PROSPECTUS
LAMINATING TECHNOLOGIES, INC.
[LOGO] 1,700,000 Units
Consisting of 1,700,000 Shares of Common Stock,
1,700,000 Redeemable Class A Warrants and
1,700,000 Redeemable Class B Warrants
Each unit ("Unit") offered by Laminating Technologies, Inc. (the "Company")
consists of one share of common stock, $.01 par value ("Common Stock"), one
redeemable class A warrant ("Class A Warrants") and one redeemable class B
warrant ("Class B Warrants"). The components of the Units will be separately
transferable immediately upon issuance. Each Class A Warrant entitles the holder
to purchase one share of Common Stock and one Class B Warrant at an exercise
price of $6.50, subject to adjustment, at any time until the fifth anniversary
of the date of this Prospectus. Each Class B Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $8.75, subject to
adjustment, at any time until the fifth anniversary of the date of this
Prospectus. Commencing one year after the date hereof, the Class A Warrants and
Class B Warrants (together the "Warrants") are each subject to redemption by the
Company at a redemption price of $.05 per Warrant on 30 days' written notice,
provided the closing bid price of the Common Stock averages in excess of $9.10
and $12.25 per share, respectively, for any 30 consecutive trading days ending
within 15 days of the notice of redemption. See "Description of Securities."
Prior to this offering (the "Offering"), there has been no public market
for the Units, the Common Stock or the Warrants, and there can be no assurance
that such markets will develop. The Units, Common Stock, Class A Warrants and
Class B Warrants have been approved for listing on the Nasdaq SmallCap Market
("Nasdaq") under the symbols LAMTU, LAMT, LAMTW and LAMTZ, respectively. See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. D.H. Blair Capital Corp., an entity whose sole
stockholder is the sole stockholder of D.H. Blair Investment Banking Corp. (the
"Underwriter"), beneficially owns an aggregate of 26.25% of the outstanding
shares of Common Stock before this Offering. Pursuant to Schedule E to the
By-Laws of the National Association of Securities Dealers, Inc. (the "NASD"),
the Units are being offered at a price no greater than the maximum recommended
by RAS Securities Corp., a qualified independent underwriter. See
"Underwriting." For information concerning a Securities and Exchange Commission
investigation relating to the Underwriter, see "Risk Factors" and
"Underwriting."
Concurrently with this Offering, the Company has registered for resale by
certain securityholders (the "Selling Securityholders") 997,500 Class A Warrants
(the "Selling Securityholder Warrants"), and the Common Stock and Class B
Warrants underlying the Selling Securityholder Warrants and the Common Stock
issuable upon exercise of such Class B Warrants. The Selling Securityholder
Warrants and the securities underlying such warrants are sometimes collectively
referred to as the "Selling Securityholder Securities." The Selling
Securityholder Warrants are issuable on the closing of this offering to the
Selling Securityholders upon the automatic conversion of warrants (the "Bridge
Warrants") acquired by them in the Company's private placement completed in
April and May 1996 (the "Bridge Financing"). The Selling Securityholders have
agreed not to sell any of the Selling Securityholder Warrants for at least 90
days after the closing of this Offering and, for the period expiring 270 days
after such Closing, have agreed to certain resale restrictions. Sales of the
Selling Securityholder Warrants or the underlying securities, or the potential
of such sales, may have an adverse effect on the market price of the securities
offered hereby.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Underwriting Discounts and Proceeds to
Price to Public Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Unit................................ $5.00 $0.465 $4.535
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Total (3) .............................. $8,500,000 $790,500 $7,709,500
============================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $255,000,
($293,250 if the over-allotment option is exercised in full); and (ii) an
option, exercisable over a period of three years commencing two years from
the date of this Prospectus, to purchase up to 170,000 Units at $6.00 per
Unit (the "Unit Purchase Option"). The Company has also agreed to indemnify
the Underwriter against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, including
the Underwriter's non-accountable expense allowance, estimated at $905,000
($943,250 if the Underwriter's over-allotment option is exercised in full).
See "Underwriting."
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 255,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $9,775,000,
$909,075 and $8,865,925 , respectively. See "Underwriting."
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The Units are being offered on a "firm commitment" basis by the Underwriter
when, as and if delivered to and accepted by the Underwriter, subject to its
right to reject orders in whole or in part and subject to certain other
conditions. It is expected that the delivery of the certificates representing
the Units will be made against payment at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, New York, New York 10005 on or about October 15,
1996.
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is October 9, 1996
<PAGE>
[This page sets forth an illustration of
a packaging product that can be produced
by the Company utilizing the LTI
Processed method and a schematic diagram
of the LTI Processed manaufacturing
system.]
The Company intends to furnish its stockholders with annual reports containing
financial statements audited by its independent auditors.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS ON THE NASDAQ SMALLCAP MARKET WHICH STABILIZE OR MAINTAIN THE
MARKET PRICE OF THE UNITS, COMMON STOCK AND/OR WARRANTS OFFERED HEREBY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
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PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by reference to, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Except as
otherwise noted, all information in this Prospectus (i) reflects a
2.7102-for-one reverse stock split of the Common Stock effected in April 1996;
(ii) reflects the conversion in April 1996 of certain outstanding indebtedness
of the Company held by certain individuals (the "Conversion Investors") into an
aggregate of 361,061 shares of Common Stock of the Company (the "Debt
Conversion"); (iii) assumes no exercise of (a) the Underwriter's over-allotment
option; (b) the Warrants; (c) the Selling Securityholder Warrants; (d) the Unit
Purchase Option; or (e) options granted or available for grant under the
Company's stock option plan; and (iv) gives effect to the automatic conversion,
on the closing of the Offering, of (a) the Bridge Warrants into the Selling
Securityholder Warrants; (b) all outstanding shares of the Company's Series A
Preferred Stock, $.01 par value ("Series A Preferred Stock"), into 184,486
shares of Common Stock. See "Management -- Stock Options," "Certain
Transactions" and "Description of Securities."
