling process known as the Polymeric Recovery
System. In the Polymeric Recovery System, patented technology is used to process
paint waste in a reaction vessel under low heat and vacuum to drive off the
volatile organic compounds and moisture. The resin, pigment and fillers that
remain are not cured but are further compounded with proprietary additives
producing a putty-like recycled material known as
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EPI-MER-TM-. The formulated material has the performance characteristics of
traditional, virgin materials but has a substantially lower formulation cost.
The Company has implemented a $2,300,000 facilities and equipment expansion of
its Toledo, Ohio facility to commercialize the Polymeric Recovery System.
PAINT WASTE PROCESSING MARKET
The Company estimates that the annual worldwide generation of paint waste
exceeds 3.7 billion pounds, approximately 1.8 billion pounds of which are
generated in the United States. The Company anticipates processing approximately
15,000,000 pounds of paint waste in Fiscal 1998, which represents less than 1%
of the paint waste generated in the United States. The Company plans to continue
to increase its market share of paint waste processing and recycling through its
newly expanded processing facility in Toledo, Ohio and owning, installing and
operating customized Polymeric Recovery Systems at the Company's customers'
plants. The Company believes that on-site facilities will be attractive to large
quantity paint waste generators due to transportation and other cost savings. In
addition, the Company plans to build an additional stand-alone plant in the
Southeast region of the United States similar to the Company's Toledo, Ohio
facility utilizing the Polymeric Recovery System to expand the Company's
capacity in new geographic areas. See "Risk Factors -- Commercial Viability of
the Polymeric Recovery System."
The Company intends to target the automotive market for the sale of on-site
facilities, which represents approximately 10% of the total U.S. paint waste
market. There are 68 automotive assembly plants in the United States, 34 of
which each generate from 2,775,000 to 7,400,000 pounds of paint waste annually.
The Company plans to initially target these 34 automotive assembly plants for
its on-site facilities and, secondarily, target the paint and coating market,
which produces approximately 950,000,000 gallons of paint annually. See "Risk
Factors -- Commercial Viability of the Polymeric Recovery System."
Besides domestic automotive manufacturers, substantial quantities of paint
waste are generated by companies that manufacture automotive sub-assemblies,
consumer durable goods, furniture, airplanes, buses, recreation vehicles, boats
and trains. In addition, paint manufacturers and paint waste brokers also
provide paint waste to the market.
RECYCLED PRODUCT MARKET
Paints and coatings are compounded polymeric materials that have chemical
composition similar to other classes of compounded polymeric materials such as
sealants, adhesives, plastics and rubbers. Because paints are used as decorative
and protective coatings, they must possess durability properties under various
aging conditions. The same is true for the other compounded polymeric materials
mentioned above. Therefore, the ingredients in paints are useful in other
classes of materials that require superior aging resistance. The materials which
comprise paints, resins, pigments, stabilizers, flow modifiers, plasticizers,
curing agents, adhesion promoters and fillers can be recovered from paint waste
so long as the paint has not cured.
The Polymeric Recovery System recovers certain materials from the paint
waste to produce EPI-MER-TM- which can be utilized as a replacement for
traditional, virgin materials in formulated products and which the Company
believes will be priced significantly less than the cost of traditional, virgin
materials. The initial target markets for EPI-MER-TM- are manufacturers and
formulators of the following compounded polymer products: vinyl plastisols, hot
melts, adhesives, pressure sensitive adhesives, caulks, butyls, asphalt,
mastics, paint and coatings. EPI-MER-TM- sales will be concentrated in the
sealant, coating and adhesive industries, which collectively have an annual
market volume in the United States of approximately eight billion pounds. In
order to generate sales of EPI-MER-TM- (i) the recycled product must meet the
same performance characteristics as the material it replaces, (ii) it must be
priced competitively relative to the product EPI-MER-TM- is replacing and other
alternatives which exist for the Company's prospective customer, and (iii) the
Company must be able to produce sufficient quantities of EPI-MER-TM- to satisfy
the customer's processing requirements. The Company does not believe that it
will be required to sell EPI-MERTM in order to be price competitive with other
paint waste processors but that sales of EPI-MERTM will instead provide the
Company with flexibility when pricing its paint waste processing services. See
"Risk Factors -- No Current Sales of EPI-MER-TM-; Developing Market for a New
Product."
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EPI-PURE-TM- is typically used as a filler in the formulation of certain
building and construction products. For example, EPI-PURE-TM- is used by
manufacturers as partial replacements for sand in concrete and calcium carbonate
in asphalt related products. Fillers such as EPI-PURE-TM- are used to add bulk
to the final product. The Company has not generated significant revenues from
the sale of EPI-PURE-TM- because the materials which EPI-PURE-TM- replaces as a
filler are generally inexpensive and the DryPure-TM- system generates a limited
supply of EPI-PURE-TM-.
MARKETING STRATEGY; PROPOSED EXPANSION PROGRAM
Since the Company began marketing its services in 1991, the major barrier to
successfully selling the Company's services has been the cost of the Company's
recycling services compared to the cost of the two main disposal alternatives,
landfilling and incineration. Using the Company's current technology (the
DryPure-TM- system), paint waste generators pay two to four times more to
recycle paint waste as compared to landfilling and incineration. The major
difference between the Company's services and the disposal alternatives is that
the disposal alternatives pose the potential for significant long-term costs.
For example, by recycling hazardous paint waste, which during the Company's last
two fiscal years have represented approximately 15% of the Company's annual
sales revenue, businesses avoid liability as a "potential responsible party" at
the landfill where their paint waste or incinerated ash is disposed and which
may be declared a Superfund clean-up site. In addition, generators of
non-hazardous paint waste avoid the expense associated with establishing that
they did not contribute to the contamination of a landfill in the event that
they are named as a "potential responsible party" with respect to the
contamination. Further, the Company's customers substantially avoid the
potentially adverse impact of changing environmental laws and regulations. Over
the past five years, the Company has been successful in convincing many paint
waste generators to select the environmentally sound alternative of the
Company's recycling services and substantially eliminating their potential
long-term costs.
The Company has been operating near capacity for the past two fiscal years.
Therefore, the Company has focused its overall marketing efforts on customer
satisfaction and maintenance of relationships instead of primarily targeting new
customers, which was the focus of the Company's marketing efforts during the
first three fiscal years of its operations.
The newly-installed Polymeric Recovery System in the Toledo, Ohio facility
provides a 50% increase in the Company's existing paint waste processing
operations. In order to fill this capacity, the Company will target the
generation of new customers while maintaining its current customer base. In
addition, the Company will focus its marketing efforts on generating sales of
EPI-MER-TM-. Although the Company believes a commercial market exists for
EPI-MER-TM-, there can be no assurance that the Company will be able to market
and sell EPI-MER-TM- on a profitable basis or at all. See "Risk Factors --
Commercial Viability of the Polymeric Recovery System" and "-- No Current Sales
of EPI-MER-TM-."
The Company plans to own, install and operate the on-site facilities.
Management currently estimates that the cost of constructing and installing each
customized on-site processing equipment installation will be approximately
$1,000,000. Management believes this marketing strategy will be attractive to
the Company's customers because the on-site facilities will enable generators of
paint waste to significantly decrease their cost of processing paint waste
through the elimination of transportation costs. The on-site installation of
Polymeric Recovery System facilities is economically feasible because the cost
of equipment to process paint waste using the Polymeric Recovery System is about
50% less than the DryPure-TM- system. Management plans to initially market the
customized on-site facilities to large automotive assembly plants in the Midwest
region of the United States where the Company has an established market
relationship and several existing customers in this market category. Although
there are no current commitments for the installation of such systems, the
Company has submitted proposals for on-site facilities to three automotive
companies, two of which are present customers of the Company. Management
currently estimates that the first customized on-site facility will be developed
within the next two years. The Company anticipates that it will enter into a
long-term agreement with the customer for each on-site facility, including set
prices for processing paint waste and minimum requirements for paint waste
processed on an annual basis, which terms the Company believes to be standard
for on-site paint waste processing facilities. In addition, the Company
anticipates that it will sell the EPI-MER-TM- generated by the Polymeric
Recovery System at each on-site facility. However,
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there can be no assurance that the Company will be able to operate the Polymeric
Recovery System in a way that will allow it to recycle paint waste in a
commercially viable manner. Further, the Company believes that only 34 of the 68
automotive assembly plants in the United States generate sufficient paint waste
to justify the purchase of a Polymeric Recovery System. This limited number of
customers may negatively impact the Company's ability to sell on-site
facilities. See "Risk Factors -- Commercial Viability of the Polymeric Recovery
System" and "-- Limited Number of Potential Customers for On-site Facilities."
In addition to the newly installed $2,300,000 Polymeric Recovery System in
the Company's Toledo, Ohio facility and the marketing of on-site facilities, the
Company plans to increase its revenue through the construction of a second
Polymeric Recovery System processing and recycling plant in the Southeast region
of the United States to accommodate that geographic market which includes
smaller and medium sized automotive assembly plants generating approximately
925,000 to 2,775,000 pounds of paint waste annually. Management estimates a cost
of $3,000,000 (excluding start-up costs) to build this second plant which
management projects will increase the Company's annual processing and recycling
capacity by approximately 12,000,000 pounds. Management currently estimates that
construction of the second plant will commence during 1998 and be completed in
late 1999. The Company has not selected a location in the Southeast region of
the United States or developed plans for the construction of the second
facility. Management projects that the second plant will be operating at full
capacity within two years of the completion of construction. See "Risk Factors
- -- Commercial Viability of the Polymeric Recovery System."
The Company plans to finance approximately 80% of the costs of the on-site
facilities and the second processing and recycling plant in the Southeast region
of the United States through industrial development revenue bond financing or,
in the event that industrial development revenue bond financing is not available
on favorable terms, from conventional financing sources. The Company has no
current commitments or arrangements for such financing and there can be no
assurance that such financing will be available or, if available, that is will
be available on acceptable terms. Without such additional financing, the Company
will not be able to complete its proposed expansion program. See "Risk Factors
- -- Captial Requirements; Potential Unavailability of Additional Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The sales of EPI-MER-TM- are being handled through direct selling efforts.
The Company believes that the use of direct sales personnel is sufficient to
provide sales coverage across a full line of potential formulators that would
use 100% of the EPI-MER-TM- produced. The Company believes that individual sales
to formulators will typically involve large quantities of EPI-MER-TM-. Because a
reformulated compound takes time for testing and acceptance, the Company is
building an inventory of EPI-MER-TM- which will demonstrate that the EPI-MER-TM-
is available for use. The Company is currently marketing EPI-MER-TM- to
approximately 10 potential customers, including those in the sealant, coating
and adhesive industries. EPI-MER-TM-, as a replacement for traditional, virgin
materials, must meet the same performance characteristics as the material it
replaces. EPI-MER-TM- has met certain vendor formulation specifications and is
undergoing further tests by vendors. See "Risk Factors -- No Current Sales of
EPI-MER-TM-; Developing Market for a New Product."
CUSTOMERS AND MARKETING
The Company markets its paint waste recycling services to businesses that
have spray painting operations that collect paint overspray (waste) in water
wash spray booths. The Company's marketing activities are concentrated in the
Midwest region of the United States where over 80% of its revenues are
generated, with the majority of annual revenues derived from customers in the
automotive assembly business. The Company's customers generally are
environmentally conscientious and by maintaining stringent quality controls, the
Company has established a reputation in the industry of addressing these
customer needs. Because the Company provides an alternative to the potential
long-term liability associated with landfill disposal of paint waste, many
customers conduct thorough reviews and audits of the Company's operations,
including the Company's compliance with environmental laws and regulations.
The Company utilizes a direct sales force to market its services. In
addition, the Company generates sales through the use of manufacturer
representatives and waste management brokers. Typically, the
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Company enters into individual, one-year purchase orders with its customers to
process and recycle their paint waste. Because generators of paint waste and the
Company need to carefully control the shipment and processing of paint waste,
upon execution of an agreement the Company establishes a long-term schedule for
delivery and processing of the customer's paint waste at the Company's Toledo,
Ohio facility. Although approximately 55% of the Company's customers
(representing approximately 82% of the Company's current sales volume) have been
customers of the Company since 1994, substantially all of the Company's business
is generated from individual purchase orders, which define the price for which
the Company will process paint waste and the quality of paint waste to be
supplied by the customer but which do not require the customer to send any paint
waste to the Company. For the fiscal year ended February 28, 1997, ARK, Inc.
(American Recycling of Kentucky) and Subaru-Isuzu Automotive, Inc. represented
approximately 18.6% and 16.3% of the Company's sales revenue, respectively.
COMPETITION
Presently, approximately 99% of paint waste nationally is disposed of
through landfills or by incineration, and approximately 1% is processed and
recycled by methods utilized by the Company and its competitors. The Company is
aware of three other companies, Haden Environmental, Salem Environmental
Services and Nortru, a division of Philip Environmental Services, that compete
directly with the Company by providing processing and recycling services to
generators of paint waste. These competitors utilize similar methods of thermal
drying to those of the Company; however, over the years the Company has
developed the capability to process a broader range of paint waste than its
competitors. In addition, management believes that the implementation of the
Polymeric Recovery System and sales of EPI-MER-TM- may give the Company a
competitive advantage by providing a higher value, recycled product for use as a
raw material in industrial products and thereby permitting the Company to
decrease the price of its paint waste processing services. See "Risk Factors --
No Current Sales of EPI-MER-TM-; Developing Market for a New Product."
Competitive factors in paint waste processing or disposal include price,
service and the potential long-term costs associated with paint waste generation
and disposal. While paint waste generally can be landfilled or incinerated at a
lower initial cost than recycling, these disposal methods expose the generators
to potential long-term liability or litigation expense under stringent federal
and state regulations. On the other hand, although the costs of the Company's
recycling processes initially are greater than landfilling or incineration, the
Company's recycling process substantially eliminates continuing generator costs.
Landfilling and incineration are provided by national, regional and local
companies, many of which have substantially greater resources than the Company.
In addition, the Company's direct recycling competitors have substantially
greater financial, marketing and other resources than the Company. There can be
no assurance that one of the Company's competitors or a new competitor will not
develop a method of recycling paint waste which is more efficient and profitable
than the methods currently employed by the Company. Additionally, there can be
no assurance that large industrial customers or other waste management companies
will not attempt to develop their own methods of recycling or otherwise
minimizing, treating or disposing of waste. See "Risk Factors -- Competition."
The Company's business is dependent on the continued use of water wash spray
booths by companies that perform spray painting. Water wash spray booths are a
capture device used in spray painting operations which uses chemically treated
water to collect fugitive paint overspray. The process uses a large volume of
air movement to carry paint spray particles into contact with a chemically
treated water flood sheet. The treated water detackifies the paint, which is
then either skimmed from the water surface or sinks to the bottom and is
subsequently collected. The Company processes the resulting sludge or paint
waste. The introduction of new technology that replaces water wash spray booths
would have a material adverse effect on the financial condition, operations and
liquidity of the Company. See "Risk Factors -- Competition."
Management believes that currently there are no recycled products similar to
EPI-MERTM which are sold as a lower cost replacement for traditional, virgin
materials used in formulated products. However, no assurances can be given that
current suppliers of traditional, virgin materials which would be replaced by
EPI-MERTM will not lower their prices to compete with EPI-MERTM. In addition, no
assurances can be given that companies with substantially greater resources than
the Company will not enter the replacement market for traditional, virgin
materials in formulated products. See "Risk Factors -- Competition."
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TECHNOLOGY LICENSES
DRYPURE-TM- SYSTEM. Under the terms of the Compromise Agreement, the
Company has a non-exclusive, perpetual license from Haden Environmental to use
the DryPure-TM- system for recycling paint waste at its Toledo, Ohio facility.
Haden Environmental is not permitted to grant a license for the DryPure-TM-
system to any third party paint waste processor through July 1, 1998 within 200
miles of Toledo, Ohio, which encompasses the industrial center of the midwestern
region of the United States and a significant portion of the Company's customer
base. Additionally, Haden Environmental and its affiliates are not permitted to
compete with the Company, directly or indirectly, as a third party paint waste
processor within 200 miles of
Toledo, Ohio through July 1, 1998. Furthermore, through July 1, 1998 Haden
Environmental is not permitted to grant a license for the DryPure-TM- system
outside the 200-mile exclusivity radius to any third party paint waste processor
without first offering the Company a 30-day right of first refusal on the
location (but not price) of the proposed new facility. The exclusivity
provisions only apply to third-party paint waste processors such as the Company,
and do not apply to the sale or lease of the DryPure-TM- system to businesses
which use the DryPure-TM- system to process paint waste or other wastes which
they generate (E.G., Chrysler, Ford, Toyota, Caterpillar). As a result, Haden
Environmental may directly compete with the Company. The Company's previously
existing obligation to pay Haden Environmental a throughput charge of $10 per
cubic yard of paint waste processed through the DryPure-TM- system will
terminate on July 1, 1998. At November 30, 1997, remaining throughput charges
were estimated to aggregate $66,000. Prior to the execution of the Compromise
Agreement, payments of the throughput charge were credited toward amounts due
under a note payable to Haden Purification. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
POLYMERIC RECOVERY SYSTEM. The Company has an exclusive, worldwide (except
for Mexico) perpetual license for the use of patented mechanical and chemical
technology from Aster which comprise the Polymeric Recovery System. The Company
pays royalties to Aster based on pounds of paint waste processed annually. The
license agreement requires the Company to pay royalties on a minimum of
1,850,000 pounds of raw paint waste in the first year of production ($37,000),
3,700,000 pounds in the second year of production ($74,000), 5,000,000 pounds in
the third year of production ($100,000) and 7,000,000 pounds for each year
thereafter ($140,000). This royalty rate decreases for annual processing in
excess of 7,500,000 pounds. Additionally, the Company will be required to pay
Aster a royalty fee of $.04 per pound of EPI-MER-TM- sold, subject to downward
adjustment if the Company is unable to sell EPI-MER-TM- for a minimum of $.30
per pound. In the event that the Company is unable to process the minimum
requirement of paint waste in any given year, the Company can retain the license
by paying the full royalties on the amount of raw paint waste processed and a
royalty fee of $.04 per pound of EPI-MER-TM- sold during that year. All royalty
fees are subject to an adjustment beginning three years from the completion of
the start-up period based on the consumer price index. The Company also pays
hourly fees to Aster for technical and manufacturing services. Although the term
of the license agreement is perpetual, the Company may terminate the license
agreement at any time if it determines that profits on the licensed technology
are insufficient. Aster may terminate the license agreement if the Company fails
to meet its financial obligations or violates any term of the license agreement
and fails to remedy such breach within 30 days after written notification by
Aster. Total payments by the Company to Aster may not fall below a minimum of
$20,000 per month unless the Company first provides Aster with six months
advance notice. At the end of the six-month notice period, the Company's license
of the Polymeric Recovery System becomes non-exclusive.
The Company has a right of first refusal to match any offer to purchase
either Aster or the Polymeric Recovery System. The license agreement also
provides for a decrease in the royalty payments made by the Company in the event
that the inventor of the licensed technology is either no longer affiliated with
Aster or is unable to provide technical services to the Company. The Company is
permitted to grant sublicenses of the Polymeric Recovery System after obtaining
the written consent of Aster. The Company and Aster will share equally in the
proceeds from sub-licensed operations outside the United States (other than
Mexico).
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DESCRIPTION OF PROCESSES
DRYPURE-TM- SYSTEM.
The Company currently processes over 95% of its paint waste using the
DryPure-TM- system. After testing all incoming paint waste from customers for
unacceptable contaminants, the paint waste is off-loaded into hoppers for
transfer to the DryPure-TM- system. At the beginning of the DryPure-TM- process,
the paint waste is pumped into a thermal fluid dryer where dual Holo-flite
screws filled with 600-degree Fahrenheit oil, indirectly heat the paint waste to
450 degrees Fahrenheit. This heating reaction drives off volatile compounds,
leaving solids consisting of cured cross-linked resins in the form of a powder.
The solids are then passed through a screen separating the cured powder from
uncured paint waste, which is then returned to the dryer for further processing.
Liquids that flash off during the process are captured in a vapor dome and are
routed to the DryPure-TM- waste heat boiler. In this boiler, captured vapors are
combusted as a supplemental fuel with natural gas at 1,400 to 1,600 degrees
Fahrenheit for a dwell time of two seconds and the thermal energy is recycled
back into the system to heat the oil which provides heat for the dryer. From
dryer to heat exchanger, the entire closed-loop process is carefully monitored
by the Company's computer system and a continuous emissions monitor checks the
stack emissions to verify and record that the vapors have been completely
destroyed.
Within the DryPure-TM- system, the Company's stack emissions comply with
applicable U.S. EPA standards and EPI-PURE-TM-, the resultant product from the
DryPure-TM- system, tests below the U.S. EPA's allowable level for leachates
which would be characterized as hazardous waste (the amount of organic and
inorganic analytes present in liquid, solid and multiphase wastes). In order to
comply with federal requirements, the maximum concentration of leachates must
not exceed the following limits (as measured in mg/L): arsenic 5.0; barium
100.0; cadmium 1.0; chromium 5.0; lead 5.0; mercury 0.2; selenium 1.0; and
silver 5.0. With the Company's two continuous-process DryPure-TM- units in
operation, nearly 72,000 pounds of paint waste can be processed in a 24-hour
period. In the last six fiscal years, the Company has processed over 76,500,000
pounds of paint waste into approximately 18,000,000 pounds of EPI-PURE-TM-. The
Company has sold over 14,500,000 pounds of EPI-PURE-TM- to the construction
industry for use as a raw material in roof mastic, concrete block,
control-low-strength materials and other construction products. Although sales
of EPI-PURE-TM- are not material from a financial point of view, sales of
EPI-PURE-TM- are significant to the Company for business purposes because such
sales complete the recycling process. See " -- Environmental Standards and
Government Regulation."
POLYMERIC RECOVERY SYSTEM.
The Polymeric Recovery System, the Company's new licensed technology, is
considered by the Company to be a significant advance in industrial paint waste
recycling technology. Certain paint wastes, once considered non-recyclable, such
as epoxy resins, latex paints and inks, can be processed and reused by the same
industries that produced them. In the Polymeric Recovery System, quality
analysis tests are performed to determine the necessary ingredients that must to
be added to the paint waste to control its final stage physical properties.
After consolidating the additives and the paint waste in a 2,000-gallon
pre-conditioning vessel, the mixture is pumped into a 3,000-gallon reactor which
resembles a pressure cooker and is processed for several hours under vacuum and
lower heat than utilized under the DryPure-TM- system (less than 300 degrees
Fahrenheit) to drive off the volatile organic compounds and moisture. The resin,
pigment and fillers that remain are not cured but are further compounded with
proprietary additives producing a product in the form of a putty, liquid or
powder material configuration known as EPI-MER-TM-, a recycled product which can
be formulated as an additive, plasticizer, resin extender or filler in vinyl or
butyl adhesive and sealant applications. The formulated material has the
performance characteristics of virgin materials but has a substantially lower
formulation cost. See "Business -- Marketing Strategy; Proposed Expansion
Program."
The installation of the Polymeric Recovery System at the Company's Toledo,
Ohio facility was completed in May 1997. The Company's Polymeric Recovery System
uses approximately 8,000 square feet of plant space in the Company's Toledo,
Ohio facility.
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For the past three fiscal years, the Company has been operating its Toledo,
Ohio plant near its capacity using three shifts which represents an annual
processing capability of approximately 17,300,000 pounds of paint waste. The
Company's annual paint waste processing capacity is increased approximately
27,750,000 pounds with the addition of the Polymeric Recovery System.
RAW MATERIALS
In the DryPure-TM- system, trap rock (a small, inexpensive stone) is used to
facilitate heat transfer, to keep paint waste from adhering to the equipment and
to reduce the size of the EPI-PURE-TM- particles. In the Polymeric Recovery
System, a plasticizer, carbon black clay and potassium hydroxide may be added to
the paint waste to control the final stage physical properties of the
EPI-MER-TM-. Each of these additives is readily available at reasonable prices.
BACKLOG
The Company's operations typically process shipments within a relatively
short time of receipt. Accordingly, no large volume of paint waste is stored at
the Company's Toledo, Ohio facility at any time. Because the generators and the
Company need to carefully control the shipment and processing of paint waste,
upon execution of a sales contract the Company establishes a long-term schedule
for delivery and processing of the customer's paint waste at the Company's
Toledo, Ohio facility. Accordingly, the Company normally has its maximum
processing capacity scheduled for one to three months in advance.
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATION
The Company's business currently consists of the recycling of paint waste.
Each aspect of this business is subject to significant federal, state and local
environmental regulations. Based upon current laws and regulations, the Company
believes that its policies, practices and procedures substantially comply with
current applicable environmental laws and regulations. Specifically, the
Company's facility in Toledo, Ohio is currently subject to the following federal
and state environmental regulations, among others: (i) federal requirements for
recyclable materials (40 CFR 266.20(b)); federal requirements for waste burned
in boilers of industrial furnaces (BIF) (40 CFR part 266, subpart H); State of
Ohio air regulations governing permits to install new sources of pollution (OAC
3745-31) and permits to operate and variances (OAC 3745-35); and the National
Pollutant Discharge Elimination System (OAC DSW-0100). Additionally, the Company
is subject to State of Ohio regulations governing the discharge of waste water
(OAC DSW-0200). Further, the Company will be subject to other state
environmental laws and regulations after it installs the on-site facilities
outside the State of Ohio and develops the second waste processing facility in
the Southeast region of the United States. No assurance can be given that such
other state environmental laws and regulations or that future changes in
environmental laws, regulations, or interpretations currently applicable to the
Company or changes in the nature of the Company's operations will not have a
material adverse effect on the financial condition, operations and liquidity of
the Company.
During the past five years, the U.S. EPA has adopted a more pragmatic
approach toward the regulated environmental community. This approach includes
the use of cost/benefit analysis before implementing additional major levels of
regulation on industry. In practice, the U.S. EPA appears to have recognized
that it must be practical in balancing its mandate to provide vigilant
environmental protection while fostering economic growth. The Company currently
estimates that it will incur expenses of approximately $40,000 when the U.S. EPA
reviews and approves the Company's plan to comply with a consent decree entered
into between the Company and the U.S. EPA. Additionally, the Company estimates
that the testing requirements necessary to demonstrate compliance with the U.S.
EPA's standards for approval of a "Part B" permit, for which the Company has
filed an application, will cost approximately $250,000. The Part B Permit allows
a company to handle hazardous waste at a specific facility under RCRA. In the
event that the U.S. EPA rejects the Company's application for a Part B permit,
or if the Company decides to modify its Toledo, Ohio facility to eliminate the
need for a Part B permit, the Company estimates that it will incur approximately
$250,000 in capital expenditures to design and implement necessary
modifications. The Company expects to incur both the $40,000 expense related to
compliance with the consent decree and the $250,000 expense in connection with
the application for a Part B permit or modifications of its Toledo, Ohio
facility within the next two years. The Company does not currently project that
it will incur any other material capital expenditures related to
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<PAGE>
compliance with environmental regulations. See "Risk Factors -- Impact of Denial
of U.S. EPA Permit" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Recycling of hazardous paint waste currently comprises approximately 15% of
the Company's sales volume, with remaining sales volume consisting of
non-hazardous paint waste. Volatile gases are generated from hazardous waste in
the recycling process and are used as a supplemental fuel in the Company's waste
heat boilers. In July 1994, the Company submitted an application with the U.S.
EPA for an operating permit identified as a "Part B" permit, which, as a
processor of hazardous paint waste, the Company is required to obtain. In
connection with its Part B permit application, the Company has requested
authorization to store hazardous paint waste which will enhance its operating
efficiencies. The Company currently is operating under interim status until a
final resolution of its application for a Part B permit is reached.
Historically, the U.S. EPA has taken several years to review submitted
applications for permits of this type. There can be no assurance, however, that
the U.S. EPA will issue a Part B permit to the Company, or, if such a permit is
issued, whether the operational and control conditions of the permit will allow
the Company to continue operations in a profitable manner. The U.S. EPA's denial
of a Part B permit could also adversely impact the Company's relations with its
customers. Although the Company continually evaluates its alternatives in the
event that its application for a Part B permit is denied, denial of such permit
could have a material adverse effect on the financial condition, operations and
liquidity of the Company. See "Risk Factors -- Impact of Denial of U.S. EPA
Permit."
The Company's comprehensive recycling program meets the objectives of RCRA
by processing a hazardous paint waste stream into a new raw material for
beneficial reuse in a manufacturing process, thereby ending a generator's
potential long-term liability. Equipment that is used to recycle hazardous waste
is not subject to hazardous waste permits or other management standards, except
air emissions controls under RCRA. However, paint waste which meets the
hazardous waste listing criteria or exhibit one or more hazardous waste
characteristics must be managed as a hazardous waste prior to the recycling
activities. The Company is not required to have a storage permit for hazardous
waste because it does not currently store any such material at its Toledo, Ohio
facility. A water discharge permit is not required for the DryPure-TM- system
since it does not result in the discharge of fluids to a sewer system or outside
the facility. The Company has been granted a "permit to install" by the Ohio EPA
which allows the installation and operation of the Polymeric Recovery System.
Presently, the waste water generated by the Polymeric Recovery System is being
treated offsite pending the installation of discharge treatment equipment which
is required to bring the waste water discharge to acceptable guidelines. The
Company estimates that the treatment equipment will cost approximately $25,000.
The Company anticipates the final water discharge permit will be granted after
the Company submits its water discharge analysis. There can be no assurance that
the Company will be able to obtain a water discharge permit.
After a generator's waste paint has been processed, the Company issues a
Recycle Certificate evidencing the Company's comprehensive manifesting and
tracking system and including the paint waste's original manifest number, dates
of processing and ultimate disposition. The information becomes a permanent
record of the Company and can be recalled/supplied if and when the generator has
a need to validate its recycle program.
Environmental legislation and regulations have changed rapidly in recent
years, and it is possible that the Company will be subject to increasingly
stringent environmental standards in the future. The Company may be required to
make significant additional expenditures relating to the environmental matters
on an ongoing basis in order to maintain its current and future operations.
There can be no assurance that any such expenditures, or other expenditures and
penalties resulting from unforeseen circumstances, administrative actions or
liabilities relating to environmental matters, will not have a material adverse
effect on the financial condition, operations and liquidity of the Company.
Furthermore, there can be no assurance that new government regulations will not
have a material adverse effect on the financial condition, operations and
liquidity of the Company.
41
<PAGE>
CORPORATE HISTORY
Meridian, a publicly-traded holding company located in Toledo, Ohio with
businesses in steel distribution and processing operations, formed the Company
under Delaware law in February 1996 as a subsidiary to hold all of the
outstanding stock and partnership interests of NPI and MEPI, the sole general
partners of EPIC. In November 1996, the Company issued shares of Common Stock
representing an aggregate 20% interest in the Company for $600,000 to the
Minority Stockholders. Prior to the completion of this Offering, the Company
will issue shares of Meridian Preferred Stock in exchange for certain
outstanding indebtedness of the Company to Meridian. The Compay estimates it
will owe Meridian approximately $4,020,000 immediately prior to the completion
of this Offering, of which $2,000,000 will be exchanged for 1,000,000 shares of
Meridian Preferred Stock, approximately $1,530,000 will be contributed to the
capital of the Company and $490,000 will be repaid to Meridian from the net
proceeds of the Offering. To the extent that the amount of debt exchanged by
Meridian for the Meridian Preferred Stock exceeds the fair market value of such
Meridian Preferred Stock, such excess shall be treated as a contribution by
Meridian to the Company's capital. See "Relationships Between the Company and
Meridian -- Meridian Preferred Stock." As a result of this Offering, Meridian's
beneficial ownership of the Common Stock will be reduced from 80% to 40% (or
37.2% if the Underwriter's Overallotment Option is exercised in full). See "Risk
Factors -- Absence of Additional Financial Support from Meridian," "-- Control
by Meridian" and "Relationships Between the Company and Meridian."
EMPLOYEES
At December 31, 1997, the Company had 32 full-time employees and had engaged
two independent contractors. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its employee
relations are satisfactory.
LITIGATION
There are no material legal proceedings pending against the Company.
PROPERTIES
The Company owns a 19,500 square foot building located in Toledo, Ohio where
it conducts its paint waste recycling operations. This property and the
Company's DryPure-TM- recycling equipment are subject to a mortgage securing
repayment of the Mortgage Note issued by the Company in connection with
industrial development revenue bonds issued by the Toledo-Lucas County (Ohio)
Port Authority to fund the initial construction of the Company's Toledo, Ohio
facility. At November 30, 1997, the outstanding principal balance of the
Mortgage Note was $2,235,000. Haden Purification has assumed liability for
one-half of the remaining principal, interest and fee payments due under the
Mortgage Note. Meridian is a guarantor of one-half of the Mortgage Note.
Substantially all of the property and equipment of the Company, which has a net
book value of $3,634,000 at November 30, 1997, has been assigned as collateral
to the Toledo-Lucas County (Ohio) Port Authority and to the Senior Lender.
The Company has subleased 1,000 square feet of administrative and sales
office space on the second floor of an office building located at 810 Chicago
Street in Toledo, Ohio from Ottawa River Steel Co. Ottawa River Steel Co., a
wholly-owned subsidiary of Meridian, leases the property from Chicago Investors.
In addition, the Company has leased a 14,000 square foot building and land
located at 805 Chicago Street in Toledo, Ohio from Chicago Investors where it
screens, packages and warehouses EPI-PURE-TM-. Chicago Investors is a general
partnership in which Champlain Investors, a general partnership, has a 50%
interest. Mr. Feniger owns a one-half interest in Champlain Investors and his
father, Yale M. Feniger, owns the remaining one-half interest.
Both leases commenced March 1, 1996 and terminate February 28, 1998, with
options permitting the Company to extend the lease term for three additional
one-year periods. Rent payments for the 810 Chicago Street property are $585 per
month for the initial two-year term, $625 per month during the first option
period, $675 per month during the second option period and $725 per month during
the third option period. Rent payments for the 805 Chicago Street property are
$1,175 per month during the initial two-year term, $1,550 per month during the
first option period, $1,700 per month during the second option period and $1,800
per month during the third option period. After the expiration of the initial
lease term or, if
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<PAGE>
applicable, any additional renewal term, the Company may retain possession of
each property as a month-to-month tenant at the monthly rent in effect during
the most recent rental period, with each lease cancelable on 60 days prior
notice by either the landlord or the Company.
The Company also leases approximately 17,000 square feet of material storage
space in Toledo, Ohio under a one year lease expiring in June 1998 with monthly
rental of $2,572.
The Company believes that its existing facilities are adequate in all
material respects for the needs of the Company's current business operations and
that the monthly rental payments are at market values that are at least as
favorable to the Company as those that could be obtained from independent third
parties. See "Relationships Between the Company and Meridian."
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the executive
officers and directors of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Bruce F. Maison............................ 55 President, Chief Executive Officer and
Director (Class II)
Real P. Remillard.......................... 66 Chief Financial Officer and Secretary
Joseph D. Van Brackel...................... 36 Treasurer
Spencer I. Browne.......................... 48 Director (Class I)
William D. Feniger......................... 50 Chairman of the Board and Director (Class
I)
James L. Rosino............................ 43 Director (Class III)
</TABLE>
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
BRUCE F. MAISON has been President and Chief Executive Officer of the
Company since its inception in February 1996 and a director since June 1996. Mr.
Maison has served as President of EPIC since April 1990. From 1981 to February
1990, Mr. Maison served as Vice President of International Operations for the
DeVilbiss Company's Industrial and Commercial Division, a manufacturer of
coating application equipment. Mr. Maison has also served as a director of the
Toledo Employers Association since April 1996. Mr. Maison earned a B.S. in
Business Administration from Wayne State University and is a graduate of the
Executive Development Programs in Finance and New Product Development at the
University of Michigan.
REAL P. REMILLARD has been Chief Financial Officer and Secretary of the
Company since June 1996. Mr. Remillard was Chief Financial Officer and Vice
President -- Finance of Meridian from August 1985 through February 1995,
Secretary of Meridian from January 1986 through May 1996 and Treasurer of
Meridian from February 1989 through May 1996. Mr. Remillard earned a B.S. from
Bryant College in Accounting and Finance and is a member of the Ohio Society of
Certified Public Accountants.
JOSEPH D. VAN BRACKEL has been Treasurer of the Company since June 1996.
From June 1995 to May 1996, Mr. Van Brackel served as Corporate Accounting
Manager of Meridian. From January 1994 to June 1995, Mr. Van Brackel served as
Assistant Controller of Chase Brass and Copper Co. and from February 1988 to
December 1993 served as Manager of Consolidations and Reporting of Vickers Inc.
Mr. Van Brackel earned a B.B.A. from the University of Notre Dame.
SPENCER I. BROWNE has been a director of the Company since November 1996.
Mr. Browne formed Stategic Asset Management LLC in January 1997 to assist small
companies in raising debt and equity capital. From August 1988 until September
1996, Mr. Browne served as President, Chief Executive Officer and a director of
Asset Investors Corporation ("AIC"), a real estate investment trust which is
traded on the New York Stock Exchange ("NYSE"), which he co-founded in 1986. He
also served as President, Chief Executive Officer and a director of Commercial
Assets, Inc., an American Stock Exchange traded company affiliated with AIC,
from its formation in October 1993 until September 1996. In addition, from June
1990 until March 1996, Mr. Browne served as President and a director of M.D.C.
Holdings, Inc., an NYSE traded company and the parent company of a major
homebuilder in Colorado. He is director of Mego Mortgage Corporation, which is a
specialized consumer finance company traded on Nasdaq.
WILLIAM D. FENIGER has been a director of the Company since February 1996
and Chairman of the Company's Board since June 1996. Mr Feniger is Chairman of
the Board of Directors and Chief Executive Officer of Meridian and has served as
such since August 1985. Mr. Feniger also currently serves as President of
Meridian and has served as such since 1991. Mr. Feniger earned a B.S. in Finance
from the University of Denver.
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<PAGE>
JAMES L. ROSINO has been a director of the Company since October 1996. Mr.
Rosino is Chief Financial Officer and Vice President -- Finance of Meridian and
has served as such since February 1996. Mr. Rosino has also served as Secretary
and Treasurer of Meridian since May 1996. From May 1988 through February 1996,
Mr. Rosino served as Corporate Controller of Meridian. Mr. Rosino earned a
Bachelor of Business Administration degree from the University of Toledo and is
a Certified Public Accountant.
The Company has agreed for a period of three years after the completion of
this Offering to use its best efforts to elect to the Board a nominee designated
by the Underwriter who is reasonably acceptable to the Company. Meridian has
executed an agreement to vote its shares of Common Stock in favor of the
Underwriter's nominee during such three year period. The Underwriter will also
be entitled to have an advisor to the Board during such three year period in the
event that its nominee is not a director of the Company. The Underwriter's
nominee, if not a director, will be entitled to attend or participate in all
Board meetings and to receive advance notice of all proposed Board actions and
resolutions.
The Underwriter has not yet designated a nominee to the Board. In the event
that the Underwriter does not designate a nominee to the Board promptly after
the completion of this Offering or the Underwriter's nominee is not reasonably
acceptable to the Company, the directors of the Company will appoint an
independent director to the Board promptly after the completion of this
Offering. After the appointment of a new director, the Board will consist of
five directors divided into three classes; Class I Directors, Class II Directors
and Class III Directors. The Company's Class I Directors, Class II Directors and
Class III Directors will serve until the annual meeting of the Company's
stockholders to be held in 1998, 1999 and in the year 2000, respectively, and
until their respective successors are duly elected and qualified or until their
early resignation or removal. Directors of each class will be elected for a full
term of three years (or any lesser period representing the balance of the
previous term of such class) and until their respective successors are duly
elected and qualified or until their resignation or removal.
Officers are appointed by and serve at the discretion of the Board. Mr.
Maison serves as President and Chief Executive Officer of the Company. Mr.
Remillard serves as Chief Financial Officer and Secretary of the Company. Both
Messrs. Maison and Remillard are employed pursuant to employment agreements. See
"-- Executive Compensation" and "Underwriting."
All future transactions between the Company and its officers, directors and
5% stockholders will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent,
disinterested directors of the Company. In addition, all agreements between the
Company and any of its stockholders entered into during the three year period
commencing the date of the completion of this Offering must be reasonably
acceptable to the Underwriter.
COMMITTEE OF THE BOARD OF DIRECTORS
Effective upon the completion of this Offering, the Board will establish an
Audit Committee, a Compensation Committee and a Stock Option Committee. The
Board has determined that Spencer I. Browne and the new director (either the
Underwriter's nominee or an independent director appointed by the Board) will
serve on the Audit Committee and the Compensation Committee. The Board has not
yet determined which directors will serve on the Stock Option Committee.
The general functions of the Audit Committee will include selecting the
independent auditors (or recommending such action to the Board), evaluating the
performance of the independent auditors and their fees for services, reviewing
the scope of the annual audit with the independent auditors and the results of
the audit with management and the independent auditors, consulting with
management, internal auditors and the independent auditors as to the systems of
internal accounting controls and reviewing the nonaudit services performed by
the independent auditors and considering the effect, if any, on their
independence.
The Compensation Committee will be authorized and directed to (i) review and
approve the compensation and benefits of the Company's executive officers, (ii)
review and approve the annual salary budgets, (iii) review management
organization and development, (iv) review and advise management regarding the
benefits, including bonuses, and other terms and conditions of employment of
other employees, and (v) review and recommend for the approval of the Board the
compensation of directors.
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<PAGE>
The Stock Option Committee will be authorized and directed to administer the
Option Plan and the Directors' Plan (both as defined below), grant options under
the Option Plan and the Directors' Plan and administer any other plans that may
be established by the Company.
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company for services rendered during the fiscal years ended February 28, 1997
and February 29, 1996 and February 28, 1995 to the Company's Chief Executive
Officer. None of the Company's other most highly compensated executive officers
received total salary and bonus compensation exceeding $100,000 during the
fiscal year ended February 28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
SECURITIES
UNDERLYING
ANNUAL COMPENSATION OPTIONS/SARS
-------------------------------- OTHER ANNUAL (NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) SHARES) COMPENSATION
- ---------------------------------- --------- ---------- --------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce F. Maison ..................
President and Chief
Executive Officer (2) 1997 $ 131,250 -- $ 2,232 -- --
1996 125,000 $ 23,000 2,611 -- --
1995 111,077 10,000 2,295 -- --
</TABLE>
- --------------
(1) The aggregate amounts of personal benefits not included in the Summary
Compensation Table do not exceed the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
(2) All compensation shown for Mr. Maison was paid to him as President of EPIC
and as President of another subsidiary of Meridian.
------------------------
EMPLOYMENT CONTRACTS
Mr. Maison is employed as President and Chief Executive Officer of the
Company under an employment agreement expiring February 2002, with automatic one
year extensions upon expiration unless either the Company or Mr. Maison notifies
the other party of its intention to terminate the agreement. The employment
agreement provides for an initial annual base salary of $131,250, subject to an
increase for each fiscal year of at least 5% of the annual base salary for the
prior fiscal year, at the discretion of the Board. The employment agreement also
provides a deferred compensation benefit of up to $190,000 and a bonus
arrangement based on the Company's performance. Mr. Maison is entitled to
hospitalization insurance, disability and retirement plan benefits and such
other benefits as are provided to executives of Meridian. In the event of the
termination of Mr. Maison by the Company other than for cause within two years
of a "change of control" of the Company, Mr. Maison will receive an amount equal
to the sum of three times his base salary and all amounts due to him through the
term of the employment agreement. For the purposes of the employment agreement,
a "change of control" occurs upon a substantial change of control of the
Company, including, without limitation, a transaction in which shares
representing greater than 30% of the voting power of the Company are acquired by
a person, entity or group other than Meridian.
Meridian has guaranteed the Company's obligations under the employment
agreement with Mr. Maison and agreed to vote the shares of Common Stock which it
owns in favor of the election of Mr. Maison to the Board. Additionally, Meridian
has agreed to pay Mr. Maison up to a maximum of 5% of the net proceeds received
by Meridian from the sale of its shares of Common Stock and Preferred Stock and
a bonus of $24,500 upon the completion of this Offering.
46
<PAGE>
Mr. Remillard is employed as Chief Financial Officer and Secretary of the
Company under an agreement expiring November 2000. The employment agreement
provides for an initial annual base salary of $50,000, subject to an increase
each year at the discretion of the Board, and requires that Mr. Remillard work
an average of 20 hours a week. Additionally, Mr. Remillard is entitled to
bonuses and stock options at the discretion of the Board. Mr. Remillard is
entitled to hospitalization insurance, disability and retirement plan benefits
and such other benefits as are provided to salaried employees of the Company.
DIRECTOR COMPENSATION
Directors of the Company do not currently receive compensation for their
services. It is expected that, upon completion of this Offering, the Company
will adopt a plan to compensate the non-employee directors based on their
attendance at meetings. In the event that the Underwriter designates an advisor
to the Board, such designee will receive the same fee for attendance at meetings
as the non-employee directors of the Company.