The Company
Laminating Technologies, Inc. (the "Company") is a development stage
company which has been formed to research, develop, design and market packaging
and specialty display products that are manufactured using the Company's
proprietary processing method ("LTI Processed"). LTI Processed(TM) is a
procedure by which polyester film is laminated onto single thickness paper
("linerboard") prior to corrugation. The Company believes that the LTI Processed
method is the only process currently available in which polyester film can be
laminated onto linerboard such that the resulting laminate can withstand the
heat and stress of corrugation. This procedure results in a packaging material
that the Company believes is physically superior, more attractive and
potentially more cost-effective than many currently existing packaging materials
such as polystyrene (styrofoam), plastic, metal and certain corrugated cardboard
products, including those that are laminated with paper and/or coated after
corrugation.
The LTI Processed method can be utilized to produce a wide variety of
packaging products and specialty displays. To date, the Company has produced a
number of prototype products, including bakery dessert boxes, coolers, frozen
food shippers, point of purchase displays, pizza delivery boxes, medical
product/specimen shippers and microwavable food disks used as pie plates and
pizza slice trays. The Company believes that these products, together with other
potential LTI Processed products, are capable of improving upon existing
packaging products by reducing or eliminating certain limitations associated
with such products. For example, the Company believes that LTI Processed
products may be leakproof, resistant to a variety of solvent and petroleum-based
chemicals, thermally insulating, recyclable, stronger and may have a higher
bursting strength than conventional corrugated products. The Company also
believes that the LTI Processed method permits higher quality printing and
results in more attractive packaging than corrugated materials printed with
traditional printing processes. Such aesthetic qualities have become more
important in recent years as retailers have significantly increased the extent
to which they display and sell products in the same packaging in which they are
shipped.
In addition, the Company believes that while LTI Processed material may be
more costly to produce than traditional corrugated board, it is generally less
expensive than certain other non-corrugated packaging products, including
styrofoam, metal and plastic. Moreover, because LTI Processed containers often
can be reused, and can be collapsed and stored pending reuse (thereby requiring
less storage space than containers made from materials such as styrofoam, metal
and plastic), they may be more cost-effective than other packaging materials,
including traditional corrugated materials. Based on these potential performance
advantages and cost savings, the Company believes that LTI Processed packaging
materials may be preferred to many packaging products currently marketed by
other suppliers.
The Company's strategy is to focus principally on (i) designing, developing
and marketing value-added, niche LTI Processed products directly to end-users
and (ii) leveraging its resources by establishing strategic alliances with
vertically integrated corrugators ("converters") for whom the Company intends to
supply LTI Processed linerboard for further manufacture (i.e., printing,
die-cutting, etc.) and sale by such converters. The Company may in the future
also seek to license its LTI Processed technology to manufacturers. With the
exception of design activities and certain printing operations, the Company
currently intends to out-source production to laminators or converters with whom
the Company expects to establish informal relationships.
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3
<PAGE>
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Since its inception, the Company has focused primarily on research and
development, has had only limited sales and has only recently begun to focus on
broader-based marketing. Most of such sales did not involve significant orders
and the Company believes that these customers were primarily evaluating the
commercial application of LTI Processed products. Moreover, further development
of the LTI Processed method may be necessary to satisfy the requirements of
specific end-users or strategic partners.
The Company was incorporated in Georgia in March 1993 as New Cooler Corp.
and subsequently changed its name to Laminating Technologies, Inc. In April
1996, the Company was merged into Laminating Merger Corporation, a Delaware
corporation, which changed its name to Laminating Technologies, Inc. The
Company's executive offices are located at 7730 Roswell Road, Atlanta, Georgia
30350-4862 and its telephone number is (770) 396-3090.
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4
<PAGE>
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The Offering
Securities Offered.......... 1,700,000 Units, each Unit consisting of one share
of Common Stock, one Class A Warrant and one
Class B Warrant.
Terms of Warrants .......... Each Class A Warrant entitles the holder to
purchase one share of Common Stock and one Class
B Warrant at an exercise price of $6.50, subject
to adjustment, at any time until the fifth
anniversary of the date of this Prospectus. Each
Class B Warrant entitles the holder to purchase
one share of Common Stock at an exercise price
of $8.75, subject to adjustment, at any time
until the fifth anniversary of the date of this
Prospectus. The Warrants are each subject to
redemption in certain circumstances. See
"Description of Securities."
Securities Offered
Concurrently by
Selling Securityholders... 997,500 Class A Warrants; 997,500 Class B Warrants
issuable upon exercise of these Class A Warrants
and 1,995,000 shares of Common Stock issuable
upon exercise of these Class A Warrants and
Class B Warrants. See "Concurrent Offering."
Common Stock Outstanding
Before Offering........... 1,230,000 shares (1)(2)
Common Stock Outstanding
After Offering............ 2,930,000 shares (1)(2)(3)
Use of Proceeds............. To repay the notes (the "Bridge Notes") issued in
the Bridge Financing, for product development,
sales and marketing and working capital. See
"Use of Proceeds."
Nasdaq Symbols (4)
Units .................. LAMTU
Common Stock: ......... LAMT
Class A Warrants: ...... LAMTW
Class B Warrants: ...... LAMTZ
Risk Factors................ The Offering involves a high degree of risk and
immediate substantial dilution. See "Risk
Factors" and "Dilution."