STOCK OPTION PLANS
1997 NON-QUALIFIED AND INCENTIVE STOCK OPTION PLAN
The Company's 1997 Non-Qualified and Incentive Stock Option Plan (the
"Option Plan") was adopted by the Board in October 1997, subject to approval by
the Company's stockholders. The Board amended the Option Plan to, among other
things, increase the number of authorized shares reserved for issuance under the
Option Plan. An aggregate of 235,000 shares of Common Stock have been reserved
for issuance under the Option Plan, subject to adjustment upon the occurrence of
certain specified capitalization events.
The Option Plan is intended to encourage ownership of Common Stock by
officers and other employees of the Company, to encourage their continued
employment with the Company, and to provide them with additional incentives to
promote the continued growth and success of the Company. The Option Plan will
become effective as of the completion of this Offering and will terminate ten
years from that date, but such termination will not affect any outstanding
options previously granted.
The Option Plan provides that the Company's Stock Option Committee may grant
options and otherwise administer the Option Plan; provided, however, in no event
shall an employee be granted an Option or Options to acquire more than 150,000
shares in any one calendar year. Options granted under the Option Plan may be
(i) incentive stock options, (ii) non-qualified stock options, or (iii) a
combination of the foregoing. The exercise price for incentive stock options
and, unless otherwise determined by the Stock Option Committee, the exercise
price for non-qualified stock options granted under the Option Plan must be at
least equal to the fair market value of the Common Stock on the date of the
grant; however, in the event that an incentive stock option is granted to an
employee who owns more than 10% of the total combined voting power of all
classes of stock of the Company or, if applicable, a subsidiary or parent
corporation of the Company, the exercise price per share for such incentive
stock options cannot be less than 110% of the fair market value of the Common
Stock on the date of grant. In addition, the Company has agreed that it will not
grant any non-qualified stock options at less than the fair market value of the
Common Stock on the date of grant. The exercise price of options granted under
the Option Plan is payable in cash or, at the discretion of the Stock Option
Committee, in whole or in part, in shares of Common Stock, valued at their fair
market value at the date of exercise; however, the Company may establish
"cashless exercise" procedures, subject to applicable laws, rules and
regulations, pursuant to which a holder of an option may exercise an option and
arrange for a simultaneous sale of the underlying Common Stock, with the
exercise price being paid from the proceeds of such sale. Options expire on the
dates determined by the Stock Option Committee, in its sole discretion, but not
later than ten years from the date of grant.
The Option Plan also provides that in the event of the occurrence of a
Change in Control (as defined in the Option Plan), an employee would be entitled
to exercise his or her options in full, regardless of any vesting requirement
set forth in such options, but each such option would terminate 90 days after
the occurrence of the Change in Control.
The Option Plan may be amended at any time by the Board, but no amendment
can be made without the approval of the Company's stockholders if stockholder
approval is required under Section 422 or
47
<PAGE>
Section 162(m) of the Code, or Rule 16b-3 under the Exchange Act. No amendment
may, however, impair the rights or obligations of the holder of any option
granted under the Option Plan without his or her consent.
Effective upon the completion of this Offering, the Company granted options,
subject to approval of the Option Plan by the Company's stockholders, to
purchase 210,000 shares of Common Stock under the Option Plan, including options
to purchase 125,000 shares granted to Bruce F. Maison, the Company's President
and Chief Executive Officer, and options to purchase 21,000 shares granted to
Real P. Remillard, the Company's Chief Financial Officer and Secretary. The per
share exercise price of all such options is the initial price at which shares of
Common Stock are sold pursuant to this Offering. All options granted to Mr.
Maison and Mr. Remillard are fully vested. One-third of all other options
granted under the Option Plan vest each year, with the options becoming fully
exercisable at the end of three years. The term of the options is ten years from
the date of grant.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Company's 1997 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") was adopted by the Board in October 1997. An aggregate of
75,000 shares of Common Stock have been reserved for issuance under the
Directors' Plan, subject to adjustment upon the occurrence of certain specified
capitalization events.
The Directors' Plan is intended to encourage non-employee directors of the
Company to acquire or increase their ownership of Common Stock on reasonable
terms and to foster a strong incentive for non-employee directors to put forth
maximum effort for the continued success and growth of the Company. The
Directors' Plan will become effective as of the completion of this Offering and
will terminate five years from that date.
Each of the Company's non-employee directors serving at the time of the
completion of this Offering (I.E., Messrs. Feniger, Rosino and Browne) will be
granted an option on the closing date of this Offering to purchase 25,000 shares
of Common Stock. The per share exercise price of options granted under the
Directors' Plan will be the fair market value of the Common Stock on the date of
grant. For Options granted on, or as of, the closing of this Offering, fair
market value is defined as the initial price at which shares of Common Stock are
sold pursuant to this Offering. The exercise price of options granted under the
Directors' Plan is payable in cash or in shares of Common Stock valued at fair
market value at the time of exercise, or a combination of cash and shares;
however, the Company may establish "cashless exercise" procedures, subject to
applicable laws, rules and regulations, pursuant to which a director may
exercise an option and arrange for a simultaneous sale of the underlying Common
Stock, with the exercise price being paid from the proceeds of such sale.
Options may be exercised at any time after the six-month anniversary of the date
of grant. Options granted under the Directors' Plan will expire ten years after
the date of grant, subject to earlier termination.
In the event that a director ceases to be a member of the Board (other than
by reason of death or disability), an option may be exercised by the director
(to the extent the director was entitled to do so at the time he or she ceased
to be a member of the Board) at any time within seven months after he or she
ceases to be a member of the Board, but not beyond the term of the option. If
the director dies or becomes disabled while he or she is a member of the Board
of Directors, or within seven months after he or she ceases to be a member of
the Board, the option may be exercised in full by his or her personal
representative or distributees at any time within one year after his or her
death or disability, but not beyond the term of the option. In the event of the
occurrence of a Change in Control (as defined in the Directors' Plan) a director
would be entitled to exercise the option in full, but such option would
terminate 90 days after the Change in Control.
The Directors' Plan may be amended at any time by the Board. No amendment
may, however, impair the rights or obligations of the holder of any option
granted under the Directors' Plan without his or her consent.
48
<PAGE>
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION; INSURANCE
Pursuant to the Company's Second Restated Certificate of Incorporation, the
Company must, to the fullest extent permitted by the General Corporation Law of
the State of Delaware (the "Delaware Law"), as amended from time to time,
indemnify all persons (E.G., directors and officers) whom it may indemnify
pursuant thereto and advance expenses incurred in defending any proceeding for
which such right to indemnification is applicable, but the indemnitee must
provide the Company with an undertaking to repay all amounts advanced if it is
determined by the Company or a final judicial decision that the indemnitee is
not entitled to be indemnified by the Company. The Company's Second Restated
Certificate of Incorporation contains a provision eliminating, to the fullest
extent permitted by Delaware Law, the personal liability of the Company's
directors for monetary damages for breach of a fiduciary duty. By virtue of this
provision, under current Delaware Law, a director of the Company will not be
personally liable for monetary damages for breach of his fiduciary duty as a
director, except for (i) any breach of his duty of loyalty to the Company or to
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) dividends or stock
purchases or redemptions that are unlawful under Delaware Law, and (iv) any
transaction from which he derives an improper personal benefit. This provision
of the Company's Second Restated Certificate of Incorporation pertains only to
breaches of duty by directors as directors and not in any other corporate
capacity such as officers, and limits liability only for breaches of fiduciary
duties under Delaware Law and not for violations of other laws such as the
federal securities laws. As a result of the inclusion of such provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that are
in violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. The inclusion
of this provision in the Company's Second Restated Certificate of Incorporation
may have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted the Company and its
stockholders.
The Company maintains directors' and officers' liability insurance covering
certain liabilities that may be incurred by directors and officers of the
Company in connection with the performance of their duties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, effective as of the
completion of this Offering, with respect to the beneficial ownership of the
Common Stock by (i) each beneficial owner of more than 5% of the issued and
outstanding shares thereof, (ii) each director, (iii) each executive officer
named in the Summary Compensation Table, and (iv) all executive officers and
directors of the Company as a group, both before and after giving effect to this
Offering. Meridian, which owns all of the outstanding Meridian Preferred Stock,
is the only holder of the Company's Preferred Stock. See "Relationships Between
the Company and Meridian."
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------
PERCENT (2)
NUMBER OF ----------------------------
SHARES BEFORE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING AFTER OFFERING
- ------------------------------------------------------------------------ -------------- ------------ --------------
<S> <C> <C> <C>
Meridian National Corporation
805 Chicago Street
Toledo, OH 43611....................................................... 1,000,000 80.0% 40.0%(3)
Elliot Smith
400 East 56th Street, Apt. 19D
New York, NY 10022..................................................... 83,333 6.7% 3.3%
MNP Corporation (4)
44225 Utica Road
Utica, MI 48318-9002................................................... 83,333 6.7% 3.3%
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Bruce F. Maison
810 Chicago Street
Toledo, OH 43611....................................................... 125,000(5) 9.1% 4.8%
Real P. Remillard
810 Chicago Street
Toledo, OH 43611....................................................... 21,000(6) 1.7% *
William D. Feniger
805 Chicago Street
Toledo, OH 43611....................................................... --(7) * *
Spencer I. Browne
650 South Cherry Street
Denver, CO 80222....................................................... 83,333(7) 6.7% 3.3%
James L. Rosino
805 Chicago Street
Toledo, OH 43611....................................................... --(7) * *
All executive officers and directors as a group (6 persons)............. 229,333(8) 16.4% 8.7%
</TABLE>
- --------------
* Less than 1%
(1) Under the rules of the Commission, a person is deemed to be the beneficial
owner of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities if that person has the right to acquire beneficial
ownership of such securities within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities. Unless
otherwise indicated by footnote, the named entities or individuals have sole
voting and investment power with respect to the shares of Common Stock
beneficially owned.
(2) The computation used in determining the percent of beneficial ownership
includes a fraction which has as its numerator (i) the actual number of
shares of stock owned, plus (ii) the number of shares beneficially owned
pursuant to rights exercisable within 60 days of the completion of this
Offering and
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the denominator includes the total number of shares outstanding plus the
number of shares determined in item (ii) of the numerator with respect to
the holder for which the computation is made. Accordingly the total
beneficial ownership exceeds 100%.
(3) Meridian will beneficially own 37.2% of the then issued and outstanding
shares of Common Stock if the Underwriter's Overallotment Option is
exercised in full.
(4) Mr. Larry Berman, the Chairman of the Board of Directors and a stockholder
of MNP Corporation, is a director of Meridian.
(5) Consists of 125,000 shares of Common Stock subject to stock options granted
pursuant to the Option Plan that will become exercisable on approval of the
Option Plan by the Company's stockholders.
(6) Consists of 21,000 shares of Common Stock subject to stock options granted
pursuant to the Option Plan that will become exercisable on approval of the
Option Plan by the Company's stockholders.
(7) Does not include 25,000 shares of Common Stock subject to stock options that
become exercisable six months after the completion of this Offering.
(8) Includes the stock options granted to Messrs. Maison and Remillard.
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<PAGE>
RELATIONSHIPS BETWEEN THE COMPANY AND MERIDIAN
GENERAL
Prior to the completion of this Offering, Meridian owned 80% of the
outstanding shares of Common Stock. As a result of this Offering, Meridian's
ownership of the Common Stock will be reduced from 80% to 40% (or 37.2% if the
Underwriter's Overallotment Option is exercised in full). Meridian is a
guarantor of one-half of the Company's obligations under the Mortgage Note which
had an outstanding principal balance of approximately $2,235,000 at November 30,
1997. In addition, Meridian is a co-signor of the Bank Debt, which had an
outstanding principal balance of $2,098,000 at November 30, 1997. With the
exception of William D. Feniger and James L. Rosino, none of the executive
officers and the present directors of the Company are present officers or
directors of Meridian. See "Risk Factors -- Absence of Additional Financial
Support from Meridian," "-- Control by Meridian," "Management" and "Principal
Stockholders."
The Senior Lender has agreed upon the completion of this Offering to
refinance the Bank Debt upon receiving a $500,000 principal payment and a loan
closing fee of $50,000 from the net proceeds of this Offering. Meridian will not
be required to co-sign the refinanced Bank Debt. In addition, William D.
Feniger, Chairman of the Board of Directors, Chief Executive Officer and
President of Meridian, who is also the Chairman of the Company's Board, will
also be released from his personal guaranty of the Bank Debt in connection with
the refinancing. Mr. Feniger owns approximately 23% of Meridian's common stock
and approximately 33% of Meridian's non-voting series A preferred stock.
Further, the terms of the refinanced Bank Debt prevent the Company from making
any loans or advances to Meridian.
PRIOR INTERCOMPANY ARRANGEMENTS
Prior to the completion of this Offering, the Company participated in a cash
arrangement with Meridian pursuant to which Meridian managed the Company's cash.
Under the arrangement, cash was remitted to Meridian as collected by the Company
and transferred as needed to meet its cash requirements. Meridian charged
interest by allocating the interest charges borne by Meridian back to the
Company based upon the average daily balances of net advances by Meridian to the
Company. Meridian also provided other management services to the Company,
including compensation and benefits administration, payroll processing, use of
certain general accounting systems and income tax compliance. Meridian allocates
costs to the Company on the basis of specific services provided. The Company's
management believes that the allocations by Meridian do not materially differ
from the actual expenses which would have been incurred had the Company not
received such services from Meridian.
REAL ESTATE LEASES
The Company has subleased 1,000 square feet of administrative and sales
office space on the second floor of an office building located at 810 Chicago
Street in Toledo, Ohio from Ottawa River Steel Co. Ottawa River Steel Co., a
wholly-owned subsidiary of Meridian, leases the property from Chicago Investors.
In addition, the Company has leased a 14,000 square foot building and land
located at 805 Chicago Street in Toledo, Ohio from Chicago Investors where it
screens, packages and warehouses EPI-PURE-TM-. Chicago Investors is a general
partnership in which Champlain Investors, a general partnership, has a 50%
interest. William D. Feniger, Chairman of the Company's Board and Chairman,
President and Chief Executive Officer of Meridian, owns a one-half interest in
Champlain Investors and his father, Yale M. Feniger, owns the remaining one-half
interest. The current annual rentals for the office space and for the
EPI-PURE-TM- processing space are $7,020 and $14,100, respectively. The Company
believes that monthly rental payments are at market rates that are at least as
favorable to the Company as those that could be obtained in dealings with third
parties on an arm's length basis. See "Business -- Properties."
MERIDIAN PREFERRED STOCK
The Company estimates that it will owe Meridian approximately $4,020,000
immediately prior to the completion of this Offering, of which $2,000,000 will
be exchanged for 1,000,000 shares of Meridian Preferred Stock, approximately
$1,530,000 will be contributed to the capital of the Company and $490,000 will
be repaid to Meridian from the net proceeds of this Offering. To the extent that
the amount of debt
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<PAGE>
exchanged by Meridian for the Meridian Preferred Stock exceeds the fair market
value of such Meridian Preferred Stock, such excess shall be treated as a
contribution by Meridian to the Company's capital. See "Description of
Securities -- Preferred Stock."
TAX SHARING AGREEMENT
The Company and Meridian have entered into a tax sharing agreement (the "Tax
Sharing Agreement") that defines the parties' rights and obligations with
respect to certain federal and state income or franchise tax matters relating to
Meridian's business for tax years or tax periods prior to the completion of this
Offering. In general, with respect to taxable periods ending on or before the
last day of the taxable year in which this Offering occurs, Meridian will
continue to be responsible for (i) filing consolidated federal income tax
returns for the Meridian affiliated group, including in each case the Company
and its subsidiaries for the relevant periods that such companies were members
of such group, (ii) filing unitary, combined or consolidated state income tax
returns for any unitary, combined or consolidated group that includes the
Company or any of its subsidiaries and Meridian or any of its other
subsidiaries, and (iii) paying the taxes (including any subsequent adjustments
resulting from the re-determination of such tax liabilities by the applicable
taxing authorities) relating to such returns except to the extent attributable
to the Company's business, which will be paid by the Company to Meridian who
will in turn pay such taxes to the applicable taxing authorities. The Company
will be responsible for separate state income tax returns, audits and tax
payments of the Company and its subsidiaries for periods prior to this Offering,
unless otherwise specifically provided in the Tax Sharing Agreement. The Company
will also be responsible for audits, filing returns and paying taxes related to
the Company's business for subsequent periods. The Company and Meridian have
agreed to cooperate with each other and to share information in preparing such
tax returns and in dealing with other tax matters.
TRANSITIONAL AGREEMENT
Meridian provides certain corporate management and administrative services
to the Company, including corporate accounting, tax, legal and employee benefit
services. The Company and Meridian have entered into a Transitional Agreement
which will be effective upon the completion of this Offering for a period of one
year and provides, among other things, for Meridian to provide such services on
a cost basis to the Company.
Future arrangements between the Company and Meridian, if any, will be
determined through negotiation between Meridian and the Company. Any such future
arrangements are also expected to be on terms no less favorable to the Company
than could be obtained in dealings with third parties on an arm's length basis.
In addition, the Company has agreed, pursuant to the Underwriting Agreement, to
not make any loans or advances to Meridian, or any entity affiliated with
Meridian, for a period of three years after the completion of this Offering.
STOCK OWNERSHIP
Upon completion of this Offering, Meridian will beneficially own, in the
aggregate, 40% of the then issued and outstanding shares of Common Stock (or
37.2% if the Underwriter's Overallotment Option is exercised in full).
Accordingly, Meridian will have significant influence on the election of the
Company's directors and other stockholder actions, including approving or
disapproving certain material corporate transactions such as a merger or sale of
substantially all of the assets of the Company.
MANAGEMENT
William D. Feniger, Chairman of the Company's Board, serves as Chairman of
the Board of Directors, President and Chief Executive Officer of Meridian. Mr.
Feniger will devote such time to the business and affairs of the Company as he
deems appropriate; however, he has duties and responsibilities to Meridian which
will require most of his time and which may reduce the time which he might
otherwise spend as Chairman of the Company's Board. Mr. Feniger, however, is not
an executive officer of the Company. Mr. Feniger owns approximately 23% of
Meridian's common stock and approximately 33% of Meridian's non-voting series A
preferred stock. Larry Berman, the Chairman of the Board of Directors and a
stockholder of MNP Corporation, which owns 6.7% of the outstanding shares of
Common Stock, is a director of Meridian. See "Management and Principal
Stockholders."
53
<PAGE>
CERTAIN OTHER RELATIONSHIPS AND RELATED TRANSACTIONS
The Senior Lender has agreed upon the completion of this Offering to
refinance the Bank Debt upon receiving a $500,000 principal payment and a
$50,000 loan closing fee from the net proceeds of this Offering. William D.
Feniger, the Chairman of the Company's Board, will be released from his personal
guaranty of the Bank Debt in connection with the refinancing. In addition, MNP
Corporation, which owns 6.7% of the outstanding shares of Common Stock, will be
released from its guaranty of $750,000 of the Bank Debt in connection with the
refinancing. MNP Corporation holds an option to purchase a building and certain
real property owned by Meridian. In the event that MNP Corporation would have
been required to make any payments to the Senior Lender pursuant to its guaranty
of the Bank Debt, under an agreement between MNP Corporation and Meridian the
option price at which the building and real property are purchasable by MNP
Corporation would have been decreased by the amount of such payment by MNP
Corporation to the Senior Lender.
All future transactions between the Company and its officers, directors and
5% stockholders will be on terms no less favorable than could be obtained from
independent third parties and will be approved by a majority of the independent,
disinterested directors of the Company. In addition, all agreements between the
Company and any of its stockholders entered into during the three year period
commencing the date of the completion of this Offering must be reasonably
acceptable to the Underwriter.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue an aggregate of 20,000,000 shares of
Common Stock, $.01 par value per share, and 2,500,000 shares of preferred stock,
$.01 par value per share (the "Preferred Stock").
COMMON STOCK
Immediately prior to the completion of this Offering, 1,250,000 shares of
Common Stock were issued and outstanding. Immediately following the completion
of this Offering (assuming the Underwriter's Overallotment Option is not
exercised), 2,500,000 shares of Common Stock will be issued and outstanding. See
"Prospectus Summary -- The Offering."
Holders of the Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of the
Common Stock do not have cumulative voting rights, so that holders of more than
50% of the shares of Common Stock (subject to the voting rights that the holders
of Preferred Stock may then possess) are able to elect all of the Company's
directors eligible for election in a given year. Subject to the preferences that
may be applicable to any class of Preferred Stock then outstanding, including
the Meridian Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared and paid from time to time by
the Board out of funds legally available therefor. See "Dividend Policy." Upon
any liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, holders of Common Stock are entitled to receive PRO RATA all assets
of the Company available for distribution to its stockholders after payment or
provision for payment of the debts and other liabilities of the Company and the
liquidation preferences of any then outstanding Preferred Stock. There are no
preemptive or other subscription rights, conversion rights, or redemption or
sinking fund provisions with respect to shares of Common Stock. All issued and
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon consummation of this Offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized by its Second Restated Certificate of
Incorporation to issue an aggregate of 2,500,000 shares of "blank check"
Preferred Stock, in one or more series and containing such rights, privileges
and limitations, including voting rights, conversion privileges and redemption
rights, as may, from time to time, be determined by the Board as to any such
series. The 1,000,000 shares of Meridian Preferred Stock will be the only shares
of Preferred Stock outstanding upon the completion of this Offering. Except for
the shares of Meridian Preferred Stock, the Company will not issue any shares of
Preferred Stock to its
54
<PAGE>
officers, directors or affiliates except on terms similar to those offered to
all of the Company's existing stockholders or to new stockholders or as may be
approved by a majority of the independent, disinterested directors on the Board
who have access, at the Company's expense, to the Company's counsel or
independent counsel. Although the Company has no current plans to issue any
shares of Preferred Stock, in the event of issuance, the Preferred Stock could
be used, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. There can be no assurance that
shares of Preferred Stock will not be issued at some time in the future in
addition to the shares of Meridian Preferred Stock. Preferred Stock may be
issued in the future in connection with acquisitions, financings or such other
matters as the Board deems to be appropriate. In the event that any such shares
of Preferred Stock are issued, a Certificate of Designation, setting forth the
series of such Preferred Stock and the relative rights, privileges and
designations with respect thereto, will be filed with the Secretary of the State
of Delaware. The effect of such Preferred Stock is that the Board alone, within
the bounds of and subject to the federal securities laws and Delaware Law, may
be able to authorize the issuance of Preferred Stock which could have the effect
of making a takeover of the Company unpalatable to potential bidders for the
hostile acquisition of the Company. See "Risk Factors -- Possible Adverse Effect
of Issuance of Preferred Stock."
The Meridian Preferred Stock bears a cumulative dividend of 8% per annum, is
non-voting and has a liquidation preference equal to the amount of the
indebtedness exchanged. Total advances from Meridian are estimated to aggregate
$4,020,000 (including accrued interest payable), of which $2,000,000 will be
converted into Meridian Preferred Stock prior to the completion of this
Offering, $1,530,000 will be contributed to the capital of the Company by
Meridian, and $490,000 will be repaid to Meridian from the net proceeds of this
Offering. In the event that earnings before interest, taxes, depreciation and
amortization ("EBITDA") of the Company for the fiscal year immediately preceding
a date of payment of the dividend is less than five times the aggregate dividend
payable upon all shares of Meridian Preferred Stock then outstanding, the
Company will only pay a PRO RATA portion of the dividend payable on the Meridian
Preferred Stock based on the percentage which EBITDA represents of five times
the aggregate dividend payable on all such outstanding shares. Some or all of
the accrued unpaid dividends may be paid on a subsequent payment date if EBITDA,
in the fiscal year immediately preceding such subsequent payment date, exceeds
five times the aggregate dividend then payable upon all of the shares of
Meridian Preferred Stock then outstanding. The Company must pay all accrued and
unpaid dividends on the Meridian Preferred Stock prior to declaring or paying
dividends on the Common Stock, including dividends which the Company may have
been unable to pay in prior years under the terms of the Meridian Preferred
Stock. Subject to certain conditions, the Meridian Preferred Stock is
redeemable, in whole or in part, at its liquidation value of $2.00 per share at
the option of the Company after five years from the date of the completion of
this Offering. The number of shares of Meridian Preferred Stock issued by the
Company equals the amount of debt exchanged by Meridian divided by the $2.00 per
share liquidation value. The Company estimates a fair value of $1.10 per share
of the Meridian Preferred Stock based on a discount rate of approximately 18%
and assuming redemption over a ten-year period commencing five years after the
date of issuance. The difference between the amount of the debt exchanged
($2,000,000) and the estimated fair value of the shares of Meridian Preferred
Stock ($1,100,000), along with the amount of debt contributed by Meridian to the
capital of Company with respect to Meridian's shares of Common Stock, estimated
to be approximately $1,530,000, will be recorded as additional paid in capital
on the Company's financial statements.
WARRANTS
In connection with this Offering, 1,250,000 Warrants will be issued pursuant
to a Warrant Agent Agreement between the Company and Continental Stock Transfer
& Trust Company, as warrant agent, and will be in registered form. Each of the
Warrants will entitle the registered holder to purchase one share of Common
Stock at a price of $5.50 per share, for a period of three years commencing two
years after the date of this Prospectus. The exercise price of the Warrants is
subject to adjustment upon the occurrence of certain events such as the issuance
of securities at a price less than the exercise price then in effect, or upon
stock splits, stock dividends, reorganizations, mergers or consolidations.
Unless exercised, the Warrants will automatically expire on the fifth
anniversary of the date of this Prospectus. The Warrants are subject to
redemption by the Company, after obtaining the approval of the Underwriter, at
$.10 per Warrant, at any time commencing two years after the date of this
Prospectus on at least 30 days prior written notice to the
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<PAGE>
holders of the Warrants, provided the closing bid quotation of the Common Stock
as reported on The Nasdaq Stock Market or the last sales price if quoted on a
national securities exchange equals or exceeds $8.25 per share, subject to
certain adjustments, on each of 20 consecutive trading days following the second
anniversary of the date of this Prospectus, and provided that such consecutive
trading days end on the third trading day prior to the date on which the Company
gives notice of redemption. The Warrants will be exercisable until the close of
business on the day immediately preceding the date fixed for redemption. See
"Risk Factors -- Adverse Effect of Redemption of Warrants."
The holders of the Warrants have certain anti-dilution protection upon the
occurrence of certain events, including stock dividends, stock splits,
reclassifications, mergers and stock issuances at a price below both the then
current market price of the Common Stock and the exercise price of the Warrants.
The holders of the Warrants have no right to vote on matters submitted to the
stockholders of the Company and have no right to receive dividends. The holders
of the Warrants are not entitled to share in the assets of the Company in the
event of liquidation, dissolution or the winding up of the Company's affairs.
The Company is required to use its reasonable efforts to have a current
registration statement on file with the Commission at all times when the
Warrants may be exercised and to effect appropriate qualifications under the
laws and regulations of the states in which the Common Stock and Warrants are
sold in this Offering in order to comply with applicable laws in connection with
such exercise. There is no assurance that the Registration Statement which
includes this Prospectus can or will be kept current or that the Company will
file any other registration statement covering the Common Stock underlying the
Warrants, that such other registration statement, if filed, will become
effective as soon as the Warrants are exercisable or that such registration
statement can or will be kept current. In any of such events, or if such Common
Stock is not registered or qualified for sale in the state in which a Warrant
holder resides, the exercise of the Warrants and the resale or other disposition
of Common Stock issued upon such exercise could be unlawful and the Warrants
will not be exercisable until such time as the Common Stock is registered or
qualified.
MINORITY STOCKHOLDER WARRANTS; BRIDGE WARRANTS
The Minority Stockholder Warrants issued to the Minority Stockholders have
the same terms and conditions as the Warrants. Additionally, the Bridge Warrants
will be exchanged effective upon the completion of this Offering for warrants
with the same terms and conditions as the Warrants. See "-- Warrants" above.
The Minority Stockholder Warrants and the Bridge Warrants, along with the
650,000 shares of Common Stock issuable upon exercise of such warrants which
will be outstanding after the completion of this Offering are treated as
"restricted securities" for purposes of Rule 144. Therefore, such warrants and
shares of Common Stock may not be resold in a public distribution except in
compliance with the registration requirements of the Securities Act, or an
exemption therefrom, or pursuant to Rule 144 under the Securities Act.
Additionally, the Minority Stockholders and the holder of the Bridge Warrants
have agreed not to sell or transfer any securities of the Company for a two year
period following the completion of this Offering, provided, however, that they
may sell or transfer the Minority Stockholder Warrants and the Bridge Warrants,
respectively, after a one year period following the completion of this Offering.
Additionally, the holders of the Minority Stockholder Warrants and the holder of
the Bridge Warrants have agreed in any public sale or transfer of securities at
any time during the three year period commencing immediately after the end of
each such person's applicable lock-up period, to sell such securities through
the Underwriter, subject to certain conditions and limited exceptions. See
"Shares Eligible for Future Sale."
REGISTRATION RIGHTS
The Company has granted certain demand registration rights to the holders of
the Underwriter's Warrant. See "Underwriting." Additionally, the holders of
Minority Stockholder Warrants and the holder of the Bridge Warrants have certain
"piggyback" registration rights with respect to registration statements filed by
the Company. The Minority Stockholders and the holder of the Bridge Warrants
have agreed not to exercise such registration rights for a three year period
from the completion of this Offering. The Company
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has agreed that for a period of three years after the completion of this
Offering that it will not file a registration statement with the Commission with
respect to equity securities issued by the Company without the prior written
consent of the Underwriter. See "Underwriting."
CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE COMPANY'S SECOND RESTATED
CERTIFICATE OF INCORPORATION AND BY-LAWS
GENERAL
The Second Restated Certificate of Incorporation and the By-laws of the
Company contain certain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company first to negotiate with the Company. Although
such provisions may have the effect of delaying, deferring or preventing a
change in control of the Company, the Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure the
Company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms. The description set forth below is intended as a summary only and
is qualified in its entirety by reference to the Second Restated Certificate of
Incorporation and By-laws of the Company.
BOARD OF DIRECTORS
The Company's Second Restated Certificate of Incorporation and By-laws
provide that the Board will consist of not less than three members, the exact
number to be determined from time to time by the Board. The Board has set the
number of directors at four. The Company has agreed to use its best efforts for
a period of three years commencing on the completion of this Offering to elect
to the Board a nominee designated by the Underwriter who is reasonably
acceptable to the Company. A majority of the Board then in office has the sole
authority to fill any vacancies on the Board. A director on the Board may be
removed from office with or without cause, at any time by the affirmative vote
of two-thirds of the outstanding shares of voting stock issued by the Company.
See "Management -- Executive Officers and Directors."
SPECIAL MEETINGS
Special meetings of the stockholders may be called by the President, a
majority of the Board or by stockholders owning shares representing at least 20%
of the entire capital stock of the Company issued and outstanding and entitled
to vote.
ANTI-TAKEOVER STATUTE
The Company is a Delaware corporation and subject to Section 203 of the
Delaware Law, an anti-takeover law. In general, Section 203 of the Delaware Law
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the Board of Directors and the
holders of at least 66 2/3% of the issued and outstanding shares of voting stock
not owned by the interested stockholder. The existence of this provision would
be expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares of
Common Stock held by stockholders. The provisions of Section 203 of the Delaware
Law do not apply to Meridian.
TRANSFER AGENT/WARRANT AGENT
The Transfer Agent and Warrant Agent for the Company's Common Stock and
Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New York,
New York 10004.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS, TO
THE EXTENT IT RELATES TO A HOLDER'S TAX BASIS IN THE WARRANTS OR THE
CONSEQUENCES OF THE SALE, EXERCISE OR LAPSE OF THE WARRANTS, IS LIMITED TO
HOLDERS OF THE WARRANTS SOLD PURSUANT TO THIS OFFERING.
TAX BASIS IN COMMON STOCK AND/OR WARRANTS
A holder's tax basis in Common Stock or Warrants will generally be the price
paid for such Common Stock or Warrants.
SALE, EXERCISE OR LAPSE OF WARRANTS
The sale of a Warrant by a holder will generally result in the recognition
of capital gain or loss to such holder, provided the Warrant is a capital asset
in the hands of the holder on the date of sale. Upon the expiration of an
unexercised Warrant, a holder will generally recognize capital loss in an amount
equal to the holder's tax basis in the Warrant, provided the Warrant is a
capital asset in the hands of the holder on such date.
As a general rule, no gain or loss will be recognized by a holder of a
Warrant on the purchase of Common Stock for cash on the exercise of the Warrant.
Gain may be recognized, however, to the extent a holder receives cash in lieu of
fractional shares of Common Stock. The tax basis of a share of Common Stock
received upon exercise of a Warrant will be equal to the sum of the holder's tax
basis in the exercised Warrant and the exercise price. The holding period for
Common Stock received upon exercise of a Warrant will commence with the date of
exercise of the Warrant.
The Company will not be required to recognize income, gain or loss on the
exercise or lapse of the Warrants.
OWNERSHIP CHANGE AND LIMITATION OF LOSSES, CREDITS AND DEDUCTIONS
Section 382 of the Code imposes limitations on the amount of "pre-change"
losses and deductions (including, in certain instances, unrealized losses and
deductions attributable to periods prior to an "ownership change") that may be
used to offset "post-change" taxable income of a corporation which undergoes an
"ownership change." Similarly, Section 383 of the Code limits the amount of
"pre-change" tax credits that may be used to reduce the "post-change" tax
liability of a corporation which undergoes an "ownership change."
The consummation of this Offering will result in an "ownership change" of
the Company within the meaning of Code Sections 382 and 383. Consequently, the
Company's ability to use its net operating loss carryforwards and other
"pre-change" deductions, losses and tax credits to offset income generated
subsequent to this Offering will generally be limited to the value of the
Company's equity immediately before this Offering (which will generally be
reduced by any capital contributions made to the Company or any of its
subsidiaries during the two-year period immediately before the change date)
multiplied by the then applicable long-term tax exempt rate applicable to
ownership changes occurring during the month this Offering occurs (the
applicable long-term tax-exempt rate for ownership changes occurring in
September 1997 is 5.45%). In certain instances, this limitation may be increased
by certain unrealized gains attributable to periods prior to this Offering to
the extent such gains are recognized in the five-year period following this
Offering. See "Risk Factors -- Effect of Offering on Tax Net Operating Losses."
It is possible that the Company could undergo another "ownership change" in
the future and, as a result, be subject to further limitations under Code
Sections 382 and 383.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS, WHICH
IS BASED ON THE LAW AS IN EFFECT AS OF THE DATE HEREOF, IS INCLUDED HEREIN FOR
GENERAL INFORMATION ONLY (I.E., IS NOT INTENDED AS TAX ADVICE) AND DOES NOT
PURPORT TO ADDRESS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT
TO A PARTICULAR HOLDER OF COMMON STOCK OR WARRANTS, IN LIGHT OF SUCH HOLDER'S
PERSONAL INVESTMENT CIRCUMSTANCES, OR TO CERTAIN HOLDERS SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS,
58
<PAGE>
NOR DOES IT DEAL WITH ANY ASPECTS OF STATE, LOCAL OR FOREIGN TAX LAWS. POTENTIAL
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF AN INVESTMENT IN COMMON STOCK OR WARRANTS UNDER
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have outstanding
2,500,000 shares of Common Stock (or 2,687,500 shares if the Underwriter's
Overallotment Option is exercised in full). The 1,250,000 shares of Common Stock
and 1,250,000 Warrants sold in this Offering (or 1,437,500 shares of Common
Stock and 1,437,500 Warrants if the Underwriter's Overallotment Option is
exercised in full) and the 1,250,000 shares of Common Stock issuable upon
exercise of the Warrants (or 1,437,500 shares if the Underwriter's Overallotment
Option is exercised in full) will be freely tradeable without restrictions under
the Securities Act except for any shares purchased by an "affiliate" of the
Company (as that term is defined in the rules and regulations under the
Securities Act), which affiliate will be subject to the resale limitations of
Rule 144 under the Securities Act. The 1,000,000 shares of Common Stock owned by
Meridian, 125,000 shares of Common Stock issuable to the Underwriter pursuant to
the Underwriter's Warrant, 150,000 Minority Stockholder Warrants, the 500,000
Bridge Warrants and the 125,000 warrants issuable to the Underwriter pursuant to
the Underwriter's Warrant (along with the 775,000 shares of Common Stock
issuable upon exercise of such warrants) which are or will be outstanding upon
the completion of this Offering are or will be treated as "restricted
securities" for purposes of Rule 144. Therefore, such warrants and shares of
Common Stock may not be resold in a public distribution except in compliance
with the registration requirements of the Securities Act, or an exemption
therefrom, or pursuant to Rule 144 under the Securities Act.
In general, under Rule 144, as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least one year shares of Common Stock which are treated as "restricted
securities," including persons who may be deemed affiliates of the Company,
would be entitled to sell, within any three-month period (beginning 90 days
after the date of this Prospectus), a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is given, provided certain
requirements as to the manner of sale and requirements as to the availability of
current public information about the Company are satisfied. A stockholder who is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale by him, and who has beneficially owned for at least two
years shares of Common Stock that are treated as "restricted securities," would
be entitled to sell such shares under Rule 144(k) immediately upon the
effectiveness of this Offering, without regard to the foregoing volume
limitations and manner of sale, notice, and availability of current public
information requirements.
The Company has agreed, for a period of three years after the completion of
this Offering, not to issue or sell any shares of Common Stock or other equity
securities or sell or grant options, warrants or rights to purchase any shares
of Common Stock or equity securities, without the prior written consent of the
Underwriter, except for (i) options to purchase up to 310,000 shares of Common
Stock, (ii) shares of Common Stock issuable upon exercise of such options, and
(iii) shares issuable upon exercise of any warrants outstanding on the date of
this Prospectus or to be outstanding upon the completion of this Offering as
described herein. Additionally, during such three year period, the Company may
issue securities in connection with an acquisition, merger or similar
transaction, provided that such securities are not registered under the
Securities Act and do not have registration rights prior to the later of (a)
twelve months after issuance, or (b) three years from the date of the completion
of this Offering. Further, the Company may issue options to purchase shares of
Common Stock to its employees, not exceeding 10% of the outstanding shares of
Common Stock outstanding on the second anniversary of the completion of this
Offering, during the period commencing on the second anniversary of such date
and ending on the fourth anniversary of such
59
<PAGE>
date. The Company has agreed that for a period of three years after the
completion of this Offering that it will not file a registration statement with
the Commission with respect to equity securities issued by the Company without
the prior consent of the Underwriter. See "Underwriting."
Except for Meridian which has agreed to a three year lock-up period, the
Company's officers and directors, the Minority Stockholders and holders of stock
options, the Bridge Warrant and the Minority Stockholder Warrants have agreed
that, subject to certain limited exceptions, for a period of two years following
the date of this Prospectus, they will not offer, sell or dispose of any Common
Stock or any securities convertible into, or exchangeable for, or warrants to
purchase or acquire, shares of Common Stock without the consent of the
Underwriter, provided, however, that the foregoing limitation shall be for one
year with respect to the sale and transfer of Minority Stockholder Warrants and
Bridge Warrants. In addition, the Company has granted certain "piggyback"
registration rights to the holders of Minority Stockholder Warrants and the
holder of the Bridge Warrants. See "Relationships Between the Company and
Meridian -- Registration Rights."
Prior to this Offering, there has been no market for the Common Stock or
Warrants. The Company can make no predictions as to the effect, if any, that
sales of shares of Common Stock or the availability of shares for sale will have
on the market prices prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect prevailing market prices.
60
<PAGE>
UNDERWRITING
The Company has agreed to sell, and the Underwriter has agreed to purchase
from the Company, 1,250,000 shares of Common Stock and 1,250,000 Warrants. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent. The Underwriter is committed to
purchase all of the securities offered hereby, if any are purchased.
The Underwriter has advised that it proposes initially to offer the
1,250,000 shares of Common Stock and 1,250,000 Warrants to the public at the
initial public offering prices set forth on the cover page of this Prospectus
and that it may allow to selected dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions not in excess of
$ per share of Common Stock and $
per Warrant, of which not more than $ per share of Common Stock and $ per
Warrant may be re-allowed to certain other dealers.
The Underwriting Agreement provides that the Underwriter will receive a
non-accountable expense allowance of 3% of the gross proceeds of this Offering.
The Company has also agreed to pay all expenses in connection with qualifying
the shares of Common Stock and Warrants offered hereby for sale under the laws
of such states as the Underwriter may designate, including expenses of counsel
retained for such purpose by the Underwriter.
The Company has granted to the Underwriter the Underwriter's Overallotment
Option, which is exercisable once during a period of 45 days after the date of
this Prospectus, to purchase up to an additional number of shares of Common
Stock and Warrants equal to 15% of the total number of shares of Common Stock
and Warrants offered hereby, solely to cover overallotments.
The Company has agreed to sell to the Underwriter for nominal consideration
the Underwriter's Warrant to purchase 125,000 shares of Common Stock and 125,000
Warrants. The Underwriter's Warrant will be non-exercisable for one year after
the date of this Prospectus. The Underwriter's Warrant may not be sold,
transferred, assigned or hypothecated for one year following the date of this
Prospectus, except to officers or partners (not directors) of the Underwriter
and members of the selling group, and/or their respective officers or partners.
Thereafter, for a period of four years, the Underwriter's Warrant will be
exercisable at 120% of the offering price of the Common Stock and Warrants,
respectively, sold to the public pursuant to this Prospectus. The Company has
also granted certain demand and "piggyback" registration rights to the holders
of the Underwriter's Warrant. In addition, the Underwriter will agree that the
Underwriter's Warrant will not be sold, transferred, assigned, hypothecated or
otherwise disposed of during the term of the Underwriter's Warrant, except to
officers or partners of the Underwriter or to any member of the selling group
and/or their respective officers or partners; the underlying securities will
nevertheless be transferable in accordance with the terms of the Underwriter's
Warrant.
For the life of the Underwriter's Warrant, the holders thereof are given, at
nominal cost, the opportunity to profit from a rise in the market price of the
Common Stock with a resulting dilution in the interest of other stockholders.
Further, the holders may be expected to exercise the Underwriter's Warrant at a
time when the Company would in all likelihood be able to obtain equity capital
on terms more favorable than those provided in the Underwriter's Warrant.
The Company has agreed, for a three year period after the completion of this
Offering, not to issue or sell any shares of Common Stock or other equity
securities or sell or grant options, warrants or rights to purchase any shares
of Common Stock or equity securities, without the prior written consent of the
Underwriter, except for (i) options to purchase up to 310,000 shares of Common
Stock, (ii) shares of Common Stock issuable upon exercise of such options, and
(iii) shares issuable upon exercise of any warrants outstanding on the date of
this Prospectus or to be outstanding upon the completion of this Offering as
described herein. Additionally, during such three year period, the Company may
issue securities in connection with an acquisition, merger or similar
transaction, provided that such securities are not registered under the
Securities Act and do not have registration rights prior to the later of (a) one
year after issuance, or (b) three years from the date of the completion of this
Offering. Further, the Company may issue
61
<PAGE>
options to purchase shares of Common Stock to its employees, not exceeding 10%
of the outstanding shares of Common Stock on the second anniversary of the
completion of this Offering, during the period commencing on the second
anniversary of such date and ending on the fourth anniversary of such date.
The Company has agreed to indemnify the Underwriter and its controlling
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments the Underwriter may be required to make in
respect thereof.
The Company has agreed for a period of three years after the completion of
this Offering to use its best efforts to elect to the Board a nominee designated
by the Underwriter who is reasonably acceptable to the Company. Meridian will
execute an agreement prior to the completion of this Offering to vote its shares
of Common Stock in favor of the Underwriter's nominee during such three year
period. The Underwriter will also be entitled to have an advisor to the Board
during such three year period in the event that no nominee of the Underwriter is
a director of the Company. The Underwriter's nominee, if any, will be entitled
to attend or participate in all Board meetings and to receive advance notice of
all proposed Board actions and resolutions, and receives the same compensation
and expense reimbursements as non-management Board Members.
The Underwriter intends to act as a market maker for the Common Stock and
Warrants after the completion of this Offering. In order to facilitate this
Offering, the Underwriter may engage in transactions that stabilize, maintain or
otherwise affect the prices of the Common Stock and Warrants. Specifically, the
Underwriter may overallot in connection with this Offering, thereby creating a
short position in the Common Stock and/or Warrants for its own account. In
addition, to cover over-allotments or to stabilize the price of the Common Stock
and Warrants, the Underwriter may bid for, and purchase, shares of Common Stock
and Warrants in the open market. The Underwriter may also reclaim selling
concessions allowed to a dealer for distributing the Common Stock and Warrants
in this Offering. The Underwriter may overallot in connection with this
Offering, if the Underwriter repurchases previously distributed shares of Common
Stock and Warrants in transaction to cover short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Common Stock and Warrants above independent market levels.