- ----------
(1) Excludes (i) an aggregate of 1,995,000 shares of Common Stock reserved for
issuance upon exercise of the Selling Securityholder Warrants; (ii) 250,000
shares of Common Stock reserved for issuance under the Company's Amended
and Restated 1996 Stock Option Plan (the "Plan"), under which, as of the
date of this Prospectus, options to purchase 190,000 shares of Common Stock
are outstanding at exercise prices of $4.00 or $5.00 per share (including
40,000 options exercisable at $5.00 per share to be granted on the date of
this Prospectus); and (iii) 36,897 shares of Common Stock issuable upon
exercise of warrants exercisable at $2.71 per share issued to the
Underwriter in March 1994.
(2) Includes 410,000 shares of Common Stock (the "Escrow Shares") which have
been deposited into escrow by the holders thereof. The Escrow Shares are
subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the
market price of the Company's Common Stock does not achieve certain levels.
If such earnings or market price levels are met, the Company will record a
substantial non-cash charge to earnings, for financial reporting purposes,
as compensation expense relating to the value of the Escrow Shares released
to Company officers and employees. See "Risk Factors -- Charges and
Potential Charges to Earnings," "Capitalization" and "Principal
Stockholders."
(3) Excludes (i) up to 1,020,000 shares of Common Stock issuable upon exercise
of the Underwriter's overallotment option and the Warrants included
therein; (ii) 5,100,000 shares of Common Stock issuable upon exercise of
the Warrants which are components of the Units offered hereby; and (iii) an
aggregate of 680,000 shares of Common Stock issuable upon exercise of the
Unit Purchase Option and the Warrants included therein. See "Underwriting."
(4) Notwithstanding quotation on the Nasdaq SmallCap Market, there can be no
assurance that an active trading market for the Company's securities will
develop or, if developed, that it will be sustained.
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5
<PAGE>
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Summary Financial Information
<TABLE>
<CAPTION>
April 19, 1993 April 19, 1993
(Commencement Year Three Months (Commencement
of Operations) Ended Ended of Operations)
Through March 31, June 30, Through
March 31, --------------------------- ----------------------- June 30,
1994 1995 1996 1995 1996 1996
----------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales ................ $ 135,887 $ 86,486 $ 119,412 $ 46,453 $ -- $ 341,785
Gross (loss) profit ...... (302,355) (213,591) (158,042) 1,997 (673,988)
Selling, general and
administrative expenses 1,037,711 1,223,044 1,042,290 201,907 666,220 3,969,265
----------- ----------- ----------- --------- --------- -----------
Operating loss ........... (1,340,066) (1,436,635) (1,200,332) (199,910) (666,220) (4,643,253)
Net (loss) ............... (1,361,215) (1,530,061) (1,228,745) (211,529) (790,533) (4,910,554)
Cumulative dividend on
preferred stock ........ 25,000 50,000 50,000 12,500 12,500 137,500
----------- ----------- ----------- --------- --------- -----------
Net (loss) attributable to
common stockholders .... $(1,386,215) $(1,580,061) $(1,278,745) $(224,029) $(803,033) $(5,048,054)
=========== =========== =========== ========= ========= ===========
Net (loss) per share of
common stock ........... $ (2.41) $ (2.70) $ (2.02)
=========== =========== ===========
Weighted average number
of common
shares outstanding ..... 575,519 586,269 632,719
=========== =========== ===========
Supplementary
Net (loss) per share
of common stock (1) .... $ (1.69) $ (1.93) $ (1.56) $ (.27) $ (.98)
=========== =========== =========== ========= =========
Weighted average number
of common shares
outstanding .......... 820,000 820,000 820,000 820,000 820,000
=========== =========== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------
Actual As Adjusted(2)
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<S> <C> <C>
Balance Sheet Data:
Working capital (deficiency) ............................ (1,615,548) 4,553,491
Total assets ............................................ 750,561 5,079,610
Total liabilities ....................................... 2,015,025 519,313
Deficit accumulated during the development stage......... (5,166,506) 5,996,245
Total stockholders's equity (deficiency)................. (1,264,464) 4,560,297
</TABLE>
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(1) Gives effect to (i) the Debt Conversion, except for the three months ended
June 30, 1996 which already reflects such conversion, (ii) the automatic
conversion of the Preferred Stock into Common Stock upon the closing of
this Offering, and (iii) the issuance of Common Stock for compensation, and
excludes the Escrow Shares.
(2) Adjusted to give effect to the sale of 1,700,000 Units offered hereby at an
initial public offering price of $5.00 per Unit, the receipt of the net
proceeds therefrom and the use of the net proceeds to repay accumulated
dividends on the Series A Preferred Stock and to repay the Bridge Notes
(plus accrued interest thereon) and the corresponding charge to operations
through the date of the repayment estimated at $829,739. See "Risk Factors
-- Charges and Potential Charges to Earnings," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating whether to purchase
the Units offered hereby. Moreover, prospective investors are cautioned that the
statements in this Prospectus that are not descriptions of historical facts may
be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors.
History of Operating Losses; Anticipated Future Losses; Working Capital
Deficit; Going Concern Explanatory Paragraph in Independent Auditors' Report. At
June 30, 1996, the Company had an accumulated deficit of approximately
$5,167,000, is continuing to incur significant operating losses and expects to
incur substantial and increasing operating losses for the foreseeable future. At
June 30, 1996, the Company also had a working capital deficit of approximately
$1,615,000. Such losses and deficit have been and will continue to be
principally the result of costs associated with the Company's research,
development, design, sales and marketing activities. The Company has received a
report from its independent auditors that includes an explanatory paragraph that
describes the substantial doubt as to the ability of the Company to continue as
a going concern. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and the financial statements included
elsewhere in this Prospectus.