The Underwriter is not required to engage in these activities, and may end any
of these activities at any time.
The Company will pay the Underwriter a fee of 5% of the exercise price of
each Warrant exercised, provided (i) the market price of the Common Stock on the
date the Warrant was exercised was greater than the Warrant exercise price on
that date, (ii) the exercise of the Warrant was solicited by a member of the
NASD, (iii) the Warrant was not held in a discretionary account, (iv) the
disclosure of compensation arrangements was made both at the time of this
Offering and at the time of exercise of the Warrant, (v) the solicitation of the
exercise of the Warrant was not a violation of Regulation M promulgated under
the Exchange Act, and (vi) the Underwriter is designated in writing as the
soliciting NASD member. The Company has agreed to not solicit Warrant exercises
other than through the Underwriter unless the Underwriter declines to make such
solicitations.
The Company has agreed to retain the Underwriter as a consultant to the
Company for two years after the completion of this Offering. During such period,
the Company has agreed to pay a finder's fee (equal to 5% of the first $5
million of transaction consideration, 4% of the next $1 million of transaction
consideration, 3% of the next $1 million of transaction consideration, 2% of the
next $1 million of transaction consideration and 1% of all transaction
consideration therafter) based on the transaction consideration of any merger,
acquisition, joint venture or other similar transaction that is originated by
the Underwriter and to which the Company is a party and to engage the
Underwriter to review and otherwise participate in any such transaction which is
originated by a party other than the Underwriter and to compensate the
Underwriter for such services.
Meridian, the Company's officers and directors, the Minority Stockholders
and holders of stock options, the Bridge Warrants and Minority Stockholder
Warrants have agreed in any public sale or transfer of securities issued by the
Company at any time during the three year period commencing immediately after
the end of each such person's applicable lock-up period, to sell such securities
through the Underwriter,
62
<PAGE>
subject to certain conditions and limited exceptions. The Company has agreed
that for a period of three years after the completion of this Offering that it
will not file a registration statement with the Commission with respect to
equity securities issued by the Company without the prior written consent of the
Underwriter. See "Shares Eligible for Future Sale."
The initial public offering price of the shares of Common Stock and Warrants
offered hereby and the exercise price and other terms of the Warrants have been
determined by negotiation between the Company and the Underwriter and do not
necessarily bear any relationship to the Company's assets, operating results,
book value per share or other generally accepted criteria of value. The offering
price of the Common Stock and the Warrants, as well as the exercise price of the
Warrants, should not be construed as indicative of their value. Furthermore,
there can be no assurance that an active public market for the Common Stock or
the Warrants will develop after this Offering or that, if developed, it will be
sustained. As a result, purchasers of the Common Stock and the Warrants will be
exposed to a risk of decline in the market price and liquidity of the Common
Stock and the Warrants after this Offering.
The Underwriter is aware that there is a formal order of investigation by
the Securities and Exchange Commission relating to the Underwriter's trading
practices and mark-ups in connection with two prior public offerings
underwritten by the Underwriter. Since the issuance of the formal order in June
1996, no charges have been brought. According to the Securities and Exchange
Commission, this investigation "should not be construed as an indication by the
Commission or its staff that any violation of law has occurred, nor as a
reflection upon any person, entity or security." The Underwriter believes that
it has violated no laws or regulations in connection with these matters. The
Underwriter intends to vigorously defend itself against any claims which may be
asserted by the Commission, but there can be no assurance that the pendency of
any investigation or inquiry or any proceeding which may thereafter be
instituted or any remedies granted in connection therewith would not adversely
and materially affect this Offering or subsequent trading in the Common Stock
and/or the Warrants.
LEGAL MATTERS
The legality of the Common Stock and Warrants offered hereby will be passed
on for the Company by Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland,
Ohio. Zimet, Haines, Friedman & Kaplan, New York, New York, has acted as counsel
to the Underwriter in connection with this Offering. Benesch, Friedlander,
Coplan & Aronoff LLP provides legal services to Meridian.
EXPERTS
The consolidated financial statements of the Company at February 28, 1997
and February 29, 1996 and for each of the three fiscal years in the period ended
February 28, 1997, included elsewhere in this Prospectus, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere in this Prospectus, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement under the Securities Act with respect to the securities
offered hereby. This Prospectus, filed as a part of the Registration Statement,
does not contain certain information set forth in or annexed as exhibits to the
Registration Statement. For further information regarding the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits filed as a part thereof, which may be inspected at the office of
the Commission without charge or copies of which may be obtained therefrom upon
request to the Commission and payment of the prescribed fee. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
63
<PAGE>
Reports filed by the Company with the Commission in the future pursuant to
the information requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York, and Chicago Regional Office, The Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Commission's web site may be accessed at (http://www.sec.gov).
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EPI TECHNOLOGIES, INC.
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets at February 28, 1997 and February 29, 1996............... F-3
For the Years Ended February 28, 1997, February 29, 1996 and February 28, 1995:
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Net Capital Deficiency.................................. F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements........................................... F-7
Condensed Consolidated Balance Sheet at November 30, 1997 (Unaudited)................ F-15
For the Nine-Month Periods Ended November 30, 1997 and 1996 (Unaudited):
Condensed Consolidated Statements of Operations.................................... F-16
Condensed Consolidated Statements of Cash Flows.................................... F-17
Notes to Condensed Consolidated Financial Statements (Unaudited)..................... F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EPI Technologies, Inc.
We have audited the accompanying consolidated balance sheets of EPI
Technologies, Inc. and predecessor companies (see Note 1) as of February 28,
1997 and February 29, 1996, and the related consolidated statements of
operations, net capital deficiency and cash flows for each of the three years in
the period ended February 28, 1997. These financial statements are the
responsibility of the companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EPI Technologies,
Inc. and predecessor companies at February 28, 1997 and February 29, 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 28, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Toledo, Ohio
May 22, 1997, except for Note 13, as to which the date is August 26, 1997
F-2
<PAGE>
EPI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 4,743 $ 26,014
Accounts receivable............................................................ 491,649 525,081
Receivable from former partner (NOTES 4 AND 8)................................. 321,875 293,250
Other current assets........................................................... 48,489 56,482
------------- ----------------
Total current assets............................................................. 866,756 900,827
Property and equipment, at cost less accumulated depreciation and amortization... 3,603,035 1,650,415
Receivable from former partner (NOTES 4 AND 8)................................... 1,031,875 1,358,625
Funds held by trustee (NOTE 5)................................................... 316,613 314,270
Other assets..................................................................... 311,511 393,446
------------- ----------------
Total assets..................................................................... $ 6,129,790 $ 4,617,583
------------- ----------------
------------- ----------------
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 728,041 $ 480,582
Advances from parent company (NOTE 7).......................................... 2,965,468 2,673,429
Long-term debt due within one year............................................. 1,028,291 609,000
------------- ----------------
Total current liabilities........................................................ 4,721,800 3,763,011
Long-term debt (NOTE 8).......................................................... 3,983,701 3,395,472
Net capital deficiency:
Common stock -- $.01 par value; 20,000,000 shares authorized; 1,250,000 shares
issued and outstanding (1,000,000 in 1996).................................... 12,500 10,000
Additional paid-in capital..................................................... 568,646 (9,900)
Deficit........................................................................ (3,156,857) (2,541,000)
------------- ----------------
Total net capital deficiency..................................................... (2,575,711) (2,540,900)
------------- ----------------
Total liabilities and net capital deficiency..................................... $ 6,129,790 $ 4,617,583
------------- ----------------
------------- ----------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-3
<PAGE>
EPI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................... $ 3,417,070 $ 3,533,514 $ 3,459,107
Operating costs and expenses:
Costs of operations................................................... 2,307,086 2,196,322 2,023,815
Selling, general and administrative................................... 1,376,957 1,045,036 941,812
------------ ------------ ------------
3,684,043 3,241,358 2,965,627
------------ ------------ ------------
Income (loss) from operations........................................... (266,973) 292,156 493,480
Other income (expense):
Cost of withdrawn registration (NOTE 11).............................. (275,908) -- --
Interest expense on external borrowings............................... (219,736) (243,683) (258,985)
Interest expense on advances from parent company...................... (218,103) (224,300) (186,918)
Interest income....................................................... 35,584 36,185 30,009
------------ ------------ ------------
(678,163) (431,798) (415,894)
------------ ------------ ------------
Income (loss) before extraordinary gain................................. (945,136) (139,642) 77,586
Extraordinary gain -- extinguishment of debt (NOTE 8)................... 329,279 -- --
------------ ------------ ------------
Net income (loss)....................................................... $ (615,857) $ (139,642) $ 77,586
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common share:
Loss before extraordinary gain........................................ $ (0.75)
Extraordinary gain.................................................... 0.26
------------
Net loss.............................................................. $ (0.49)
------------
------------
Pro forma loss per common share:
Loss before extraordinary gain........................................ $ (0.60)
------------
------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-4
<PAGE>
EPI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
EPI ADDITIONAL
TECHNOLOGIES, PAID-IN
INC. PREDECESSORS CAPITAL DEFICIT TOTAL
------------ ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1994................... $ 600 $ (2,478,944) $ (2,478,344)
Net income............................... 77,586 77,586
----- ------------- -------------
Balance at February 28, 1995............... 600 (2,401,358) (2,400,758)
Net loss................................. (139,642) (139,642)
Elimination of common stock of
predecessors............................ (600) (600)
Issuance of 1,000,000 shares of common
stock................................... 10,000 (9,900) 100
------------ ----- ---------- ------------- -------------
Balance at February 29, 1996............... 10,000 -- (9,900) (2,541,000) (2,540,900)
Issuance of 250,000 shares of common
stock................................... 2,500 578,546 581,046
Net loss................................. (615,857) (615,857)
------------ ----- ---------- ------------- -------------
Balance at February 28, 1997............... $ 12,500 $ -- $ 568,646 $ (3,156,857) $ (2,575,711)
------------ ----- ---------- ------------- -------------
------------ ----- ---------- ------------- -------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-5
<PAGE>
EPI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (615,857) $ (139,642) $ 77,586
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 338,690 254,586 257,141
Noncash interest expense................................ -- -- 50,055
Extraordinary gain-extinguishment of debt............... (329,279) -- --
Changes in operating assets and liabilities:
Accounts receivable................................... 33,432 70,774 (307,275)
Other current assets.................................. 7,993 (16,689) 19,242
Accounts payable and accrued liabilities.............. 221,433 61,446 (97,418)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities....... (343,588) 230,475 (669)
INVESTING ACTIVITIES
Additions to property and equipment....................... (2,147,537) (140,294) (63,510)
Changes in other assets................................... (16,105) (3,009) (186,899)
Increase in funds held by trustee......................... (2,343) (4,939) (7,061)
---------------- ---------------- ----------------
Net cash used in investing activities..................... (2,165,985) (148,242) (257,470)
FINANCING ACTIVITIES
Borrowings on notes payable to bank....................... 2,350,000 -- --
Payments on long-term debt................................ (734,783) (287,332) (370,514)
Issuance of 250,000 shares of common stock................ 581,046 -- --
Net advances from parent company.......................... 292,039 224,177 569,333
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities....... 2,488,302 (63,155) 198,819
---------------- ---------------- ----------------
Increase (decrease) in cash............................... (21,271) 19,078 (59,320)
Cash at beginning of period............................... 26,014 6,936 66,256
---------------- ---------------- ----------------
Cash at end of period..................................... $ 4,743 $ 26,014 $ 6,936
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental information:
Cash paid for interest, net of amount capitalized....... $ 200,173 $ 234,732 $ 226,590
---------------- ---------------- ----------------
---------------- ---------------- ----------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-6
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
EPI Technologies, Inc. (the "Company"), its wholly-owned subsidiaries, National
Purification, Inc. ("NPI") and MEPI Corp. ("MEPI"), and Environmental
Purification Industries Company ("EPIC"), an Ohio general partnership whose sole
general partners are NPI and MEPI. The Company was formed on February 26, 1996,
as a wholly-owned subsidiary of Meridian National Corporation ("Meridian"). NPI
and MEPI were formerly wholly-owned subsidiaries of Meridian, which transferred
their ownership to the Company. The accompanying financial statements reflect
the combined accounts of the Company, NPI and MEPI for periods prior to the
transfer of ownership by Meridian.
On November 19, 1996 the Company sold to outside investors 250,000 shares of
common stock for gross proceeds of $600,000 ($2.40 per share) representing a 20%
interest in the Company.
The Company operates a paint waste recycling facility which is currently
operating near its processing capacity. A $2.3 million expansion project,
expected to commence operations in the second quarter of fiscal 1998, will
supplement the current recycling process and significantly increase total
processing capacity. The expansion project will incorporate a new technology for
recycling paint wastes (see Note 9).
The Company has a working capital deficiency, recurring losses and continues
to rely on Meridian for financial support. Meridian also has a working capital
deficiency, and has experienced losses in recent years. The Company's losses
have contributed to the losses of Meridian.
The Company is pursuing a public offering of common stock. If the proposed
public offering is successfully completed, Meridian does not intend to continue
to provide financial support to the Company, except for the guarantee of a
mortgage note to a trustee bank and the guarantee of the Company's obligations
pursuant to an employment agreement with a senior executive of the Company. In
the event that the Company does not complete the proposed public offering,
Meridian may not be able to continue to provide financial support to the Company
indefinitely.
Meridian provides certain services to the Company, including compensation
and benefits administration, payroll processing, use of certain general
accounting systems and income tax compliance. Meridian allocates costs to the
Company on the basis of specific services provided. In the opinion of
management, such allocations do not materially differ from the actual costs
which would have been incurred had the Company not received such services from
Meridian.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
AMORTIZATION
Deferred financing costs are being amortized over the term of the loan based
on the straight-line method, which approximates the amortization expense which
would have resulted from the interest method.
CAPITALIZED INTEREST
Interest costs of approximately $56,000 in 1997 have been capitalized as a
cost of the expansion of the paint waste recycling facility.
F-7
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided over the estimated useful lives
of the various classes of assets using the straight-line method, based on the
following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment........................................... 10 years
Land improvements................................................. 15 years
Building and building improvements................................ 40 years
Office furniture and equipment.................................... 5 years
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue upon processing of its customers' paint
wastes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on, among other things, the Company's financial condition, the
collateral securing outstanding debt and the frequently redetermined interest
rates associated with the majority of the Company's debt instruments, the
Company believes that the aggregate fair values of advances from Meridian and
long-term debt approximate the carrying values.
INCOME TAXES
For federal and state income tax purposes, the taxable income or loss of the
Company is included in the consolidated income tax returns of Meridian. Net
operating losses and related income tax provisions are allocated based on
federal income tax consolidated return rules. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
LONG-LIVED ASSETS
Effective March 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Such adoption
had no impact on the Company's financial statements. The Company evaluates the
recoverability of long-lived assets based on undiscounted projected cash flows,
excluding interest and taxes, when factors indicate that an impairment may
exist.
LOSS PER COMMON SHARE
Loss per common share is computed using 1,250,000 shares of common stock.
For calculation purposes, the 250,000 shares of common stock issued during
fiscal 1997 at a price below the $5.00 per share proposed public offering price
are considered to have been outstanding for the entire period. Common stock
purchase warrants issued in August 1997 are not considered in the calculation of
loss per common share because, upon completion of the proposed public offering,
the exercise price on such warrants will automatically be adjusted to a price in
excess of the $5.00 per share proposed public offering price.
PRO FORMA LOSS PER COMMON SHARE
Pro forma loss per common share is computed using historical earnings and
common shares outstanding adjusted to (i) eliminate interest charges on debt
expected to be repaid from the net proceeds of the proposed public offering and
(ii) reflect the number of shares of common stock to be sold in the proposed
public offering in connection with the repayment of such debt. Accordingly, loss
before extraordinary gain was reduced by $86,017, which represents interest on
(A) $490,000 in advances from Meridian and (B) $500,000 to be applied against
notes payable to a bank, each expected to be repaid from the net proceeds of the
proposed public offering. For calculation purposes, the weighted average
outstanding shares of
F-8
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
common stock were increased by 182,000 shares of common stock, which represents
the number of shares of common stock to be sold in connection with the proposed
public offering which are required to repay such advances from Meridian and such
notes payable to the bank.
NEW ACCOUNTING PRONOUNCEMENTS
No new accounting standards, which have not been adopted by the Company, are
expected to have a material effect on the financial statements of the Company.
3. CUSTOMER CONCENTRATIONS
Accounts receivable as of February 28, 1997 and February 29, 1996 are
principally due from companies which operate in the automotive industries and
which are principally located in the midwestern region of the United States.
Percentage of sales to major customers for the years ended February 28, 1997 and
February 29, 1996 were: 18.6% and 15.3%, respectively, to ARK, Inc. (American
Recycling of Kentucky), and 16.3% and 13.2%, respectively, to Subaru-Isuzu
Automotive, Inc. These two customers comprise approximately $150,000 and
$145,000 of the accounts receivable balance at February 28, 1997 and February
29, 1996, respectively. Credit is extended based on, among other things, an
evaluation of credit reports and payment practices. Collateral or letters of
credit are not required.
4. RECEIVABLE FROM FORMER PARTNER
EPIC was formed in September 1989 with two partners: NPI and Haden
Purification, Inc. ("Haden Purification"). Effective July 1, 1992, MEPI was
admitted as a partner and Haden Purification terminated its partnership
interest.
In connection with the 1992 termination of its partnership interest in EPIC,
Haden Purification assumed liability for one-half of the remaining principal,
interest and fee payments due under the Company's 8.5% mortgage note payable and
was assigned 50% of the amount held in trust to meet future debt service
requirements. The obligations of Haden Purification under its assumed liability
are consistent with the terms and requirements of the 8.5% mortgage note payable
to the trustee bank disclosed in Note 8. Haden Purification makes principal,
interest and fee payments directly to the trustee bank. Principal payments,
which amounted to $293,250, $273,750 and $252,500 in 1997, 1996 and 1995,
respectively, reduce the receivable from former partner and reduce long-term
debt in the balance sheet and have been excluded from the statements of cash
flows. Interest and fee payments of $149,099, $173,347 and $207,247 in 1997,
1996 and 1995, respectively, are excluded from the statements of operations and
the statements of cash flows. The current portion of the receivable from Haden
Purification represents the principal payment requirements for Haden
Purification for the next twelve months.
5. FUNDS HELD BY TRUSTEE
A primary reserve fund was established pursuant to the terms of the loan
agreement between the Company and the Toledo-Lucas County (Ohio) Port Authority
(the "Port Authority") (see Note 8). Additionally, the Company has established a
closure fund as required under regulations issued by the U.S. Environmental
Protection Agency (the "U.S. EPA"). The fund balances are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
Primary reserve................................................... $ 584,196 $ 584,578
Closure........................................................... 19,667 16,942
------------ ------------
603,863 601,520
Portion attributable to former partner............................ (287,250) (287,250)
------------ ------------
$ 316,613 $ 314,270
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
The trustee may use funds from the primary reserve fund to meet debt service
requirements under certain circumstances. The trustee, at the direction of the
U.S. EPA, would use the funds from the closure fund to pay costs of closure or
post-closure care of the Company's paint waste recycling facility. In connection
with termination in 1992 of its partnership interest in EPIC, Haden Purification
was assigned 50% of the Company's residual interest in the primary reserve fund.
Any application by the trustee of primary reserve funds to the financing
payments required under the 8.5% mortgage note payable reduces Haden
Purification's obligation under its assumption proportionately. Haden
Purification is also entitled to 50% of any refund by the trustee of amounts in
the primary reserve fund.
These funds are held by a trustee, are valued at cost which approximates
market and consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
U. S. Government securities....................................... $ 565,424 $ 561,706
Other............................................................. 38,439 39,814
------------ ------------
$ 603,863 $ 601,520
------------ ------------
------------ ------------
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
Machinery and equipment........................................... $ 2,938,097 $ 2,916,383
Land and land improvements........................................ 119,825 119,825
Building and building improvements................................ 306,400 306,400
Office furniture and equipment.................................... 56,300 50,115
Construction in progress.......................................... 2,234,300 71,568
------------ ------------
5,654,922 3,464,291
Less accumulated depreciation and amortization.................... 2,051,887 1,813,876
------------ ------------
Net property and equipment........................................ $ 3,603,035 $ 1,650,415
------------ ------------
------------ ------------
</TABLE>
7. ADVANCES FROM PARENT COMPANY
The Company participates in the centralized financing and cash management
system of Meridian. Under this system, the advances from parent company
fluctuate daily as a result of cash activity attributable to the Company.
Advances from Meridian are due upon demand. Interest is charged on intercompany
advances and outstanding borrowings at 1% over the prime rate and amounted to
$218,000, $224,000 and $187,000 in 1997, 1996 and 1995, respectively. The
effective interest rate on such intercompany advances was 9.25% and 9.8% at
February 28, 1997 and February 29, 1996, respectively.
F-10
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
------------ ------------
<S> <C> <C>
8.5% mortgage note payable to trustee bank, due in monthly
installments, including interest, of approximately $73,000 until
final maturity in November 2000................................. $ 2,707,500 $ 3,303,750
Notes payable to bank, due in monthly installments of $21,000,
plus interest (9.75% at February 28, 1997) at 1.5% above prime,
with a payment of $150,000 due September 1997 and a final
payment of $1,906,000 due March 1998............................ 2,287,000 --
Note payable to Haden Purification................................ -- 700,722
Other............................................................. 17,492 --
------------ ------------
5,011,992 4,004,472
Less amounts due in one year...................................... 1,028,291 609,000
------------ ------------
$ 3,983,701 $ 3,395,472
------------ ------------
------------ ------------
</TABLE>
The mortgage note payable to trustee bank was incurred in connection with
development revenue bonds issued by the Port Authority. The note is secured by
substantially all property and equipment, excluding construction in progress,
which has a net book value of approximately $1,369,000 at February 28, 1997.
The balance of the mortgage note not assumed by Haden Purification,
$1,353,750 at February 28, 1997, has been guaranteed by Meridian. Interest
expense in the consolidated statements of operations excludes interest and fee
payments made by Haden Purification amounting to $146,600, $170,900 and $193,300
in 1997, 1996 and 1995, respectively.
During fiscal 1997, the Company arranged financing totaling $2,350,000 with
its bank. The proceeds have been primarily used to finance an expansion of the
Company's paint waste recycling operation, expected to commence operations in
the second quarter of fiscal 1998, and to repay existing obligations. Monthly
payments required amount to $21,000 plus interest at prime plus 1.5%. The notes
originally required final principal payments of $650,000 and $1,469,000 on
September 30, 1997 and October 31, 1997, respectively. The bank has agreed to
extend the notes until March 1998, requiring the continuation of the monthly
principal payments of $21,000 and an additional payment due of $150,000 in
September 1997. A final payment of $1,906,000 is due in March, 1998. These
borrowings are guaranteed by a corporation which is a stockholder of the
Company. Additionally, an officer and stockholder of Meridian and the chairman
of the Company's Board of Directors has personally guaranteed the Company's
borrowings from the bank. The Company is investigating various opportunities to
obtain long-term financing for the project.
In June 1996, the Company executed an agreement (the "Compromise Agreement")
to repay the note payable to Haden Purification which had an outstanding
principal balance due of $679,000 at the date of settlement. The terms of the
Compromise Agreement included, among other things, settlement of the note
payable and accrued interest for a payment of $350,000 made in February 1996.
The Company is required to continue to pay, through July 1, 1998, Haden
Environmental Corporation, an affiliate of Haden Purification, a throughput
charge of $10 per cubic yard of paint waste processed through the Company's
current recycling system. Prior to execution of the Compromise Agreement,
payments of the throughput charge were credited
F-11
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
8. LONG-TERM DEBT -- (CONTINUED)
towards amounts due under the note payable to Haden Purification. The gain of
$329,279 on early extinguishment of debt is reflected as an extraordinary gain.
The throughput charges will be reported as operating expenses as incurred.
Future throughput charges are estimated to aggregate $114,000.
Maturities of long-term debt in each of the five years subsequent to
February 28, 1997 are approximately as follows: 1998 -- $1,028,000; 1999 --
$2,610,000; 2000 -- $764,000; 2001 -- $608,000 and 2002 -- $2,000. These amounts
include principal payments to be made by Haden Purification as follows: 1998 --
$322,000; 1999 -- $350,000; 2000 -- $380,000 and 2001 -- $302,000.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into a license agreement with Aster, Inc. ("Aster")
whereby Aster has granted the Company the exclusive right, except in Mexico, to
use certain patented processes and technology in the Company's paint recycling
process. The Company's $2.3 million facility expansion will utilize the licensed
process and technology. The Company has agreed to pay Aster royalties and other
fees for ongoing work performed by Aster to commercialize and to continue to
refine the processes, formulae and technology. Minimum monthly payments required
under the agreement are $20,000. The Company's agreement with Aster is perpetual
in nature and is exclusive worldwide to the Company except for Mexico and has
patent coverage in North America, Japan and Europe. The Company is required to
pay Aster a $20,000 monthly minimum which can be composed of royalties,
technical service fees and processing fees. Payments made to Aster amounted to
$182,000 during the six months ended August 31, 1997 and $294,000, $296,000,
$63,000 during the fiscal years 1997, 1996 and 1995, respectively, inclusive of
payments for paint waste processed for the Company at Aster's facility.
As part of the agreement, the Company agreed to fund an $80,000 settlement
between Aster and a third party under which the third party relinquished all
rights to Aster technology. The final payment of $40,000 under the settlement
agreement was paid in March 1997. The Company has recorded the settlement
expenses as prepaid royalty fees included in "Other Assets," and will charge
such amounts to expense over a five year period.
The Company will be required to pay royalty fees to Aster based on pounds of
paint waste processed with the new technology. These fees will be payable upon
successful startup of the new equipment and sale of EPI-MERTM, which is the
recycled material produced by using this technology. The Aster license agreement
requires payment of royalties on a minimum processing level of 1,850,000 pounds
of raw paint waste in the first year of production ($37,000), 3,700,000 pounds
in the second year ($74,000), 5,000,000 pounds in the third year ($100,000), and
7,000,000 pounds for each year thereafter ($140,000). This royalty rate
decreases for annual processing in excess of 7,500,000 pounds. Additionally, the
Company will be required to pay Aster a royalty fee of $.04 per pound of
EPI-MERTM sold, subject to adjustment if the Company is unable to sell EPI-MERTM
for a minimum of $.30 per pound. All royalty fees are subject to an adjustment
at the end of the third year of processing based on the consumer price index.
The Company also pays hourly fees to Aster for technical and manufacturing
services. Total payments by the Company to Aster may not fall below a minimum of
$20,000 per month unless the Company provides Aster with six months advance
notice. At the end of the six month notice period, the Company's license for the
use of the technology would become non-exclusive.
The Company leases certain property and equipment under agreements
classified as operating leases. Total rent expense charged to operations for
1997, 1996 and 1995 approximated $52,000, $41,000 and $30,000, respectively.
Minimum future rental commitments under noncancellable operating leases at
February 28, 1997, including aggregate payments of $77,000 to an affiliated
company and an affiliate of an officer and director of the Company, are $40,000
in 1998, $31,000 in 1999, $27,000 in 2000 and $22,000 in 2001.
F-12
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company is a party to an employment agreement with its President and
Chief Executive Officer (the "President") which becomes effective upon the
completion of the proposed public offering. The Company carries key man life
insurance of $1 million on the President. The employment agreement expires in
February 2002 with automatic one-year extensions upon expiration unless either
the Company or the President notifies the other party of its intention to
terminate the agreement. The employment agreement provides for an initial annual
base salary of $131,250, subject to an increase for each fiscal year of at least
5% of the annual base salary for the prior fiscal year, at the discretion of the
Board of Directors of the Company. The employment agreement also provides a
deferred compensation benefit of up to $190,000 (which is funded through an
annuity purchased by the Company) and a bonus arrangement based on the Company's
performance. In the event of the termination of the President by the Company
other than for cause within two years of a "change of control" of the Company,
the President will receive an amount equal to the sum of three times his base
salary and all amounts due him through the term of his employment agreement.
Meridian has guaranteed the Company's obligations under the employment agreement
and agreed to vote the shares of common stock which it owns in favor of the
election of the President to the Board.
10. RELATED PARTY TRANSACTIONS
Meridian provides management services to the Company. Such services include
compensation and benefits administration, payroll processing, use of certain
general accounting systems, income tax compliance and treasury services.
Meridian allocates costs to the Company on the basis of specific services
provided. In the opinion of management, such allocations do not materially
differ from the actual costs which would have been incurred had the Company not
received such services from Meridian. Aggregate allocated charges were
approximately $30,000, $22,200 and $22,600 in 1997, 1996 and 1995, respectively.
During Fiscal 1997, the Chairman of the Board loaned $55,000 to the Company,
which the Company repaid before year end. Related interest expense was
approximately $2,000.
11. COST OF WITHDRAWN REGISTRATION
During 1997, the Company incurred expenses in conjunction with a proposed
initial public offering of an approximate 50% interest in the Company. Due
primarily to weakness in the public market for the offering, the planned
offering was withdrawn. The Company expensed in the fourth quarter of fiscal
1997 approximately $276,000 of legal, accounting and other costs related to the
uncompleted offering.
12. INCOME TAXES
The Company has allocated net operating loss carryforwards for federal tax
purposes of approximately $2,624,000 available for the reduction of future
federal income tax. Net operating loss carryforwards begin expiring in fiscal
2005.
A reconciliation of the provision for income taxes excluding extraordinary
gains, based on the statutory U. S. federal tax rate of 34%, to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Tax (benefit) based on statutory U. S. federal income
tax rate.............................................. $ (321,346) $ (47,478) $ 26,379
Effects of use of losses by consolidated group.......... 172,122 4,282 179,752
Change in valuation allowance........................... 164,506 47,000 (250,000)
State deferred taxes.................................... (24,676) (7,000) 38,000
Other................................................... 9,394 3,196 5,869
----------- ---------- -----------
Combined provision for income taxes..................... $ -- $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
F-13
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
Significant components of deferred tax assets at year end are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allocated net operating loss carryforwards......... $ 1,050,000 $ 915,000 $ 715,000
Discontinued registration costs.................... 53,000 -- --
Property and equipment............................. -- 58,000 191,000
Other.............................................. 16,000 11,000 31,000
------------- ----------- -----------
Total deferred tax assets............................ 1,119,000 984,000 937,000
Deferred tax liability--property and equipment....... (102,000) -- --
Valuation allowance.................................. (1,017,000) (984,000) (937,000)
------------- ----------- -----------
Net deferred taxes................................... $ -- $ -- $ --
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
The change in the valuation allowance equals the change in net deferred
taxes. There are no deferred tax liabilities.
13. SUBSEQUENT EVENT
On August 26, 1997, the Company's stockholders authorized a 10,000-for-one
split of the common stock and an increase in the number of authorized shares.
All references in the financial statements to the number of common shares and
per common share amounts have been retroactively restated to reflect the
10,000-for-one stock split.
F-14
<PAGE>
EPI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current Assets:
Cash............................................................................................. $ 1,676
Accounts receivable.............................................................................. 470,706
Receivable from former partner................................................................... 372,500
Other current assets............................................................................. 43,351
-------------
Total current assets............................................................................... 888,233
Property and equipment, at cost less accumulated depreciation and amortization..................... 3,633,870
Receivable from former partner..................................................................... 745,000
Deferred public offering costs..................................................................... 308,216
Funds held by trustee.............................................................................. 330,650
Other assets....................................................................................... 290,971
-------------
Total assets....................................................................................... $ 6,196,940
-------------
-------------
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities......................................................... $ 1,301,774
Advances from parent company..................................................................... 3,698,762
Long-term debt due within one year............................................................... 3,096,748
-------------
Total current liabilities.......................................................................... 8,097,284
Long-term debt..................................................................................... 1,501,113
Net capital deficiency:
Common stock -- $.01 par value; 20,000,000 shares authorized; 1,250,000 shares issued and
outstanding..................................................................................... 12,500
Additional paid-in capital....................................................................... 618,647
Deficit.......................................................................................... (4,032,604)
-------------
Total net capital deficiency....................................................................... (3,401,457)
-------------
Total liabilities and net capital deficiency....................................................... $ 6,196,940
-------------
-------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-15
<PAGE>
EPI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER
30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net sales........................................................................... $ 2,792,236 $ 2,581,636
Operating costs and expenses:
Costs of operations............................................................... 2,090,744 1,753,798
Selling, general and administrative............................................... 1,093,226 1,045,434
------------- -------------
3,183,970 2,799,232
------------- -------------
Loss from operations................................................................ (391,734) (217,596)
Other income (expense):
Interest expense on external borrowings........................................... (284,423) (171,360)
Interest expense on advances from parent company.................................. (232,409) (173,370)
Interest income................................................................... 32,820 27,656
------------- -------------
(484,012) (317,074)
------------- -------------
Loss before extraordinary gain...................................................... (875,746) (534,670)
Extraordinary gain--extinguishment of debt ......................................... -- 329,279
------------- -------------
Net loss............................................................................ $ (875,746) $ (205,391)
------------- -------------
------------- -------------
Earning (loss) per common share:
Loss before extraordinary gain.................................................... $ (0.70) $ (0.42)
Extraordinary gain................................................................ -- 0.26
------------- -------------
Net loss.......................................................................... $ (0.70) $ (0.16)
------------- -------------
------------- -------------
Pro forma loss per common share:
Loss before extraordinary gain.................................................... $ (0.56) $ (0.33)
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-16
<PAGE>
EPI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER
30,
--------------------------
1997 1996
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................................. $ (875,746) $ (205,391)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Extraordinary gain--extinguishment of debt.......................................... -- (329,279)
Depreciation and amortization....................................................... 367,003 227,989
Changes in operating assets and liabilities:
Accounts receivable............................................................... 20,943 22,972
Other current assets.............................................................. (31,737) 50,415
Accounts payable and accrued liabilities.......................................... 573,733 612,939
----------- -------------
Net cash provided by operating activities............................................. 54,196 379,645
INVESTING ACTIVITIES
Additions to property and equipment................................................... (298,675) (1,455,973)
Changes in other assets............................................................... (324,964) (571,136)
Increase in funds held by trustee..................................................... (14,037) (27,953)
----------- -------------
Net cash used in investing activities................................................. (637,676) (2,055,062)
FINANCING ACTIVITIES
Net advances from parent company...................................................... 733,294 (696,448)
Payments on long-term debt............................................................ (427,881) (592,189)
Borrowings on notes payable........................................................... 250,000 2,350,000
Issuance of 250,000 shares of common stock............................................ -- 590,000
Proceeds for issuance of warrants..................................................... 25,000 --
----------- -------------
Net cash provided by financing activities............................................. 580,413 1,651,363
----------- -------------
Decrease in cash...................................................................... (3,067) (24,054)
Cash at beginning of period........................................................... 4,743 26,014
----------- -------------
Cash at end of period................................................................. $ 1,676 $ 1,960
----------- -------------
----------- -------------
Supplemental information:
Cash paid for interest, net of amount capitalized................................... $ 259,522 $ 159,827
----------- -------------
----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-17
<PAGE>
EPI TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of EPI Technologies, Inc. (the "Company"), its wholly-owned
subsidiaries, National Purification, Inc. ("NPI"), and MEPI Corp. ("MEPI"), and
Environmental Purification Industries Company ("EPIC"), an Ohio general
partnership whose sole general partners are NPI and MEPI. The Company was formed
on February 26, 1996, as a subsidiary of Meridian National Corporation
("Meridian"). NPI and MEPI were formerly wholly-owned subsidiaries of Meridian,
which transferred their ownership to the Company. The accompanying condensed
consolidated financial statements reflect the combined accounts of the Company,
NPI and MEPI for periods prior to the transfer of ownership by Meridian.
2. GENERAL
The unaudited condensed consolidated financial statements have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring items,
necessary for a fair presentation of the periods. The results of operations for
interim periods are not necessarily indicative of actual results achieved in
full fiscal years.
As contemplated by the Securities and Exchange Commission under Rule 10-01
of Regulation S-X, the accompanying consolidated financial statements and
related notes have been condensed and do not contain certain information
included in the Company's annual consolidated financial statements and notes
thereto.
3. COMMON STOCK
On August 26, 1997, the Company's stockholders authorized a 10,000-for-one
split of the common stock and an increase in the number of authorized shares.
All references in the financial statement to the number of common shares and per
common share amounts have been retroactively restated to reflect the 10,000-for-
one stock split.
4. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed using 1,250,000 shares of
common stock. For calculation purposes, the 250,000 shares of common stock
issued during fiscal 1997 at a price below the $5.00 per share proposed public
offering price are considered to have been outstanding for the entire period.
Common stock purchase warrants issued in August 1997 are not considered in the
calculation of earnings (loss) per common share because, upon completion of the
proposed public offering, the exercise price on such warrants will automatically
be adjusted to a price in excess of the $5.00 per share proposed public offering
price.
5. PRO FORMA LOSS PER COMMON SHARE
Pro forma loss per common share is computed using historical earnings and
common shares outstanding adjusted to (i) eliminate interest charges on debt
expected to be repaid from the net proceeds of the proposed public offering and
(ii) reflect the number of shares of common stock to be sold in the proposed
public offering in connection with the repayment of such debt. Accordingly, loss
before extraordinary gain was reduced by $72,309 and $62,821 for the nine months
ended November 30, 1997 and 1996, respectively, which represents interest on (A)
$490,000 in advances from Meridian and (B) $500,000 to be applied against notes
payable to a bank, each expected to be repaid from the net proceeds of the
proposed public offering. For calculation purposes, the weighted average
outstanding shares of common stock were increased by 198,000 shares of common
stock and 176,686 shares of common stock for the nine months ended November 30,
1997 and 1996, respectively, which represents the number of shares of common
stock to be sold in connection with the proposed public offering which are
required to repay such advances from Meridian and such notes payable to the
bank.
F-18
<PAGE>
6. BRIDGE FINANCING
In August 1997, the Company raised $275,000 through a private placement of a
unit consisting of an aggregate of (i) a $250,000 bridge note and (ii) bridge
warrants. The bridge note is unsecured, bears interest at the rate of 10% per
annum and is due upon the completion of the proposed offering. The Note provides
for a default rate of interest of 18% per annum. The bridge warrants, sold for
an aggregate price of $25,000, entitle the holder to purchase shares of Common
Stock at an exercise price of $2.40 per share. The bridge warrants automatically
convert to warrants with the same terms as the warrants offered pursuant to the
proposed offering including the exercise price of $5.50 per share upon the
completion of the proposed offering.
F-19
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES OFFERED HEREBY, OR AN OFFER TO SELL, OR SOLICITATION
OF AN OFFER TO BUY, SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Summary Selected Consolidated Financial Data.............................. 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 31
Management................................................................ 44
Principal Stockholders.................................................... 50
Relationships Between the Company and Meridian............................ 52
Certain Other Relationships and Related Transactions...................... 54
Description of Securities................................................. 54
Certain Federal Income Tax Considerations................................. 58
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 61
Legal Matters............................................................. 63
Experts................................................................... 63
Additional Information.................................................... 63
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
EPI
TECHNOLOGIES, INC.
1,250,000 SHARES OF
COMMON STOCK
AND
1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
-------------------------
P R O S P E C T U S
-------------------------
[LOGO]
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
registration of the Common Stock and Warrants offered hereby, other than
underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 5,059
NASD Filing Fee.................................................... 2,170
Boston Stock Exchange Filing Fee................................... 5,000
Nasdaq Filing Fee.................................................. 1,000
Printing Expenses.................................................. 125,000
Legal Fees and Expenses............................................ 110,000
Underwriter's Nonaccountable Expense Allowance..................... 191,250
Accounting Fees and Expenses....................................... 65,000
"Blue Sky" Fees and Expenses....................................... 35,000
Transfer Agent, Warrant Agent and Registrar Fees................... 20,000
Miscellaneous...................................................... 21,771
----------
Total........................................................ $ 581,250
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Second Restated Certificate of Incorporation contains a
provision requiring indemnification of directors and officers to the fullest
extent authorized by Delaware Law. The Delaware Law permits a corporation to
indemnify its directors and officers (among others) against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought (or threatened to be brought) by third parties, if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. In a derivative action, I.E., one by or in the right of
the corporation, indemnification may be made for expenses (including attorneys'
fees) actually and reasonably incurred by directors and officers in connection
with the defense or settlement of such action if they acted in good faith and in
a manner they reasonably believed to be in or not opposed to the best interests
of the corporation, except that no indemnification will be made in respect of
any claim, issue or matter as to which such person has been adjudged liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court deems proper. The
Delaware Law further provides that, to the extent any director or officer has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in this paragraph, or in defense of any claim issue or
matter therein, such person will be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith. In addition, the Company's Second Restated Certificate of
Incorporation contains a provision eliminating the personal liability of the
Company's directors for monetary damages for certain breaches of their fiduciary
duty.
The Company maintains directors' and officers' liability insurance covering
certain liabilities that may be incurred by the directors and officers of the
Company in connection with the performance of their duties.
Reference is made to Section 6 of the proposed form of Underwriting
Agreement between the Company and the Underwriter, filed as Exhibit 1.1 hereto,
for a description of the indemnification arrangements with respect to this
Offering.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as described in this Item, no securities of the Company have been
sold by the Company within the past three years without registration under the
Securities Act of 1933, as amended (the "Securities Act"). In the past three
years, the Company has made the following sale of unregistered securities, which
were exempt from the registration requirements of the Securities Act:
In connection with the formation of the Company in February 1996, 100 shares
of the Company's Common Stock were issued to Meridian National Corporation for
$100. In November 1996, 8 1/3 shares of Common Stock were issued to each of
Spencer I. Browne, Elliot Smith and MNP Corporation for an aggregate of
$600,000.
In August 1997, the Company issued the Bridge Warrants, which permit the
holders upon exercise to purchase an aggregate of 500,000 shares of Common Stock
in connection with the Bridge Financing for $25,000. The Bridge Warrant comes
into warrants with substantially the same terms as the Warrants upon completion
of this Offering.
In November 1997, in consideration of an agreement to waive premptive rights
underlying Common Stock owned and not to offer, sell or otherwise dispose of
Common Stock for a two year period, the Company issued warrants to Spencer I.
Browne, Elliot Smith and MNP Corporation which permit such persons upon exercise
to purchase an aggregate of 150,000 shares of Common Stock. These transactions
are exempt from the registration requirements of the Securities Act on the basis
of Section 4(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*1.2 Form of Consulting and Investment Banking Agreement.
*3.1 Restated Certificate of Incorporation of the Company, dated August 27, 1997.
*3.2 Form of Second Restated Certificate of Incorporation of the Company.
*3.3 By-laws of the Company.
*4.1 Specimen Stock Certificate.
*4.2 Form of Warrant Agreement (including Form of Redeemable Warrant).
*4.3 Form of Underwriter's Warrant Agreement.
*4.4 Form of Certificate of Designation for the Meridian Preferred Stock.
4.5 Form of Registration Rights Agreement among the Company, the holder of the Bridge
Warrants and the Minority Stockholders.
*5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
*10.1 Lease dated March 1, 1996 between EPIC, as tenant, and Chicago Investors, as
landlord.
*10.2 Sublease dated March 1, 1996 between EPIC, as subtenant, and Ottawa River Steel
Co., as sublandlord.
*10.3 Form of Tax Sharing Agreement between the Company and Meridian.
*10.4 Form of Transitional Agreement between the Company and Meridian.
*10.5 Form of 1997 Non-Qualified and Incentive Stock Option Plan.
10.6 Form of 1997 Non-Employee Directors' Stock Option Plan, as amended.
*10.7 License Agreement dated September 7, 1995 between Aster and EPIC and amendment
dated September 7, 1995.
*10.8 Employment Agreement dated July 30, 1996 between Bruce F. Maison and the Company.
10.9 Form of Letter Agreement between Bruce F. Maison and Meridian.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*10.10 Employment Agreement dated July 25, 1997 between the Company and Real P. Remillard.
*10.11 Loan Agreement dated as of December 15, 1989 between Toledo-Lucas County Port
Authority and EPIC.
*10.12 Open-End Mortgage and Security Agreement dated as of December 15, 1989 from EPIC to
Society Bank & Trust, as Trustee.
*10.13 Compromise Agreement dated as of June 28, 1996 among Haden MacLellan Holdings,
PLC., Haden, Inc., Haden Environmental, Haden Purification, Meridian, NPI, MEPI,
EPIC and the Company.
*10.14 $300,000 Term Note dated February 29, 1996 by the Company and Meridian in favor of
the Senior Lender, as amended.
*10.15 $350,000 Term Note dated July 25, 1996 by the Company and Meridian in favor of the
Senior Lender, as amended.
*10.16 $1,700,000 Term Note dated November 4, 1996 by the Company, EPIC and Meridian in
favor of the Senior Lender.
*10.17 Security Agreement dated November 4, 1996 between the Company, EPIC and the Senior
Lender.
*10.18 Subordinated Cognovit Promissory Note dated August 28, 1997 issued by the Company
in connection with the Bridge Financing.