Development Stage Company; No History of Operations. The Company was
organized in March 1993 and is currently in the development stage. While it has
conducted limited research and development and sales and marketing activities,
it has not generated significant revenues and may experience many of the
problems, delays, expenses and difficulties commonly encountered by early stage
companies, many of which are beyond the Company's control. These include, but
are not limited to, unanticipated problems relating to product development,
testing, manufacturing, marketing, competition and regulatory compliance,
including but not limited to possible regulations governing food packaging and
recyclability, as well as additional costs and expenses that may exceed current
estimates. There can be no assurance that the Company will successfully develop
and commercialize any products, generate any revenues or ever achieve profitable
operations. Additionally, the Company has never produced LTI Processed materials
under the conditions and in the volume that will be required to be profitable
and cannot predict all of the manufacturing difficulties that may arise. Given
the particular properties of LTI Processed materials, the Company has in the
past been forced to modify package construction to accommodate unforeseen design
problems, including those associated with excess heat and cold retention in food
service packaging. Thus, the Company's proposed products may require significant
further research, development, design, testing as well as regulatory clearances
prior to larger-scale commercialization. There can be no assurance that the
Company's products will be successfully marketed, prove to be safe and
practical, receive regulatory approvals if required (including, but not limited
to, possible domestic or foreign requirements regarding packaging used in food
service as well as possible domestic or foreign requirements regarding the
recyclability of the Company's materials), or be capable of being produced in
commercial quantities at reasonable costs. See "Business."
Use of Proceeds to Repay Indebtedness; Need for Significant Additional
Funds. The Company requires the proceeds of this Offering to pursue its business
plan. Approximately $2,080,000, or approximately 31%, of the net proceeds of
this Offering will be used for the repayment of the Bridge Notes issued in the
Bridge Financing. In addition, approximately $150,000 of the net proceeds of
this Offering will be used to pay the accumulated dividends on the Company's
Series A Preferred Stock. The remaining proceeds of this Offering are only
expected to be sufficient to fund the Company's operations for approximately
twelve months and the Company will require additional funds to continue its
operations after such period. Moreover, the Company's cash requirement may vary
materially from those currently anticipated due to product development programs,
relationships with strategic partners, if any, changes in the direction of the
Company's activities and other factors. The Company has no commitments for any
future funding and there can be no assurance that the Company will be able to
obtain additional financing in the future from either debt or equity financings,
collaborative arrangements or other sources on acceptable terms. Any future
financing may result in significant dilution to investors. If the Company is
unable to obtain the necessary financing, it will be required to significantly
curtail its activities or cease operations.
Uncertainty of Market Acceptance. The success of LTI Processed products
will require the Company to secure production and marketing alliances within the
highly competitive corrugated packaging market, which is characterized by
manufacturers who operate at very low profit margins and by end-users who often
seek the lowest packaging and materials costs possible. Additionally, much of
the corrugated packaging industry is characterized
7
<PAGE>
by long-standing business relationships between manufacturers and end-users. The
Company will likely encounter resistance from end-users reluctant to incur
possible additional costs associated with LTI Processed products (compared to
non-laminated corrugated products and other materials). In addition, the use of
LTI Processed products may require that end-users change both their packaging
material and their source of packaging material and perhaps incur the further
cost and inconvenience of interrupting their production line to accommodate
these changes. The Company has not conducted any market studies as to the
commercial viability of LT1 Processed products and there can be no assurance
that the Company will be able to successfully demonstrate to manufacturers and
end-users that the properties of LTI Processed products justify the additional
costs and/or burdens associated with such products. See "-- Need for Independent
Laboratory Testing."
Need for Independent Laboratory Testing. The Company currently has no
independent laboratory studies or test results to verify its claims as to the
physical properties of LTI Processed materials. Because such independent tests
are frequently relied upon within the packaging industry, the Company
anticipates that its lack of objective corroboration will likely hamper future
marketing efforts. To date, the Company has had only limited success in
marketing LTI Processed materials and has encountered difficulties in
penetrating certain segments of the packaging industry where, for example, the
strength and insulating properties of LTI Processed products would be critical
but where manufacturers and end-users demand objective confirmation of these
properties. The Company has retained the services of an independent laboratory
and expects to commence such testing as soon as practicable following the
closing of this Offering. However there can be no assurance of when or if such
tests will be successfully concluded or whether such tests will confirm the
Company's beliefs about the physical properties of its products. Should any such
laboratory tests, if performed, fail to support the Company's beliefs regarding
its products, the marketability of such products will be adversely affected.
Dependence on Suppliers; Shortages of Raw Materials and Price Fluctuations.
The Company does not manufacture the raw material that is used in its products
and thus it depends on its raw material suppliers. The Company does not have any
long-term supply or distribution agreements with any of its suppliers. The
Company's success will depend in part on its ability to maintain relationships
with its current suppliers and to develop new supplier relationships, as to
which there can be no assurance. There can be no assurance that the loss of, or
a significant disruption in the relationship with, one or more of the Company's
suppliers would not have a material adverse effect on the Company's business and
results of operations. Moreover, the corrugating industry periodically suffers
shortages of roll stock paper from which corrugated board is made. These
shortages more seriously affect non-vertically integrated corrugating converters
(i.e., those that do not own their own timber and produce their own roll stock)
by raising prices and forcing customers of corrugated board to purchase from
integrated converters. In that the Company intends to utilize, to some extent,
non-integrated converters for the production of LTI Processed packaging, a
shortage-induced price increase could raise the price of such LTI Processed
materials beyond its value margin, causing end-users to seek integrated
suppliers who may not use the Company's products.