10.19 Form of Warrant Agreement among the Company, the holder of the Bridge Warrants and
the Minority Stockholders.
10.20 Form of First Amendment to Employment Agreement dated July 30, 1996 between Bruce
F. Maison and the Company.
10.21 Form of Amended and Restated 1997 Non-Qualified and Incentive Stock Option Plan.
10.22 Form of Loan and Security Agreement among National Bank of Canada, the Company and
EPIC (including the form of Promissory Note and form of Term Note).
*21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included in their opinion
filed as Exhibit 5.1 to this Registration Statement).
*24.1 Power of Attorney of the Company.
27.1 Financial Data Schedule.
</TABLE>
- --------------
* Filed previously.
B. FINANCIAL STATEMENT SCHEDULES
All schedules required pursuant to the requirements of Item 16(b) are
omitted because they are not applicable, not material, not required or the
required information is included in the applicable financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
II-3
<PAGE>
or in the aggregate, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) That for the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company under Rule 424(b)(1),
or (4) or 497(h) under the Securities Act shall be deemed as a part of this
registration statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF TOLEDO, STATE OF OHIO ON
JANUARY 22, 1998.
EPI TECHNOLOGIES, INC.
By: /s/ BRUCE F. MAISON
-----------------------------------
Bruce F. Maison
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ --------------------------------------- ----------------------
<C> <S> <C>
* President, Chief Executive Officer and
-------------------------------------- Director January 22, 1998
Bruce F. Maison
* Chief Financial Officer and Secretary
-------------------------------------- January 22, 1998
Real P. Remillard
* Chairman of the Board and Director
-------------------------------------- January 22, 1998
William D. Feniger
* Director
-------------------------------------- January 22, 1998
Spencer I. Browne
* Director
-------------------------------------- January 22, 1998
James L. Rosino
</TABLE>
By: /s/ BRUCE F.
MAISON
-------------------------
Bruce F. Maison
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..................................................................
*1.2 Form of Consulting and Investment Banking Agreement.............................................
*3.1 Restated Certificate of Incorporation of the Company, dated August 27, 1997.....................
*3.2 Form of Second Restated Certificate of Incorporation of the Company.............................
*3.3 By-laws of the Company..........................................................................
*4.1 Specimen Stock Certificate......................................................................
*4.2 Form of Warrant Agreement (including Form of Redeemable Warrant)................................
*4.3 Form of Underwriter's Warrant Agreement.........................................................
*4.4 Form of Certificate of Designation for the Meridian Preferred Stock.............................
4.5 Form of Registration Rights Agreement among the Company, the holder of the Bridge Warrants and
the Minority Stockholders......................................................................
*5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP...........................................
*10.1 Lease dated March 1, 1996 between EPIC, as tenant, and Chicago Investors, as landlord...........
*10.2 Sublease dated March 1, 1996 between EPIC, as subtenant, and Ottawa River Steel Co., as
sublandlord....................................................................................
*10.3 Form of Tax Sharing Agreement between the Company and Meridian..................................
*10.4 Form of Transitional Agreement between the Company and Meridian.................................
*10.5 Form of 1997 Non-Qualified and Incentive Stock Option Plan......................................
10.6 Form of 1997 Non-Employee Directors' Stock Option Plan, as amended..............................
*10.7 License Agreement dated September 7, 1995 between Aster and EPIC and amendment dated September
7, 1995........................................................................................
*10.8 Employment Agreement dated July 30, 1996 between Bruce F. Maison and the Company................
10.9 Form of Letter Agreement between Bruce F. Maison and Meridian...................................
*10.10 Employment Agreement dated July 25, 1997 between the Company and Real P. Remillard..............
*10.11 Loan Agreement dated as of December 15, 1989 between Toledo-Lucas County Port Authority and
EPIC...........................................................................................
*10.12 Open-End Mortgage and Security Agreement dated as of December 15, 1989 from EPIC to Society Bank
& Trust, as Trustee............................................................................
*10.13 Compromise Agreement dated as of June 28, 1996 among Haden MacLellan Holdings, PLC., Haden,
Inc., Haden Environmental, Haden Purification, Meridian, NPI, MEPI, EPIC and the Company.......
*10.14 $300,000 Term Note dated February 29, 1996 by the Company and Meridian in favor of the Senior
Lender, as amended.............................................................................
*10.15 $350,000 Term Note dated July 25, 1996 by the Company and Meridian in favor of the Senior
Lender, as amended.............................................................................
*10.16 $1,700,000 Term Note dated November 4, 1996 by the Company, EPIC and Meridian in favor of the
Senior Lender..................................................................................
*10.17 Security Agreement dated November 4, 1996 between the Company, EPIC and the Senior Lender.......
*10.18 Subordinated Cognovit Promissory Note dated August 28, 1997 issued by the Company in connection
with the Bridge Financing......................................................................
10.19 Form of Warrant Agreement among the Company, the holder of the Bridge Warrants and the Minority
Stockholders...................................................................................
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.20 Form of First Amendment to Employment Agreement dated July 30, 1996 between the Company and
Bruce F. Maison................................................................................
10.21 Form of Amended and Restated 1997 Non-Qualified and Incentive Stock Option Plan.................
10.22 Form of Loan and Security Agreement among National Bank of Canada, the Company and EPIC
(including the form of Promissory Note and form of Term Note).
*21.1 List of Subsidiaries............................................................................
23.1 Consent of Ernst & Young LLP....................................................................
*23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included in their opinion filed as
Exhibit 5.1 to this Registration Statement)....................................................
*24.1 Power of Attorney of the Company................................................................
27.1 Financial Data Schedule.........................................................................
</TABLE>
- --------------
* Filed previously.
<PAGE>
EXHIBIT 4.5
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made as of this
___ day of ______________, 1997, by and among EPI Technologies, Inc., a
Delaware corporation (the "Company"), and Spencer I. Browne ("Browne"),
Elliot Smith ("Smith"), MNP Corporation, a Michigan corporation ("MNP"), and
Guido Mendogni ("Mendogni" and, collectively with Browne, Smith and MNP, the
"Investors").
PREAMBLE
WHEREAS, each of Browne, Smith and MNP (collectively, the "Minority
Stockholders") own 83,333.33 shares of the Company's common stock, par value
$.01 per share ("Common Stock"), and warrants to purchase 50,000 shares of
Common Stock ("Minority Stockholder Warrants") and Mendogni owns warrants to
purchase 500,000 shares of Common Stock ("Bridge Warrants");
WHEREAS, the Minority Stockholders, among other things, have waived
certain registration rights with respect to their shares of Common Stock in
connection with the Company's initial public offering of shares of Common
Stock (the "IPO");
WHEREAS, effective upon the completion of the IPO, the warrants held by
Mendogni automatically convert into warrants being offered by the Company in
the IPO; and
WHEREAS, the Company desires to extend certain registration rights with
respect to the Registerable Securities (as hereinafter defined) to the
Investors.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the Company and the Investors agree as follows:
Section 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
(a) "business day" shall mean any day which is not a Saturday,
Sunday or public holiday under the laws of the United States of America or
the State of Ohio.
(b) "Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
(c) "Holder" shall mean each of the Investors and anyone who
holds outstanding Registrable Securities to whom the registration rights
conferred by this Agreement have been transferred in compliance with this
Agreement.
(d) "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement, and compliance with applicable
state securities laws of such states in which Holders notify the Company of
their intention to offer Registrable Securities.
<PAGE>
(e) "Registrable Securities" shall mean all of the following to
the extent the same have not been sold to the public: (i) any and all shares
of Common Stock held by a Minority Stockholder on the date of this Agreement;
(ii) the Minority Stockholder Warrants; (iii) the shares of Common Stock
underlying the Minority Stockholder Warrants; (iv) the Bridge Warrants; (v)
the shares of Common Stock underlying the Bridge Warrants; (vi) shares of
capital stock issued in respect of shares of Common Stock referred to in (i),
(iii) and (v) above in any reorganization; and (vii) shares of capital stock
issued in respect of the shares of Common Stock referred to in (i) through
(vi) as a result of a stock split, stock dividend, recapitalization or
combination. Notwithstanding the foregoing, Registrable Securities shall not
include otherwise Registrable Securities (1) sold by a person in a
transaction in which his, her or its rights under this Agreement are not
properly assigned; (2) (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or
(B) sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act under Section 4(1) thereof, in
either case such that all transfer restrictions, and restrictive legends with
respect thereto, if any, are removed upon the consummation of such sale; or
(3) the registration rights associated with such securities have been
terminated pursuant to Section 8 of this Agreement.
(f) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
Section 2. PIGGYBACK REGISTRATION.
(a) If, at any time during the term of this Agreement, the
Company proposes to prepare and file any registration statement or
post-effective amendments thereto covering equity or debt securities of the
Company, or any such securities of the Company held by its stockholders
(other than pursuant to a Form S-4 relating to a merger or acquisition or
pursuant to a Form S-8 or successor form) (for purposes of this Agreement,
collectively, a "Registration Statement"), it will give written notice of its
intention to do so at least thirty (30) days prior to the filing of each such
Registration Statement, to all Holders of Registrable Securities. Upon the
written request of such a Holder (a "Requesting Holder"), made within twenty
(20) business days after receipt of notice from the Company of its intention
to file a Registration Statement, that the Company include any of the
Requesting Holder's Registrable Securities in the proposed Registration
Statement, the Company shall, as to each such Requesting Holder, use its best
efforts to effect the registration under the Securities Act of the
Registrable Securities which it has been so requested to register; PROVIDED,
HOWEVER, that the Company shall in any event be entitled to withdraw such
Registration Statement prior to its effectiveness if such Registration
Statement is withdrawn as to all securities proposed to be registered
thereunder.
(b) If the Registration Statement is for a registered public
offering involving an underwriting, the Company shall so advise the Holders
as a part of the Notice given pursuant to subsection 2(a). In such event,
the right of any Requesting Holder to registration pursuant to this Section 2
shall be conditioned upon such Requesting Holder's participation in such
underwriting and the inclusion of such Requesting Holder's Registrable
Securities in the underwriting to the extent provided herein. All Requesting
Holders proposing to distribute their securities through such
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<PAGE>
underwriting shall (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 2, if the managing underwriter(s) determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter(s) may limit the number of Registrable
Securities to be included in the proposed Registration Statement and
underwriting, or may exclude Registrable Securities entirely from such
Registration Statement. The Company shall so advise all Requesting Holders
and the other holders distributing their securities through such underwriting
pursuant to piggyback registration rights similar to this Section 2, and the
number of shares of Registrable Securities and other securities that may be
included in the proposed Registration Statement and underwriting shall be
allocated among all Requesting Holders and other holders in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities
sought to be registered held by such Requesting Holders and other securities
held by other holders which such holders seek to register in connection with
the proposed Registration Statement. If any Requesting Holder disapproves of
the terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the managing underwriter. If, by the
withdrawal of such Registrable Securities, a greater number of Registrable
Securities held by other Requesting Holders may be included in such
registration (up to the limit imposed by the underwriters), the Company shall
offer to all Requesting Holders and the other holders the right to include
additional Registrable Securities in the Registration Statement on a PRO RATA
basis. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from such Registration Statement.
(c) Notwithstanding anything to the contrary in this Agreement,
in no event shall a Holder be permitted to exercise registration rights with
respect to a Registration Statement filed by the Company with the Commission
pursuant to a demand registration under the terms of that certain
Underwriter's Warrant Agreement dated as of _______________, 1997 between the
Company and Duke & Co., Inc., a Florida corporation ("Duke"), without the
prior written consent of the person or persons making such demand
registration request.
(d) Notwithstanding anything to the contrary in this Agreement,
none of the Minority Stockholders shall be permitted to exercise the
piggyback registration rights set forth in Section 2.1(a) of this Agreement
for a period of three (3) years commencing on the date first written above.
Section 3. EXPENSES OF REGISTRATION. All expenses incurred in
connection with registrations pursuant to Section 2 hereof, including without
limitation all registration, filing and qualification fees, printing
expenses, fees and disbursements of counsel for the Company and expenses of
any special audits of the Company's financial statements incidental to or
required by such registration, shall be borne by the
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<PAGE>
Company, except that the Company shall not be required to pay underwriters'
fees, discounts or commissions relating to Registrable Securities or fees of
separate legal counsel of a Holder.
Section 4. REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep
each Requesting Holder participating therein advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense the Company will:
(a) promptly prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act;
(b) furnish such number of prospectuses and other documents
incident thereto as a Requesting Holder from time to time may reasonably
request;
(c) use reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of
any suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction, at the earliest possible moment;
(d) register or qualify such Registrable Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
underwriter(s), if any, reasonably requires;
(e) cause all Registrable Securities covered by such
registrations to be listed on each securities exchange or quotation system,
including the Nasdaq Small Cap Market, on which similar securities issued by
the Company are then listed or quoted;
(f) use reasonable efforts to cause its accountants to issue to
the underwriter, if any, or the Requesting Holders, if there is no
underwriter, comfort letters and updates thereof, in customary form and
covering matters of the type customarily covered in such letters with respect
to underwritten offerings;
(g) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
Requesting Holders of a majority of the Registrable Securities being sold or
the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities (including, without
limitation, effecting a stock split or a combination of shares);
(h) make available for inspection by any Requesting Holder, any
underwriter participating in any disposition pursuant to such Registration
Statement, and any attorney, accountant or other agent retained by any such
Requesting Holder or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such Requesting Holder, underwriter,
attorney, accountant or agent in connection with such Registration Statement;
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(i) deliver promptly to each Requesting Holder whose securities
are included in a Registration Statement copies of all correspondence between
the Commission and the Company, its counsel or auditors and all memoranda
relating to discussions with the Commission or its staff with respect to the
Registration Statement;
(j) if the offering is underwritten, at the request of any
Requesting Holder to use its reasonable efforts to furnish on the date that
Registrable Securities are delivered to the underwriters for sale pursuant to
such registration an opinion in the customary form of counsel representing
the Company for the purposes of such registration; and
(k) notify each Requesting Holder, at any time a prospectus
covered by such Registration Statement is required to be delivered under the
Securities Act, of the happening of any event of which it has knowledge 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.
Section 5. INDEMNIFICATION.
(a) In the event of a registration of any of the Registrable
Securities under the Securities Act pursuant to Section 2, the Company will
indemnify and hold harmless each Holder of such Registrable Securities
thereunder, each underwriter of such Registrable Securities thereunder and
each other person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such Holder, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Securities were registered under the Securities
Act, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon 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
any violation by the Company of any rule or regulation promulgated under the
Securities Act or any state securities law applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, and will reimburse each such Holder, each of its officers,
directors and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability
or action, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage or liability arises out of or is
based on any untrue statement or omission based upon written information
furnished to the Company by such Holder or underwriter specifically for use
therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration is being effected, indemnify and hold harmless the Company, each
of its directors and officers, each underwriter, if any, of the Company's
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<PAGE>
securities covered by such a Registration Statement, each person who controls
the Company and each underwriter within the meaning of the Securities Act,
and each other such Holder, each of its officers, directors and partners and
each person controlling such Holder, against all claims, losses, expenses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement or alleged untrue statement of any material
fact contained in any such Registration Statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company, such
Holders, such directors, officers, partners, persons or underwriters for any
reasonable legal or any other expenses incurred in connection with
investigating, defending or settling any such claim, loss, damage, liability
or action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering
circular or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder specifically for use
therein; provided, however, the aggregate amount for which any Holder, its
officers, directors and partners, and any person controlling such Holder,
shall be liable under this Section 5(b) shall not in any event exceed the
aggregate proceeds received by such Holder from the sale of Registrable
Securities sold by such Holder in such registration.
(c) Each party entitled to indemnification under this Section 5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claims as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall
not be unreasonably withheld), and the Indemnified Party may participate in
such defense at such party's expense, and provided further that the failure
of any Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations hereunder, unless such failure
resulted in actual detriment to the Indemnifying Party. 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 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 of such claim or litigation.
(d) Notwithstanding the foregoing, to the extent that the
provisions on indemnification contained in the underwriting agreements
entered into among the selling Holders, the Company and the underwriters in
connection with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall be
controlling as to the Registrable Securities included in the public offering.
(e) If the indemnification provided for in this Section 5 is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred
to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party thereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such loss, liability, claim, damage
or expense in such proportion as
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<PAGE>
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other hand in connection with
the statements or omissions which resulted in such loss, liability, claim,
damage or expense as well as any other relevant equitable considerations.
The relevant fault of the Indemnifying Party and the Indemnified Party shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount any Holder shall be obligated to
contribute pursuant to this Section 5(e) shall be limited to an amount equal
to the proceeds to such Holder of the Registrable Securities sold pursuant to
the Registration Statement which gives rise to such obligation to contribute
(less the aggregate amount of any damages which the Holder has otherwise been
required to pay in respect of such loss, claim, damage, liability or action
or any substantially similar loss, claim, damage, liability or action arising
from the sale of such Registrable Securities).
(f) The indemnification provided by this Section 5 shall be a
continuing right to indemnification and shall survive the registration and
sale of any securities by any Person entitled to indemnification hereunder
and the expiration or termination of this Agreement.
Section 6. INFORMATION BY HOLDER. Any Requesting Holder shall promptly
furnish to the Company such information regarding such Requesting Holder and
the distribution proposed by such Requesting Holder as the Company may
request in writing and as shall be required in connection with any
registration referred to herein.
Section 7. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities of a Holder and keep information
available granted to a Holder by the Company under Section 2 may be assigned
by a Holder to any partner or shareholder of such Holder, to any other
Holder, or to a transferee or assignee of an Investor who receives at least
25,000 shares of Registrable Securities (as adjusted for stock splits and the
like); PROVIDED, HOWEVER, that the Company is given written notice by the
Holder at the time of or within a reasonable time after said transfer,
stating the name and address of said transferee or assignee and identifying
the securities with respect to which such registration rights are being
assigned.
Section 8. TERMINATION OF RIGHTS. The rights of any particular Holder
to cause the Company to register securities under Section 2 shall terminate
with respect to such Holder at the earlier of (i) at such time as such
Holder who is not an affiliate of the Company (within the meaning of Rule 405
under the Securities Act) is able to dispose of all of his Registrable
Securities in a three-month period pursuant to the provisions of Rule 144
under the Securities Act, and (ii) the date that is the eighth anniversary
of the date hereof.
Section 9. MISCELLANEOUS.
(a) This Agreement may be amended only by a writing signed by the
Company and Holders of at least seventy-five percent (75%) of the Registrable
Securities (including shares of Common Stock underlying the Minority
Stockholder Warrants and the Bridge Warrants) held by such Holders, as
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<PAGE>
constituted from time to time. The Holders hereby consent to future
amendments to this Agreement that permit future investors, other than
employees, officers or directors of the Company, to be made parties hereto
and to become Holders of Registrable Securities; PROVIDED, HOWEVER, that no
such future amendment may materially impair the rights of the Holders
hereunder without obtaining the requisite consent of the Holders, as set
forth above.
(b) Nothing contained in this Agreement shall be construed as
requiring any Holder to exercise his, her or its Minority Stockholder
Warrants or Bridge Warrants, as the case may be, prior to the initial filing
of any Registration Statement or the effectiveness thereof.
(c) This Agreement may be executed in any number of counterparts,
all of which shall constitute a single instrument.
(d) All notices to be given to any party shall be in writing and
delivered by hand in person, or by express overnight courier service, or by
electronic facsimile transmission (with a copy sent by first-class mail,
postage prepaid), or by registered or certified mail, return receipt
requested, postage prepaid, addressed (a) if to a Holder, at such Holder's
address set forth on the books of the Company, or at such other address as
such Holder shall have furnished to the Company in writing, or (b) if to any
other holder of any Registrable Securities, at such address as such holder
shall have furnished the Company in writing, or, until any such Holder so
furnishes an address to the Company, then to and at the address of the last
Holder of such securities who has so furnished an address to the Company, or
(c) if to the Company, at 810 Chicago Street, Toledo, Ohio 43611 (Attention:
President), or at such other address as the Company shall have furnished to
the Holders, with a copy to Benesch, Friedlander, Coplan & Aronoff LLP, 2300
BP America Building, 200 Public Square, Cleveland, Ohio 44114 (Attention:
Lawrence M. Bell). Any notice given by (i) electronic facsimile will be
effective when confirmed if given prior to 6:00 p.m., local time, on a
business day, otherwise it will be effective on the next succeeding business
day; (ii) overnight courier or personal delivery will be effective on the day
delivered, unless such day is not a business day, in which case it will be
effective on the next succeeding business day; and (iii) registered or
certified mail will be effective three business days after deposit in the
mails, all fees prepaid.
(e) Any other provisions of this Agreement to the contrary
notwithstanding, the Company's obligation to file a Registration Statement,
or cause such Registration Statement to become effective, shall be suspended
for such a period that there exists at the time material non-public
information relating to the Company which, in the reasonable opinion of the
Company, should not be disclosed.
(f) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any
manner affect or render illegal, invalid or unenforceable any other provision
of this Agreement, and this Agreement shall be carried out as if any such
illegal, invalid or unenforceable provision were not contained herein.
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<PAGE>
(g) If, and as often as, there is any change in the Common Stock
by way of a stock split, stock dividend, combination or reclassification, or
through a merger, consolidation, reorganization or recapitalization, or by
any other means, appropriate adjustment shall be made in the provisions
hereof so that the rights and privileges granted hereby shall continue with
respect to the Common Stock as so changed.
(h) This Agreement shall be governed by and construed in
accordance with the procedural and substantive laws of the State of Delaware
without regard to principles of conflicts of law.
IN WITNESS WHEREOF, the Company and the Investors have executed this
Registration Rights Agreement as of the date first above specified.
EPI TECHNOLOGIES, INC.
___________________________________________
By: Real Remillard, Chief Financial Officer
___________________________________________
SPENCER I. BROWNE
___________________________________________
ELLIOT SMITH
MNP CORPORATION
___________________________________________
By:___________________, ___________________
___________________________________________
GUIDO MENDOGNI
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Exhibit 10.6
1997 NON-EMPLOYEE DIRECTORS'
STOCK OPTION PLAN OF
EPI TECHNOLOGIES, INC.
1. PURPOSE OF THE PLAN. This 1997 Non-Employee Directors' Stock Option
Plan of EPI Technologies, Inc. adopted on this _______ day of
_______________, 1997, is intended to encourage directors of the Company who
are not officers or key employees of the Company or any of its Subsidiaries
to acquire or increase their ownership of common stock of the Company. The
opportunity so provided is intended to foster in participants an incentive to
put forth maximum effort for the continued success and growth of the Company
and its Subsidiaries.
2. DEFINITIONS. When used herein, the following terms shall have the
meaning set forth below:
2.1 "BOARD" means the Board of Directors of EPI Technologies, Inc.
2.2 "CHANGE IN CONTROL" means a change in control of the company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act (as in
effect on the date the Plan is adopted by the Board), whether or not the
Company is then subject to such reporting requirement; provided, that,
without limitation, such a Change in Control shall be deemed to have
occurred if:
(a) any "person" (as defined in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing forty percent (40%) or more of the
combined voting power of the
<PAGE>
Company's then outstanding securities other than either (i) in
connection with a transaction or series of related transactions
approved by the Board (which Board must include at least a majority
who were Continuing Directors and which transaction or series of
related transactions must have been approved by a majority of the
Continuing Directors) or (ii) as the result of the reduction in the
number of issued and outstanding Shares pursuant to a transaction or
series of related transactions approved by the Board (which Board must
include at least a majority who were Continuing Directors and which
transaction or series of related transactions must have been approved
by a majority of the Continuing Directors); provided, however, that a
Change in Control shall not be deemed to occur under this clause
(a) by reason of the acquisition of securities by the Company or an
employee benefit plan (or any trust funding such a Plan) maintained by
the Company, or solely by reason of the issuance of securities
directly by the Company; or
(b) during any period of two (2) consecutive years (not
including any period prior to the adoption of this Plan) there shall
cease to be a majority of the Board comprised of Continuing Directors;
or
(c) (i) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other
than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
at least eighty percent (80%) of the
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combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger
or consolidation, or
(ii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale
or disposition by the Company of all or substantially all the
Company's assets.
2.3 "CODE" means the Internal Revenue Code of 1986, as in effect at
the time of reference, or any successor revenue code which may hereafter be
adopted in lieu thereof, and any reference to any specific provisions of
the Code shall refer to the corresponding provisions of the Code as it may
hereafter be amended or replaced.
2.4 "COMMITTEE" means the Stock Option Committee of the Board or any
other committee appointed by the Board which is invested by the Board with
responsibility for the administration of the Plan.
2.5 "COMPANY" means EPI Technologies, Inc.
2.6 "CONTINUING DIRECTORS" means individuals who at the beginning of
any period of two (2) consecutive years (not including any period prior to
the adoption of this Plan) constitute the Board and any new director(s)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved.
2.7 "DIRECTORS" means directors who serve on the Board and who are
not officers or key employees of the Company or any of its Subsidiaries.
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<PAGE>
2.8 "ERISA" means the Employee Retirement Income Security Act of
1974, as in effect at the time of reference, or any successor law which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of ERISA shall refer to the corresponding provisions of ERISA as
it may hereafter be amended or replaced.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in
effect at the time of reference, or any successor law which may hereafter
be adopted in lieu thereof, and any reference to any specific provisions of
the Exchange Act shall refer to the corresponding provisions of the
Exchange Act as it may be amended or replaced.
2.10 "FAIR MARKET VALUE" means with respect to the Shares, (i) the
closing price of the Shares on the principal stock exchange on which Shares
are then traded or admitted to trading, on the last business day prior to
the date on which the value is to be determined, (ii) if no sales take
place on such day on any such exchange, the average of the last reported
closing bid and asked prices on such day as officially quoted on any such
exchange, or (iii) if the Shares are not then listed or admitted to trading
on any such exchange, the average of the last reported closing bid and
asked prices on such day on the over-the-counter market. For purposes of
(i) above, the National Association of Securities Dealers National Market
System shall be deemed a principal stock exchange. Notwithstanding the
foregoing, with respect to Options granted on, or as of, the date of the
closing of the Company's initial offering of Shares pursuant to a
registration statement under the Securities Act of 1933 which has been
filed with, and declared effective by, the Securities Exchange Commission,
Fair Market Value means the initial price at which Shares are sold in such
offering.
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2.11 "OPTION" means the right to purchase the number of Shares
specified by the Plan at a price and for a term fixed by the Plan, and
subject to such other limitations and restrictions as the Plan and the
Committee imposes.
2.12 "OPTION AGREEMENT" means a written agreement in such form as may
be, from time to time, hereafter approved by the Committee, which shall be
duly executed by the Company and the Director and which shall set forth the
terms and conditions of an Option under the Plan.
2.13 "PLAN" means the 1996 Non-Employee Directors' Stock Option Plan
of EPI Technologies, Inc.
2.14 "REGULATION T" means Part 220, chapter II, title 12 of the Code
of Federal Regulations, issued by the Board of Governors of the Federal
Reserve System pursuant to the Exchange Act, as amended from time to time.
2.15 "RULE 16B-3" means Rule 16b-3 of the General Rules and
Regulations of the Securities and Exchange Commission as in effect at the
time of reference, or any successor rules or regulations which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of Rule 16b-3 shall refer to the corresponding provisions of
Rule 16b-3 as it may hereafter be amended or replaced.
2.16 "SHARES" means shares of the Company's $.01 par value common
stock or, if by reason of the adjustment provisions contained herein, any
rights under an Option under the Plan pertain to any other security, such
other security.
2.17 "SUBSIDIARY" or "SUBSIDIARIES" means any corporation or
corporations other than the Company in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock
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possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
2.18 "SUCCESSOR" means the legal representative of the estate of a
deceased Director or the person or persons who shall acquire the right to
exercise or receive an Option by bequest or inheritance or by reason of the
death of the Director.
2.19 "TERM" means the period during which a particular Option may be
exercised.
3. STOCK SUBJECT TO THE PLAN. There will be reserved for use, upon the
exercise of Options to be granted from time to time under the Plan, an aggregate
of 100,000 Shares, which Shares may be, in whole or in part, as the Board shall
from time to time determine, authorized but unissued Shares, or issued Shares
which shall have been reacquired by the Company. Any Shares subject to issuance
upon exercise of Options but which are not issued because of a surrender, lapse,
expiration or termination of any such Option prior to issuance of the Shares
shall once again be available for issuance in satisfaction of Options.
4. ADMINISTRATION OF THE PLAN. The Board shall appoint the Committee,
which shall consist of at least two (2) members of the Board who are neither
employees nor officers of the Company. Subject to the provisions of the Plan,
the Committee shall have full authority, in its discretion, to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, and generally to interpret and determine any and all matters whatsoever
relating to the administration of the Plan and the granting of Options
hereunder. The Board may, from time to time, appoint members to the Committee
in substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee shall select one of
its members as its chairman and shall hold its meetings at such times and places
as it shall
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deem advisable. A majority of its members shall constitute a quorum. Any
action of the Committee may be taken by a written instrument signed by all of
the members, and any action so taken shall be fully as effective as if it had
been taken by a vote of a majority of the members at a meeting duly called and
held. The Committee shall make such rules and regulations for the conduct of
its business as it shall deem advisable and shall appoint a Secretary who shall
keep minutes of its meetings and records of all action taken in writing without
a meeting. No member of the Committee shall be liable, in the absence of bad
faith, for any act or omission with respect to his or her service on the
Committee.
5. GRANT OF OPTIONS. Each Director who is a Director on the date the
Plan becomes effective shall be granted an Option on such date to purchase
25,000 Shares without further action by the Board or the Committee. Each
Director who joins the Board after the date the Plan becomes effective shall be
granted an Option on the first day of his initial term on the Board to purchase
7,500 Shares without further action by the Board or the Committee. If the
number of Shares available under the Plan on a scheduled grant date is
insufficient to make all automatic grants required to be made pursuant to the
Plan on such date, then each eligible Director shall receive an Option to
purchase a pro rata number of the remaining Shares, if any, under the Plan;
provided further, however, that if such proration results in fractional Shares,
then such Option shall be rounded down to the nearest number of whole Shares.
6. BASIC STOCK OPTION PROVISIONS.
6.1 OPTION PRICE. The option price per share of any Option granted
under the Plan shall be the Fair Market Value of the Shares covered by the
Option on the date the Option is granted.
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6.2 TERM OF OPTIONS. Options granted hereunder shall be
exercisable for a Term of ten (10) years from the date of grant thereof,
but shall be subject to earlier termination as hereinafter provided, and
except as otherwise provided in the Plan, prior to its expiration or
termination, any Option granted hereunder may be exercised at any time
after the six (6) month anniversary of the date of grant of such Option.
6.3 TERMINATION OF DIRECTORSHIP. In the event a Director ceases to
be a member of the Board (other than by reason of death or disability), an
Option may be exercised by the Director in full at any time within seven
(7) months after he or she ceases to be a member of the Board, but not
beyond the Term of the Option.
6.4 DEATH OR DISABILITY OF DIRECTOR. If a Director dies or becomes
disabled while he or she is a member of the Board, or within seven (7)
months after he or she ceases to be a Member of the Board, an Option may be
exercised in full by the Director's Successor, at any time within one (1)
year after he or she ceases to be a member of the Board on account of such
death, but not beyond the Term of the Option.
7. EXERCISE OF RIGHTS UNDER AWARDS.
7.1 NOTICE OF EXERCISE. A Director entitled to exercise an Option
may do so by delivery of a written notice to that effect specifying the
number of Shares with respect to which the Option is being exercised and
any other information the Committee may require. The notice shall be
accompanied by payment in full of the purchase price of any Shares to be
purchased, which payment shall be made in cash or by certificates of Shares
held for more than six (6) months, duly endorsed in blank, equal in value
to the purchase price of the Shares to be purchased based on their Fair
Market Value at the time of exercise or a combination thereof. No Shares
shall be issued upon exercise of an Option
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until full payment has been made therefor. All notices or requests
provided for herein shall be delivered to the Company's Chief Financial
Officer, or such other person as the Committee may designate. No
fractional Shares shall be issued.
7.2 CASHLESS EXERCISE PROCEDURES. The Company, in its sole
discretion, may establish procedures whereby a Director, subject to the
requirements of Rule 16b-3, Regulation T, federal income tax laws, and
other federal, state and local tax and securities laws, can exercise an
Option or a portion thereof without making a direct payment of the option
price to the Company. If the Company so elects to establish a cashless
exercise program, the Company shall determine, in its sole discretion, and
from time to time, such administrative procedures and policies as it deems
appropriate and such procedures and policies shall be binding on any
Director wishing to utilize the cashless exercise program.
8. OTHER OPTION TERMS AND CONDITIONS. Each Option or each Option
Agreement evidencing the grant of an Option shall contain such other terms and
conditions not inconsistent herewith as shall be approved by the Committee.
9. RIGHTS OF OPTION HOLDER. The holder of an Option shall not have any
of the rights of a stockholder with respect to the Shares subject to purchase or
receipt under his or her Option, except to the extent that one or more
certificates for such Shares shall be issuable to the holder upon the due
exercise of the Option and the payment in full of the purchase price therefor.
10. NONTRANSFERABILITY OF OPTIONS. An Option shall not be transferable,
other than: (a) by will or the laws of descent and distribution, and an Option
may be exercised, during the lifetime of the holder of the Option, only by the
holder, or in the event of death, the holder's Successor, or in the event of
disability, the holder's personal representative, or (b) pursuant to a qualified
domestic relation order, as defined in the Code or ERISA or the rules
thereunder.
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11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes
in all of the outstanding Shares by reason of stock dividends, stock splits,
reclassifications, recapitalizations, mergers, consolidations, combinations, or
exchanges of shares, separations, reorganizations or liquidations, or similar
events, or in the event of extraordinary cash or non-cash dividends being
declared with respect to the Shares, or similar transactions or events, the
number and class of Shares available under the Plan in the aggregate, the number
and class of Shares subject to Options theretofore granted, applicable purchase
prices and all other applicable provisions, shall, subject to the provisions of
the Plan, be equitably adjusted by the Committee (which adjustment may, but need
not, include payment to the holder of an Option, in cash or in shares, in an
amount equal to the difference between the price at which such Option may be
exercised and the then current fair market value of the Shares subject to such
Option as equitably determined by the Committee). The foregoing adjustment and
the manner of application of the foregoing provisions shall be determined by the
Committee, in its sole discretion. Any such adjustment may provide for the
elimination of any fractional share which might otherwise become subject to an
Option.
12. CHANGE IN CONTROL. Notwithstanding anything to the contrary in the
Plan or in any Option Agreement, in the case of a Change in Control of the
Company, each Option granted under the Plan shall terminate ninety (90) days
after the occurrence of such Change in Control, and an Option holder shall have
the right, commencing at least five (5) days prior to such Change in Control and
subject to any other limitation on the exercise of such Option in effect on the
date of exercise, to immediately exercise any Option in full, without regard to
any vesting limitations, to the extent it shall not have been previously
exercised.
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13. FORMS OF OPTIONS. An Option shall be granted hereunder on the date or
dates specified in the Plan. Whenever the Plan provides for the receipt of an
Option by a Director, the Company's Chief Financial Officer or such other person
as the Committee shall appoint, shall forthwith send notice thereof to the
Director, in such form as the Committee shall approve, stating the number of
Shares subject to the Option, its Term, and the other terms and conditions
thereof. The notice shall be accompanied by a written Option Agreement, in such
form as may from time to time hereafter be approved by the Committee, which
shall have been duly executed by or on behalf of the Company. Execution by the
Director to whom such Option is granted of said Option Agreement in accordance
with the provisions set forth in this Plan shall be a condition precedent to the
exercise of any Option.
14. TAXES.
14.1 RIGHT TO WITHHOLD REQUIRED TAXES. The Company shall have the
right to require a person entitled to receive Shares pursuant to the
exercise of an Option under the Plan to pay the Company the amount of any
taxes which the Company is or will be required to withhold, if any, with
respect to such Shares before the certificate for such Shares is delivered
pursuant to the Option. Furthermore, the Company may elect to deduct such
taxes from any other amounts then payable in cash or in shares or from any
other amounts payable any time thereafter to the Director.
14.2 DIRECTOR ELECTION TO WITHHOLD SHARES. A Director may satisfy the
withholding tax liability, if any, with respect to the exercise of an
Option, by having the Company withhold Shares otherwise issuable upon
exercise of the Option if such Director makes an election to do so which
satisfies the requirements of Rule 16b-3.
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15. TERMINATION OF THE PLAN. The Plan shall terminate five (5) years from
the date the Plan becomes effective, and an Option shall not be granted under
the Plan after that date although the terms of any Option may be amended at any
date prior to the end of its Term in accordance with the Plan. Any Option
outstanding at the time of termination of the Plan shall continue in full force
and effect according to the terms and conditions of the Option and this Plan.
16. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from
time to time by the Board. Notwithstanding the discretionary authority granted
to the Committee in Section 4 of the Plan, no amendment of the Plan or any
Option granted under the Plan shall impair any of the rights of any holder,
without the holder's consent, under any Option theretofore granted under the
Plan.
17. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for Shares
pursuant to an Option exercise may be postponed by the Company for such period
as may be required for it with reasonable diligence to comply with any
applicable requirements of any federal, state or local law or regulation or any
administrative or quasi-administrative requirement applicable to the sale,
issuance, distribution or delivery of such Shares. The Committee may, in its
sole discretion, require a Director to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the delivery of any Shares pursuant thereto.
18. FEES AND COSTS. The Company shall pay all original issue taxes on the
exercise of any Option granted under the Plan and all other fees and expenses
necessarily incurred by the Company in connection therewith.
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19. EFFECTIVENESS OF THE PLAN. The Plan shall become effective on the
later of (i) the date the Plan is approved by the Board or (ii) the date of the
closing of the Company's initial public offering of Shares pursuant to a
registration statement under the Securities Act of 1933, which has been filed
with, and declared effective by, the Securities Exchange Commission.
20. OTHER PROVISIONS. As used in the Plan, and in Option Agreements and
other documents prepared in implementation of the Plan, references to the
masculine pronoun shall be deemed to refer to the feminine or neuter, and
references in the singular or the plural shall refer to the plural or the
singular, as the identity of the person or persons or entity or entities being
referred to may require. The captions used in the Plan and in such Option
Agreements and other documents prepared in implementation of the Plan are for
convenience only and shall not affect the meaning of any provision hereof or
thereof.
21. DELAWARE LAW TO GOVERN. This Plan shall be governed by and construed
in accordance with the laws of the State of Delaware.
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SECRETARY'S CERTIFICATE
I, Real P. Remillard, Secretary of EPI Technologies, Inc., a Delaware
corporation (the "Company"), do hereby certify that the Board of Directors of
the Company, in an action by their unanimous written consent dated January
22, 1997, hereby adopted the following resolution with respect to the 1997
Non-Employee Directors' Stock Option Plan of EPI Technologies, Inc. (the
"Directors' Plan"):
RESOLVED, that the 1997 Non-Employee Directors' Stock Option Plan of EPI
Technologies, Inc. (the "Directors' Plan") be, and it hereby is, amended
by deleting the first sentence of Section 3 of the Directors' Plan in its
entirety and replacing such sentence with the following:
There will be reserved for use, upon the exercise of Options to be
granted from time to time under the Plan, an aggregate of 75,000
Shares, which Shares may be, in whole or in part, as the Board shall
from time to time determine, authorized but unissued Shares, or
issued Shares which shall have been reacquired by the Company.
RESOLVED, that the Directors' Plan be, and it hereby is, amended by
deleting the first two sentences of Section 4 of the Directors' Plan in
its entirety and replacing such sentences with the following:
The Board shall be invested with the responsibility for the
administration of the Plan, including prior to the time at which the
Plan becomes effective; provided, however, that the Board may appoint
a Committee which shall be invested with the responsibility for
administration of the Plan; provided, further, however, that at such
time as the Company becomes subject to the Exchange Act, the Board
shall appoint a Committee, which shall consist of not less than two
outside directors as defined in Treasury Regulation 1.162-27, which
shall be invested with the responsibility for the administration of
the Plan. Subject to the provisions of the Plan, the Board, or the
Committee if one has been appointed, shall have full authority, in
its discretion, to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, and generally to
interpret and determine any and all matters whatsoever relating to
the administration of the Plan and the granting of options thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of
January, 1998.
EPI TECHNOLOGIES, INC.
/s/ Real P. Remillard
----------------------------------
Real P. Remillard, Secretary
<PAGE>
Exhibit 10.9
January __, 1998
Mr. Bruce Maison
7224 Oakhill Drive
Sylvania, Ohio 43560
Dear Bruce:
Reference is hereby made to the letter agreement dated July 30, 1996
between Environmental Purification Industries, Inc., a Delaware corporation (now
known as EPI Technologies, Inc.) ("EPI, Inc."), and you (the "Employment
Agreement"). For purposes of this Agreement, you are referred to as "Maison."
Meridian National Corporation ("Meridian") hereby agrees as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Affiliate" shall have the meaning set forth in Rule 405 of
the Securities Act of 1933, as amended (the "Securities Act").
(b) "Fair Market Value" shall mean (i) if a security is publicly
traded, the average of the last reported sales prices of such security
(trading regular way) for a ten trading day period ending three days
prior to the closing of a transaction or the date of termination of
Maison's employment with EPI, Inc., as the case may be, or if no reported
sale takes place on a trading day included in such period, the average of
the reported closing bid and asked prices in the regular way for such
trading day, in either case as reported on the New York Stock Exchange
or, if such security is not listed or admitted for trading on the New
York Stock Exchange, on the Nasdaq National Market of the National
Association of Securities Dealers, Inc. Automated Quotations System
("Nasdaq"), or if such security is not quoted on the Nasdaq National
Market, the average of the closing bid and asked prices for a ten trading
day period ending three days prior to the closing of a transaction or the
date of termination of Maison's employment with EPI, Inc., as the case
may be, on the Nasdaq SmallCap Market or the Nasdaq over-the-counter
market as reported by Nasdaq or, if bid and asked prices for such
security on a trading day included in such period shall not have been
reported through Nasdaq, the average of the bid and asked prices on such
day, as furnished by any New York Stock Exchange member firm making a
market in such security selected from time to time by the Board of
Directors of Meridian for that purpose, or (ii) if a security is not
publicly traded, the fair market value of such security as determined by
the Board of Directors of Meridian, in good faith and on a reasonable
basis.
(c) "Gross Proceeds" shall mean the cash or securities which
Meridian receives as consideration for the sale of its shares of Common
Stock (as hereinafter defined), or the sale, conversion, liquidation or
redemption by EPI, Inc. of Meridian's shares of Meridian
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 2
Preferred Stock (as hereinafter defined) received by Meridian in
connection with the IPO (as hereinafter defined), as the case may be. In
the event that the proceeds from the sale of Common Stock or sale,
conversion, liquidation or redemption of the Meridian Preferred Stock are
securities, the Gross Proceeds received by Meridian shall be determined
based on the Fair Market Value of such securities.
(e) "Net Fair Market Value" shall mean the difference of the
Fair Market Value of the Meridian Preferred Stock or Common Stock, as the
case may be, on the date which Maison's employment with EPI, Inc. is
terminated less Meridian's costs of sale including, without limitation,
commissions, attorneys' fees and other out-of-pocket expenses associated
with the transaction.
(d) "Net Proceeds" shall mean the Gross Proceeds received by
Meridian on the sale of its shares of Common Stock or the sale,
conversion, liquidation or redemption by EPI, Inc. of Meridian's shares
of Meridian Preferred Stock, as the case may be, less Meridian's costs of
sale including, without limitation, commissions, attorneys' fees and
other out-of-pocket expenses associated with the transaction.
2. GUARANTY. Meridian hereby guaranties performance of the
obligations of EPI, Inc. under the Employment Agreement. This guaranty is a
continuing and irrevocable guaranty, binding upon Meridian and its successors
and assigns, and the rights and obligations of Maison under this Agreement will
inure to the benefit of, and will be binding upon, Maison and his heirs,
personal representatives and estate. In the event that EPI, Inc. breaches any
of its obligations under the Employment Agreement, Meridian will, upon written
demand by Maison, promptly perform the obligation of EPI, Inc.
3. VOTING OF SHARES. During the term of the Employment Agreement, if
Maison is nominated for election as a director of EPI, Inc., Meridian agrees to
vote all of its shares of voting capital stock of EPI, Inc. in favor of election
of Maison as a director of EPI, Inc.
4. BONUS; SALE OF MERIDIAN PREFERRED STOCK.
(a) Upon receipt by Meridian of a payment for advances made by
Meridian to EPI, Inc. from the proceeds of an initial public offering
underwritten by Duke & Co., Inc. (the "IPO") of EPI, Inc.'s common stock,
par value $.01 per share ("Common Stock"), pursuant to an effective
registration statement under the Securities Act, Meridian will promptly
pay to Maison a bonus equal to five percent (5%) of such payment.