Dependence on Third Parties for Manufacturing and Marketing Activities. The
Company does not intend to directly manufacture either LTI Processed linerboard
or finished products. Instead the Company expects to contract for manufacture
with outside laminators, corrugators and sheet plants with whom the Company
expects to establish informal relationships. Although the Company believes that
such services are widely available, there can be no assurance that the Company
will be able to procure these services on terms acceptable to the Company.
Moreover, the Company's dependence on such third parties will reduce its control
over the manufacturing process.
Additionally, the Company may rely on large integrated converters to market
LTI Processed products to their end-users and intends to pursue strategic
alliances with such companies for manufacture and marketing. The success of the
Company will depend, in part, on its ability to enter into and maintain such
strategic alliances and the collaborator's strategic interest in and ability to
successfully manufacture and/or market LTI Processed products. To the extent the
Company enters into any strategic alliance, the Company will be dependent to a
significant extent on such partners. The success of any such strategic alliance
will depend in part upon such partners' own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
developed and/or marketed by such partners. If any such partners are
unsuccessful in manufacturing and/or marketing the Company's products, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company has no experience in manufacturing or marketing products on a
commercial scale and does not have the resources to manufacture on a commercial
scale any of its products. To the extent that the Company determines not to, or
is unable to, enter into strategic alliances with respect to the manufacture or
marketing of LTI Processed products, significant additional funds, capital
expenditures, management resources and time will be required
8
<PAGE>
to establish a manufacturing facility or develop a larger sales force. There can
be no assurance that the Company will be able to enter into strategic alliances
to manufacture or market its proposed products or, in lieu thereof, establish a
manufacturing facility or develop a sufficient sales force, or be successful in
gaining market acceptance of its products. See "Business -- Manufacturing" and
"-- Sales and Marketing."
Dependence on Patents and Proprietary Technology; Uncertainty of Patent
Protection; No Assurance of Significant Competitive Advantage. The Company's
success will depend in part on its ability to obtain patent protection for its
products, both in the United States and abroad. On December 9, 1988, Michael
Olvey, Sr., the inventor of the LTI Processed method and a founder and former
President of the Company, filed a patent application with the U.S. Patent and
Trademark Office (the "U.S. Patent Office") covering the Company's LTI Processed
technology. On March 15, 1990, the U.S. Patent Office rejected the claims of the
Company's patent application as being too broad in light of prior art. On April
19, 1993, Mr. Olvey assigned all rights to this patent application to the
Company. The Company expects to submit a modification of its original
application after the completion of this Offering.
There can be no assurance that any patent applications filed by or on
behalf of the Company will result in patents being issued, that patents, if any,
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide any significant competitive
advantage to the Company. Furthermore, there can be no assurance that others
have not independently developed, or will not independently develop, similar
products or technologies or, if patents are issued to the Company, will not
design around such patents.
The Company's potential products may conflict with patents which have been
or may be granted to competitors or others. In particular, the Company is aware
of a patent issued to Adolph Coors Company that relates to certain processes by
which film, including polyester film, is reverse-printed and laminated onto
linerboard. Such patent may affect the ability of the Company to obtain patent
protection for some or all of the claims included in its patent application.
Moreover, there can be no assurance that any application of the Company's
technology will not infringe the Coors patent or any other patents or
proprietary rights of others. Such other persons could bring legal actions
against the Company claiming damages and seeking to enjoin manufacturing and
marketing of the Company's products. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. If the Company becomes involved in
litigation, it could consume a substantial portion of the Company's time and
resources. Moreover, the non-approval of the Company's patent application or the
invalidation of any patent that may be issued to the Company would likely have a
material adverse effect on the Company.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets.
The Company intends to protect its proprietary technology through the use
of licensing, exclusivity and non-disclosure agreements with the laminators,
corrugators, converters and printers with which it may establish strategic
alliances and production relationships. The Company also requires that certain
of its employees and consultants execute a confidentiality agreement upon the
commencement of an employment or consulting relationship with the Company. The
agreements generally provide that trade secrets and all inventions conceived by
the individual and all confidential information developed or made known to the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information. See "Business -- Patents and Proprietary Rights."
Competition. Competition in the corrugated and packaging industries is
intense and based significantly on price. Moreover, certain aspects of the
Company's business, including printing, are characterized by rapidly evolving
technology that could result in the technological obsolescence of processes
utilized by the Company. The Company competes with many corrugating firms and
manufacturers of other packaging products, including those made of styrofoam,
metal and plastic. Most of the Company's competitors have substantially greater
financial, technical
9
<PAGE>
and human resources than the Company and are better equipped to develop,
manufacture and market products. These companies also compete with the Company
in recruiting and retaining highly qualified personnel and consultants.
Additionally, there are both corrugated and other packaging and display
materials available which can provide some or all of the physical
characteristics of LTI Processed products as well as high quality aesthetics and
which directly compete with the Company's products. Major corrugating and
integrated converters produce large quantities of corrugated products with wax
and other coatings which are water resistant and can be used, for example, to
pack wet and frozen foods for extended periods and to reduce abrasion of items
with delicate finishes. The Company will face intense competition from these
manufacturers to the extent that these products present viable alternatives to
LTI Processed products. These products may remain attractive to many end-users
as they can be lower priced and end-users will not have to incur the potential
cost of interrupting product lines and supply sources to accommodate different
packaging from a new company. The Company intends to compete with such
manufacturers by offering a product that can be more expensive but which the
Company believes will be of higher quality, and in many circumstances, more
cost-efficient in the long term. Additionally, the Company will face competition
from non-integrated converters who supply corrugated products that are laminated
with high quality, lithographically printed paper. While the Company believes
that these products do not have the physical properties of LTI Processed and
offer little price advantage over LTI Processed, they will effectively compete
with the Company's products in the market for quality printed products.
The Company also expects to encounter significant competition as it seeks
to enter markets for other forms of value-added packaging and products such as
styrofoam, metal and plastic. Given the fact that the physical properties of
these other materials have been long established, that end-users are accustomed
to using these materials and that manufacturers have massive national and
international production and marketing efforts as well as sophisticated and well
developed product lines, the Company will need to persuade end-users of the
value of an entirely new material and product design which is purchased from a
new supplier. There can be no assurance that such efforts will be successful.
Moreover, there can be no assurance that other companies will not develop
products which are superior to the Company's or which achieve greater market
penetration. See " Business -- Competition."
Historical Inability to Leverage Technology; Management Turnover. Although
the Company was organized in March 1993, its basic laminating technology has
been owned by the Company and its predecessors since 1988. Nonetheless, the
Company and its predecessors have been unable to successfully commercialize such
technology, have generated only minimal revenues and have been unable to
effectively penetrate the Company's target markets. In addition, the Company has
had a limited number of management personnel and has also experienced
significant turnover in such managment since inception. These management issues
have contributed to periods of limited or no operating activity and insufficient
continuity of business relationships and related agreements. See "--Risks
Related to Potential License Agreements." While the Company has recently
instituted a new management team, there can be no assurance that current
management will be successful in implementing the Company's business plan, or
that the Company will not be adversely affected by issues relating to past
operations.
Risks Related to Potential License Agreements. The Company believes that
approximately six years ago a predecessor to the Company entered into
negotiations regarding two potential licenses of the LTI Processed technology.
Neither the Company nor the other parties to such negotiations have been able to
produce a copy of an executed license agreement and, to the Company's knowledge,
no significant license-related activities have been performed. Based on the
Company's efforts to determine the existence of any such agreements, the Company
does not believe any license agreements exist. However, there can be no
assurance that license agreements do not exist or as to the terms of any such
license. Although the Company's strategy currently does not emphasize licensing
its technology, the Company may determine to do so in the future. In the event
that any previous license agreements exist, they may limit the Company's ability
to enter into additional licenses in the future or may otherwise restrict the
Company's operations, which could have an adverse effect on the Company.
Uncertainty of Government Regulatory Requirements. To the extent that LTI
Processed is used in the food service and packaging industries, the Company will
be required to ensure that its products meet federal Food and Drug
Administration (the "FDA") regulations regarding materials used in contact with
food. The Company believes that both the polyester film and the bonding agents
used in LTI Processed products will be in compliance with approved food additive
regulations permitting the types of food contact use contemplated by the
Company. However, there can be no assurance that the Company's use of the
materials included in its products will not require separate FDA approval.
Obtaining FDA approval has historically been a costly and time-consuming
process. The
10
<PAGE>
Company may also need to seek regulatory approval from foreign governments for
the use of LTI Processed products shipped to those countries. For example, the
European Union has strict regulations as to the disposability and recyclability
of imported packaging and paper products. There can be no assurance that such
foreign regulations will not restrict or preclude the Company from engaging in
activities in such countries, which could have a material adverse effect on the
Company. The failure to obtain any required regulatory approvals could have a
material adverse effect on the Company.
Charges and Potential Charges to Earnings. The Securities and Exchange
Commission (the "Commission") has taken the position with respect to escrow
arrangements such as that entered into by the Company and its stockholders that
in the event any shares are released from escrow to the holders who are
officers, directors, employees or consultants of the Company, a compensation
expense will be recorded for financial reporting purposes. Accordingly, in the
event of the release of the Escrow Shares, the Company will recognize during the
period in which the earnings thresholds are probable of being met or such stock
price levels achieved, a substantial noncash charge (not deductible for income
tax purposes) to operations equal to the then fair market value of such shares,
which would have the effect of significantly increasing the Company's loss or
reducing or eliminating earnings, if any, at such time. The recognition of such
compensation expense may have a depressive effect on the market price of the
Company's securities. Notwithstanding the foregoing discussion, there can be no
assurance that the Company will attain the targets which would enable the Escrow
Shares to be released from escrow.
The Company also expects to incur a non-recurring charge to operations,
aggregating approximately $829,739, during the quarter in which the closing of
this Offering occurs relating to the Bridge Financing and the repayment of the
Bridge Notes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Broad Discretionary Use of Proceeds. The Company has broad discretion with
respect to the specific application of approximately $3,174,500, or
approximately 47%, of the net proceeds of the Offering. Such amounts are
intended to be used for working capital, including salaries and the payment of
certain accounts payable. Thus, purchasers of the Units will be entrusting their
funds to the Company's managment, upon whose judgment the investors must depend,
with only limited information concerning management's specific intentions. See
"Use of Proceeds."
Use of Proceeds to Benefit Insiders. The Company expects to utilize a
portion of the proceeds for the Offering to pay salaries to executive officers
of the Company aggregating approximately $357,000 during the 12-month period
following the closing of the Offering. In addition, certain stockholders of the
Company loaned an aggregate of approximately $1,040,000 to the Company through
December 1995, which amounts have been and will be repaid out of the proceeds of
the Bridge Financing and this Offering. An aggregate of $495,000 of this
indebtedness was converted into Bridge Notes and Bridge Warrants in the Bridge
Financing (on the same terms as non-affiliated investors) and such Bridge Notes
will be repaid, together with interest at a rate of 10% per annum, from the
proceeds of this Offering. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Management."