(b) Provided that Maison is employed by EPI, Inc. at the time,
in the event that Meridian shall (i) exchange certain advances to EPI,
Inc. for shares of preferred stock of EPI, Inc. ("Meridian Preferred
Stock"), and (ii) contribute certain advances to EPI, Inc. to the capital
of EPI, Inc., each in connection with the IPO, Meridian shall, upon the
sale,
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 3
conversion, liquidation or redemption by EPI, Inc. of any such shares of
Meridian Preferred Stock received in connection with the IPO, promptly
pay to Maison five percent (5%) of the Net Proceeds received by Meridian
from such sale, conversion, liquidation or redemption.
5. SALE OF CAPITAL STOCK OF EPI, INC. BY MERIDIAN. Provided that
Maison is employed by EPI, Inc. at the time, Meridian agrees to pay to Maison a
percentage of the aggregate amount of Net Proceeds realized by Meridian, in one
or more transactions, upon the sale of up to 850,000 shares of Common Stock
owned by Meridian as of the closing of the IPO, as adjusted for stock splits,
dividends and combinations, as follows:
(a) 1.0% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $1.00 per share of Common Stock but less than or equal to $1.99
per share of Common Stock;
(b) 2.0% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $2.00 per share of Common Stock but less than or equal to $2.99
per share of Common Stock;
(c) 3.0% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $3.00 per share of Common Stock but less than or equal to $3.99
per share of Common Stock;
(d) 4.0% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $4.00 per share of Common Stock but less than or equal to $4.99
per share of Common Stock;
(e) 4.5% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $5.00 per share of Common Stock but less than or equal to $5.49
per share of Common Stock; and
(f) 5.0% of the aggregate amount of Net Proceeds, if the average
price per share of Common Stock (calculated by dividing the aggregate
amount of Gross Proceeds by the number of shares sold) is equal to or
exceeds $5.50 per share of Common Stock.
Such payments will be made within thirty (30) days following the date Meridian
receives such Net Proceeds and will be subject to federal, state or local income
tax withholding laws applicable to Meridian or EPI, Inc. Notwithstanding
anything to the contrary in this Agreement, in no event shall
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 4
Meridian be required to pay Maison any Net Proceeds from the sale of up to an
aggregate of 150,000 shares of Common Stock owned by Meridian to any of MNP
Corporation, a Michigan corporation, Elliot Smith or Spencer Browne pursuant to
a warrant agreement or otherwise.
6. TERMINATION OF MAISON EMPLOYMENT PRIOR TO SALE OF MERIDIAN
PREFERRED STOCK OR COMMON STOCK. In the event that (i) Maison's employment with
EPI, Inc. is terminated by EPI, Inc. on or prior to February 28, 2002 for any
reason other than "cause" (as such term is defined in the Employment Agreement),
is terminated due to the death or "permanent disability" (as such term is
defined in the Employment Agreement) of Maison on or prior to February 28, 2002,
or is terminated by Maison at any time prior to July 27, 2007 due to a decrease
in his base compensation pursuant to the last sentence of Paragraph 3(b) of the
Employment Agreement, (ii) the Employment Agreement is not renewed by EPI, Inc.
upon its expiration on February 28, 2002, (iii) Maison's employment with EPI,
Inc. is terminated by Maison during the period commencing March 1, 2002 through
and including July 26, 2007 for any reason other than due to a decrease in his
base compensation pursuant to the last sentence of Paragraph 3(b) of the
Employment Agreement, (iv) Maison's employment with EPI, Inc. is terminated by
EPI, Inc. for any reason other than "cause" during the period commencing March
1, 2002 through and including July 26, 2007, or is terminated during such period
due to the death or "permanent disability" of Maison, or (v) Maison's employment
with EPI, Inc. is terminated by either Maison or EPI, Inc. for any reason other
than "cause" on or subsequent to July 27, 2007 or is terminated after such date
due to the death or "permanent disability" of Maison, then, in any such case,
Meridian shall be required to pay Maison a percentage of the proceeds received
by Meridian on the sale of the Meridian Preferred Stock and Common Stock based
on the percentages set forth in Paragraphs 4 and 5, respectively; PROVIDED,
HOWEVER, that:
(a) Meridian shall only be required to make such payment or
payments to Maison upon the sale of up to 850,000 shares of Common Stock
or the sale, conversion, liquidation or redemption of the Meridian
Preferred Stock received by Meridian in connection with the IPO;
(b) the amount of such payment or payments to Maison shall be
computed based on the product of the applicable percentages set forth in
Paragraphs 4 and 5 multiplied by the lesser of (x) the Net Proceeds from
the sale, conversion, liquidation or redemption, and (y) the Net Fair
Market Value of the Meridian Preferred Stock and the Common Stock, as the
case may be; and
(c) the sale of the shares of Common Stock or the sale,
conversion, liquidation or redemption of the Meridian Preferred Stock
occurs on or prior to, (1) in the case of Paragraphs 6(a)(i) and
6(a)(ii), the fifth anniversary of the date of Maison's termination, (2)
in the case of Paragraph 6(a)(iii), the date which is two years and 180
days from the date of termination of employment by Maison, (3) in the
case of Paragraph 6(a)(iv), (i) the sixth anniversary of the date of
Maison's termination if such termination occurs after February 28, 2002
but on or before July 31, 2003, (ii) the seventh anniversary of the date
of Maison's
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 5
termination if such termination occurs after July 31, 2003 but on or
before July 31, 2004, (iii) the eighth anniversary of the date of
Maison's termination if such termination occurs after July 31, 2004 but
on or before July 31, 2005, (iv) the ninth anniversary of the date of
Maison's termination if such termination occurs after July 31, 2005 but
on or before July 31, 2006, and (v) the tenth anniversary of the date of
Maison's termination if such termination occurs after July 31, 2006, and
(4) in the case of Paragraph 6(a)(v), the tenth anniversary of the date
of Maison's termination if such termination.
7. SALE OF BOTH MERIDIAN PREFERRED STOCK AND COMMON STOCK. Subject to
the limitations on payments set forth in Paragraph 6, in the event that Meridian
sells both its shares of Meridian Preferred Stock received in connection with
the IPO and up to 850,000 shares of Common Stock (net of any prior sales of
Common Stock for which Maison received compensation) to a single purchaser or
one or more purchasers which are Affiliates either in a single transaction or
series of related transactions (a "Single Sale Transaction"), for the purpose of
determining the amount owed to Maison pursuant to this Agreement it shall be
assumed that fifty percent (50%) of the consideration from such Single Sale
Transaction was paid to Meridian for the Meridian Preferred Stock and fifty
percent (50%) of the consideration from such Single Sale Transaction was paid to
Meridian for its shares of Common Stock. In the event that at the time of a
Single Sale Transaction Meridian owns in excess of 850,000 shares of Common
Stock (net of any prior sales of Common Stock for which Maison received
compensation) or any shares of preferred stock issued by EPI, Inc. in addition
to the shares of Meridian Preferred Stock received in connection with the IPO
and such additional shares of Common Stock and/or EPI, Inc. preferred stock are
also sold in the Single Sale Transaction, the Fair Market Value of such
additional shares of Common Stock and/or EPI, Inc. preferred stock shall be
deducted from the consideration paid to Meridian for the Single Sale Transaction
prior to computing any amounts due to Maison from such Single Sale Transaction.
8. PARAGRAPH HEADINGS; ENTIRE AGREEMENT. The Paragraph headings set
forth herein are for reference purposes only and shall not in any way affect the
meaning or interpretation of the terms of this Agreement. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings, both oral
and written, between the parties with respect to the subject matter hereof
including, without limitation, that certain agreement between Meridian and
Maison dated July 30, 1996. No inducement, promise, understanding or condition
not set forth herein has been made or relied upon by either party hereto.
Neither this Agreement nor any provisions hereof is intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
9. BINDING AGREEMENT. The rights and obligations of Meridian under
this Agreement will inure to the benefit of, and will be binding upon, Meridian
and its successors and assigns, and the rights and obligations of Maison under
this Agreement will inure to the benefit of, and will be binding upon, Maison
and his heirs, personal representatives and estate.
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 6
10. ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach of this Agreement, will be settled by
arbitration in accordance with the Rules of the American Arbitration Association
then pertaining in the City of Toledo, Ohio, and judgment upon the award
rendered by the Arbitrator or Arbitrators may be entered in any Court having
jurisdiction thereof. The Arbitrator or Arbitrators will possess the power to
issue mandatory orders and restraining orders in connection with such
arbitration.
11. NOTICES. Any notice to be given under this Agreement must be
personally delivered in writing or will be deemed duly given after it is posted
in the United States mail, postage prepaid, registered or certified, return
receipt requested, and if mailed to Meridian, must be addressed to Meridian at
its principal place of business, attention: Chairman, and if mailed to Maison,
must be addressed to him at his home address last shown on the records of
Meridian, or at such other address or addresses as either Meridian or Maison may
in the future designate in writing to the other.
12. WAIVER. The failure of either party to enforce any provision or
provisions of this Agreement will not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy will not constitute a waiver of such party's right to
assert all other legal remedies available to it under the circumstances.
13. EFFECTIVE DATE. This Agreement will become effective on the date of
the closing of the IPO, provided that Maison is employed by EPI, Inc. on such
date.
14. MISCELLANEOUS. No modification, termination or attempted waiver of
this Agreement will be valid unless in writing and signed by the party against
whom the same is sought to be enforced. This Agreement will be governed by and
construed according to the laws of the State of Ohio, without regard to conflict
of laws principles.
<PAGE>
Mr. Bruce Maison
January __, 1998
Page 7
If the foregoing understanding respecting the Agreement between you and
Meridian is acceptable to you, please indicate your approval by signing a copy
of this letter in the space provided below and return it to me.
Sincerely,
MERIDIAN NATIONAL CORPORATION
By:
------------------------------------
William D. Feniger, Chairman
The terms and provisions of this Agreement are hereby approved and
accepted this ___ day of January, 1998.
---------------------------------------
Bruce Maison
<PAGE>
Exhibit 10.19
WARRANT AGREEMENT
WARRANT AGREEMENT (this "Agreement"), dated as of ________, 1998, by
and among EPI TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and
_____________ (the "Stockholder").
W I T N E S S E T H:
WHEREAS, the Stockholder has waived certain rights in connection with
a public offering by the Company pursuant to a Registration Statement on Form
S-1 (Registration No. 333-37071) (the "Registration Statement") filed pursuant
to the Securities Act of 1933, as amended (the "Act"), of shares of its common
stock, par value $0.01 per share ("Common Stock"), and redeemable common stock
purchase warrants; and
WHEREAS, in consideration for the Stockholder's waiver of its rights
in connection with the Registration Statement, the Company has agreed to issued
to the Stockholder 50,000 redeemable Common Stock purchase warrants (the
"Warrants);
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company and the
Stockholders, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the authorized common stock of the
Company of any class, whether now or hereafter authorized, which has the right
to participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage, which at the date hereof consists of Common
Stock of the Company, $.01 par value.
(b) "Corporate Office" shall mean the office of the Company at which
at any particular time its principal business shall be administered, which
office is located on the date hereof at 810 Chicago Street, Toledo, Ohio 43611.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Company shall have received both (i) the warrant certificate representing
such Warrant (a "Warrant Certificate"), with the exercise form thereon duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing, and (ii) payment in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price.
<PAGE>
(d) "Initial Warrant Exercise Date" shall mean, as to each Warrant,
_______, 2000 [24 months from Effective Date].
(e) "Purchase Price" shall mean the price to be paid upon exercise of
each Warrant in accordance with the terms hereof, which price shall be $5.50 per
share of Common Stock, subject to adjustment from time to time pursuant to the
provisions of Section 9 hereof, and subject to the Company's right to reduce the
Purchase Price upon notice to all Warrant Holders.
(f) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants in accordance with the terms hereof, which
price shall be $.10 per Warrant, subject to adjustment from time to time
consistent with the provisions of Section 9 hereof.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books maintained by
the Company pursuant to Section 6.
(h) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company. as the Company's transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean, with respect to each
Warrant, 5:00 p.m. (Eastern time) on _________, 2003 [5 years after Effective
Date], or on the business day immediately preceding the date fixed for
redemption (as set forth in Section 8), whichever is earlier; provided that if
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then 5:00 p.m. (Eastern time) on the next following day
which in the State of New York is not a holiday nor a day on which banks are
authorized to close. Upon notice to all Warrant Holders, the Company shall have
the right to extend the Warrant Expiration Date.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase Fifty Thousand
(50,000) shares of Common Stock upon the exercise thereof, in accordance with
the terms hereof, subject to modification and adjustment as provided in Section
9.
(b) Upon execution of this Agreement, a Warrant Certificate
representing the number of Warrants sold pursuant to this Agreement shall be
executed by the Company and delivered to the Stockholder.
(c) From time to time up to the Warrant Expiration Date, the Company
shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 50,000 shares of Common Stock,
subject to adjustment as described herein, upon the exercise of Warrants in
accordance with this Agreement.
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<PAGE>
(d) From time to time up to the Warrant Expiration Date, the Company
shall countersign and deliver Warrant Certificates in required whole number
denominations to the persons entitled thereto in connection with any transfer or
exchange permitted under this Agreement; provided that no Warrant Certificates
shall be issued except (i) the Stockholder, (ii) those issued on or after the
Initial Warrant Exercise Date upon the exercise of fewer than all Warrants
represented by any Warrant Certificate to evidence any unexercised Warrants held
by the exercising Registered Holder, (iii) those issued upon any transfer or
exchange pursuant to Section 6; (iv) those issued in replacement of lost,
stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; and
(v) those issued at the option of the Company, in such form as may be approved
by its Board of Directors, to reflect any adjustment or change in the Purchase
Price, the number of shares of Common Stock purchasable upon exercise of the
Warrants or the Redemption Price therefor made pursuant to Section 9.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A, and may have such letters, numbers or other marks
of identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates) and issued in registered form. Warrants shall be numbered
serially with the letters WA on each Warrant Certificate.
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by mutual signatures or by facsimile
signatures printed thereon. In case any officer of the Company who shall have
signed a Warrant Certificate shall cease to be such officer of the Company
before the date of issuance of the Warrant Certificate, such Warrant Certificate
may nevertheless be issued and delivered with the same force and effect as
though the person who signed such Warrant Certificate had not ceased to be such
officer of the Company. After signature by the Company, a Warrant Certificate
shall be delivered to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a).
SECTION 4. EXERCISE. Each Warrant may be exercised by the
Registered Holder thereof at any time on or after the Initial Warrant Exercise
Date, but not after the Warrant Expiration Date, upon the terms and subject to
the conditions set forth herein and in the applicable Warrant Certificate. A
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date and the person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the holder
upon exercise thereof as of the close of business on the Exercise Date.
Promptly following the Exercise Date, the Company shall cause to
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<PAGE>
be issued and delivered by the Transfer Agent to the person or persons entitled
to receive the same a certificate or certificates for the securities deliverable
upon such exercise (plus a Warrant Certificate for any remaining unexercised
Warrants of the Registered Holder).
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company has reserved, and covenants that it will at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon exercise of Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding Warrants.
The Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants shall, at the time of delivery, be duly and
validly issued, fully paid, nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof (other than those which the Company
shall promptly pay or discharge) and that upon issuance such shares shall be
listed on each national securities exchange, if any, on which the other shares
of outstanding Common Stock of the Company are then listed or, if applicable,
The Nasdaq Stock Market.
(b) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same had paid to the Company the
amount of transfer taxes or charges incident thereto, if any.
(c) The Company shall requisition the Transfer Agent from time to
time for certificates representing shares of Common Stock issuable upon exercise
of the Warrants.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Company at its Corporate Office, and upon
satisfaction of all the terms and provisions hereof, the Company shall execute,
issue and deliver in exchange therefor the Warrant Certificate or Certificates
which the Registered Holder making the exchange shall be entitled to receive.
(b) The Company shall keep at its office books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute, issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing the aggregate
number of Warrants so transferred.
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<PAGE>
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the "Election to
Purchase" or "Assignment" form, as appropriate, on the reverse thereof shall be
duly endorsed, or be accompanied by a written instrument or instruments of
transfer and subscription, in form satisfactory to the Company, duly executed by
the Registered Holder or his attorney-in-fact authorized in writing.
(d) The Company may require payment by such Registered Holder of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any exchange or registration of transfer.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Company and thereafter disposed of or destroyed.
(f) Prior to due presentment for registration of transfer thereof,
the Company may deem and treat the Registered Holder of any Warrant Certificate
as the absolute owner thereof and of each Warrant represented thereby
(notwithstanding any notations of ownership or writing thereon made by anyone
other than a duly authorized officer of the Company) for all purposes and shall
not be affected by any notice to the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company of
evidence satisfactory to them of the ownership of and loss, theft, destruction
or mutilation of any Warrant Certificate and (in case of loss, theft or
destruction) of indemnity satisfactory to them, and (in the case of mutilation)
upon surrender and cancellation thereof, the Company shall execute and (in the
absence of notice to the Company that the Warrant Certificate has been acquired
by a bona fide purchaser) deliver to the Registered Holder in lieu thereof a new
Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Company may prescribe pursuant to Section 6(d) or otherwise.
SECTION 8. REDEMPTION.
(a) Commencing on the Initial Warrant Exercise Date, on prior written
notice as required pursuant to the provisions of paragraph (b) of this Section 8
below, the Warrants may be redeemed by the Company at the Redemption Price,
provided the closing bid quotation of the Common Stock on The Nasdaq Stock
Market or the last sales price if quoted on a national securities exchange
equals or exceeds $8.25 per share, subject to adjustment consistent with the
provisions of Section 9 hereof, for 20 consecutive trading days ending on the
third trading day prior to the date on which the Company gives notice of
redemption. All Warrants must be redeemed if any of the Warrants are redeemed.
(b) In case the Company shall desire to exercise its right to so
redeem the Warrants, it shall mail a notice of redemption to each of the
Registered Holders of the Warrants to
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<PAGE>
be redeemed, first class, postage prepaid, not earlier than the forty-fifth
(45th) day before the date fixed for redemption and not later than the thirtieth
(30th) day before the date fixed for redemption, at such Registered Holder's
last address as it shall appear on the records of the Company. Any notice mailed
in the manner provided herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the Redemption Price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the Redemption Price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 p.m. (Eastern time) on the
business day immediately preceding the date fixed for redemption. No failure to
mail such notice nor any defect therein or in the mailing thereof shall affect
the validity of the proceedings for such redemption except as to a holder (a) to
whom notice was not mailed or (b) whose notice was defective. An affidavit of
the Secretary or an Assistant Secretary of the Company that notice of redemption
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant that has been called for
redemption shall terminate at 5:00 p.m. (Eastern time) on the business day
immediately preceding the date fixed for redemption. After such termination,
Holders of the redeemed Warrants shall have no further rights except to receive,
upon surrender of the redeemed Warrant, the Redemption Price.
(e) From and after the date fixed for redemption, the Company shall,
at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more Warrants to be redeemed, deliver or cause to be delivered to or upon the
written order of such Holder a sum in cash equal to the Redemption Price of each
such Warrant. From and after the date fixed for redemption and upon the deposit
or setting aside by the Company of a sum sufficient to redeem all the Warrants
called for redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the Redemption Price, shall cease.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF
COMMON STOCK OR WARRANTS.
(a) (i) In the event the Company shall, at any time or from time
to time after the date hereof, issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine the outstanding
shares of Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision or combination being herein called a "Change of Shares"),
then, and thereafter upon each further Change of Shares, the applicable Purchase
Price in effect immediately prior to such Change of Shares shall be changed to a
price (calculated to the nearest cent) determined by multiplying the Purchase
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such Change of Shares and the denominator of which shall
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<PAGE>
be the total number of shares of Common Stock outstanding immediately after such
Change of Shares.
(ii) Subject to the exceptions referred to in Section 9(h),
in the event that the Company shall at any time or from time to time issue or
sell any shares of its Common Stock for a consideration per share of Common
Stock less than the then applicable Purchase Price, the Purchase Price shall
thereupon be reduced to a price (calculated to the nearest cent) determined by
dividing (x) an amount equal to the sum of (i) the number of shares of Common
Stock of the Company outstanding immediately prior to such issue or sale
multiplied by the then applicable Purchase Price plus (ii) the consideration, if
any, received by the Company upon such issuance or sale by (y) the total number
of shares of Common Stock of the Company outstanding immediately after such
issuance or sale.
(iii) If the Company shall at any time after the date hereof
issue or sell any shares of any other securities convertible into Common Stock
or any options or warrants to purchase Common Stock (except as provided in
Section 9(h)), including in connection with retirement of outstanding debt, for
a consideration per share less than the Purchase Price in effect immediately
prior to the time of such issue or sale, then, forthwith upon such issue or
sale, the Purchase Price shall be reduced to the price (calculated to the
nearest cent) determined by dividing (x)an amount equal to the sum of (i) the
number of shares of Common Stock outstanding immediately prior to such issue or
sale multiplied by the Purchase Price at the time plus (ii) the consideration,
if any, received by the Company upon such issue or sale by (y) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
(iv) For purposes of this Section 9(a) the consideration in
connection with any such issue or sale shall be the amount of cash received by
the Company (or, in the case of securities sold to underwriters or dealers for
public offering or to the public through underwriters, the public offering
price) for the sale of such shares or other securities, options or warrants,
before deducting therefrom any commissions or other expenses paid or incurred by
the Company in connection with the issue or sale of such securities, options or
warrants plus any additional cash receivable by the Company on conversion or
exercise of such other securities, options or warrants except that, if any
portion of such consideration is a consideration other than cash, the amount of
such consideration other than cash shall be (i) the principal amount thereof,
plus any accrued but unpaid interest thereon and all other amounts payable in
connection with such debt including for expenses and yield maintenance premiums,
in the case of debt forgiven, exchanged or converted, and (ii) the value of such
consideration as determined in good faith by the Board of Directors of the
Company (whose determination shall be conclusive), in the case of any other non-
cash consideration.
(v) If the conversion or exercise price of any securities
convertible into Common Stock or options or warrants to purchase Common Stock is
not specified at the time of the issue or sale of such securities, option or
warrants, the amount thereof, for purposes only of this Section 9(a), shall be
as determined in accordance with Section 9(i).
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(vi) In the event of the issuance or sale by the Company of
any securities convertible into Common Stock or any options or warrants to
purchase Common Stock (except as provided in Section 9(h)), the Company shall be
deemed to have issued the maximum number of shares of Common Stock into which
such convertible securities may be converted or the maximum number of shares of
Common Stock deliverable upon the exercise of such options or warrants, as the
case may be, for the minimum consideration payable in respect thereof. On the
expiration of such options or warrants or the termination of the right to
convert such convertible securities, the Purchase Price shall be readjusted
based upon the number of shares of Common Stock actually delivered upon the
exercise of such options or warrants or upon the conversion of such convertible
securities. Except as provided in the next preceding sentence no further
adjustment of the Purchase Price shall be made as a result of the actual
issuance of shares of Common Stock upon the exercise of such options or warrants
or the conversion of such convertible securities.
(b) Upon each adjustment of the applicable Purchase Price pursuant to
Section 9(a), the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
9(c)) be such number of shares (calculated to the nearest tenth) purchasable at
the applicable Purchase Price immediately prior to such adjustment multiplied by
a fraction, the numerator of which shall be the applicable Purchase Price in
effect immediately prior to such adjustment and denominator of which shall be
the applicable Purchase Price in effect immediately after such adjustment.
(c) The Company may elect, upon any adjustment of the applicable
Purchase Price, to adjust the number of Warrants outstanding, in lieu of
adjusting the number of shares of Common Stock purchasable upon the exercise of
each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the applicable Purchase Price in effect immediately prior to such
adjustment and the denominator of which shall be the applicable Purchase Price
in effect immediately after such adjustment. Upon each such adjustment of the
number of Warrants, the Redemption Price in effect immediately prior to such
adjustment also shall be adjusted by multiplying such Redemption Price by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately after such adjustment and the denominator of which shall be the
Purchase Price in effect immediately prior to such adjustment. Upon each
adjustment of the number of Warrants pursuant to this Section 9, the Company
shall, as promptly as practicable, cause to be distributed to each Registered
Holder of Warrant Certificates on the date of such adjustment Warrant
Certificates evidencing, subject to Section 10, the number of additional
Warrants, if any, to which such Holder shall be entitled as a result of such
adjustment or, at the option of the Company, cause to be distributed to such
Holder in substitution and replacement for the Warrant Certificates held by such
Holder prior to the date of adjustment (and upon surrender thereof, if required
by the Company) new Warrant Certificates evidencing the number of Warrants to
which such Holder shall be entitled after such adjustment.
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(d) In the case of any consolidation or merger of the Company with or
into another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock), or in case of any sale or conveyance to another corporation of
the property of the Company as, or substantially as, an entirety (other than a
sale/leaseback, mortgage or other financing transaction), the Company shall
cause effective provision to be made so that each holder of a Warrant then
outstanding shall have the right thereafter, by exercising such Warrant, to
purchase the kind and number of shares of stock or other securities or property
(including cash) receivable upon such consolidation, merger, sale or conveyance
by a holder of the number of shares of Common Stock that might have been
purchased upon exercise of such Warrant, immediately prior to such
consolidation, merger, sale or conveyance. Any such provision shall include
provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The foregoing
provisions shall similarly apply to successive consolidations, mergers, sales or
conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates,
continue to express the applicable Purchase Price per share, the number of
shares purchasable thereunder and the Redemption Price therefor as were
expressed in the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly after the fiscal quarter in which such
adjustment was triggered prepare a certificate signed by the Chairman or
President, and by the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the applicable Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant after
such adjustment, and, if the Company shall have elected to adjust the number of
Warrants, the number of Warrants to which the Registered Holder of each Warrant
shall then be entitled, and the adjustment in Redemption Price resulting
therefrom, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly cause a brief summary of such certificate
to be sent by ordinary first class mail to each Registered Holder of Warrants at
his or her last address as it shall appear on the registry books of the Company.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of the Secretary or an Assistant Secretary of the
Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(g) For purposes of Section 9(a), 9(b) and 9(c) hereof, the following
provisions (i) and (ii) shall also be applicable.
(i) The number of shares of Common Stock outstanding at any
given time shall include shares of Common Stock owned or held by or for the
account of the Company and
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the sale or issuance of such treasury shares or the distribution of any such
treasury shares shall not be considered a Change of Shares for purposes of said
sections.
(ii) No adjustment of the Purchase Price shall be made unless
such adjustment would require an increase or decrease of at least $0.05 in such
price; provided that any adjustments which by reason of this clause (ii) are not
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $0.05 in the Purchase Price then in effect hereunder.
(h) No adjustment to the Purchase Price or to the number of shares of
Common Stock purchasable upon the exercise of each Warrant will be made,
however, with respect to the following:
(1) upon the issuance or exercise of any of the Warrants;
(2) upon (i) the issuance or sale of shares of Common Stock
pursuant to options, warrants or convertible or exchangeable securities
outstanding as of the date of this Agreement, (ii) issuance of shares of Common
Stock pursuant to the Company's 1997 Non-Qualified and Incentive Stock Option
Plan and 1997 Non-Employee Directors' Stock Option Plan as each of such plans
exists on the date hereof, or (iii) the issuance of shares of Common Stock
pursuant to warrants sold to the public or Duke & Co., Inc. in connection with
the Registration Statement; or
(3) upon the issuance of any shares of Common Stock in
connection with a consolidation or merger in which the Company or a wholly owned
subsidiary of the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of the
outstanding Common Stock, or (ii) pursuant to and in connection with the
acquisition by the Company or any wholly owned subsidiary of the Company of all
or substantially all of the assets or stock (or other equity interests, as the
case may be) of another entity.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each of the then
Registered Holders of the Warrants all of such rights, warrants or options to
which each such holder would have been entitled if, on the date of determination
of stockholders entitled to the rights, warrants or options being granted by the
Company, such holder were the holder of record of the number of whole shares of
Common Stock then issuable upon exercise (assuming, for purposes of
10
<PAGE>
this Section 9(j), that the exercise of Warrants is permissible during periods
prior to the Initial Warrant Exercise Date) of his Warrants. Such grant by the
Company to the holders of the Warrants shall be in lieu of any adjustment which
otherwise might be called for pursuant to this Section 9.
(k) In case the Company shall, at any time prior to the exercise of a
Warrant, make any distribution of its assets to holders of the Common Stock,
then the Registered Holder of such Warrant who exercises his Warrant after the
record date for determination of those Registered Holders of Common Stock
entitled to such distribution of assets shall be entitled to receive, upon
exercise of the Warrant, in addition to Common Stock, the amount of such
distribution which would have been payable to such Registered Holder had he been
the holder of record of the Common Stock receivable upon exercise of such
Warrant on the record date for the determination of those entitled to such
distribution.
SECTION 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
shall nevertheless not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on The Nasdaq Stock Market, the current value shall be the last
reported sale price of the Common Stock on The Nasdaq Stock Market or such
exchange on the last business day prior to the date of exercise of the Warrant,
or if no such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of the Warrant; or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants,
11
<PAGE>
as such, any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance or reclassification of stock,
change of par value or change of stock to no par value, consolidation, merger or
conveyance or otherwise), or to receive notice of meetings, or to receive
dividends or subscription rights, until such Holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
SECTION 12. RIGHTS OF ACTION. All rights of action with respect to
this Agreement are vested in the respective Registered Holders of the Warrants,
and any Registered Holder of a Warrant, without consent of the holder of any
other Warrant, may, in his own behalf and for his own benefit, enforce against
the Company his right to exercise his Warrants for the purchase of shares of
Common Stock in the manner provided in the Warrant Certificates and this
Agreement.
SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant,
by his acceptance thereof, consents and agrees with the Company and every other
holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of the
Company by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office of the Company, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Company in
its sole discretion, together with payment of any applicable transfer taxes; and
(b) The Company may deem and treat the person in whose name the
Warrant Certificate is registered as the holder and as the absolute, true and
lawful owner of the Warrants represented thereby for all purposes, and the
Company shall not be affected by any notice or knowledge to the contrary, except
as otherwise expressly provided in Section 7 hereof.
SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company
shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or
Warrant Certificates evidencing the same shall thereupon be canceled by it and
retired.
SECTION 15. MODIFICATION OF AGREEMENT. Subject to the provisions of
Section 4(b), the the Company may by supplemental agreement make any changes or
corrections in this Agreement (i) that they shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or manifest
mistake or error herein contained or (ii) that they may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Warrant Certificates; provided, however, that this Agreement shall not otherwise
be modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders of Warrant Certificates representing not less
than a majority of the outstanding Warrants, and provided, further, that no
change in the number of or nature of the securities purchasable upon the
exercise of any Warrant, or the Purchase Price therefor, or the acceleration of
the Warrant Expiration Date, shall be
12
<PAGE>
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed.
SECTION 16. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made three days after such is mailed first class registered or certified mail,
postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Company; and if to the Company, at 810 Chicago Street, Toledo,
Ohio 43611 Attention: President, or at such other address as may have been
furnished to the Registered Holders in writing by the Company, with a copy to
Benesch, Friedlander, Coplan & Aronoff LLP, 2300 BP America Building, 200 Public
Square, Cleveland, Ohio 44114, Attention Ira C. Kaplan, Esq.
SECTION 17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio, without reference to
principles of conflict of laws.
SECTION 18. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns and the
holders from time to time of the Warrant Certificates. Nothing in this
Agreement is intended or shall be construed to confer upon any other person any
right, remedy or claim, in equity or at law, or to impose upon any other person
any duty, liability or obligation.
SECTION 19. TERMINATION. This Agreement shall terminate at the close
of business on the Warrant Expiration Date of all the Warrants or such earlier
date upon which all Warrants have been exercised and/or redeemed.
SECTION 20. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed as of the date first above written.
EPI TECHNOLOGIES, INC.
By:
-------------------------------------
Name:
Title:
[STOCKHOLDER]
By:
-------------------------------------
Name:
14
<PAGE>
EXHIBIT A
(FORM OF FACE OF WARRANT CERTIFICATE)
No. WA- Warrants
VOID AFTER _______, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
EPI TECHNOLOGIES, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, __________ or registered
assigns (the "Registered Holder") is the owner of the number of Redeemable
Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one (1) fully paid and nonassessable share of common
stock, $0.01 par value (the "Common Stock"), of EPI TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), at any time from _________, 2000 to the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Election to Purchase Form on the reverse
hereof duly executed, at the corporate office of the Company, accompanied by
payment of $5.50, subject to adjustment (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement") dated as of
_________, 1998, by and among the Company and ____________ (the "Sstockholder").
Reference is hereby made to said Warrant Agreement for a more complete statement
of the rights and limitations of rights of the Registered Holder hereof and the
rights, duties and obligations of the Company thereunder. In the event of a
conflict between the terms of this Warrant Certificate and the Warrant
Agreement, the terms of the Warrant Agreement shall prevail. Copies of said
Warrant Agreement are on file at the corporate office of the Company.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustments.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor for the balance of such Warrants.
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (Eastern time) on
________, 2003, or on the business day immediately preceding the date fixed for
redemption, whichever is earlier. If such date shall in the State of New York
be a holiday or a day on which the banks are authorized to close, then the
Expiration Date shall mean 5:00 p.m. (Eastern time) on the next following day
which in the State of New York is not a holiday or a day on which banks are
authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. This Warrant shall not be exercisable by a Registered Holder in any
state in which it would be unlawful for the Company to deliver the shares of
Common Stock upon exercise of the Warrants represented hereby.
The Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Company, for a new Warrant
Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment of this Warrant Certificate at
such office for registration of transfer, together with any transfer fee and any
tax or other governmental charge imposed in connection with such transfer, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as may be provided in the
Warrant Agreement.
Commencing ________, 2000, this Warrant may be redeemed at the option
of the Company, at the Redemption Price (as defined in the Warrant Agreement),
provided the closing bid quotation of the Common Stock on The Nasdaq Stock
Market or the last sales price if quoted on a national securities exchange
equals or exceeds $8.25 per share (subject to adjustment as set forth in the
Warrant Agreement) for 20 consecutive trading days ending on the third trading
day prior to the date on which the Company gives notice of redemption. Notice
of redemption shall be given not later than the thirtieth day, and not earlier
than the forty fifth day, before the date fixed for redemption, all as provided
in the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to this Warrant except to
receive the Redemption Price per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company may deem and treat the Registered Holder as the absolute owner hereof
and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company) for all purposes and shall not be affected by any notice to the
contrary.
<PAGE>
This Warrant Certificate and each Warrant represented hereby shall be
governed by and construed in accordance with the laws of the State of Ohio,
without reference to principles of conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized, and a facsimile of its corporate seal to be imprinted hereon.
EPI TECHNOLOGIES, INC.
By
-------------------------------------
Its
By
-------------------------------------
Its
Date:
---------------
Seal
<PAGE>
(FORM OF REVERSE OF WARRANT CERTIFICATE)
ELECTION TO PURCHASE FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
(___) Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
-------------------------
please print or type name and address
and be delivered to
-------------------------
-------------------------
-------------------------
-------------------------
please print or type name and address
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
("NASD"). If not solicited by an NASD member, please write "unsolicited" in the
space below.
<PAGE>
Please indicate the name of the NASD member firm which solicited the exercise
of the Warrant.
-------------------------------------
Name of soliciting NASD Member
Dated:
------------------
-------------------------------------
Name
(Please Print or Typewrite)
-------------------------------------
Signature
-------------------------------------
Street Address
-------------------------------------
City, State and Zip Code
-------------------------------------
Social Security or Other
Taxpayer ID Number
Signature Guaranteed:
-------------------------------------
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
-------------------------
please print or type name and address
(___) of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints _______________ Attorney to transfer this
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
Dated:
-------------- ---------------------------------------------------
Signature Guaranteed:
-------------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE ELECTION TO PURCHASE FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A MEDALLION BANK.
<PAGE>
Exhibit 10.20
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") dated as of
_______________, 1997 by and between EPI Technologies, Inc., a Delaware
corporation (f/k/a Environmental Purification Industries, Inc.) ("Employer"),
and Bruce Maison ("Employee"). Capitalized terms shall have the meanings given
them in the Employment Agreement (as hereinafter defined) unless otherwise
defined herein.
WHEREAS, Employer and Employee are parties to an Employment Agreement dated
July 30, 1996 (the "Employment Agreement"); and
WHEREAS, Employer and Employee desire to amend certain terms of the
Employment Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein and for other valuable consideration, the parties hereto agree
as follows:
1. AMENDMENTS TO THE EMPLOYMENT AGREEMENT. Employer and Employee agree
that, effective upon the date hereof, the Employment Agreement shall be amended
as follows:
(a). Paragraphs 4(a) and 4(b) of the Employment Agreement shall be
amended in their entirety to state as follows:
(a) If Employee's employment with Employer (i) has not been
terminated on or prior to February 28, 2002, (ii) is terminated
due to the death or "permanent disability" (as defined in
paragraph 11) of Employee on or prior to February 28, 2002, or
(iii) is terminated by Employee due to a decrease in his base
compensation pursuant to the last sentence of paragraph 3(b),
then Employee will be entitled to receive a deferred benefit (a
"Deferred Benefit") in an amount equal to $190,000, payable in
120 successive monthly installments of $1,583.33, without
interest, commencing on the first day of the first month
following the date of termination of employment. If the
termination of Employee's employment with Employer occurs prior
to February 29, 2000 for any reason other than the reasons set
forth in clauses (ii) and (iii) of the preceding sentence,
Employee shall not be entitled to any part of the Deferred
Benefit; thereafter, in the event that Employee's employment is
terminated prior to February 28, 2002 for any reason other than
the reasons set forth in clauses (ii) and (iii) of the preceding
sentence or for "cause" (as such term is defined in paragraph
6(a)), Employee shall be entitled to receive a Deferred Benefit,
payable in 120 successive monthly installments, without interest,
equal to $190,000 multiplied by the "Applicable Fraction", as
defined by the following schedule:
<PAGE>
"Applicable
Date of Termination Fraction"
------------------- ------------
On or after February 29, 2000
but before February 28, 2001 1/2
On or after February 28, 2001
but before February 28, 2002 3/4
(b) In the event of Employee's death while in the employ of
Employer or thereafter, but prior to payment in full of the
Deferred Benefit, Employer shall, subject to paragraph 4(d)
below, continue to pay the full $190,000 Deferred Benefit,
without interest, in over the 120 month period set forth in
paragraph 4(a) above, to such beneficiary(s) as shall be
designated by Employee in a notice for that purpose furnished to
Employer, or in the absence or failure of such designation, to
Employee's spouse, or in the event that Employee shall have no
spouse or in the event that Employee's spouse shall predecease
him or die during the 120 month payment period, to Employee's
estate.
(b). The last sentence of paragraph 9 shall be amended and restated in
its entirety as follows:
For the purposes of this Agreement, a "Change in
Control" will occur upon a substantial change in
control of Employer, which includes, without
limitation, a transaction pursuant to which shares
representing greater than 30% of the voting power
of Employer are acquired by a person, entity or
group (as such term is used in Rule 13d-5 under
the Securities Exchange Act of 1934, as amended)
other than Meridian National Corporation, a
Delaware corporation (including a merger
transaction involving Employer but not including
the acquisition of shares of voting stock by an
underwriter in an underwritten offering of
securities by the Company).
(c). Paragraph 16 of the Employment Agreement shall be amended and
restated in its entirety as follows:
16. EFFECTIVE DATE. This Agreement will become
effective on the date of the closing of the public offering
of shares of common stock of Employer pursuant to an
effective registration statement under the Securities Act of
1933, as amended, in connection with the
2
<PAGE>
proposed "spin-off" by Meridian National Corporation of the
companies that comprise its paint recycling business (the
"Effective Date"), provided that Employee is employed by
Employer on such date.
2. OTHER TERMS AND CONDITIONS. Employer and Employee agree that all
other terms, conditions, covenants and agreements set forth in the Employment
Agreement, except as otherwise amended or modified herein, shall continue in
full force and effect. This Amendment shall be null and void and have no effect
in the event that the Employment Agreement does not become effective pursuant to
paragraph 16 of the Employment Agreement, as amended.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Employment Agreement as of the date first written above.
EPI TECHNOLOGIES, INC.
___________________________________
By:
Its:
___________________________________
BRUCE MAISON
3
<PAGE>
EXHIBIT 10.21
AMENDED AND RESTATED
1997 NON-QUALIFIED AND
INCENTIVE STOCK OPTION PLAN
OF
EPI TECHNOLOGIES, INC.
1. PURPOSE OF THE PLAN. This Amended and Restated 1997 Non-Qualified and
Incentive Stock Option Plan of EPI Technologies, Inc. adopted as of the ___ day
of November, 1997, is intended to encourage officers, other key employees and
consultants of the Company and its Subsidiaries to acquire or increase their
ownership of common stock of the Company on reasonable terms. The
opportunity so provided is intended to foster in participants a strong
incentive to put forth maximum effort for the continued success and growth of
the Company and its Subsidiaries, to aid in retaining individuals who put
forth such efforts, and to assist in attracting the best available
individuals to the Company and its Subsidiaries in the future.
2. DEFINITIONS. When used herein, the following terms shall have the
meaning set forth below:
2.1 "BOARD" means the Board of Directors of EPI Technologies, Inc.
2.2 "CHANGE IN CONTROL" means a change in control of the company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act (as in
effect on the date the Plan is adopted by the Board), whether or not the
Company is then subject to such reporting requirement; provided, that,
without limitation, such a Change in Control shall be deemed to have
occurred if:
(a) any "person" (as defined in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3
<PAGE>
under the Exchange Act), directly or indirectly, of securities of the
Company representing forty percent (40%) or more of the combined
voting power of the Company's then outstanding securities other than
either (i) in connection with a transaction or series of related
transactions approved by the Board (which Board must include at least
a majority who were Continuing Directors and which transaction or
series of related transactions must have been approved by a majority
of the Continuing Directors) or (ii) as the result of the reduction in
the number of issued and outstanding Shares pursuant to a transaction
or series of related transactions approved by the Board (which Board
must include at least a majority who were Continuing Directors and
which transaction or series of related transactions must have been
approved by a majority of the Continuing Directors); provided,
however, that a Change in Control shall not be deemed to occur under
this clause (a) by reason of the acquisition of securities by the
Company or an employee benefit plan (or any trust funding such a plan)
maintained by the Company or solely by reason of the issuance of
securities directly by the Company; or
(b) during any period of two (2) consecutive years (not
including any period prior to the adoption of this Plan) there shall
cease to be majority of the Board comprised of Continuing Directors;
or
(c) (i) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining
<PAGE>
outstanding or by being converted into voting securities of the
surviving entity) at least eighty percent (80%) of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or
(ii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's
assets.
2.3 "CODE" means the Internal Revenue Code of 1986, as in effect at
the time of reference, or any successor revenue code which may hereafter be
adopted in lieu thereof, and any reference to any specific provisions of
the Code shall refer to the corresponding provisions of the Code as it may
hereafter be amended or replaced.
2.4 "COMMITTEE" means the Stock Option Committee of the Board or any
other committee appointed by the Board which is invested by the Board with
responsibility for the administration of the Plan.
2.5 "COMPANY" means EPI Technologies, Inc.
2.6 "CONTINUING DIRECTORS" means individuals who at the beginning of
any period of two (2) consecutive years (not including any period prior to
the adoption of this Plan) constitute the Board and any new director(s)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
so approved.
<PAGE>
2.7 "ERISA" means the Employee Retirement Income Security Act of
1974, as in effect at the time of reference, or any successor law which may
hereafter be adopted in lieu thereof, and any reference to any specific
provisions of ERISA shall refer to the corresponding provisions of ERISA as
it may hereafter be amended or replaced.
2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in
effect at the time of reference, or any successor law which hereafter be
adopted in lieu thereof, and any reference to any specific provisions of
the Exchange Act shall refer to the corresponding provisions of the
Exchange Act as it may hereafter be amended or replaced.
2.9 "FAIR MARKET VALUE" means with respect to the Shares, (i) the
closing price of the Shares on the principal stock exchange on which Shares
are then traded or admitted to trading, on the last business day prior to
the date on which the value is to be determined, (ii) if no sales take
place on such day on any such exchange, the average of the last reported
closing bid and asked prices on such day as officially quoted on any such
exchange, or (iii) if the Shares are not then listed or admitted to trading
on any such exchange, the average of the last reported closing bid and
asked prices on such day on the over-the-counter market. For purposes of
(i) above, the National Association of Securities Dealers National Market
System shall be deemed a principal stock exchange. Notwithstanding the
foregoing, with respect to Options granted on, or as of, the date of the
closing of the Company's initial public offering of Shares pursuant to a
registration statement under the Securities Act of 1933 which has been
filed with, and declared effective by, the Securities Exchange Commission,
Fair Market Value means the initial price at which Shares are sold in such
offering.
<PAGE>
2.10 "INCENTIVE STOCK OPTION" means an Option meeting the
requirements and containing the limitations and restrictions set forth in
Section 422 of the Code.
2.11 "NON-QUALIFIED STOCK OPTION" means an Option other than an
Incentive Stock Option.
2.12 "OPTION" means the right to purchase the number of Shares
specified by the Committee, at a price and for a term fixed by the
Committee, in accordance with the Plan, and subject to such other
limitations and restrictions as the Plan and the Committee may impose.
2.13 "OPTION AGREEMENT" means a written agreement in such form as may
be, from time to time, hereafter approved by the Committee, which shall be
duly executed by the Company and the Participant and which shall set forth
the terms and conditions of an Option under the Plan.
2.14 "PARENT" means any corporation, other than the employer
corporation, in an unbroken chain of corporations ending with the employer
corporation if, at the time of the granting of the Option, each of the
corporations other than the employer corporation owns stock possessing
fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
2.15 "PARTICIPANT" means officers (including officers who are members
of the Board), other key employees of the Company or any of the Company's
Subsidiaries, and, with respect to eligibility to receive awards of
Non-Qualified Stock Options, consultants
<PAGE>
to the Company or any of its Subsidiaries (excluding consultants who are
also non-employee directors of the Company).
2.16 "PLAN" means the Amended and Restated 1997 Non-Qualified and
Incentive Stock Option Plan of EPI Technologies, Inc.
2.17 "REGULATION T" means Part 220, chapter II, title 12 of the Code
of Federal Regulations, issued by the Board of Governors of the Federal
Reserve System pursuant to the Exchange Act, as amended from time to time,
or any successor regulation which may hereafter be adopted in lieu thereof.
2.18 "RULE 16b-3" means Rule 16b-3 of the General Rules and
Regulations of the Exchange Act, as in effect at the time of reference, or
any successor rules or regulations which may hereafter be adopted in lieu
thereof, and any reference to any specific provisions of Rule 16b-3 shall
refer to the corresponding provisions of Rule 16b-3 as it may hereafter be
amended or replaced.
2.19 "SHARES" means shares of the Company's $.01 par value common
stock or if, by reason of the adjustment provisions contained herein, any
rights under an Option under the Plan pertain to any other security, such
other security.
2.20 "SUBSIDIARY" or "SUBSIDIARIES" means any corporation or
corporations other than the employer corporation in an unbroken chain of
corporations beginning with the employer corporation if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.
<PAGE>
2.21 "SUCCESSOR" means the legal representative of the estate of a
deceased Participant or the person or persons who shall acquire the right
to exercise or receive an Option by bequest or inheritance or by reason of
the death of the Participant.
2.22 "TERM" means the period during which a particular Option may be
exercised.
3. STOCK SUBJECT TO THE PLAN. There will be reserved for use, upon the
exercise of Options to be granted from time to time under the Plan, an aggregate
of 235,000 Shares, which Shares may be, in whole or in part, as the Board shall
from time to time determine, authorized but unissued Shares, or issued Shares
which shall have been reacquired by the Company. Any Shares subject to issuance
upon exercise of Options but which are not issued because of a surrender, lapse,
expiration or termination of any such Option prior to issuance of the Shares
shall once again be available for issuance in satisfaction of Options.
4. ADMINISTRATION OF THE PLAN. The Board shall be invested with the
responsibility for the administration of the Plan, including prior to the
time at which the Plan becomes effective; provided, however, that the Board
may appoint a Committee which shall be invested with the responsibility for
administration of the Plan; provided, further, however, that at such time as
the Company becomes subject to the Exchange Act, the Board shall appoint a
Committee, which shall consist of not less than two outside directors as
defined in Treasury Regulation 1.162-27, which shall be invested with the
responsibility for the administration of the Plan. Subject to the provisions
of the Plan, the Board, or the Committee, if one has been appointed, shall
have full authority, in its discretion, to determine the Participants to whom
Options shall be granted, the number of Shares to be covered by each of the
Options, and the terms of any such Option; to amend or cancel Options
(subject to Section 18 of the Plan); to accelerate the vesting of Options; to
require the cancellation or surrender of any previously granted options or
other awards under this Plan or any other plans of the Company as a condition
to the granting of an Option; to interpret the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; and generally to
interpret and determine any and all matters whatsoever relating to the
administration of the Plan and the
<PAGE>
granting of Options hereunder. The Board may, from time to time, appoint
members to the Committee in substitution for or in addition to members
previously appointed and may fill vacancies, however caused, in the Committee.
The Committee shall select one of its members as its chairman and shall hold its
meetings at such times and places as it shall deem advisable. A majority of its
members shall constitute a quorum. Any action of the Committee may be taken by
a written instrument signed by all of the members, and any action so taken shall
be fully as effective as if it had been taken by a vote of a majority of the
members at a meeting duly called and held. The Committee shall make such rules
and regulations for the conduct of its business as it shall deem advisable and
shall appoint a Secretary who shall keep minutes of its meetings and records of
all action taken in writing without a meeting. No member of the Committee shall
be liable, in the absence of bad faith, for any act or omission with respect to
his or her service on the Committee.
5. PARTICIPANTS TO WHOM OPTIONS MAY BE GRANTED. Options may be granted
while the Plan is in effect to such of the Participants as the Committee, in its
discretion, shall determine; provided, however, that no Incentive Stock
Option may be granted to a Participant who is not an employee of the Company
or any of its Subsidiaries. In determining the Participants to whom Options
shall be granted and the number of Shares to be subject to purchase under
such Options, the Committee shall take into account the duties of the
respective Participants, their present and potential contributions to the
success of the Company and its Subsidiaries, and such other factors as the
Committee shall deem relevant in connection with accomplishing the purposes
of the Plan; provided, however, no Participant may receive Options to acquire
more than 150,000 Shares in any one calendar year. No Option shall be
granted to any member of the Committee so long as his or her membership on
the Committee continues or to any member of the Board who is not also an
officer or key employee of the Company or any Subsidiary.
<PAGE>
6. BASIC OPTION TERMS.
6.1 TYPES OF OPTIONS. Options granted under the Plan may be (i)
Incentive Stock Options, (ii) Non-Qualified Stock Options, or (iii) a
combination of the foregoing. The Option Agreement shall designate whether
an Option is an Incentive Stock Option or a Non-Qualified Stock Option and
separate Option Agreements shall be issued for each type of Option when a
combination of an Incentive Stock Option and a Non-Qualified Stock Option
is granted on the same date to the same Participant. Any Option which is
designated as a Non-Qualified Stock Option shall not be treated by the
Company or the Participant to whom the Option is granted as an Incentive
Stock Option for Federal income tax purposes.
6.2 OPTION PRICE. Unless otherwise determined by the Committee, the
option price per share of any Non-Qualified Stock Option granted under the
Plan shall not be less than the Fair Market Value of the Shares covered by
the Option on the date the Option is granted. The option price per share
of any Incentive Stock Option granted under the Plan shall not be less than
the Fair Market Value of the Shares covered by the Option on the date the
Option is granted.
Notwithstanding anything herein to the contrary, in the event an
Incentive Stock Option is granted to a Participant who, at the time such
Incentive Stock Option is granted, owns, as defined in Section 424 of the
Code, stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of:
(i) the Company; or
(ii) if applicable, a Subsidiary; or
(iii) if applicable, a Parent,
<PAGE>
then the option price per share of any Incentive Stock Option granted to
such Participant shall not be less than one hundred ten percent (110%) of
the Fair Market Value of the Shares covered by the Option on the date the
Option is granted.
6.3 TERM OF OPTIONS. Options granted hereunder shall be exercisable
for a Term of not more than ten (10) years from the date of grant thereof,
but shall be subject to earlier termination as hereinafter provided. Each
Option Agreement issued hereunder shall specify the Term of the Option,
which Term shall be determined by the Committee, in accordance with its
discretionary authority hereunder.
Notwithstanding anything herein to the contrary, in the event an
Incentive Stock Option is granted to a Participant who, at the time such
Incentive Stock Option is granted, owns, as defined in Section 424 of the
Code, stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of:
(i) the Company; or
(ii) if applicable, a Subsidiary; or
(iii) if applicable, a Parent,
then such Incentive Stock Option shall not be exercisable more than five
(5) years from the date of grant thereof, but shall be subject to earlier
termination as hereinafter provided.
7. LIMIT ON FAIR MARKET VALUE OF INCENTIVE STOCK OPTIONS. No Participant
may be granted an Incentive Stock Option hereunder to the extent that the
aggregate fair market value (such fair market value being determined as of the
date of grant of the option in question) of the stock with respect to which
incentive stock options are first exercisable by such Participant during any
calendar year (under all such plans of the Participant's employer corporation,
its Parent, if any, and its Subsidiaries, if any) exceeds One Hundred Thousand
Dollars ($100,000). For purposes of
<PAGE>
the preceding sentence, options shall be taken into account in the order in
which they were granted. Any Option granted under the Plan which is intended to
be an Incentive Stock Option, but which exceeds the limitation set forth in this
Section 7, shall be a Non-Qualified Stock Option.
8. DATE OF GRANT. Unless otherwise determined by the Committee, the date
of grant of an Option granted hereunder shall be the date on which the Committee
acts in granting the Option.
9. EXERCISE OF RIGHTS UNDER OPTIONS.
9.1 NOTICE OF EXERCISE. A Participant entitled to exercise an
Option may do so by delivery to the Company of a written notice to that
effect specifying the number of Shares with respect to which the Option is
being exercised and any other information the Committee may require. The
notice shall be accompanied by payment in full of the purchase price of any
Shares to be purchased, which payment shall be made in cash or, with the
Committee's approval (which in the case of Incentive Stock Options must be
given at the date of grant), in Shares valued at Fair Market Value at the
time of exercise or a combination thereof. No Shares shall be issued upon
exercise of an Option until full payment has been made therefor. All
notices or requests provided for herein shall be delivered to the Chief
Financial Officer of the Company, or such other person that the Committee
may designate. No fractional Shares shall be issued.
9.2 CASHLESS EXERCISE PROCEDURES. The Company, in its sole
discretion, may establish procedures whereby a Participant, subject to the
requirements of Rule 16b-3, Regulation T, federal income tax laws, and
other federal, state and local tax and securities laws, can exercise an
Option or a portion thereof without making a direct payment of the option
price to the Company; provided, however, that these cashless exercise
procedures
<PAGE>
shall not apply to Incentive Stock Options which are outstanding on the
date the Company establishes such procedures unless the application of such
procedures to such Options is permitted pursuant to the Code and the
regulations thereunder without affecting the Options' qualification under
Code Section 422 as Incentive Stock Options. If the Company so elects to
establish a cashless exercise program, the Company shall determine, in its
sole discretion, and from time to time, such administrative procedures and
policies as it deems appropriate and such procedures and policies shall be
binding on any Participant wishing to utilize the cashless exercise
program.
10. OTHER OPTION TERMS AND CONDITIONS. Each Option and each Option
Agreement evidencing the grant of an Option may contain such other terms and
conditions not inconsistent herewith as shall be approved by the Committee.
11. RIGHTS OF OPTION HOLDER. The holder of an Option shall not have any
of the rights of a stockholder with respect to the Shares subject to purchase
under the holder's Option, except to the extent that one or more certificates
for such Shares shall be issuable to the holder upon the due exercise of the
Option and the payment in full of the purchase price therefor.
12. NONTRANSFERABILITY OF OPTIONS. An Option shall not be transferable,
other than: (a) by will or the laws of descent and distribution, and an Option
may be exercised, during the lifetime of the holder of the Option, only by the
holder or in the event of death, the holder's Successor, or in the event of
disability, the holder's personal representative, or (b) pursuant to a qualified
domestic relation order, as defined in the Code or ERISA or the rules
thereunder; provided, however, that an Incentive Stock Option may not be
transferred pursuant to a qualified domestic relations order unless the transfer
is otherwise permitted pursuant to the Code and the
<PAGE>
regulations thereunder without affecting the Option's qualification under Code
Section 422 as an Incentive Stock Option.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes
in all of the outstanding Shares by reason of stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations, or exchanges of
shares, separations, reorganizations or liquidations, or similar events, or in
the event of extraordinary cash or non-cash dividends being declared with
respect to the Shares, or similar transactions or events, the number and class
of Shares available under the Plan in the aggregate, the number and class of
Shares subject to Options theretofore granted, applicable purchase prices and
all other applicable provisions, shall, subject to the provisions of the Plan,
be equitably adjusted by the Committee (which adjustment may, but need not,
include payment to the holder of an Option, in cash or in shares, in an amount
equal to the difference between the price at which such Option may be exercised
and the then current fair market value of the Shares subject to such Option as
equitably determined by the Committee). The foregoing adjustment and the manner
of application of the foregoing provisions shall be determined by the Committee
in its sole discretion. Any such adjustment may provide for the elimination of
any fractional Share which might otherwise become subject to an Option.
14. CHANGE IN CONTROL. Notwithstanding anything to the contrary in the
Plan or in any Option Agreement, in the case of a Change in Control of the
Company, each Option granted under the Plan shall terminate ninety (90) days
after the occurrence of such Change in Control, and an Option holder shall have
the right, commencing at least five (5) days prior to such Change in Control and
subject to any other limitation on the exercise of such Option in effect on the
date of exercise, to immediately exercise any Option in full, without regard to
any vesting limitations, to the extent it shall not have been previously
exercised.
<PAGE>
15. FORM OF OPTIONS. Nothing contained in the Plan nor any resolution
adopted or to be adopted by the Board or by the stockholders of the Company
shall constitute the granting of an Option. An Option shall be granted
hereunder only by action taken by the Committee in granting an Option. Whenever
the Committee shall designate a Participant for the receipt of an Option, the
Chief Financial Officer of the Company, or such other person as the Committee
shall appoint, shall forthwith send notice thereof to the Participant, in such
form as the Committee shall approve, stating the number of Shares subject to the
Option, its Term, and the other terms and conditions thereof. The notice shall
be accompanied by a written Option Agreement, in such form as may from time to
time hereafter be approved by the Committee, which shall have been duly executed
by or on behalf of the Company. If the surrender of previously issued options
or awards under this Plan or any other plans of the Company is made a condition
of the grant, the notice shall set forth the pertinent details of such
condition. Execution by the Participant to whom such Option is granted of said
Option Agreement in accordance with the provisions set forth in this Plan shall
be a condition precedent to the exercise of any Option.
16. TAXES.
16.1 RIGHT TO WITHHOLD REQUIRED TAXES. The Company shall have the
right to require a person entitled to receive Shares pursuant to the
exercise of an Option under the Plan to pay the Company the amount of any
taxes which the Company is or will be required to withhold with respect to
such Shares before the certificate for such Shares is delivered pursuant to
the Option. Furthermore, the Company may elect to deduct such taxes from
any other amounts then payable in cash or in shares or from any other
amounts payable any time thereafter to the Participant. If the Participant
disposes of Shares acquired pursuant to an Incentive Stock Option in any
transaction considered to be a
<PAGE>
disqualifying transaction under Sections 421 and 422 of the Code, the
Participant shall notify the Company of such transfer and the Company shall
have the right to deduct any taxes required by law to be withheld from any
amounts otherwise payable then or at any time thereafter to the
Participant.
16.2 PARTICIPANT ELECTION TO WITHHOLD SHARES. Subject to Committee
approval (which in the case of Incentive Stock Options must be given at the
time of grant), a Participant may satisfy his or her tax liability with
respect to the exercise of an Option by having the Company withhold Shares
otherwise issuable upon exercise of the Option; provided, however, that if
a Participant is subject to Section 16(b) of the Exchange Act at the time
the Option is exercised, such election must satisfy the requirements of
Rule 16b-3.
17. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years from
the date the Plan becomes effective, and an Option shall not be granted under
the Plan after that date although the terms of any Option may be amended at any
date prior to the end of its Term in accordance with the Plan. Any Options
outstanding at the time of termination of the Plan shall continue in full force
and effect according to the terms and conditions of the Option and the Plan.
18. AMENDMENT OF THE PLAN. The Plan may be amended at any time and from
time to time by the Board, but no amendment without the approval of the
stockholders of the Company shall be made if stockholder approval under
Section 422 of the Code, Section 162(m) of the Code or Rule 16b-3 would be
required. Notwithstanding the discretionary authority granted to the Committee
in Section 4 of the Plan, no amendment of the Plan or any Option granted under
the Plan shall impair any of the rights of any holder, without the holder's
consent, under any Option theretofore granted under the Plan.
<PAGE>
19. DELIVERY OF SHARES ON EXERCISE. Delivery of certificates for Shares
pursuant to the exercise of an Option may be postponed by the Company for such
period as may be required for it with reasonable diligence to comply with any
applicable requirements of any federal, state or local law or regulation or any
administrative or quasi-administrative requirement applicable to the sale,
issuance, distribution or delivery of such Shares. The Committee may, in its
sole discretion, require a Participant to furnish the Company with appropriate
representations and a written investment letter prior to the exercise of an
Option or the delivery of any Shares pursuant thereto.
20. FEES AND COSTS. The Company shall pay all original issue taxes on the
exercise of any Option granted under the Plan and all other fees and expenses
necessarily incurred by the Company in connection therewith.
21. EFFECTIVENESS OF THE PLAN. The Plan, which was approved by the
Board on ____________, 1997, amends and restates the 1997 Non-Qualified and
Incentive Stock Option Plan of the Company that was approved by the Board on
October 1, 1997. The Plan shall become effective on the date of the
closing of the Company's initial public offering of Shares pursuant to a
registration statement under the Securities Act of 1933, which has been filed
with, and declared effective by, the Securities Exchange Commission. The
Plan shall thereafter be submitted to the Company's stockholders for approval
and unless the Plan is approved by the affirmative votes of the holders of
shares having a majority of the voting power of all shares represented at a
meeting duly held in accordance with Delaware law within twelve (12) months
after being approved by the Board, the Plan and all Options granted under it
shall be void and of no force and effect.
22. OTHER PROVISIONS. As used in the Plan, and in Option Agreements and
other documents prepared in implementation of the Plan, references to the
masculine pronoun shall be deemed to refer to the feminine or neuter, and
references in the singular or the plural shall refer to
<PAGE>
the plural or the singular, as the identity of the person or persons or entity
or entities being referred to may require. The captions used in the Plan and in
such Option Agreements and other documents prepared in implementation of the
Plan are for convenience only and shall not affect the meaning of any provision
hereof or thereof.
23. DELAWARE LAW TO GOVERN. This Plan shall be governed by and construed
in accordance with the laws of the State of Delaware.
<PAGE>
Exhibit 10.22
LOAN AND SECURITY AGREEMENT
among
NATIONAL BANK OF CANADA
and
EPI TECHNOLOGIES, INC.
ENVIRONMENTAL PURIFICATION INDUSTRIES COMPANY
January __, 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made and entered into
by and among NATIONAL BANK OF CANADA ("Bank"), EPI TECHNOLOGIES, INC., f/k/a
Environmental Purification Industries, Inc. ("EPI") and ENVIRONMENTAL
PURIFICATION INDUSTRIES COMPANY ("EPIC"; and together with EPI, sometimes will
be referred to collectively as "Borrowers" and individually as a "Borrower").
RECITALS
A. EPI is indebted to Bank pursuant to the terms of (i) a term note dated
February 29, 1996 in the principal amount of $300,000 (the "EPI First Term
Note"), executed by EPI and Meridian National Corporation ("MNC") pursuant to
the provisions of the Loan and Security Agreement, dated December 6, 1989,
entered into by and among MNC, Ottawa River Steel Co., National Metal
Processing, Inc., Interstate Metal Processing, Inc., Precise Pac, Inc. and
Meridian Environmental Services, Inc. and Bank, as amended (the "MNC Loan
Agreement"), and (ii) a term note dated July 25, 1996 in the principal amount of
$350,000 (the "EPI Second Term Note") executed by EPI and MNC pursuant to the
provisions of the MNC Loan Agreement.
B. Borrowers are indebted to Bank pursuant to a term note dated November
4, 1996, in the principal amount of $1,700,000 (the "EPI Third Term Note";
which, together with the EPI First Term Note and the EPI Second Term Note, as
each may be amended, modified or supplemented from time to time, together with
all notes issued in substitution thereof or replacement thereof, are referred to
collectively herein as the "EPI Term Notes") executed by Borrowers and MNC
pursuant to the provisions of the MNC Loan Agreement.
C. The EPI First Term Note was amended by Amendment Number One to Term
Note (EPI First Term Note), and the EPI Second Term Note was amended by
Amendment Number One to Term Note (EPI Second Term Note), each dated November 4,
1996.
D. Borrowers have requested that Bank provide Borrowers with a credit
facility for the purpose of (i) refinancing the EPI Term Notes, and (ii)
otherwise providing Borrowers with working capital financing.
E. Subject to the terms and conditions set forth in this Agreement, Bank
has agreed to provide such financing to Borrowers pursuant to the provisions of
this Agreement.
PROVISIONS
NOW, THEREFORE, in consideration of the foregoing and the provisions set
forth in this Agreement, it is agreed as follows:
<PAGE>
1. GENERAL
1.1 DEFINED TERMS. When used herein, the following terms shall have the
following meanings:
ACCOUNT DEBTOR - Any Person who is or may become obligated to a
Borrower under, with respect to or on account of an Account.
ACCOUNTS - As to each Borrower, all of such Borrower's accounts,
contracts, contract rights, notes, bills, drafts, acceptances, general
intangibles, choses in action, and all other debts, obligations and
liabilities in whatever form, owing to such Borrower from any Person,
whether now existing or hereafter arising, now or hereafter received by or
belonging or owing to such Borrower, for goods sold or leased or for
services rendered, whether or not earned by performance and whether or not
evidenced by contracts, instruments or documents, or however otherwise the
same may have been established or created, all guarantees and security
therefor, all right, title and interest of such Borrower in the merchandise
or services which gave rise thereto including, without limitation, the
rights of reclamation and stoppage in transit, and all rights of an unpaid
seller of merchandise or services.
AFFILIATE - With respect to each Borrower, each other Borrower, any
Subsidiary or executive officer or director of any Borrower or any other
Person:
(A) Which, directly or indirectly, through one or more
intermediaries controls, or is controlled by, or is under common
control with, any Borrower;
(B) Which owns or controls, on an aggregate basis, including all
beneficial ownership and ownership or control as a trustee, guardian
or other fiduciary, at least ten percent (10%) or more of any class of
the Voting Stock of any Borrower; or
(C) Ten percent (10%) or more of the Voting Stock (or in the
case of a Person which is not a corporation, ten percent (10%) or more
of the equity interest) of which is beneficially owned or held by any
Borrower.
The term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of Voting Stock, by contract, or
otherwise.
BANKRUPTCY LAWS - All applicable statutes, rules, regulations and
other forms of law, federal, state or otherwise including, without
limitation, the provisions of Title 11 of the United States Code, in each
instance as in effect from time to time, relating to the bankruptcy,
insolvency, liquidation or reorganization of Persons or the modification or
alteration of the rights of creditors.
BANK'S ACCOUNT - As defined in Section 5.1(C) of this Agreement.
2
<PAGE>
BASE RATE - The prime rate for commercial loans, as announced publicly
by Bank from time to time as its United States prime rate or its corporate
base rate or other designation which may replace its prime rate, which rate
may not be the lowest or best rate offered by Bank.
CAPITAL EXPENDITURES - As to each Borrower, amounts expended or which
such Borrower becomes obligated to expend, without regard to the manner in
which such amounts or the instrument pursuant to which they are made are
characterized by any Person, (A) for the acquisition, construction or
installation of properties that are to be included as fixed assets on such
Borrower's books, (B) for the lease of any property that would be
capitalized under GAAP, (C) for the incurring of any other capitalized cost
or (D) for any additions to or replacements of any of the foregoing.
CASH COLLATERAL. Deposits of cash or other funds on deposit in any
savings account or certificate(s) of deposit with Bank, the full amount of
which is intended to and shall be held as additional Collateral for the
repayment of the Term Loan, the Revolving Loan, and all other Obligations
of Borrowers to Bank, and to which Bank shall have an express right of
setoff, for which Borrowers hereby appoint Bank and any of its officers as
Borrowers' attorney-in-fact with full authority to withdraw or otherwise
dispose of the Cash Collateral as may be provided in this Agreement.
CODE - The Uniform Commercial Code as adopted and in force in the
State of Ohio as from time to time in effect.
COLLATERAL - The Fixed Collateral, Revolving Collateral, Cash
Collateral, Premises, and all other Property of Borrowers now or at any
time or times hereafter subject to a Lien in favor of Bank.
COLLATERAL LOCATION - As to each Borrower, such Borrower's principal
business location, and all states and counties where any Collateral is
located as of the date hereof, including, without limitation, the locations
identified on EXHIBIT A attached to this Agreement.
CONTRACT RATE - A fluctuating rate equal to one (1) percentage point
above the Base Rate.
CREDIT DOCUMENTS - This Agreement, the Notes, and all other
agreements, instruments and documents (including, without limitation, all
assignments, security agreements, lien waivers, subordinations, guarantees,
powers of attorney, and consents) heretofore, now, or hereafter executed by
any Borrower and/or delivered to Bank with respect to the transactions
contemplated by this Agreement, in each instance as the foregoing may be
amended from time to time.
DEBT INSTRUMENTS - As to each Borrower, any contract, agreement,
instrument, or other document or arrangement under which such Borrower has
(A) any indebtedness, obligation, or liability (including, without
limitation, any contingent liability under any
3
<PAGE>
guaranty) for borrowed money or for the deferred portion of the purchase
price of any capital asset or for other capital financing, or (B) the
right or obligation to incur any such indebtedness, obligation or
liability.
DEFAULT RATE - A fluctuating rate of interest equal to two (2)
percentage points above the Contract Rate.
DEPOSITORY ACCOUNT - As defined in Section 5.1(A) of this Agreement.
DEPOSITORY AGREEMENT - As defined in Section 5.1(A) of this Agreement.
DEPOSITORY BANK - As defined in Section 5.1(A) of this Agreement.
ELIGIBLE ACCOUNTS - Accounts arising out of the completed bona-fide
sale or lease of goods or rendition of services by a Borrower in the
ordinary course of such Borrower's business and in accordance with the
terms and conditions of all purchase orders, contracts or other documents
relating thereto, which are subject to Bank's perfected security interest
and no other Lien (other than Permitted Liens), and for a liquidated amount
maturing as stated in an invoice or other documentary evidence relating
thereto which has been provided, and is in form satisfactory, to Bank;
provided, however, that, unless Bank otherwise agrees, no such Account
shall be an Eligible Account if:
(A) The Account arises out of a sale made by a Borrower to an
Affiliate of such Borrower or to a Person controlled by an Affiliate
of such Borrower;
(B) The Account is due or unpaid more than ninety (90) days
after the invoice date thereof;
(C) The Account Debtor claims any right of credit, allowance or
adjustment with respect to such Account, except a discount allowed for
prompt payment, or such Account is otherwise disputed or contingent in
any respect, but only to the extent the Account Debtor claims any such
right of credit, allowance, or adjustment;
(D) The Account Debtor has returned any of the goods from the
sale of which the Account arose, but only to the extent of the amount
of the returned goods of such Account Debtor;
(E) There exists any facts, events or circumstances which Bank
determines in its reasonable discretion may be or would be reasonably
expected to impair the validity, collectibility or enforcement of such
Account or would reasonably be expected to reduce the amount payable
thereunder from the face value of the invoice related thereto, but
only to the extent of the amount by which the amount payable
thereunder is expected to be reduced;
4
<PAGE>
(F) To the extent that the Account Debtor also is a creditor of
any Borrower or to the extent that the Account otherwise is or would
be reasonably expected to become subject to any right of setoff or
offset by the Account Debtor, then the amount of the Account subject
to the right of such setoff or offset shall not be an Eligible
Account;
(G) The Account Debtor has commenced a voluntary case under any
Bankruptcy Laws, or made an assignment for the benefit of creditors,
or a decree or order for relief has been entered by a court having
jurisdiction in the premises in respect of the Account Debtor in an
involuntary case under any Bankruptcy Laws or any other petition or
other application for relief under any Bankruptcy Laws has been filed
against the Account Debtor, or the Account Debtor has failed,
suspended business, ceased to be solvent, or consented to or suffered
a receiver, trustee, liquidator, or custodian to be appointed for it
or for all or a significant portion of its assets or affairs;
(H) The Account arises out of a sale to an Account Debtor
outside the United States unless the sale is made to an Account
Debtor located in Canada or is made pursuant to a letter of credit,
guaranty, or acceptance terms, in each case acceptable to Bank in its
reasonable discretion;
(I) The Account arises out of a sale to an Account Debtor on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval,
consignment or any other repurchase or return basis or is evidenced by
chattel paper;
(J) The Account Debtor is the United States of America or any
department, agency or instrumentality thereof, unless the right to
payment of such Account is assigned to Bank, pursuant to the
Assignment of Claims Act of 1940, as amended;
(K) The goods giving rise to such Account have not been shipped
and delivered to and accepted by the Account Debtor or the services
giving rise to such Account have not been fully performed by Borrower
and accepted by the Account Debtor or the Account otherwise does not
represent a final sale; or
(L) The Account, when added to the aggregate balance of all
other Accounts of the Account Debtor, exceeds a credit limit
determined by Bank, in its reasonable discretion, to the extent such
Account exceeds such limit.
ERISA - The Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules and regulations from time to time
promulgated thereunder.
EVENT OF DEFAULT - As defined in Section 10.1 of this Agreement.
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FINANCIAL STATEMENTS - The financial statements of EPI and its
Subsidiaries heretofore provided to Bank and the financial statements of
EPI and its Subsidiaries subsequently delivered to Bank during the term
hereof as otherwise provided herein.
FIXED COLLATERAL - Borrowers' fixed assets (other than real property)
including, without limitation, all machinery, equipment, furniture,
furnishings, fixtures, tools, dies, molds, parts, material handling
equipment, supplies and motor vehicles (titled and untitled) of every kind
and description, now or hereafter owned by Borrowers, or in which Borrowers
may have or may hereafter acquire any interest, wheresoever located, and
all proceeds of the foregoing, including, without limitation, the items of
Fixed Collateral described in EXHIBIT B attached to this Agreement.
[Excepted from the Fixed Collateral is the machinery and equipment securing
the mortgage note payable to Society Bank & Trust, Trustee ("Society"),
pursuant to an Indenture with the Toledo-Lucas County Port Authority, which
has since been assigned by Society to Mellon Bank, F.S.B.] [SUBJECT TO
REVIEW OF PORT AUTHORITY DOCUMENTS].
GAAP - Generally accepted accounting principles, consistently applied,
which are in effect from time to time.
GUARANTY - All obligations of any Person (the "guarantor") which
guarantee or assure the payment of, or performance with respect to, any
indebtedness, liability, or other obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly including,
without limitation, obligations incurred by such guarantor through an
agreement, contingent or otherwise:
(A) To purchase such indebtedness, liability or obligation or
any Property or assets constituting security therefor;
(B) To advance or supply funds (a) for the purchase or payment
of such indebtedness, liability or obligation, or (b) to maintain
working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such
indebtedness, liability or obligations;
(C) To lease Property or to purchase any Security or other
Property or services primarily for the purpose of assuring the owner
of such indebtedness, liability or obligation of the ability of the
primary obligor to make payment of the indebtedness, liability or
obligations; or
(D) Otherwise to assure the owner of the indebtedness, liability
or obligation of the primary obligor against loss in respect thereof.
INDEBTEDNESS - As to each Borrower, such Borrower's present and future
obligations, liabilities, debts, claims and indebtedness, contingent, fixed
or otherwise, however evidenced, created, incurred, acquired, owing or
arising (whether under written or oral agreement, by operation of law or
otherwise) including, without limitation, (A) any obligations or
liabilities of any Person which are secured by any Lien (other than
Permitted
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Liens) upon Property of such Borrower, even though such Borrower has not
assumed or otherwise become liable for the payment thereof, (B) any
obligations or liabilities created or arising under any lease (including
capitalized leases) or under any conditional sales contract or other title
retention agreement with respect to Property used or acquired by such
Borrower, even though the rights and remedies of the lessor, seller or
lender are limited to repossession, (C) any obligations or liabilities
arising under any lease or other contractual arrangement relating to
security deposits, advance payments or other prepaid funds in the hands of
or held by such Borrower subject to return or refund to any Person, (D) all
unfunded pension fund obligations and liabilities, and (E) deferred taxes
of any nature.
INVENTORY - As to each Borrower, all inventory now owned or leased or
hereafter acquired or leased by such Borrower including, without
limitation, all goods, merchandise, work-in-process, raw materials,
finished goods, inventory held for renting to other Persons and all other
materials, supplies, and tangible personal property of any kind, nature or
description held for sale or lease or for display or demonstration, or
furnished or to be furnished under contracts of service or which are or
which might be used or consumed in connection with the manufacturing,
packing, shipping, advertising, selling, leasing, or furnishing of such
goods, merchandise or other personal property and all documents of title or
other documents pertaining thereto.
LIEN - Any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract including, without
limitation, the security interest or lien arising from a security
agreement, mortgage, encumbrance, pledge, conditional sale, trust receipt
or assignment, lease, consignment, or bailment for security purposes.
LOCKBOX - As defined in Section 5.1(B) of this Agreement.
MATERIAL ADVERSE EFFECT - As to any events, occurrences, or
conditions, if the result thereof, either singly or in the aggregate, would
have a material and adverse effect on (1) the Property, business,
operations, prospects, profitability or condition (financial or otherwise)
of any Borrower, (2) the ability of any Borrower to repay the Obligations
as and when due or (3) Bank's Lien on any Collateral or the priority
thereof.
MATERIAL AGREEMENTS - Those contracts, agreements, documents, or other
arrangements required to be disclosed under the provisions of Section
6.1(C) of this Agreement.
MORTGAGES - Mortgages or deeds of trust, in each instance in form
satisfactory to Bank, creating mortgage liens on the Premises (subject to
the liens and encumbrances described in the Mortgages) in favor of Bank to
secure the Obligations.
NOTES - The Promissory Note, the Term Note and other notes or other
instruments evidencing Borrowers' obligation to repay any Obligations.
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OBLIGATIONS - All debts, liabilities, and obligations of Borrowers to
Bank under this Agreement and also any and all other debts, liabilities,
and obligations of Borrowers to Bank of every kind and description, direct
or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising including, without limiting the generality of the
foregoing, any debt, liability, or obligation of Borrowers to Bank under
any guaranty or to any other Person which Bank may have obtained by
assignment or otherwise and all interest, fees, charges, and expenses which
at any time may be payable by Borrowers to Bank pursuant to any of the
Credit Documents or otherwise, and all costs and expenses actually incurred
including reasonable attorney fees arising from or relating to claims or
causes of action made or filed against Bank by third parties as a result of
Borrowers' actions or inactions.
PENSION PLAN - Any pension plan, retirement payment plan,
profit-sharing plan, defined benefit or contribution plan, or "employee
pension benefit plan" as defined in Section 3(2) of ERISA that is
maintained or contributed to by Borrowers.
PERMITTED INDEBTEDNESS - As defined in Section 7.2(C) of this
Agreement.
PERMITTED LIENS - As defined in Section 7.2(G) of this Agreement.
PERSON - An individual, partnership, joint venture, corporation,
trust, or unincorporated organization, or a government or agency or
political subdivision thereof.
PREMISES - Those parcels of real property described on EXHIBIT C
attached to this Agreement including all improvements thereon and all
tenements, hereditaments, appurtenances, and other rights and estates of
any Borrower therein or thereto.
PROMISSORY NOTE - The promissory note to be executed by Borrowers in
the form attached as EXHIBIT D to this Agreement (with such changes or
modifications, if any, to which Bank and Borrowers may agree) evidencing
the revolving credit loan made by Bank pursuant to Section 2.1 of this
Agreement, together with all amendments thereto and all notes issued in
substitution therefor or replacement thereof.
PROPERTY - Any kind of property or asset, whether real, personal, or
mixed, or tangible or intangible, or any interest including, without
limitation, any leasehold interest held in any such properties or assets.
RESTRICTED INVESTMENT - As defined in Section 7.2(Q) of this
Agreement.
REVOLVING COLLATERAL - All of Borrowers'
(1) Inventory;
(2) Contract rights and general intangibles including, without
limitation, goodwill, trademarks, trademark applications, trade
styles, trade names, patents,
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patent applications, and deposit accounts whether now owned or
hereafter created or acquired;
(3) Accounts and other receivables, together with all customer
lists, original books and records, ledger and account cards, computer
tapes, discs, printouts and records, whether now in existence or
hereafter created; and
(4) Documents, warehouse receipts, instruments, and chattel
paper, whether now owned or hereafter created.
REVOLVING LOAN - As defined in Section 2.1(A) of this Agreement.
REVOLVING LOAN BORROWING BASE - Subject to the provisions of Section
2.1(B) of this Agreement, an amount equal to the lesser of:
(1) eighty-five percent (85%) of the unpaid face amount of
Eligible Accounts (less the maximum discounts, credits and allowances
which may be taken by or granted to Account Debtors in connection
therewith); or
(2) the Revolving Loan Credit Limit.
REVOLVING LOAN CREDIT LIMIT - An amount equal to One Million Five
Hundred Thousand Dollars ($1,500,000).
SECURITY - As defined in Section 2(1) of the Securities Act of 1933,
as amended.
SUBSIDIARY - As to a Borrower, any corporation of which 50% or more of
the Voting Stock is at any time, directly or indirectly, owned by such
Borrower and/or one or more of its Subsidiaries.
TERM LOAN - As defined in Section 2.2(A) of this Agreement.
TERM NOTE - The term note to be executed by Borrowers in the form
attached as EXHIBIT E to this Agreement (with such changes or
modifications, if any, to which Bank may agree) evidencing the term loan
made by Bank pursuant to Section 2.2 of this Agreement, together with
all amendments thereto and all notes issued in substitution or
replacement thereof.
UNUSED LINE FEE - As defined in Section 2.4 hereof.
VOTING STOCK - Securities of any class or classes of a corporation
which, at the time of reference thereto, entitles the holders to elect a
majority of the corporate directors.
1.2 ACCOUNTING TERMS. Any accounting terms used in this Agreement which
are not otherwise specifically defined shall have the meanings customarily given
them in accordance with GAAP.
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1.3 OTHER TERMS. Unless the context indicates to the contrary, all other
terms contained in this Agreement shall have the meanings provided for by the
Code to the extent the same are used or defined therein.
1.4 USE OF PLURAL FORM. All definitions shall be equally applicable to
both the singular and plural forms of the defined terms.
2. LOANS AND ADVANCES
Subject to the provisions of this Agreement and each of the other Credit
Documents including, without limitation, those provisions of this Agreement or
the Credit Documents that provide that no loan advances need be made by Bank if,
at the date of request for loan advances hereunder by Borrowers, an Event of
Default, or event or condition which, with notice, lapse of time or both, would
constitute an Event of Default, then exists, Bank will provide the credit
facilities described in this Section 2 for the account of Borrowers.
2.1 REVOLVING LOAN
(A) ESTABLISHMENT OF REVOLVING LOAN. Subject to the provisions of
this Agreement, and subject at all times to Bank's right to the creation of
reserves for accrued but unpaid interest and otherwise as Bank deems
necessary or appropriate from time to time, Bank shall make such loans to
Borrowers consisting of advances made by Bank against the value of Eligible
Accounts (the "Revolving Loan"); provided, however, that the aggregate
unpaid principal of the Revolving Loan outstanding at any one time shall
not at any time exceed the Revolving Loan Borrowing Base.
(B) CHANGES IN REVOLVING LOAN BORROWING BASE. At any time and upon
providing Borrowers sixty (60) calendar days prior written notice, Bank may
increase or decrease the Revolving Loan Borrowing Base and each such
increase or decrease shall become effective thirty (30) calendar days after
such notice for the purpose of calculating the amounts which Bank may be
willing to advance or to allow to remain outstanding as revolving credit
advances; provided, however, Bank shall have the right upon three (3)
calendar days prior written notice to immediately increase or decrease the
Revolving Loan Borrowing Base if an Event of Default exists on the date of
such 3-day notice.
(C) PAYMENT. The Revolving Loan shall be payable in full upon the
earlier of an Event of Default or _______________, 1999, shall bear
interest as provided in Section 2.1(D) of this Agreement, and shall be
evidenced by, and repayable in accordance with, the Promissory Note, but in
the absence of the Promissory Note shall be evidenced by Bank's record of
disbursements and repayments, which record shall be subject to Section 2.6
hereof.
(D) INTEREST ON REVOLVING LOAN. The Revolving Loan shall bear
interest on the unpaid principal balance from time to time outstanding
until the date paid at a rate per annum equal to the Contract Rate, such
interest being payable monthly commencing
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______________, 199__ and continuing on the last day of each month so
long as any principal balance remains outstanding. Any increase or
decrease in the interest rate resulting from a change in the Base Rate
shall become effective on the date of such change. Interest shall be
computed on a 360-day year basis based upon the actual number of days
elapsed.
2.2. TERM LOAN
(A) ESTABLISHMENT OF TERM LOAN. Subject to the provisions of this
Agreement, Bank shall make a term loan to Borrowers in the amount of One
Million Six Hundred Twenty Thousand Dollars ($1,620,000; the "Term Loan").
(B) PAYMENT. The Term Loan shall bear interest as provided in
Subsection (C) of this Section 2.2 and shall be evidenced by, and repayable
in accordance with, the Term Note but, in the absence of the Term Note,
shall be evidenced by Bank's records of disbursements and repayments.
Without in any way limiting Bank's right at any time to demand payment of
the entire principal amount of the Term Loan, and all interest accrued
thereon, upon the occurrence of an Event of Default, which right is
absolute and unconditional, the principal balance of the Term Loan shall be
payable in sixty (60) monthly installments as follows: (a) fifty-nine (59)
equal monthly installments of Nineteen Thousand Dollars ($19,000.00) each,
commencing __________________ and continuing on the last day of each month
thereafter, and (b) a final payment of Four Hundred Ninety-Nine Thousand
Dollars ($499,000.00) due and payable on ______________________.
(C) INTEREST ON TERM LOAN. The Term Loan shall bear interest on the
unpaid principal balance from time to time outstanding until the date paid
at a rate per annum equal to the Contract Rate. Such interest shall be
payable monthly commencing ___________________, and continuing on the last
day of each month thereafter so long as any principal balance remains
outstanding. Any increase or decrease in the Contract Rate resulting from
a change in the Base Rate shall become effective on the date of such
change. Interest shall be computed on a 360-day year basis based upon the
actual number of days elapsed.
2.3 CONDITIONS APPLICABLE TO REQUESTS FOR REVOLVING LOAN. In addition to
all other conditions set forth in this Agreement, each request by Borrowers for
funds to be advanced to Borrowers under the Revolving Loan also shall be subject
to the following specific conditions:
(A) NOTICE OF REQUEST. The President or Chief Financial Officer of
EPI or any other Person designated in writing by the President or Chief
Financial Officer of EPI shall notify Bank in writing or telephonically of
Borrowers' request for funds to be advanced under the Revolving Loan, which
request shall be received by Bank not later than 1:00 p.m., Cleveland, Ohio time
and shall state the total amount of the funds to be advanced to Borrowers under
the Revolving Loan.
(B) BORROWING BASE CERTIFICATE. Borrowers' notice of request for a
Revolving Loan shall be accompanied by a duly completed and executed borrowing
base certificate in the
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form of EXHIBIT G-1 attached to this Agreement (the "Borrowing Base
Certificate"), demonstrating that the principal amount of the Revolving Loan,
when added to the aggregate principal amount of all Revolving Loans then
outstanding, shall not exceed the Revolving Loan Borrowing Base.
(C) BORROWERS' ACCEPTANCE OF PROCEEDS. The acceptance by any of the
Borrowers of the proceeds of any portion of the Revolving Loan, as of the date
of such acceptance, shall be deemed to constitute (1) a representation and
warranty by Borrowers to Bank that all conditions set forth in this Agreement
have been satisfied, and (2) a confirmation by Borrowers of the granting and
continuance of the Lien in favor of Bank created pursuant to this Agreement and
the Credit Documents.
(D) CONDITIONS TO MAKING REVOLVING LOAN. Bank shall not make any
advance to Borrowers under the Revolving Loan unless (1) Bank shall have
received Borrowers' written or telephonic request in the prescribed time as set
forth in Subsection (A) of this Section 2.3, (2) no Event of Default shall then
exist or, immediately after the making of any advance to Borrowers under the
Revolving Loan, would exist, (3) all provisions or covenants contained in
Section 7 of this Agreement shall have been complied with or performed, (4) all
of the Credit Documents shall be in full force and effect, (5) the
representations and warranties contained in Section 6 of this Agreement shall be
true and correct in all material respects as if made on and as of the date of
such borrowing except to the extent that any such representations or warranties
expressly relate to an earlier date, and (6) Bank shall not have made demand for
the payment of the Obligations or otherwise terminated the availability of any
portion of the Revolving Loan.
2.4 FEES AND ADDITIONAL CHARGES.
(A) CLOSING FEE. As additional consideration for the financing being
made available to Borrowers under the provisions of this Agreement, Borrowers
shall pay to Bank on the date of this Agreement a closing fee of $50,000 (the
"Closing Fee"). The Closing Fee shall be fully earned upon the execution of
this Agreement by Borrowers and Bank, and shall not be subject to proration or
rebate upon any prepayment of the loans under this Agreement or termination of
this Agreement for any reason.