Dependence on Key Personnel. The Company is dependent on Michael E. Noonan,
the Company's Chairman and Chief Executive Officer, as well as principal members
of its management, design and marketing staff, the loss of one or more of whom
could substantially impair the Company's development and marketing plans. The
Company has obtained a $2,000,000 "key-man" life insurance policy on the life of
Mr. Noonan and has also entered into a one year employment agreement with Mr.
Noonan. Additionally, the Company has entered into a consulting agreement with
Michael Olvey, Sr., the inventor of the LTI Processed method and a founder of
the Company. The future success of the Company depends in large part upon its
ability to attract and retain highly qualified personnel. The Company faces
intense competition for such highly qualified personnel from other corrugated
manufacturers and may be required to pay higher salaries to attract and retain
such personnel. There can be no assurance that the Company will be able to hire
sufficient qualified personnel on a timely basis or retain such personnel. The
loss of such key personnel or failure to recruit additional key personnel by the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, many members of the
Company's management team have only recently joined the Company. Managing the
integration of new personnel could adversely affect the Company's growth and
progress until such integration occurred. See "Management."
11
<PAGE>
Dilution. The purchasers of the Units in the Offering will incur immediate
and substantial dilution of approximately $3.19, or 63.8%, in the net tangible
book value per share of their Common Stock ($2.95, or 59.0%, if the
Underwriter's over-allotment option is exercised in full). Additional dilution
to public investors, if any, may result to the extent that the Warrants, the
Underwriter's Unit Purchase Option and/or other outstanding options or warrants
are exercised at a time when the net tangible book value per share of Common
Stock exceeds the exercise price of any such securities. See "Dilution."
Absence of Prior Trading Market; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to this Offering, there has
been no market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after this
Offering. The initial public offering price of the Units and the exercise prices
and other terms of the Warrants have been determined by negotiation between the
Company and the Underwriter and are not related to the Company's asset value,
net worth, results of operations or any other criteria of value and may not be
indicative of the prices that may prevail in the public market. D.H. Blair
Capital Corp., an entity whose sole stockholder is the sole stockholder of the
Underwriter, beneficially owns an aggregate of 26.25% of the outstanding shares
of Common Stock before this Offering. In addition, the Underwriter owns warrants
to purchase 36,897 shares of Common Stock of the Company. As a result of such
stockholdings, the Underwriter may be deemed to be an affiliate of the Company
by the NASD. Accordingly, this Offering is being made pursuant to Schedule E to
the NASD By-Laws. Under Schedule E to the By-Laws of the NASD, when a member of
the NASD, such as the Underwriter, participates in the public distribution of
securities of a company in which it or its affiliates owns 10% or more of the
outstanding voting securities, and where there is no "bona fide independent
market" for such securities, the public offering price can be no higher than
that recommended by a qualified independent underwriter. Accordingly, the Units
in this Offering will be offered at a price no greater than that recommended by
RAS Securities Corp., a qualified independent underwriter. The market prices of
the Units, Common Stock and Warrants could also be subject to significant
fluctuations in response to variations in the Company's quarterly operating
results, developments concerning proprietary rights, government regulations,
general trends in the industry and other factors. See "Underwriting."
Outstanding Options and Warrants. Upon completion of this Offering, the
Company will have outstanding (i) 1,700,000 Class A Warrants to purchase an
aggregate of 1,700,000 shares of Common Stock and 1,700,000 Class B Warrants;
(ii) 1,700,000 Class B Warrants to purchase 1,700,000 shares of Common Stock;
(iii) the Selling Securityholder Warrants to purchase 997,500 shares of Common
Stock and 997,500 Class B Warrants; (iv) warrants to purchase 36,897 shares of
Common Stock, which Warrants are owned by the Underwriter; (v) the Unit Purchase
Option to purchase an aggregate of 680,000 shares of Common Stock, assuming
exercise of the underlying Warrants; and (vi) 250,000 shares of Common Stock
reserved for issuance upon exercise of options under the Company's 1996 Stock
Option Plan, under which options to purchase 190,000 shares of Common Stock have
been granted (including 40,000 options to be granted on the date of this
Prospectus). Holders of such warrants and options are likely to exercise them
when, in all likelihood, the Company could obtain additional capital on terms
more favorable than those provided by warrants and options. Further, while these
warrants and options are outstanding, the Company's ability to obtain additional
financing on favorable terms may be adversely affected. See "Management -- Stock
Options" and "Description of Securities."