(B) UNUSED LINE FEE. Until such time as the Revolving Loan is
terminated as provided in this Agreement and Borrowers' Obligations are paid
in full, Borrowers shall pay to Bank a per annum amount calculated based on a
360-day year equal to one-quarter of one percent (.250%) per annum of the
difference between the Revolving Loan Credit Limit for the preceding month
and the average daily outstanding principal balance of the Revolving Loan
during the preceding month (the "Unused Line Fee"). The Unused Line Fee
shall be due and payable in arrears on the first day of each month commencing
_____________________.
2.5 OPTIONAL CHARGE AGAINST REVOLVING LOAN. To the extent Borrowers do
not remit, when due, any payments of interest or, in the case of loans other
than the Revolving Loan, any payment of principal or any other payment required
to be made by Borrowers to the Bank pursuant to the terms of any of the Credit
Documents, the Bank may make such payment in the exercise of its reasonable
discretion by increasing the outstanding principal balance of the Revolving Loan
to
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prevent any such amount from becoming past due, but it is expressly
acknowledged and agreed by Borrowers that Bank shall be under no obligation
to do so.
2.6 ACCOUNTINGS. Any accounting rendered by Bank to Borrowers shall be
deemed correct and conclusively binding upon Borrowers unless (A) EPI notifies
Bank by certified mail, return receipt requested, within thirty (30) calendar
days after the date when each such accounting is mailed or otherwise delivered
to Borrowers, or (B) there exists a bona fide mistake in such accounting
regardless of which party discovers such mistake.
2.7 ALL ADVANCES TO CONSTITUTE ONE LOAN. The Revolving Loan, the Term
Loan and all other amounts owed by Borrowers to Bank under this Agreement,
whether or not evidenced by a promissory note, shall constitute one obligation
of Borrowers, secured by Bank's lien on and security interest in all of the
Collateral. Each Borrower shall be jointly and severally liable to Bank for all
of the Obligations, regardless of whether such Obligations arise as a result of
advances made directly to Borrowers, it being stipulated and agreed that all
monies advanced by Bank hereunder inure to the benefit of Borrowers, and that
Bank is relying on the joint and several liability of Borrowers in extending
credit and otherwise making advances hereunder.
2.8 EXCESS INTEREST. In no contingency or event whatsoever shall the
interest rate charged pursuant to the terms of this Agreement exceed the highest
rate permissible under any law which a court of competent jurisdiction shall, in
a final determination, deem applicable hereto. In the event that such a court
determines that Bank has received interest under this Agreement in excess of the
highest applicable rate, such excess interest shall be first applied to any
unpaid principal balance owed by Borrowers, and if the then remaining excess
interest is greater than the unpaid principal balance, Bank shall promptly
refund such excess interest to Borrowers.
2.9 REVIVAL. To the extent that Borrowers make a payment or payments to
Bank or to the extent Bank receives any payment or proceeds of the Collateral
for Borrowers' benefit, which payment or proceeds or any part thereof is
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver, or any other party under
any bankruptcy act, state or federal law, common law or equitable cause, then,
to the extent of such payment or proceeds received, the Obligations or part
thereof intended to be satisfied shall be revived and shall continue in full
force and effect, as if such payment or proceeds had not been received by Bank.
3. DEFAULT INTEREST
Upon and after the occurrence of an Event of Default, and during the
continuation thereof, the Obligations shall bear interest at the Default Rate,
calculated daily on a 360-day year basis, based upon the actual number of days
elapsed.
4. COLLATERAL; GENERAL TERMS
4.1 GRANT OF SECURITY INTEREST. To secure the prompt payment and
performance of the Obligations, and in addition to any other Collateral or Lien
securing the Obligations, Borrowers
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hereby grant to Bank a security interest in and to all of the following
Property of Borrowers, whether now owned or existing or hereafter acquired or
arising and wheresoever located:
(A) FIXED COLLATERAL. All Fixed Collateral.
(B) REVOLVING COLLATERAL. All Revolving Collateral.
(C) CASH COLLATERAL. All Cash Collateral.
(D) DEPOSITS; ACCOUNTS. Any and all deposits or other sums at any
time credited by or due from Bank to Borrowers, whether in a Depository
Account or other account, together with any and all instruments, documents,
policies and certificates of insurance, securities, goods, Accounts, choses
in action, general intangibles, chattel paper, cash or other Property, and
the proceeds of each of the foregoing, to the extent owned by Borrowers or
in which Borrowers have an interest and which now or hereafter are at any
time in the possession or control of Bank or in transit by mail or carrier
to or from Bank or in the possession of any Person acting in Bank's behalf,
without regard to whether Bank received the same in pledge, for
safekeeping, as agent for collection or transmission or otherwise or
whether Bank had conditionally released the same, and any and all balances,
sums, proceeds and credits of Borrowers with, and any claims of Borrowers
against, Bank.
(E) ACCESSIONS, PRODUCTS, AND PROCEEDS. All accessions to,
substitutions for, and all replacements, products, and proceeds of the
Property described in Subsections (A), (B), (C) and (D) above including,
without limitation, proceeds of insurance policies insuring such Property.
(F) BOOKS AND RECORDS. All books, records, and other property
(including, without limitation, credit files, programs, printouts, and
other materials and records) of Borrowers pertaining to any of the Property
described in Subsections (A), (B), (C), (D) or (E) above.
4.2 PERFECTION OF BANK'S SECURITY INTEREST IN COLLATERAL. Borrowers shall
execute such financing statements provided for by applicable law, and otherwise
take such other action and execute such assignments or other instruments or
documents, in each case as Bank may request, to evidence, perfect, or record
Bank's security interest in the Collateral. Borrowers hereby authorize Bank to
execute and file any such financing statement or continuation statement on
Borrowers' behalf. The parties acknowledge that a carbon, photographic, or
other reproduction of this Agreement shall be sufficient as a financing
statement to the extent permitted by law.
4.3 INSURANCE. Borrowers shall maintain and pay for insurance including,
without limitation, insurance upon all tangible Collateral wherever located, in
storage or in transit in vehicles including goods evidenced by documents,
covering casualty, hazards, public liability, and such other risks in such
amounts and with such insurance companies as shall in each instance be
reasonably satisfactory to Bank. Borrowers shall deliver certified copies of
such policies or insurance binders thereof to Bank with satisfactory
endorsements naming Bank as an additional insured and loss payee as its interest
may appear. In the event Borrowers deliver insurance binders
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to Bank, then Borrowers shall deliver the insurance policies relating thereto
to Bank within sixty (60) days of the date of this Agreement. Borrowers will
use reasonable efforts to have each policy of insurance or endorsement
contain a provision in substantially the same form or effect as set forth on
EXHIBIT F attached to this Agreement. Borrowers shall promptly deliver to
Bank true copies of all reports made to insurance companies. Upon the
occurrence and continuance of an Event of Default, Borrowers hereby
irrevocably make, constitute, and appoint Bank (and all officers, employees,
or agents designated by Bank) as Borrowers' true and lawful attorney-in-fact
and agent, with full power of substitution, such that Bank shall have the
right and authority to make, and adjust claims under such policies of
insurance (provided, however, that Bank shall consult with Borrowers prior to
finally making, settling, or adjusting claims under such policies of
insurance), receive, and endorse the name of Borrowers on, any check, draft,
instrument or other item of payment for the proceeds of such policies of
insurance and make all determinations and decisions with respect to such
policies of insurance or to pay any premium in whole or in part relating
thereto. Without waiving or releasing any obligation or default by Borrowers
hereunder, Bank may (but shall be under no obligation to do so) at any time
or times thereafter maintain such action with respect thereto which Bank
deems advisable. All sums disbursed by Bank in connection therewith
including, without limitation, reasonable attorneys' fees, court costs,
expenses and other charges relating thereto, shall be payable, on demand, and
until paid by Borrowers to Bank, with interest thereon at the Contract Rate,
shall be additional Obligations hereunder secured by the Collateral.
4.4 PROTECTION OF COLLATERAL; REIMBURSEMENT. All insurance expenses and
all expenses of protecting, storing, warehousing, insuring, handling,
maintaining, and shipping any Collateral, any and all excise, property, sales,
use or other taxes imposed by any state, federal or local authority on any of
the Collateral, or in respect of the sale thereof, or otherwise in respect of
Borrowers' business operations which, if unpaid, could result in the imposition
of any Lien upon the Collateral, shall be borne and paid by Borrowers. If
Borrowers fail to promptly pay any portion thereof when due, except as may
otherwise be permitted hereunder or under any of the other Credit Documents,
Bank may, at its option, but shall not be required to, pay the same. All sums
so paid or incurred by Bank for any of the foregoing and any and all other sums
for which Borrowers may become liable hereunder and all costs and expenses
(including reasonable attorneys' fees, legal expenses, and court costs) which
Bank may incur in enforcing or protecting its Lien on or rights and interest in
the Collateral or any of its rights or remedies under this or any other
agreement between the parties hereto or in respect of any of the transactions to
be had hereunder shall be repayable on demand and, until paid by Borrowers to
Bank with interest thereon at the Contract Rate, shall be additional Obligations
hereunder secured by the Collateral. Bank shall not be liable or responsible in
any way for the safekeeping of any of the Collateral or for any loss or damage
thereto or for any diminution in the value thereof, or for any act or default of
any warehouseman, carrier, forwarding agency, or other Person whomsoever.
4.5 INSPECTION. Bank (by any of its officers, employees, agents or
representatives) shall upon reasonable notice have the right to inspect the
Collateral, all books, records, journals, orders, receipts or other
correspondence related thereto (and to make extracts or copies thereof as Bank
may desire) and the premises upon which any of the Collateral is located for the
purpose of verifying the amount, quality, quantity, value and condition of, or
any other matter relating to, the Collateral.
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5. COLLECTION OF ACCOUNTS; REPORTING
5.1 COLLECTION OF ACCOUNTS.
(A) PROCEEDS. From and after the first date Borrowers submit to Bank
a notice of request for funds to be advanced under the Revolving Loan in
accordance with Section 2.3(A), and except for minor petty cash required in
the ordinary course of business of Borrowers, all checks, drafts, cash and
other proceeds realized from the sale of any Inventory or otherwise from
the sale or other disposition of any of the other Collateral including, but
not limited to, all proceeds realized from the collection of the Accounts
or otherwise pursuant to any contract right, note, bill, draft, acceptance,
chose in action and other like forms of general intangibles, and all
remittances received by Borrowers with respect to the foregoing, shall,
upon receipt by Borrowers, be held by Borrowers as trustee of an express
trust for Bank's sole benefit and subject to immediate deposit (in their
original form duly endorsed in blank) in a special account over which Bank
has the sole right and power of withdrawal, maintained at a financial
institution acceptable to Bank (such financial institution and account
being herein referred to as the "Depository Bank" and "Depository Account"
respectively). The Depository Account shall be subject to the written
agreement of the Depository Bank to waive any right of setoff it might
otherwise claim to have against any funds in the Depository account and to
otherwise charge any costs relative to the Depository Account to Borrowers
or such other account(s) as Borrowers may maintain with the Depository
Bank, such agreement (the "Depository Agreement") to be in form and
substance acceptable to Bank. Bank assumes no responsibility for any
claims of accord and satisfaction or release with respect to funds which
have been deposited in the Depository Account.
(B) LOCKBOX. If at any time requested by Bank, Borrowers shall
instruct all Account Debtors to mail their payments directly to a
designated post office lockbox (a "Lockbox") maintained at Borrowers'
expense, with respect to which only Bank or, should Bank so agree, a
designated financial institution shall have the right of access and all
payments so received shall be subject to immediate deposit into the
Depository Account.
(C) BANK'S ACCOUNT. All funds held in the Depository Account shall
be subject to transfer to an account designated by the Bank (the "Bank's
Account") as set forth in the Depository Agreement or as otherwise
designated by Bank and the application of any such funds to the payment of
the Obligations shall not occur until Bank's receipt of such funds in
cleared federal funds in Bank's Account. The order and method of
application of such payment to the Obligations shall be in the sole
discretion of Bank.
(D) NOTIFICATION OF ACCOUNT DEBTORS. Upon the occurrence and
continuance of an Event of Default, Bank shall have the right to notify
Account Debtors and other Persons indebted to Borrowers of Bank's interest
in any such amounts payable to Borrowers and to instruct such Account
Debtors and other Persons to remit the same and deposit in Bank's Account
of all funds arising therefrom (less any costs of collection and other
charges or expenses incurred in connection therewith as hereinafter
provided) in cleared federal funds, the same shall be applied to the
Obligations.
16
<PAGE>
5.2 VERIFICATION OF ACCOUNTS. Any of Bank's officers, employees, or
agents shall have the right, at any time or times hereafter, in the name of
Bank, any designee of Bank or in the name of Borrowers, to verify the validity,
amount or any other matter relating to any Accounts by mail, telephone,
telegraph, or otherwise.
5.3 ASSIGNMENTS, RECORDS AND SCHEDULES OF ACCOUNTS. On or before the
fifteenth (15th) calendar day of each month from and after the date hereof,
Borrowers shall deliver to Bank, in form and substance acceptable to Bank, a
detailed aged trial balance of all then existing Accounts specifying the names,
face value and dates of invoices for each Account Debtor obligated on an Account
so listed. In addition, upon Bank's reasonable request, Borrowers shall furnish
Bank with copies of proof of delivery and the original copy, if available of all
documents relating to the Accounts including, without limitation, repayment
histories and present status reports, relating to the Accounts and such other
matters and information relating to the status of then existing Accounts as Bank
shall reasonably request. If an Event of Default has occurred and is
continuing, Borrowers shall execute and deliver to Bank, on forms supplied by
Bank and at such intervals as Bank may from time to time require, written
assignments of all of its Accounts after shipment of the subject goods, together
with copies of invoices and/or invoice registers related thereto as Bank may
from time to time request.
5.4 OTHER REPORTS. Borrowers shall furnish Bank with (a) a "Borrowing
Base Certificate" in the form attached to this Agreement as EXHIBIT G-1 each
time Borrowers request Bank to advance funds under the Revolving Loan, (b) a
"Borrowing Base Certificate" in the form attached to this Agreement as EXHIBIT
G-2 on or before the fifteen (15th) calendar day of each month from and after
the date hereof, dated as of the end of the preceding accounting period, (c) on
or before the fifteenth (15th) day of each month from and after the date hereof,
a report listing Borrowers' Inventory as of the last day of the preceding
accounting period, and (d) such other reports regarding Inventory as Bank from
time to time reasonably may request. Such reports shall be on forms requested
or provided by Bank and shall contain such detailed information as is
satisfactory to Bank. Borrowers shall conduct a physical count of its Inventory
at such reasonable intervals as Bank may request (but in no event less than once
during each fiscal year) during the term of this Agreement and shall supply Bank
with a copy of such physical count accompanied by a report of the value (at the
lower of cost, calculated on a first-in, first-out basis, or market value
thereof).
6. REPRESENTATIONS AND WARRANTIES
6.1 GENERAL REPRESENTATIONS AND WARRANTIES. As an inducement to Bank to
make advances under this Agreement, Borrowers warrant and represent to Bank each
of the following:
(A) EXISTENCE; FOREIGN QUALIFICATION. EPI is a corporation duly
organized, validly existing, and in good standing under the laws of its
state of incorporation and is duly qualified and authorized to do business
and is in good standing as a foreign corporation in each other state or
jurisdiction where the character of its Property or its business activities
makes such qualification necessary, except where the failure to so qualify
will not cause or result in a Material Adverse Effect. EPIC is a general
partnership duly organized and
17
<PAGE>
validly existing under the laws of the State of Ohio and is duly
qualified and authorized to do business and is in good standing as a
foreign partnership in each other state or jurisdiction where the
character of its Property or the nature of its activities makes such
qualification necessary, except where the failure to so qualify will not
cause or result in a Material Adverse Effect.
(B) AUTHORITY. Each Borrower has the right and power and is duly
authorized and empowered to enter into, execute, deliver and perform this
Agreement and each of the other Credit Documents to which it is a party.
This Agreement and each of the other Credit Documents to which a Borrower
is a party have each been duly authorized and approved by the all necessary
actions of such Borrower, and are the valid and binding obligations of such
Borrower, enforceable against such Borrower in accordance with their
respective terms. The execution, delivery and performance of this
Agreement and each of the other Credit Documents to which a Borrower is a
party will not conflict with nor result in any breach in any of the
provisions of, or constitute a default under, or result in the creation of
any Lien (other than Permitted Liens) upon any Property of such Borrower
under the provisions of, a Borrower's applicable Certificate of
Incorporation, Articles of Incorporation, Regulations, Bylaws, Partnership
Agreement or any Material Agreement.
(C) MATERIAL AGREEMENTS. Except as disclosed on EXHIBIT H attached
to this Agreement, no Borrower is a party to any (1) Debt Instrument, (2)
security agreement, mortgage, deed of trust, pledge, assignment, or other
document or arrangement whereby any Lien upon any of Borrowers' Property
exists in favor of any Person other than Bank, (3) lease (capital,
operating or otherwise), whether as lessee or lessor thereunder, (4)
contract, commitment, agreement, or other arrangement involving the
purchase or sale of any Inventory by such Borrower, or the license of any
right to or by such Borrower, (5) contract, commitment, agreement, or other
arrangement with any Affiliate of such Borrower, (6) management or
employment contract or contract for personal services with any Affiliate of
such Borrower, which is not otherwise terminable at will or on less than
ninety (90) days notice without liability, (7) collective bargaining
agreement, (8) Pension Plan, or (9) other contract, agreement,
understanding or arrangement which, if individually or in the aggregate as
to Sub-paragraphs (1) through (8) above is violated, breached, or
terminated for any reason, would have or would be reasonably expected to
have a Material Adverse Effect.
(D) OTHER CORPORATE AFFILIATES. Except as disclosed on EXHIBIT I
attached to this Agreement, no Borrower (1) has any Subsidiaries, (2) has
been the surviving corporation of any merger or consolidation during the
preceding five (5) years, or (3) has been known as or operated under or
otherwise used any other corporate or fictitious name, trade name, or trade
style during the preceding five (5) years.
(E) COMPLIANCE WITH LAWS. Each Borrower (1) holds all permits,
certificates, licenses, orders, registrations, franchises, authorizations,
and other approvals from all Federal, state, local, and foreign
governmental and regulatory bodies necessary for the conduct of its
business is in full compliance with applicable law, (2) is in full
compliance with all Federal, state, local, or foreign applicable statutes,
rules, regulations, and orders including, without limitation, those
relating to environmental protection, occupational
18
<PAGE>
safety and health, and equal employment practices, (3) is not in
violation of or in default under any Material Agreement, and (4) has not
received any notice to the effect that it is not in full compliance with
any of the requirements of ERISA which, if individually or in the
aggregate as to Sub-paragraphs (1) through (4) above is violated,
breached, or terminated for any reason, would have a Material Adverse
Effect.
(F) LITIGATION AND ADMINISTRATIVE PROCEEDINGS. Except as disclosed
on EXHIBIT J attached to this Agreement, there are (1) no lawsuits,
actions, investigations, or other proceedings pending or, to the best of
Borrowers' knowledge, threatened against any Borrower, or in respect of
which any Borrower may have any liability, in any court or before any
governmental authority, arbitration board, or other tribunal, (2) no
grievances, disputes, or controversies outstanding with any union or other
organization of the employees of any Borrower, or threats of work stoppage,
strike, or pending demands for collective bargaining, which would have or
would be reasonably expected to have a Material Adverse Effect. Except as
disclosed on EXHIBIT J attached to this Agreement, there are no orders,
writs, injunctions, judgments, or decrees of any court or government agency
or instrumentality to which any Borrower is a party or by which any
Borrower's Property is bound.
(G) USE OF PROCEEDS. Borrowers' uses of the proceeds of any
advances made by Bank to Borrowers pursuant to this Agreement are, and
will continue to be, legal and proper corporate uses, duly authorized by
each Borrower, and such uses are and will continue to be consistent with
all applicable laws and statutes in all material respects, as in effect
from time to time. No Borrower is engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within
the meaning of any regulation of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any loans to Borrowers
will be used to purchase or carry (or refinance any borrowing, the
proceeds of which were used to purchase or carry) any margin stock, or
to extend credit to others for the purpose of purchasing or carrying
margin stock.
(H) INTELLECTUAL PROPERTY. Each Borrower owns, possesses, or has the
right to use all the patents, patent applications, trademarks, service
marks, copyrights, licenses, and rights with respect to the foregoing
necessary for the conduct of its business without any known conflict with
the rights of others. All such patents, patent applications, trademarks,
service marks, trade names, copyrights, licenses and other similar rights
are listed on EXHIBIT K attached to this Agreement.
(I) LOCATION OF COLLATERAL. All of the Collateral is located at a
Collateral Location.
(J) TITLE TO ASSETS. Borrowers have good title to and ownership of
all Property they purport to own, which, in the case of the Collateral, is
free and clear of all Liens, except those in favor of Bank and any
Permitted Liens.
(K) FINANCIAL STATEMENTS. The Financial Statements have been
prepared in accordance with GAAP and in conformity with Borrowers' normal
accounting practices,
19
<PAGE>
policies, and principles which have been consistently applied and which
fairly present the financial position of Borrowers at such date and the
results of operations of Borrowers for such period. There has not been
any change in the condition, financial or otherwise, of Borrowers as
shown on Borrowers' most recent interim Financial Statements, and no
change in the aggregate value of machinery and equipment reflected on
Borrowers' most recent Financial Statements, except changes in the
ordinary course of business, none of which individually or in the
aggregate will have a Material Adverse Effect, except as disclosed in
this Agreement.
(L) ACCURATE AND COMPLETE STATEMENTS. Neither this Agreement nor any
written statement made by Borrowers in connection with this Agreement
contains any untrue statement of a material fact or omits a material fact
necessary to make the statements contained therein or in this Agreement not
misleading, except any bona fide mistakes therein. After due inquiry by
Borrowers, there is no known fact which Borrowers have not disclosed to
Bank which has a Material Adverse Effect.
(M) TAX RETURNS. All Federal, state and local tax returns and other
reports required by law to be filed in respect of the income, business,
properties and employees of each Borrower have been filed, and all taxes,
assessments, fees and other governmental charges which are due and payable
have been paid, except as otherwise permitted herein or the failure to do
so does not and will not cause or result in a Material Adverse Effect. The
provision for taxes on the books of each Borrower is adequate for all years
not closed by applicable statutes and for the current fiscal year.
(N) SECURITIES LAWS. Borrowers' execution and delivery of this
Agreement and each of the other Credit Documents to which they are a party
will not directly or indirectly violate or result in a violation of Section
7 of the Securities Exchange Act of 1934, as amended, or any regulations
issued pursuant thereto.
(O) ENVIRONMENTAL LAWS. Except as disclosed on EXHIBIT L attached to
this Agreement, (1) the Premises and all other real property owned or
leased by any Borrower, and all improvements, equipment or other Property
located thereon or used therein and all business operations conducted
thereupon, have been operated or maintained, and are, in compliance in all
material respects with, (a) the provisions of the Federal Occupational
Safety and Health Act, the National Environmental Protection Act, the
Resource Conservation and Recovery Act, and all rules and regulations
thereunder and all similar Federal, state and local laws, rules, and
regulations, and (b) all applicable Federal, state, and local laws, rules,
and regulations relating to air emissions, water discharge, noise
emissions, solid or liquid waste disposal, hazardous waste, or materials,
or other environmental, health or safety matters, and (2) there are no
outstanding citations, notices, or orders of non-compliance issued to any
Borrower, or relating to the respective businesses, assets, property,
leaseholds, or equipment of any Borrower under any such laws, rules, or
regulations. Borrowers shall indemnify and hold Bank harmless from and
against any liability, loss, damage, suit, action, or proceeding pertaining
to solid or hazardous waste materials or other waste-like or toxic
substances discovered at or relating to Borrowers' business operations or
the locations where Borrowers previously did, presently do, or in the
20
<PAGE>
future may, operate their business including, without limitation, claims
of any Federal, state, or municipal government or quasi-governmental
agency, or any third person, whether arising under the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980, the
Resource Conservation and Recovery Act, or any other Federal, state, or
municipal law or regulation, or tort, contract or common law.
(P) CONTINUED BUSINESS. There exists no actual, pending, or, to the
best of Borrowers' knowledge, any threatened termination, cancellation or
limitation of, or any modification or change in the business relationship
of any Borrower and any customer or supplier, or any group of customers or
suppliers, whose purchases or supplies, individually or in the aggregate,
are material to the business of any Borrower, and there exists no present
condition or state of facts or circumstances which would materially affect
adversely any Borrower in any respect or prevent any Borrower from
conducting such business or the transactions contemplated by this Agreement
in substantially the same manner which it was theretofore conducted.
(Q) MAINTENANCE OF FIXED COLLATERAL. Except as provided in Exhibit
B, all Fixed Collateral necessary to conduct Borrowers' business is in good
operating condition and has been maintained in accordance with prevailing
industry practices.
(R) FRAUDULENT CONVEYANCE. The security interests and liens granted
by Borrowers and/or the utilization of the proceeds of the borrowings
described in this Agreement are not, and will not be, in violation or
contravention of the general corporate laws of Ohio, the Uniform Fraudulent
Conveyance Act as adopted in Ohio, or any other law designed for the
protection of the rights of creditors.
6.2 REAFFIRMATION. Each request for an advance made by Borrowers pursuant
to this Agreement shall, unless Bank is otherwise notified in writing prior to
the time of such advance, constitute (A) an automatic representation and
warranty by Borrowers to Bank that there does not then exist an Event of Default
or any event or condition which, with notice, lapse of time and/or the making of
such advance, would constitute an Event of Default, and (B) a reaffirmation as
of the date of such request of all of the representations and warranties of
Borrowers contained in this Agreement or any of the other Credit Documents,
except with respect to the Exhibits attached to this Agreement (the "Exhibits"),
provided that Borrowers provide to Bank (1) upon the occurrence of events or
conditions which have or would reasonably be expected to have a Material Adverse
Effect, information necessary to update the Exhibits describing such events,
occurrences or conditions, and (2) changes or additions to the information on
the Exhibits as otherwise required by this Agreement.
7. COVENANTS AND CONTINUING AGREEMENTS
7.1 AFFIRMATIVE COVENANTS. So long as any Obligations remain unsatisfied,
each Borrower covenants that, unless otherwise consented to by Bank in writing,
it will undertake each of the following:
21
<PAGE>
(A) TRANSACTION FEES. Pay to Bank, on demand, any and all fees,
costs or expenses which Bank pays to a bank or other similar institution
arising out of or in connection with (1) the forwarding by Bank to
Borrowers or any other Person on behalf of Borrowers of any proceeds of
loans made by Bank pursuant to this Agreement, or (2) the depositing for
collection, by Bank, of any check or item of payment received and/or
delivered to Bank on account of the Obligations.
(B) EXISTENCE. Preserve and maintain its separate legal existence
and all rights, privileges, and franchises in connection therewith, and
maintain its qualification and good standing in all states in which such
qualification is necessary in order for Borrowers to conduct their business
in such states except where the failure to so qualify would not have a
Material Adverse Effect.
(C) TAX RETURNS AND PAYMENT OF TAXES. File all Federal, state, and
local tax returns and other reports such Borrower is required by law to
file, maintain adequate reserves for the payment of all taxes, assessments,
governmental charges, and levies imposed upon it, its income, or its
profits, or upon any Property belonging to it and pay and discharge all
such taxes, assessments, governmental charges and levies prior to the date
on which penalties attach thereto, except where the same are being
contested in good faith by appropriate proceedings and adequate book
reserves have been established with respect to each such claim being
contested.
(D) MAINTENANCE OF PROPERTY. Maintain the Property necessary
to conduct its business in good condition and make all necessary
renewals, repairs, replacements, additions and improvements thereto so
as to maintain the value and operating efficiency thereof, ordinary wear
and tear excepted.
(E) COMPLIANCE WITH LAWS. Comply with all laws, ordinances,
governmental rules and regulations to which it is subject and obtain all
licenses, permits, franchises, or other governmental authorizations
necessary to the ownership of its Properties or to the conduct of its
business or which, if violated, might result in a Material Adverse Effect.
(F) ERISA COMPLIANCE. At all times make prompt payment of any and
all contributions required to meet the minimum funding standards set forth
in Sections 302 and 305 of ERISA with respect to each Pension Plan, if any,
maintained by Borrowers and otherwise in regard thereto (1) furnish Bank,
upon Bank's request therefor, with any annual report required to be filed
pursuant to Section 103 of ERISA in connection with each Pension Plan, (2)
notify Bank as soon as practicable of any "Reportable Event" (as defined
under ERISA) other than any event not required to be reported to the
Pension Benefit Guaranty Corporation ("PBGC") in accordance with applicable
regulations and of any additional act or condition arising in connection
with any Pension Plan which might constitute grounds for the termination
thereof by the PBGC or for the appointment by the appropriate United States
District Court of a trustee to administer the Pension Plan, and (3) furnish
to Bank, promptly upon Bank's request therefor, such additional information
concerning any such Pension Plan or any other such employee benefit plan as
may be reasonably requested.
22
<PAGE>
(G) ACCOUNT DEBTOR DISCLOSURE. Promptly upon, but in no event later
than ten (10) business days after, learning thereof, inform Bank, in
writing, of the assertion of any claims, offsets or counterclaims by any
Account Debtor and of any allowances, credits and/or other monies granted
by it to any Account Debtor and not otherwise disclosed to Bank; and
furnish to and inform Bank of all material adverse information relating to
the financial condition of any Account Debtor.
(H) BOOKS AND RECORDS. Keep adequate records and books of account
with respect to its business activities in which proper entries are made in
accordance with GAAP reflecting all its financial transactions.
(I) FINANCIAL INFORMATION. Cause to be prepared and furnished to
Bank the following financial information (which in the case of any
financial statements shall consist of a consolidated and consolidating
balance sheet, income statement and cash flow statement kept and prepared
in accordance with GAAP, unless Borrowers' independent certified public
accountants concur in any changes therein and such changes are disclosed to
Bank and are consistent with then generally accepted accounting
principles):
(1) On or within one hundred twenty (120) days after the close
of each fiscal year of EPI, the audited annual consolidating and
consolidated financial statements of EPI and its Subsidiaries as of
the end of such year prepared by a firm of independent certified
public accountants of recognized standing acceptable to Bank, together
with a management letter, if any, of such independent certified public
accountants;
(2) On or within thirty (30) days after the end of each calendar
month hereafter, unaudited consolidated and consolidating and interim
financial statements of EPI and its Subsidiaries as of the end of the
preceding accounting period and of the portion of Borrowers' fiscal
year then elapsed certified by the principal financial officer of EPI
as prepared in accordance with GAAP (without footnote disclosures) and
fairly presenting the financial position and results of operations of
Borrowers for such accounting period;
(3) On or within thirty (30) days after the close of each fiscal
year of Borrowers, a projected income statement and cash flow
statement of Borrowers, prepared on a consolidated basis, for their
next fiscal year;
(4) As soon as possible, but not later than fifty (50) calendar
days after the end of each fiscal quarter, (a) a copy of EPI's Form
10-Q filed with the Securities and Exchange Commission, and (b) a
financial covenant compliance worksheet, in form reasonably
satisfactory to Bank, reflecting the computation of the financial
covenants set forth in Section 7.1 and 7.2 of this Agreement as of the
end of the period covered by such financial statements.
23
<PAGE>
(5) Concurrently with the delivery of each of the financial
statements described in Subparagraphs (1) and (2) above, a certificate
from the chief financial officer of EPI certifying to Bank that (a) to
the best of his knowledge, Borrowers have kept, observed, performed
and fulfilled each and every covenant, obligation and agreement
binding upon Borrowers contained in this Agreement or the other
documents, and that no Event of Default, or any event which with the
giving of notice or lapse of time or both, would constitute an Event
of Default, has occurred or specifying any such Event of Default, or
(b) one or more Events of Default has occurred and is continuing, and
setting forth Borrowers' proposed resolutions to remedy such Events of
Default;
(6) In addition to the Form 10-Q described above in Subparagraph
(4) of this Section 7.1(I), copies of any definitive proxy statements,
financial statements or definitive proxy statements, financial
statements or reports which Borrowers have made available to its
shareholders, and copies of any regular periodic or special reports,
schedules, registration statements or other documents (including,
without limitation, all Forms 8-K and 10-K) which Borrowers file with
the Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or any national securities exchange
or self-regulatory securities organization including the National
Association of Securities Dealers, Inc.; and
(7) Such other data and information (financial and otherwise) as
Bank, from time to time, may reasonably request, bearing upon or
related to the Collateral or each Borrower's financial condition
and/or results of operations.
(J) NOTIFICATION OF CERTAIN EVENTS. Notify Bank in writing of each
of the following occurrences:
(1) Promptly upon learning thereof, of the institution of any
material suit, action, or administrative proceeding against a Borrower
or relating to any of its Property, whether or not the claim is
considered by such Borrower to be covered by insurance;
(2) At least fifteen (15) days prior thereto, of a Borrower's
opening of any new office or place of business or closing of any
existing office or place of business;
(3) Promptly upon learning thereof, of any material labor
dispute to which a Borrower may become a party, any strikes or
walkouts relating to any of their plants or other facilities, and the
expiration of any material labor contract to which such Borrower is a
party or by which it is bound;
(4) Within seven (7) business days after obtaining knowledge of
the occurrence of a Borrower's default under any Material Agreement;
24
<PAGE>
(5) Promptly upon the occurrence thereof, of any default by any
obligor under any note or other evidence of debt payable, other than
Accounts, to a Borrower; and
(6) Promptly upon the occurrence thereof, of any Event of
Default.
(K) INVENTORY RECEIPTS. Provide Bank, upon the request of Bank, with
all warehouse receipts respecting any Inventory and copies of all
agreements between a Borrower and any bailee, warehousemen or similar party
with whom Inventory may from time to time be stored.
(L) GOVERNMENT ACCOUNTS. If any of the Accounts arise out of a
contract with the United States of America, or any department, agency,
subdivision or instrumentality thereof, promptly notify Bank thereof in
writing and execute any instruments and take any other action required or
requested by Bank to perfect Bank's security interest in such Accounts
under the provisions of the Assignment of Claims Act of 1940.
(M) DELIVERY OF EVIDENCE OF OWNERSHIP. Deliver to Bank, at Bank's
reasonable request, within two (2) business days after Bank's request: (i)
any and all evidence of ownership of Fixed Collateral, inclusive of any
certificates of title or applications therefor, and (ii) accurate,
itemized records, maintained to the best of Borrowers' ability, describing
the kind, type, quantity and value of all Fixed Collateral, a summary of
which shall be provided to Bank.
(N) DELIVERY OF ACCOUNT INSTRUMENTS. In the event any Account is or
becomes evidenced by any note, trade acceptance or other instrument,
promptly notify Bank of such fact and, upon Bank's reasonable request,
deliver the same to Bank, appropriately endorsed to Bank's order and,
regardless of the form of such endorsement, Borrowers hereby waive
presentment, demand, notice of dishonor, protest and notice of protest and
all other notices with respect thereto.
(O) TANGIBLE NET WORTH. Commencing on the date of this Agreement,
and continuing on the last day of each fiscal quarter of Borrowers
thereafter, Borrowers shall maintain on a consolidated basis, a Tangible
Net Worth which is equal to or greater than the following amounts on the
following dates:
<TABLE>
<CAPTION>
DATE TANGIBLE NET WORTH
---- ------------------
<S> <C>
On the date of this Agreement $4,750,000
On February 28, 1998 $4,500,000
On May 31, 1998 $4,250,000
On August 31, 1998 $4,400,000
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
On November 30, 1998 $4,550,000
On February 28, 1999 $4,750,000
On May 31, 1999 and on the $5,000,000
last day of each quarter thereafter
through February 29, 2000
On May 31, 2000 and on the $5,250,000
last day of each quarter thereafter
through February 28, 2001
On May 31, 2001 and on last day $6,250,000
of each quarter thereafter
</TABLE>
For purposes of this Section 7.1(O) and Section 7.1(P), "Tangible Net
Worth" shall mean the amount of the shareholders' equity computed in
accordance with GAAP applied in the preparation of the certified
consolidated financial statements of EPI described in Section 7.1(I), but
deducting from such amount the sum of (1), (2), (3) and (4) below:
(1) The net book value of all intangible assets including,
without limitation, goodwill, trademarks, trade names, copyrights,
patents, and rights in any thereof, unamortized debt discount and
expense and "special technologies";
(2) The net book value of all marketable and nonmarketable
securities which are not deemed to be cash equivalents by Bank (but
excluding for this purpose up to $2,000,000 of restricted cash
received from the proceeds of the initial public offering of EPI
shares which will be earmarked for long-term asset acquisitions);
(3) Any write-up in the book value of any assets, other than
write-ups in the ordinary course of business, resulting from a
revaluation thereof which results in a corresponding increase in
shareholder equity;
(4) Loans or advances to individual shareholders, employees or
any other individual, corporation, or other entity;
(P) TOTAL DEBT/TANGIBLE NET WORTH RATIO. Commencing on
February 28, 1998, and continuing on the last day of each fiscal quarter
of Borrowers thereafter, Borrowers shall maintain, on a consolidated
basis, a Total Debt to Tangible Net Worth ratio which is equal to or
less than the following ratios on the following dates:
26
<PAGE>
<TABLE>
<S> <C>
DATE TOTAL DEBT TO TANGIBLE
NET WORTH RATIO
February 28, 1998 1.25 to 1
February 28, 1999 1.50 to 1
February 29, 2000, and
thereafter 2.00 to 1
</TABLE>
For purposes of this Section 7.1(P) "Total Debt" shall mean the sum of all
balance sheet liabilities of Borrowers, determined on a consolidated basis
in accordance with GAAP.
(Q) INTEREST COVERAGE RATIO. Commencing on February 28,
1999, and continuing on the last day of each calendar quarter
thereafter, maintain, on a consolidated rolling four (4) calendar
quarter basis, an "Interest Coverage Ratio" equal to or greater than
3.00. For purposes of this Section 7.1(Q), (1) the numerator of the
"Interest Coverage Ratio" shall equal the net consolidated cumulative
net income plus interest, taxes, depreciation, amortization and other
non-cash expenses of EPI and its Subsidiaries for the applicable four
(4) prior consecutive calendar quarters, and (2) the denominator shall
equal total consolidated cumulative interest expense of EPI and its
Subsidiaries for such period.
(R) BANK FEES; AUDIT FEES. Borrowers promptly shall
reimburse Bank for all reasonable legal fees, recording and filing fees,
and related expenses incurred by Bank in connection with the
transactions described in this Agreement. Borrowers shall pay Bank an
audit fee and any other expenses actually incurred by Bank in connection
with its periodic audit of the books and records of Borrowers.
Borrowers hereby authorize Bank to pay such fees and expenses and charge
the same to Borrowers' loan account with Bank. It is agreed that the
current audit fee charged by Bank is $500 per man day plus any
out-of-pocket expenses incurred by Bank in connection with the audit.
(S) FIXED CHARGES COVERAGE RATIO. Commencing as of November 30,
1998, and continuing on the last day of each fiscal quarter thereafter,
maintain a "Fixed Charges Coverage Ratio" equal to or greater than 1.0 to
1.0. For purposes of this Section 7.1(S), (1) the numerator of the "Fixed
Charges Coverage Ratio" shall equal Borrowers' consolidated net income
before interest expenses, taxes, depreciation and amortization for the
period for which the calculation is being made MINUS Capital Expenditures
(excluding Capital Expenditures solely made from proceeds of the initial
public offering of EPI stock) during such period, and (2) the denominator
of the "Fixed Charges Coverage Ratio" shall equal the sum of Borrowers'
interest expense and principal payments on Debt Instruments during such
period. The Fixed Charges Coverage Ratio shall be calculated for the
following periods on the following dates:
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<PAGE>
<TABLE>
<S> <C>
DATE OF CALCULATION PERIOD COVERED
November 30, 1998 August 31, 1998 -
November 30, 1998
February 28, 1999 August 31, 1998 -
February 28, 1999
May 31, 1999 August 31, 1998 -
May 31, 1999
August 31, 1999 and on the The rolling twelve (12) month
last day of each fiscal quarter period ending on the last day
thereafter of the fiscal quarter then ended
</TABLE>
(T) CASH COLLATERAL. Maintain on deposit with Bank Cash Collateral
of not less than $750,000 at any time.
7.2 NEGATIVE COVENANTS. So long as any Obligations remain unsatisfied,
each Borrower covenants that, unless Bank has first consented thereto in
writing, it will not cause to occur or undertake any of the following:
(A) MERGERS AND ACQUISITIONS. Merge, consolidate, or acquire
all or any substantial portion of the assets or capital stock of any
Person except between any Borrowers.
(B) LOANS AND ADVANCES. Make any loans or other advances of money,
or grant extensions of credit to any Person including, without limitation,
their Affiliates, Subsidiaries, officers, employees, and shareholders,
normal extensions of trade credit in the ordinary course of business and
reasonable salary, travel, or relocation advances, advances against
commissions, and other similar advances in the ordinary course of business
which, in the aggregate, are not in excess of $25,000 at any time.
(C) PERMITTED INDEBTEDNESS. Create, incur, assume, or suffer to
exist any Indebtedness except (1) the Obligations and (2) the following
(herein referred to as "Permitted Indebtedness"):
(a) Trade payables and other liabilities incurred in the
ordinary course of business; and
(b) Such other Indebtedness as described on EXHIBIT M attached
to this Agreement, Permitted Liens, or as approved by Bank in writing.
(D) AFFILIATED TRANSACTIONS. Except as permitted by Sections 7.2(B),
7.2(H) and 7.2(I) of this Agreement, enter into, or be a party to, any
transaction with any Affiliate of any Borrower, except in the ordinary
course of, and pursuant to the reasonable requirements
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<PAGE>
of, such Borrower's business and upon fair and reasonable terms which
are fully disclosed to Bank and are no less favorable to such Borrower
than it would obtain in a comparable arm's length transaction with a
Person not an Affiliate of a Borrower.
(E) MODIFICATION OF ACCOUNTS. Permit or agree to any material
extension or modification with respect to, or compromise or settle any
Accounts, which singly or in the aggregate would or would be expected to
result in a Material Adverse Effect.
(F) GUARANTEES. Become or be liable with respect to any Guaranty
except (i) by endorsement of instruments or items of payment in the
ordinary course of business for deposit or collection, and (ii) the
guaranty of payment to a third party of a Borrower by another Borrower in
the ordinary course of business.
(G) PERMITTED LIENS. Permit or suffer to exist any Lien in or upon
any of the Collateral, except the following (herein referred to as
"Permitted Liens"):
(1) Those security interests granted in favor of Bank pursuant
to this Agreement and the other Credit Documents;
(2) Liens securing taxes, assessments, or governmental charges
or levies, or the claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like Persons, provided the
payment thereof is not at the time required;
(3) Liens incurred or deposits made in the ordinary course of
business, and provided any amounts secured thereby are not overdue or
delinquent in any respect;
(4) Attachment, judgment, and other similar non-tax Liens
arising in connection with court proceedings, provided the execution
or other enforcement of such Liens is effectively stayed or bonded
within thirty (30) days after issuance or filing and the claims
secured thereby are being actively contested in good faith and by
appropriate proceedings;
(5) Reservations, exceptions, encroachments, easements, rights
of way, covenants, conditions, restrictions, leases, and other similar
title exceptions or encumbrances affecting real Property, provided
they do not in the aggregate materially detract from the value of such
Properties or materially interfere with their use in the ordinary
conduct of such Borrower's business; and
(6) Such other Liens as described on EXHIBIT N attached to this
Agreement or as approved by Bank in writing.
(H) CAPITAL DISTRIBUTIONS. Except as permitted in Section 7.2(B) of
this Agreement, make loans or advances, pay dividends or make distributions
in cash or otherwise, effect any redemption or other distribution of
property to any shareholder (other than a Borrower), or invest in or
purchase any stock or securities of any individual, firm, or corporation
(other
29
<PAGE>
than a Borrower) (collectively, the "Permitted Capital Transactions"), or
sell, pledge, encumber, or transfer any of its capital stock except to a
Borrower; provided, however, that notwithstanding the foregoing, EPI may
pay dividends on EPI's Cumulative Preferred Stock, par value $.01 per
Share, designated "Meridian Preferred Stock" as more particularly described
on Exhibit N-1.
(I) DIVESTITURES. Except as permitted in Section 7.2(B) of this
Agreement, divest themselves of any material assets or business theretofore
conducted by transferring the same to any Affiliate (other than a Borrower)
or any partnership, joint venture, or similar arrangement or subcontract
any operations to any Affiliate (other than a Borrower); provided, however,
that Borrower may (i) purchase new equipment to be used at a facility in
Mt. Pleasant, Tennessee (the "Mt. Pleasant Facility") in connection with a
proposed joint venture between EPI and Laidlaw Environmental Services, Inc.
("Laidlaw") in accordance with the terms set forth in the letter of intent
between Laidlaw and EPI dated November 11, 1997 (the "Letter of Intent")
and (ii) direct processable paint waste from EPI's automotive manufacturing
customers located in the southeastern United States to the Mt. Pleasant
Facility in accordance with the Letter of Intent, and any such actions
shall not be deemed a violation of this Section 7.2(I).
(J) CAPITAL EXPENDITURES. Make Capital Expenditures which would
cause the Capital Expenditures of Borrowers, determined in the aggregate on
a consolidated basis, commencing with the date of this Agreement, to exceed
the following amounts during the following time periods:
<TABLE>
<CAPTION>
TIME PERIOD CAPITAL EXPENDITURE LIMITS
----------- --------------------------
<S> <C>
Commencing on the date
of this Agreement and ending on
February 28, 1998 $ 500,000
Commencing on March 1, 1998
and ending on February 28, 1999 $4,500,000
Commencing on March 1, 1999
and ending on February 29, 2000 $4,500,000
Commencing on March 1, 2000
and ending on February 28, 2001 $ 500,000
Commencing on March 1, 2001
and ending on February 28, 2002
and for each succeeding twelve-
month period commencing on the
first day of March and ending on the
last day of February $ 500,000
</TABLE>
30
<PAGE>
(K) PRINCIPAL BUSINESS LOCATION. Transfer its executive offices, or
maintain records with respect to Accounts, at any locations other than a
principal business location identified on EXHIBIT A attached to this
Agreement, except upon providing Bank with thirty (30) days' prior written
notice thereof.
(L) DEPOSITS AND WITHDRAWALS. Except with respect to transactions
otherwise permitted hereunder, make deposits to or withdrawals from any of
its deposit accounts for the benefit of any of their Affiliates.
(M) DISPOSITION OF PROPERTY. Sell, lease, transfer or otherwise
dispose of any of its Property, other than Inventory sold in the ordinary
course of business and other than the divestitures described above in
Subparagraph (I) of this Section 7.2.
(N) NAMES. Use any business name (other than its own) or any
fictitious name, trade name, trade style or "d/b/a" except for the names
disclosed on EXHIBIT O attached to this Agreement and made a part hereof
unless EPI provides Bank with thirty (30) days prior written notice
thereof.
(O) CONDITIONAL SALES. Make a sale to any customer on approval,
consignment, bill-and-hold, guaranteed sale, sale and return or any other
repurchase basis, unless such sale is specifically identified on the
written assignments of Accounts delivered to Bank pursuant to Section 5.3
of this Agreement.
(P) MARGIN SECURITIES. Own, purchase or acquire (or enter into any
contract to purchase or acquire) any "margin security" as defined by any
regulation of the Federal Reserve Board as now in effect or as the same may
hereafter be in effect unless, prior to any such purchase or acquisition or
entering into any such contract, Bank shall have received an opinion of
counsel satisfactory to Bank to the effect that such purchase or
acquisition will not cause this Agreement or the Promissory Note to violate
Regulation G or any other regulation of the Federal Reserve Board then in
effect.
(Q) RESTRICTED INVESTMENTS. Make or have any Restricted Investment,
which for purposes of this Agreement shall mean any investment in cash or
by delivery of Property to any Person, whether by acquisition of stock,
indebtedness or other obligation, or Security, or by loan, advance or
capital contribution, or otherwise, in any Property except the following:
(1) Property to be used in the ordinary course of business;
(2) Current assets arising from the sale of goods and services
in the ordinary course of business of Borrowers;
(3) Investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United
States of America, provided that such obligations mature within one
(1) year from the date of acquisition thereof;
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<PAGE>
(4) Investments in commercial paper given the highest rating by
a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof; and
(5) Investments in money market accounts and certificates of
deposit.
(R) LEASE/SALE OF PROPERTY. Enter into any arrangement with any
Person providing for the leasing by such Borrower of Property which has
been or is to be sold or transferred by any Borrower to such person if
funds have been or are to be advanced by such Person on the security of
such Property or rental obligations of such Borrower.
(S) PREPAYMENT OF INDEBTEDNESS. Make any prepayment of principal on
any Indebtedness, except: (1) the Obligations; and (2) payment discounts
offered by the vendors of Borrowers.
(T) PAYMENTS ON AFFILIATE LOANS. Make any payments of principal
and/or interest to any Affiliate of any Borrower on any indebtedness, loan
or advance to one or more Borrowers by any such Affiliate; provided that
Borrowers may make a payment of up to $500,000 towards indebtedness owed to
Meridian National Corporation with proceeds of the initial public offering
of EPI stock.
8. SURVIVAL OF OBLIGATIONS UPON TERMINATION OF AGREEMENT
Except as otherwise expressly provided for in this Agreement and in any
of the other Credit Documents, no termination or cancellation (regardless of
cause or procedure) of this Agreement or any of the other Credit Documents
shall in any way affect or impair the powers, obligations, duties, rights,
and liabilities of Borrowers or Bank in any way or respect relating to (1)
any transaction or event occurring prior to such termination or cancellation
or (2) any of the undertakings, agreements, covenants, warranties and
representations of Borrowers or Bank contained in this Agreement or the other
Credit Documents. Once all Obligations of Borrowers to Bank have been fully
paid and satisfied and this Agreement is terminated, then all such
undertakings, agreements, covenants, warranties and representations shall be
terminated and cancelled and Bank shall terminate its Lien on the Collateral
and have no further rights and remedies.
9. CONDITIONS PRECEDENT
9.1 CONDITIONS. Notwithstanding any other provision of this Agreement
or any of the other Credit Documents, and without affecting in any manner the
rights of Bank under the other Sections of this Agreement, it is understood
and agreed that Bank shall have no obligation to advance funds to Borrowers
at any time under Section 2 of this Agreement unless and until each of the
following conditions have been and continue to be satisfied, all in form and
substance satisfactory to Bank and its counsel:
(A) ABSENCE OF LEGAL ACTIONS. No legal action, proceeding,
investigation, regulation or legislation shall have been instituted,
threatened or proposed before any court,
32
<PAGE>
governmental agency or legislative body to enjoin, restrain, or prohibit,
or to obtain damages in respect of, this Agreement or any of the other
Credit Documents or the consummation of the transactions contemplated
hereby or thereby, or which, in Bank's reasonable opinion would make it
inadvisable to consummate the transactions contemplated by this Agreement.
(B) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Borrowers in this Agreement are true and correct in all
material respects and no Event of Default or condition which, with notice,
lapse of time or both would constitute an Event of Default then exists.
(C) OTHER MATERIAL EVENTS. No event, occurrence or condition shall
then exist which would have a Material Adverse Effect.
(D) DELIVERY OF DOCUMENTS. Bank shall have received the following
documents, each to be in form and substance satisfactory to Bank and its
counsel:
(1) The Promissory Note duly executed by Borrowers;
(2) The Term Note duly executed by Borrowers;
(3) The written opinion of counsel to Borrowers as to the
transactions contemplated by this Agreement, in form and substance
satisfactory to Bank and its counsel;
(4) Copies of all filing receipts or acknowledgments or other
oral or written evidence issued by any governmental authority to
evidence any filing or recordation necessary to perfect or amend the
Liens of Bank in the Collateral and evidence in a form acceptable to
Bank that such Liens constitute valid and first priority perfected
Liens, subject only to any Permitted Liens;
(5) Certificates for each of Borrowers' insurance policies
evidencing the existence of the insurance coverage required pursuant
to the Credit Documents, together with all appropriate endorsements
thereto naming Bank as a lender's loss payee, mortgagee and additional
insured;
(6) A Certificate of the Secretary or an Assistant Secretary of
each Borrower, dated as of the date of this Agreement, certifying (a)
that attached thereto is a true and complete copy of the Articles (or
Certificate) of Incorporation and Code of Regulations (or Bylaws) of
such Borrower, as in effect on the date of such certification, (b)
that attached thereto is a true and complete copy of resolutions, in
form satisfactory to Bank, adopted by the Board of Directors of such
Borrower, authorizing the execution, delivery and performance of this
Agreement and each of the other Credit Documents to which it is a
party and the consummation of the transactions contemplated hereby and
thereby, and (c) as to the incumbency and
33
<PAGE>
genuineness of the signature of each officer of such Borrower
executing this Agreement and the other Credit Documents to which
such Borrower is a party;
(7) Good standing certificates for each Borrower issued by the
Secretary of State of each jurisdiction in which such Borrower's
qualification is required under this Agreement.
(8) A certificate signed by the President or Chief Financial
Officer of each Borrower and dated as of the date of this Agreement,
stating that (a) the representations and warranties set forth in
Section 6 hereof are true and correct on and as of such date, (b) such
Borrower is on such date in compliance with all the terms and
provisions set forth in this Agreement, and (c) on such date no event
or condition has occurred or is continuing which with the giving of
notice, the lapse of time, or both, would constitute an Event of
Default;
(9) Duly executed written lien waivers and landlord consents in
favor of Bank from each lessor, bailee, warehouseman, mortgagee or
similarly situated Person who may, with respect to any location at
which any of the Collateral is to be located or stored, by operation
of law or otherwise, have any Lien in or upon such Collateral;
(10) Delivery of the Borrowing Base Certificate, dated as of the
date of this Agreement, described in Section 5.4 of this Agreement;
(11) A pro-forma balance sheet for EPI and its Subsidiaries as of
the date hereof, certified by the President or Chief Financial Officer
of EPI as being true, complete and accurate, reflecting a consolidated
Tangible Net Worth of at least $4,750,000 on the date of this
Agreement and otherwise acceptable to Bank;
(12) A summary aged trial balance of Borrowers' Accounts as of
_________, 1998, a report listing Borrowers' inventory as of
______________ and a period-end recapitulation regarding inventory and
accounts receivable of Borrowers, in each case in form and substance
acceptable to Bank;
(13) Written instructions from Borrowers directing the
disbursement of proceeds of the loans made pursuant to this Agreement;
and
(14) Such other agreements, instruments and documents including,
without limitation, assignments, security agreements, mortgages, deeds
of trust, pledges, guaranties and consents, which Bank may require to
be executed in connection with this Agreement.
(E) CLOSING OF PUBLIC OFFERING. The proposed initial public offering
of EPI stock has been completed and closed in accordance with the terms of
such offering disclosed to Bank.
34
<PAGE>
9.2 WAIVER OF CONDITIONS PRECEDENT. If Bank makes the initial loans
hereunder prior to the fulfillment of any of the conditions precedent set
forth in Section 9.1 hereof, the making of such initial loans shall
constitute only an extension of time for the fulfillment of such condition
and not a waiver thereof unless expressly stated, and Borrowers shall
thereafter use their best efforts to fulfill each such condition promptly.
10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(A) PAYMENT OF DEBT SERVICE. Failure by Borrowers to (1) make
payment of principal, interest or any other sum on any Note on the due date
thereof, (2) pay any other Obligation on the due date thereof, or (3) to
remit Accounts or deposit funds as required by the terms of this Agreement.
(B) REPRESENTATIONS AND WARRANTIES. Any warranty, representation, or
other statement made or furnished to Bank by or on behalf of Borrowers, any
guarantor of the Obligations in this Agreement or in any of the other
Credit Documents or in any instrument furnished in compliance with or in
reference to this Agreement proves to have been false or inaccurate in any
material respect when made or furnished.
(C) OTHER PROVISIONS. Failure or neglect by Borrowers or any
guarantor of the Obligations to perform, keep, or observe any other term,
provision, condition, covenant, warranty or representation contained in
this Agreement or in any of the other Credit Documents which is required to
be performed, kept, or observed by Borrowers, any such guarantor and such
failure continues for a period of ten (10) days after Bank has given
Borrowers written notice thereof in the manner set forth in Section 12.10
of this Agreement.
(D) CROSS-DEFAULT. Upon the occurrence of any material default or
Event of Default (and the expiration of any applicable grace period
relating thereto) by any Borrower under any Obligation, or the violation
(and the expiration of any applicable grace period relating thereto) by any
Borrower of the terms of any other agreement entered into among or between
Bank and either Borrower.
(E) FALSE OR MISLEADING REPORTS. The making or delivering to Bank by
any Borrower, or any of its officers, employees, or agents any statement,
report, financial statement, or certificate which is not true and correct
in any material respect.
(F) DESTRUCTION OF COLLATERAL. The loss, theft, substantial damage
or destruction of any material portion of the Collateral to the extent not
covered by insurance in an amount equal to at least its replacement value
(as required by this Agreement and subject to such deductibles as Bank
shall have agreed to in writing), or the sale, lease, encumbrance or other
disposition of a material portion of the Collateral except in all cases as
may be specifically permitted by other provisions of this Agreement.
35
<PAGE>
(G) VALUE OF COLLATERAL; FINANCIAL CONDITION OF BORROWERS. Any
Material Adverse Effect on the value of the Collateral or the financial
condition or operating results of Borrowers.
(H) TERMINATION OF EXISTENCE. The dissolution, termination of
existence, insolvency (failure to pay its debts as they mature or where the
fair salable value of its assets is not in excess of its liabilities) or
business failure of any Borrower or any guarantor of the Obligations.
(I) BANKRUPTCY. The commencement of any proceedings under any
Bankruptcy Laws by any Borrower or against any Borrower to the extent such
proceedings are not dismissed within sixty (60) days after the filing
thereof, or the appointment of a receiver, trustee, custodian or similar
fiduciary for any Borrower, or the assignment for the benefit of the
creditors of any Borrower or the making by any Borrower of any offer of
settlement, extension or composition to its unsecured creditors generally,
to the extent such assignment, appointment or other such action continues
for longer than thirty (30) days.
(J) CEASES TO CONDUCT BUSINESS. Except for the sale of Property as
permitted by this Agreement, any Borrower ceases to conduct all or any
material part of its business or are enjoined, restrained or in any way
prevented by court, governmental or administrative order from conducting
all or any material part of its business affairs.
(K) JUDGMENT ENTRIES. The entry by a court of any judgment in excess
of $50,000 requiring the payment of money against any Borrower, which
judgment is not discharged, bonded, stayed, vacated or set aside within
thirty (30) days of its entry, or a notice of any material Lien, levy,
attachment or assessment is filed of record with respect to all or any of
the Collateral by any Person including, without limitation, the United
States, any department, agency or instrumentality thereof, or by any state,
county, municipal or other governmental agency, or if any material taxes or
assessments owing at any time or times hereafter becomes a Lien upon the
Collateral or any other assets of any Borrower and, except Permitted Liens
or as otherwise permitted by Bank, the same is not effectively stayed,
bonded or released within thirty (30) days after the same becomes a Lien,
or in the case of ad valorem taxes, prior to the last date when payment may
be made without penalty.
(L) INSURANCE OF COLLATERAL. Failure on the part of Borrowers to
keep the Collateral or any goods evidenced by chattel paper or documents
insured against loss by fire or otherwise for insurable value thereof in
companies with coverages (including Lender's Loss Payable Endorsement) and
in amounts acceptable to Bank and make the loss, if any, payable to and
deposit the policies with Bank, all premiums on such policies to be paid by
Borrowers.
10.2 ACCELERATION OF THE OBLIGATIONS. Except upon the occurrence of an
Event of Default specified in Section 10.1(I) hereof, which shall give Bank
the right to accelerate all Obligations without notice to Borrowers, upon the
occurrence of an Event of Default, and upon notice by Bank to Borrowers in
the manner set forth in Section 12.10 hereof, all of the Obligations due or
to become due from Borrowers to Bank, whether under this Agreement, the Notes
or otherwise, shall,
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<PAGE>
at the option of Bank become at once due and payable, anything in the Notes
or other evidence of the Obligations or in any of the other Credit Documents
to the contrary notwithstanding.
10.3 REMEDIES. Upon and after the occurrence of an Event of Default,
Bank shall have, to the extent permitted by applicable law, and in addition
to any other right or remedy provided for in this Agreement, each of the
following rights and remedies:
(A) GENERAL RIGHTS AND REMEDIES. All of the rights and remedies of a
secured party under the Code or under other applicable law, and all other
legal and equitable rights to which Bank may be entitled, all of which
rights and remedies shall be cumulative, and none of which shall be
exclusive, to the extent permitted by law, in addition to any other rights
or remedies contained in this Agreement or in any of the other Credit
Documents.
(B) POSSESSION OF COLLATERAL. The right to take immediate possession
of the Collateral, and (1) require Borrowers to assemble the Collateral, at
Borrowers' expense, and make it available to Bank at Borrowers' principal
place of business, or (2) enter any of the premises of Borrowers or
wherever any Collateral shall be located and to keep and store the same on
such premises until sold. If the premises on which the Collateral is
located is owned or leased by Borrowers, then Borrowers shall not charge
Bank for storage of such Collateral on such premises for a period of at
least ninety (90) days after sale or disposition of the Collateral. Bank
is hereby granted a non-exclusive license or other right to use, without
charge, Borrowers' labels, patents, copyrights, rights of use of any name,
trade secrets, trade a similar nature, as it pertains to the Collateral, in
advertising for sale and selling any Collateral and Borrowers' rights under
all licenses and all franchise agreements shall inure to Bank's benefit.
(C) FORECLOSE LIENS. The right to foreclose the Liens created under
this Agreement and each of the other Credit Documents or under any other
agreement relating to the Collateral.
(D) DISPOSITION OF COLLATERAL. The right to sell or to otherwise
dispose of all or any Collateral in its then condition, or after any
further manufacturing or processing thereof, at public or private sale or
sales, wholesale dispositions, or sales pursuant to one or more contracts,
with such notice as may be required by law, in lots or in bulk, for cash or
on credit, all as Bank, in its reasonable discretion, may deem advisable.
Borrowers acknowledge and agree that ten (10) days written notice to
Borrowers of any public or private sale or other disposition of Collateral
shall be reasonable notice thereof, and such sale shall be at Borrowers'
premises or at such other locations where the Collateral then is located,
or as otherwise determined by Bank. Bank shall have the right to conduct
such sales on Borrowers' premises, without charge therefor, and such sales
may be adjourned from time to time in accordance with applicable law
without further requirement of notice to Borrowers. Bank shall have the
right to bid or credit bid at any such sale on its own behalf.
(E) SET-OFF. The right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination
thereof, and, to the extent permitted by
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<PAGE>
applicable law, Bank may purchase all or any part of the Collateral at
public or private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations.
Subject to the rights of the holders of any Permitted Lien having priority
over the Liens of Bank, if any, the proceeds realized from the sale of any
Collateral shall be applied first to the reasonable costs, expenses and
attorneys' fees and expenses incurred by Bank for collection and for
acquisition, completion, protection, removal, storage, sale and delivery
of the Collateral; second, to interest due upon any of the Obligations; and
third, to the principal of the Obligations. If any deficiency shall arise,
Borrowers shall remain liable to Bank therefor. In the event of any
surplus, it shall be paid promptly to Borrowers.
10.4 APPLICATION OF COLLATERAL; TERMINATION OF FINANCING. Upon the
occurrence of any Event of Default, Bank may also, with or without proceeding
with sale or foreclosure or demanding payment of the Obligations, without
notice, terminate Bank's further performance under this Agreement or any
other agreement or agreements between Bank and Borrowers, without further
liability or obligation by Bank, and may also, at any time, appropriate and
apply on any Obligations any and all Collateral in the possession of Bank.
No such termination shall absolve, release or otherwise affect the liability
of Borrowers in respect of transactions had prior to such termination, nor
affect any of the Liens, rights, powers, and remedies of Bank, but they
shall, in all events, continue until all Obligations of Borrowers to Bank are
satisfied.
10.5 REMEDIES CUMULATIVE. All covenants, conditions, provisions,
warranties, guaranties, indemnities, and other undertakings of Borrowers
contained in this Agreement, each of the other Credit Documents or in any
document referred to herein or therein or contained in any agreement
supplementary hereto or thereto or in any schedule or report given to Bank,
or contained in any other agreement between Bank and Borrowers, heretofore,
concurrently, or hereafter entered into or delivered, shall be deemed
cumulative to and not in derogation or substitution of any of the terms,
covenants, conditions, or agreements of Borrowers herein contained.
10.6 CROSS-COLLATERAL AND CROSS-DEFAULT. Each of the security interest
and liens granted to Bank by Borrowers pursuant to the Credit Documents or
otherwise shall secure any and all of Borrowers' liabilities and obligations
to Bank under the Credit Documents including, but not limited to, Borrowers'
obligations under the Term Note and the Promissory Note. It is further
understood and agreed that a default under either of the Promissory Note or
the Term Note, or any of the Credit Documents shall constitute a default
under each of the other Notes and under each of the other Credit Documents.
References in any of the other Credit Documents to events or conditions
constituting a default shall in no way impair Bank's absolute and
unconditional right to demand immediate repayment of the unpaid balance of
the Promissory Note, notwithstanding the fact that at the time of such demand
there may not exist any event or condition constituting a default.
10.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of Borrowers and Bank and their respective successors
and assigns; provided, however, that Borrowers shall not assign any of their
rights under the Credit Documents in whole or in part without the prior
written consent of Bank.
38
<PAGE>
10.8 RELATIONSHIP OF BORROWERS. The liability of each of the Borrowers
under this Agreement is joint and several, and absolute and unconditional,
without regard to the liability of any other person, and shall not in any
manner be affected by reason of the partial or complete unenforceability or
invalidity of any obligations under this Agreement or other security or
guaranty for any of the loans and may be enforced without requiring Bank to
first resort to any other right, remedy or security that Bank may have, and
that no Borrowers shall have any right of subrogation, reimbursement or
indemnity whatsoever, nor any right of recourse to security for the debts and
obligations of the Borrowers to Bank unless and until all of such debts and
obligations have been paid in full. No delay in making demand on any one of
Borrowers for satisfaction of its liability hereunder shall prejudice Bank's
right to enforce such satisfaction. Bank in its reasonable discretion may,
without prejudice to its rights under this Agreement, at any time or times
(a) grant any one or more of Borrowers whatever financial accommodations that
Bank may from time to time deem advisable, even if such Borrower might be in
default in any respect under this Agreement, (b) release any obligor or
Collateral or assent to any exchange of Collateral, if any, irrespective of
the consideration, if any, received therefor, (c) grant any waiver or consent
or forbear from exercising any right, power or privilege that Bank may have
to acquire against any one or more of Borrowers, (d) grant any other
indulgence to any obligor, and (e) accept any Collateral for, or other
obligors upon, the obligations described herein.
11. APPOINTMENT OF BANK AS BORROWERS' LAWFUL ATTORNEY
Each Borrower hereby irrevocably designates, makes, constitutes and
appoints Bank (and all persons designated by Bank) as such Borrower's true
and lawful attorney (and agent-in-fact) for the purposes designated in
Sub-paragraphs (A) through (P) of this Section 11, and, upon the occurrence
and continuance of an Event of Default, Bank, or Bank's agent, in each
Borrower's or Bank's name, may: (A) demand payment of the Accounts, (B)
enforce payment of the Accounts, by legal proceedings or otherwise, (C)
exercise all of each Borrower's rights and remedies with respect to the
collection of the Accounts and any other Collateral, (D) settle, adjust,
compromise, extend or renew the Accounts, (E) settle, adjust or compromise
any legal proceedings brought to collect the Accounts, (F) if permitted by
applicable law, sell or assign the Accounts and other Collateral upon such
terms, for such amounts and at such time or times as Bank deems advisable,
(G) discharge and release the Accounts and any other Collateral, (H) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral, (I) prepare, file and sign such Borrower's name on a proof of
claim in bankruptcy or similar document against any Account Debtor, (J)
prepare, file and sign such Borrower's name on any notice of Lien, assignment
or satisfaction of Lien or similar document in connection with the Accounts,
(K) do all acts and things necessary, in Bank's reasonable discretion, to
fulfill such Borrower's obligations under this Agreement, (L) endorse the
name of such Borrower upon any of the items of payment or proceeds relating
to any Collateral and deposit the same to the account of Bank on account of
the Obligations, (M) endorse the name of such Borrower upon any chattel paper
document, instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to the Accounts, Inventory and any other
Collateral, (N) use such Borrower's stationery and sign the name of such
Borrower to verifications of the Accounts and notices thereof to Account
Debtors, (O) use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
Accounts, Inventory and any other Collateral to which such Borrower has
access, and (P) notify post office authorities to change the address for
delivery of such Borrower's
39
<PAGE>
mail to an address designated by Bank, receive and open all mail addressed to
such Borrower, and, after removing all remittances and other proceeds of
Collateral, forward the mail to such Borrower.
12. MISCELLANEOUS
12.1 MODIFICATION OF AGREEMENT; SALE OF INTEREST. This Agreement, the
Notes and each of the other Credit Documents may not be modified, altered or
amended, except by an agreement in writing signed by each Borrower and Bank.
Borrowers may not sell, assign or transfer this Agreement, or any of the
other Credit Documents or any portion thereof including, without limitation,
Borrowers' rights, title, interests, remedies, powers, and/or duties
hereunder or thereunder. Borrowers hereby consent, except as otherwise
provided in this Agreement, to Bank's participation, sale, assignment,
transfer or other disposition, at any time or times hereafter, of this
Agreement, or any of the other Credit Documents, or of any portion hereof or
thereof including, without limitation, Bank's rights, title, interests,
remedies, powers, and/or duties hereunder or thereunder.
12.2 ATTORNEYS' FEES AND EXPENSES. If, at any time or times, whether
prior or subsequent to the date hereof, regardless of the existence of an
Event of Default, Bank employs counsel for advice or other representation or
incurs legal and/or other costs and expenses in connection with each of the
following:
(A) LOAN DOCUMENTS. The preparation of this Agreement and all of the
other Credit Documents or any amendment of or modification of this
Agreement or any of the other Credit Documents.
(B) LOAN ADMINISTRATION. The administration of this Agreement and
each of the other Credit Documents and the transactions contemplated hereby
and thereby.
(C) LITIGATION. Any litigation, contest, dispute, suit, proceeding
or action (whether instituted by Bank, Borrowers or any other Person) in
any way relating to the Collateral, this Agreement, any of the other Credit
Documents or Borrowers' affairs, but excluding any litigation between
Borrowers and Bank as adverse parties unless otherwise permitted by law in
connection with any judgment awarded in favor of the prevailing party.
(D) ENFORCEMENT OF BANK'S RIGHTS. Any attempt to enforce any rights
of Bank against any Person, other than Borrowers, which may be obligated to
Bank by virtue of this Agreement or any of the other Credit Documents
including, without limitation, any guarantor of the Obligations and any
Account Debtors.
(E) PROTECTION OF COLLATERAL. Any attempt to inspect, verify,
protect, collect, sell, liquidate or otherwise dispose of the Collateral.
(F) FILINGS. The filing and recording of all documents required by
Bank to perfect Bank's Liens in the Collateral including without
limitation, any documentary stamp tax or any other taxes incurred because
of such filing or recording.
40
<PAGE>
In any such event, the reasonable attorneys' fees arising from such services
and all reasonably incurred expenses, costs, charges and other fees of such
counsel or of Bank or relating to any of the events or actions described in
this Section 12.2 shall be payable, on demand, by Borrowers to Bank and shall
be additional Obligations hereunder secured by the Collateral. Without
limiting the generality of the foregoing, such expenses, costs, charges and
fees may include accountants' fees, costs and expenses; court costs and
expenses; photocopying and duplicating expenses; court reporter fees, costs
and expenses; long distance telephone charges; air express charges, telegraph
charges; secretarial overtime charges; and expenses for travel, lodging and
food paid or incurred in connection with the performance of such legal
services. Additionally, if any taxes (other than Federal or state income
taxes payable by Bank) shall be payable on account of the execution or
delivery of this Agreement, or the execution, delivery, issuance or recording
of any of the other Credit Documents, or the creation of any of the
Obligations hereunder, by reason of any existing or hereafter enacted federal
or state statute, Borrowers shall pay all such taxes including, without
limitation, any interest and/or penalty thereon, and shall indemnify and hold
Bank harmless from and against liability in connection therewith.
12.3 WAIVER BY BANK. Bank's failure, at any time or times hereafter, to
require strict performance by Borrowers of any provision of this Agreement or
any of the other Credit Documents shall not waive, affect or diminish any
right of Bank thereafter to demand strict compliance and performance
therewith. Any suspension or waiver by Bank of an Event of Default by
Borrowers under this Agreement or any of the other Credit Documents shall not
suspend, waive or affect any other Event of Default by Borrowers under this
Agreement or any of the other Credit Documents, whether the same is prior or
subsequent thereto and whether of the same or of a different type. None of
the undertakings, agreements, warranties, covenants and representations of
Borrowers contained in this Agreement or any of the other Credit Documents
and no Event of Default by Borrowers under this Agreement or any of the other
Credit Documents shall be deemed to have been suspended or waived by Bank,
unless such suspension or waiver is by an instrument in writing specifying
such suspension or waiver and is signed by a duly authorized representative
of Bank and directed to Borrowers.
12.4 SEVERABILITY. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
12.5 PARTIES. This Agreement and the other Credit Documents shall be
binding upon and inure to the benefit of the successors and assigns of
Borrowers and Bank. This provision, however, shall not be deemed to modify
Section 12.1 hereof.
12.6 CONFLICT OF TERMS. The provisions of each of the other Credit
Documents and any exhibit or schedule hereto are incorporated in this
Agreement by this reference thereto. Except as otherwise provided in this
Agreement and except as otherwise provided in any of the other Credit
Documents by specific reference to the applicable provision of this
Agreement, if any provision contained in this Agreement is in conflict with,
or inconsistent with, any provision in any of the other Credit Documents, the
provision contained in this Agreement shall govern and control.
41
<PAGE>
12.7 WAIVERS BY BORROWERS. Except as otherwise provided for in this
Agreement or as required by applicable law, Borrowers waive (A) presentment,
demand and protest and notice of presentment, protest, default, nonpayment,
maturity, release, compromise, settlement, extension or renewal of any or all
commercial paper, accounts, contract rights, documents, instruments, chattel
paper and guaranties at any time held by Bank on which Borrowers may in any
way be liable, (B) notice prior to taking possession or control of the
Collateral which might be required by any court prior to allowing Bank to
exercise any of Bank's remedies, and (C) AS A SPECIFICALLY BARGAINED
INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO
BORROWERS, BORROWERS AND BANK EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY
ACTION, CLAIM, SUIT, OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS
AGREEMENT AND/OR THE CONDUCT OF THE RELATIONSHIP BETWEEN BANK AND BORROWERS.
12.8 AUTHORIZATION. Bank is authorized to make loans under the terms of
this Agreement upon the request, either written or oral, in the name of
Borrowers of the President or Chief Financial Officer of EPI or such other
persons, from time to time, holding the offices or positions with Borrowers
as designated in any separate borrowing or banking resolutions delivered by
Borrowers to Bank and all loans made by Bank to Borrowers or for its account
under this Agreement shall be conclusively deemed to have been authorized by
Borrowers and to have been made pursuant to duly authorized requests therefor.
12.9 GOVERNING LAW. THIS AGREEMENT HAS BEEN ACCEPTED BY BANK AT AND
SHALL BE DEEMED TO HAVE BEEN MADE AT CLEVELAND, OHIO. THE LOANS PROVIDED FOR
HEREIN ARE TO BE FUNDED AND REPAID TO BANK AT 125 WEST 55 STREET, NEW YORK,
NEW YORK 10019 (OR SUCH OTHER PLACE AS DESIGNATED TO BORROWERS), BUT THIS
AGREEMENT SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO. AS PART
OF THE CONSIDERATION FOR NEW VALUE RECEIVED, BORROWERS HEREBY CONSENT TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF OHIO
AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED OR
CERTIFIED MAIL DIRECTED TO BORROWERS AT THE ADDRESS STATED IN SECTION
12.10(B) BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON
ACTUAL RECEIPT THEREOF. BORROWERS WAIVE ANY OBJECTION TO JURISDICTION AND
VENUE OF ANY ACTION INSTITUTED HEREUNDER AND AGREE NOT TO ASSERT ANY DEFENSE
BASED ON LACK OF JURISDICTION OR VENUE IN ANY JURISDICTION WHERE COLLATERAL
IS LOCATED. NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF BANK TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF
BANK TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWERS OR THEIR PROPERTY IN
THE COURTS OF ANY OTHER JURISDICTION.
12.10 NOTICES. Except as otherwise provided herein, any notice
required hereunder shall be in writing, and shall be deemed to have been
validly served, given or delivered upon deposit in
42
<PAGE>
the United States mails, with proper postage prepaid, and addressed to the
party to be notified as follows:
(A) If to Bank, at: National Bank of Canada
One Cleveland Center, Suite 2430
1375 East 9th Street
Cleveland, Ohio 44114
ATTN: Jack Jankovic
With a copy to: Arter & Hadden
1100 Huntington Bank Building
925 Euclid Avenue
Cleveland, Ohio 44115-1475
ATTN: Eugene M. Killeen
(B) If to Borrowers, EPI Technologies, Inc.
810 Chicago Street
Toledo, Ohio 43611
ATTN: Chief Financial Officer
With a copy to: Benesch, Friedlander, Coplan & Aronoff, LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
ATTN: Lawrence M. Bell
or to such other address as each party may designate for itself by like
notice given in accordance with this Section 12.10.
12.11 SECTION TITLES. The section titles and table of contents
contained in this Agreement are and shall be without substantive meaning and
content of any kind whatsoever and are not a part of the agreement between
the parties hereto.
12.12 EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective
only upon Bank's acceptance hereof.
43
<PAGE>
IN WITNESS WHEREOF, the duly authorized officers of the parties to this
Agreement have executed this Agreement this _____ day of _______________,
1998.
EPI TECHNOLOGIES, INC. ENVIRONMENTAL PURIFICATION
INDUSTRIES COMPANY
By NATIONAL PURIFICATION, INC.,
By: General Partner
------------------------------
Title:
---------------------------
By:
-------------------------------
Title:
----------------------------
AND
NATIONAL BANK OF CANADA By MEPI CORP., General Partner
By: By:
------------------------------ -------------------------------
Title: Title:
--------------------------- ----------------------------
44
<PAGE>
LIST OF EXHIBITS
EXHIBIT A Locations of Collateral
EXHIBIT B Fixed Collateral; Exceptions
EXHIBIT C Description of the Premises
EXHIBIT D Form of Promissory Note
EXHIBIT E Form of Term Note
EXHIBIT F Form of Loss Payee Endorsement
EXHIBIT G-1 Form of Borrowing Base Certificate (provide with Request for
Advance)
EXHIBIT G-2 Form of Borrowing Base Certificate (Monthly reporting)
EXHIBIT H Schedule of Material Agreements
EXHIBIT I Schedule of General Disclosures
EXHIBIT J Schedule of Litigation and Administrative Proceedings
EXHIBIT K Schedule of Patents, Trademarks, and Other
Intangible Rights
EXHIBIT L Compliance with Environmental Laws
EXHIBIT M Schedule of Permitted Indebtedness
EXHIBIT N Schedule of Permitted Liens
EXHIBIT N-1 Description of Meridian Preferred Stock
EXHIBIT O Fictitious or Other Names of Borrowers
45
<PAGE>
EXHIBIT D
PROMISSORY NOTE
$1,500,000 Cleveland, Ohio
January __, 1998
FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to pay
to the order of NATIONAL BANK OF CANADA ("Bank") the principal amount of ONE
MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000), or the aggregate unpaid
principal amount of all loans evidenced by this Note made by Bank to Borrowers
pursuant to Section 2.1 of a certain Loan and Security Agreement dated of even
date herewith, entered into by and among EPI Technologies, Inc., ("EPI"),
Environmental Purification Industries, Inc. ("EPIC") and Bank (which, as
hereafter amended, modified or supplemented from time to time, is referred to
herein as the "Loan Agreement"), whichever is less. Capitalized terms used in
this Promissory Note (the "Note") shall have the meanings ascribed to them in
the Loan Agreement.
Borrowers also promise to pay interest on the unpaid principal balance of
each loan from time to time outstanding from the date of such loan until the
payment in full thereof at a rate per annum which shall be determined in
accordance with the provisions of Section 2.1 of the Loan Agreement. Interest
shall be payable on each date provided for in Section 2.1 of the Loan Agreement;
PROVIDED, however, that interest on any principal portion which is not paid when
due shall be payable on demand.
The undersigned agree to pay the aggregate unpaid principal amount of
all loans evidenced by this Note in one installment, due and payable on
_________________.
Payment of the principal of, and interest on, this Note shall be made in
lawful money of the United States of America to Bank at 125 West 55th Street,
New York, New York 10019, or at such other place as the holder shall have
designated to the undersigned in writing.
This Note is secured by, among other things, the security interests and
liens described in the Loan Agreement and reference is hereby made to the Loan
Agreement for a statement of the rights and obligations of Bank and the duties
and obligations of the undersigned in relation thereto, but neither this
reference to the Loan Agreement nor any provision thereof shall affect or impair
the absolute and unconditional obligation of the undersigned to pay the
principal of, and interest on, this Note when due.
Page 1 of 3
<PAGE>
Upon the occurrence of an Event of Default (as defined in the Loan
Agreement) which has not been waived in writing by Bank, the undersigned shall
pay Bank interest on the daily average balance of all amounts outstanding under
this Note at a per-annum rate (the "Default Rate") of two (2) percentage points
plus the rate otherwise applicable to amounts outstanding under this Note from
the date when due or the date such Event of Default has occurred, as applicable,
until all amounts due under this Note are paid in full or such Event of Default
has been waived in writing by Bank; PROVIDED, however, that the Default Rate
shall not exceed the maximum rate permitted by applicable law.
Upon the occurrence of an Event of Default (as defined in the Loan
Agreement), all or any portion of the principal and interest due or to become
due under this Note shall become at once due and payable at the option of the
holder of this Note without notice, demand, presentment, or dishonor, which the
undersigned hereby waive.
The undersigned agree to pay upon default the costs of collection including
reasonable fees of attorneys.
No delay or omission on the part of the holder in exercising any rights
under this Note shall operate as a waiver of such right or of any other right of
such holder, nor shall any delay, omission, or waiver on any one occasion be
deemed a bar to or waiver of the same or any other right on any further
occasion. The undersigned and every endorser of this Note, regardless of the
time, order, or place of signing, waive presentment, demand, protest, and notice
of every kind, and assent to any one or more extension or postponement of the
time of payment or any other indulgences, to any substitutions, exchanges, or
releases of collateral for this Note, and to additions or releases of any other
parties or persons primarily or secondarily liable.
The undersigned authorize any attorney-at-law to (a) appear before any
court of record, state or Federal, in the County of the State of Ohio in which
this Note was executed, or in any other county of the State of Ohio or any other
State of the United States of America, after the unpaid principal of this Note
becomes due, (b) waive issuance and service of process, (c) admit the maturity
of this Note, (d) enter an appearance and confess judgment against the
undersigned in favor of Bank for the amount then appearing due, together with
interest thereon and costs of suit (including reasonable attorneys' and
paralegals' fees), and (e) thereupon to release all errors and waive all rights
of appeal and stay of execution. No such judgment against the undersigned based
upon one or more matured obligations shall be a bar to a subsequent judgment or
judgments pursuant to this warrant of attorney against the undersigned based
upon subsequently matured obligations of the undersigned. The foregoing warrant
of attorney shall survive any judgment, it being understood that should any
judgment be vacated for any reason, the foregoing warrant of attorney
nevertheless may thereafter be used for obtaining an additional judgment or
judgments.
This Note is being executed and delivered in Cleveland, Ohio.
Page 2 of 3
<PAGE>
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
EPI TECHNOLOGIES, INC.
By:
--------------------------------------
Title:
-----------------------------------
ENVIRONMENTAL PURIFICATION
INDUSTRIES COMPANY
By National Purification, Inc.
General Partner
------------------------------------------
and
By MEPI Corp., General Partner
------------------------------------------
Page 3 of 3
<PAGE>
EXHIBIT E
TERM NOTE
$1,620,000 Cleveland, Ohio
January __, 1998
FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to
pay to the order of NATIONAL BANK OF CANADA ("Bank") the principal amount of
ONE MILLION SIX HUNDRED TWENTY THOUSAND DOLLARS ($1,620,000) as hereinafter
provided, with interest on the unpaid principal balance from time to time
outstanding at a rate per annum equal to one (1) percentage point above
Bank's Base Rate (as defined in the Loan Agreement, as described below).
Interest shall be payable monthly commencing on ____________, 1998, and
continuing on the last day of each month thereafter until the entire
principal amount has been repaid in full. Any increase or decrease in the
interest rate resulting from a change in Bank's Base Rate shall become
effective on the date of such change. Interest shall be computed on a 360-day
year basis based on the actual number of days elapsed.
The undersigned agree to pay the principal of and any unpaid interest on
this Term Note (the "Note") in full in sixty monthly installments consisting
of (a) fifty-nine (59) equal monthly installments of Nineteen Thousand
Dollars ($19,000) each, commencing _________________ and continuing on the
last day of each successive calendar month thereafter and (b) a final payment
on _________________ in the amount of Four Hundred Ninety-Nine Thousand
Dollars ($499,000), or such other amount of principal and accrued but unpaid
interest remaining unpaid on _________________.
Payment of the principal of and interest on this Note shall be made in
lawful money of the United States of America to Bank at 125 West 55th
Street, New York, New York, or at such other place as the holder shall have
designated to the undersigned in writing.
This Note is issued pursuant to the Loan And Security Agreement, entered
into by and among EPI Technologies, Inc. ("EPI"), Environmental Purification
Industries Company ("EPIC") and Bank dated of even date herewith (the "Loan
Agreement") to which reference is hereby made for a statement of the rights
and obligations of Bank and the duties and obligations of the Borrowers
undersigned in relation thereto, but neither this reference to the Loan
Agreement nor any provision thereof shall affect or impair the absolute and
unconditional obligation of the undersigned to pay the principal of, and
interest on, this Note when due.
This Note is secured by, among other things, the security interests and
liens described in the Loan Agreement.
Page 1 of 3
<PAGE>
The undersigned may prepay all or any portion of this Note at any time and
in any amount without penalty.
Upon the occurrence of an Event of Default (as defined in the Loan
Agreement) which has not been waived in writing by Bank, the undersigned shall
pay Bank interest on the daily average balance of all amounts outstanding under
this Note at a rate per annum (the "Default Rate") of two (2) percentage points
plus the rate otherwise applicable to all amounts outstanding under this Note
from the date when due or the date such Event of Default has occurred, as
applicable, until all amounts due herein are paid in full or such Event of
Default has been waived by Bank; provided, however, that the Default Rate shall
not exceed the maximum rate permitted by applicable law.
Upon the occurrence of an Event of Default (as defined in the Loan
Agreement), all or any portion of the principal and interest due or to become
due under this Note shall become at once due and payable at the option of the
holder of this Note without notice, demand, presentment, or dishonor, which the
undersigned hereby waive.
The undersigned agree to pay upon default the costs of collection including
reasonable fees of attorneys.
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such right or of any other right of
such holder, nor shall any delay, omission or waiver on any one occasion be
deemed a bar to or waiver of the same or any other right on any future occasion.
The undersigned and every endorser of this Note regardless of the time, order or
place of signing waive presentment, demand, protest and notices of every kind
and assent to any one or more extensions or postponements of the time of payment
or any other indulgences, and to any substitutions, exchanges, or releases of
any other parties or persons primarily or secondarily liable.
The undersigned authorize any attorney-at-law to appear before any court of
record, state or Federal, in the county of the State of Ohio in which this Note
was executed or in any other State of the United States of America after the
unpaid principal of this Note becomes due, waive the issuance and service of
process, admit the maturity of this Note, confess judgment against the
undersigned in favor of Bank for the amount then appearing due, together with
interest thereon and costs of suit, and thereupon to release all errors and
waive all rights of appeal and stay of execution. The foregoing warrant of
attorney shall survive any judgment, it being understood that should any
judgment be vacated for any reason, the foregoing warrant of attorney
nevertheless may thereafter be used for obtaining an additional judgment or
judgments.
This Note is being executed and delivered in Cleveland, Ohio.
Page 2 of 3
<PAGE>
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
EPI TECHNOLOGIES, INC.
By: ------------------------------
Title:------------------------------
ENVIRONMENTAL PURIFICATION
INDUSTRIES COMPANY
By National Purification, Inc.
General Partner
------------------------------------
and
By MEPI Corp., General Partner
------------------------------------
Page 3 of 3
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Consolidated Financial Data," "Summary Selected Consolidated Financial Data,"
and "Experts" and to the use of our report dated May 22, 1997 (except
Note 13, as to which the date is August 26, 1997) in the Registration Statement
(Form S-1) and related Prospectus of EPI Technologies, Inc. for the
registration of 1,437,500 shares of its Common Stock and 1,437,500 redeemable
warrants to purchase Common Stock.
[SIG]
Ernst & Young LLP
Toledo, Ohio
January 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EPI TECHNOLOGIES, INC.
AS OF AND FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001012957
<NAME> EPI TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
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0
0
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