Control by Existing Stockholders; Potential Anti-takeover Provisions. Upon
completion of this Offering, the directors, executive officers and principal
stockholders of the Company will own approximately 30% of the outstanding Common
Stock of the Company. As a result, such directors, officers and principal
stockholders will generally be able to influence significantly the outcome of
corporate transactions or other matters submitted for stockholder approval. Such
influence by principal stockholders could preclude any unsolicited acquisition
of the Company and consequently adversely affect the market price of the Common
Stock. The Company's Board of Directors is also authorized to issue from time to
time, without stockholder authorization, shares of preferred stock, in one or
more designated series or classes. The Company is also subject to a Delaware
statute regulating business combinations. Any of these provisions could
discourage, hinder or preclude an unsolicited acquisition of the Company and
could make it less likely that stockholders receive a premium for their shares
as a result of any such attempt. See "Certain Transactions," "Principal
Stockholders" and "Description of Securities."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to the
Concurrent Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Offering, 997,500 Selling
Securityholder Warrants and the underlying securities have been registered for
resale concurrently with this Offering, subject to a contractual
12
<PAGE>
restriction that the Selling Securityholders not sell any of the Selling
Securityholder Warrants for at least 90 days after the date of this Prospectus
and, during the period from 91 to 270 days after the date of this Prospectus,
may only sell specified percentages of such Selling Securityholder Warrants. In
addition to the 1,700,000 Units offered
hereby, approximately 137,631 shares of Common Stock will be eligible for
immediate resale in the public market and, subject to compliance with Rule 144
under the Securities Act, approximately 483,355 shares of Common Stock will be
eligible for sale in the public market beginning 90 days from the date of this
Prospectus (subject to the restrictions on transfer applicable to the Escrow
Shares). An additional 50,003 shares of Common Stock issuable upon the exercise
of vested options and warrants will also become eligible for sale in the public
market pursuant to Rule 701 and Rule 144 under the Securities Act beginning 90
days from the date of this Prospectus. The Securities and Exchange Commission
has recently proposed an amendment to the holding period requirements of Rule
144 to permit resales of restricted securities after a one-year holding period
rather than a two-year holding period, and to permit unrestricted resales by
non-affiliates after a two-year holding period rather than a three-year holding
period. However, holders of all of the outstanding shares of Common Stock and
outstanding options prior to the Offering have agreed not to sell any shares of
Common Stock for a period of 13 months from the date of this Prospectus without
the prior written consent of the Underwriter. In addition, the holders of the
Unit Purchase Option and the holders of options and warrants to purchase an
aggregate of 153,244 shares of Common Stock have certain demand and "piggy-back"
registration rights with respect to their securities commencing twelve months
from the closing of this Offering. Exercise of such rights could involve
substantial expense to the Company. See "Description of Securities," "Shares
Eligible for Future Sale," Concurrent Offering" and "Underwriting."
Potential Adverse Impact of Release of Locked-up Securities. All of the
Company's current stockholders, officers and directors have agreed not to sell,
assign, transfer or otherwise dispose publicly any of their shares of Common
Stock for a period of 13 months after the date of this Prospectus without the
prior written consent of the Underwriter. Sales of such shares of Common Stock,
or the possibility of such sales, in the public market may have an adverse
effect on the market price of the securities offered hereby.
Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if, with respect to the Class A Warrants, the closing bid price of the
Common Stock shall have averaged in excess of $9.10 per share and, with respect
to the Class B Warrants, $12.25 per share, in each instance for 30 consecutive
trading days ending within 15 days of the notice. Redemption of the Warrants
could force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or (iii) to accept the nominal redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants.
See "Description of Securities -- Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants; Lack of
Certain Aftermarket Exemptions. Holders of Warrants will be able to exercise the
Warrants only if (i) a current prospectus under the Securities Act relating to
the securities underlying the Warrants is then in effect and (ii) such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the securities underlying the
Warrants following completion of the Offering to the extent required by Federal
securities laws, there can be no assurance that the Company will be able to do
so. The value of the Warrants may be greatly reduced if a prospectus covering
the securities issuable upon the exercise of the Warrants is not kept current or
if the securities are not qualified, or exempt from qualification, in the states
in which the holders of Warrants reside. Persons holding Warrants who reside in
jurisdictions in which such securities are not qualified and in which there is
no exemption will be unable to exercise their Warrants and would either have to
sell their Warrants in the open market or allow them to expire unexercised. If
and when the Warrants become redeemable by the terms thereof, the Company may
exercise its redemption right even if it is unable to qualify the underlying
securities for sale under all applicable state securities laws. See "Description
of Securities -- Redeemable Warrants."
In addition, following the completion of the Offering, purchases of the
Company's Common Stock may be made only by residents of jurisdictions where such
securities are qualified or exempt from qualification under the securities laws
of the relevant jurisdiction. The Company anticipates that it will be unable to
secure qualifications or exemptions in approximately ten states and that certain
of the exemptions it will receive will only become available
13
<PAGE>
90 or 180 days following the Offering. In particular, the State of New Jersey
has denied an aftermarket exemption for the Common Stock, citing concerns
relating to the suitability of an investment in the Company's securities.
Possible Adverse Effect on Liquidity of the Company's Securities Due to the
Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co., Inc.
by the Securities and Exchange Commission. The Commission is conducting an
investigation concerning various business activities of the Underwriter and D.H.
Blair & Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other
persons. The Company has been advised by the Underwriter that the investigation
has been ongoing since at least 1989 and that it is cooperating with the
investigation. The Underwriter cannot predict whether this investigation will
ever result in any type of formal enforcement action against the Underwriter or
Blair & Co., or, if so, whether any such action might have an adverse effect on
the Underwriter or the securities offered hereby. The Company has been advised
that Blair & Co. intends to make a market in the securities following the
Offering. An unfavorable resolution of the Commission's investigation could have
the effect of limiting such firm's ability to make a market in the Company's
securities, which could adversely affect the liquidity or price of such
securities. See "Underwriting."
Possible Restrictions on Market-Making Activities in Company's Securities.
The Underwriter has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Rule 10b-6 under the Securities Act of 1934,
as amended (the "Exchange Act"), may prohibit Blair & Co. from engaging in any
market-making activities with regard to the Company's securities for the period
from nine business days (or such other applicable period as Rule 10b-6 may
provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Selling Securityholder Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least two
and possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Underwriter or Blair & Co. is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. Any temporary cessation of such market-making activities
could have an adverse effect on the market price of the Company's securities.
See "Underwriting."
Possible Delisting of Securities from the Nasdaq Stock Market. While the
Company's Units, Common Stock, Class A Warrants and Class B Warrants meet the
current Nasdaq listing requirements and are expected to be initially included on
the Nasdaq SmallCap Market, there can be no assurance that the Company will meet
the criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2,000,000 in total assets and
$1,000,000 in capital and surplus, (ii) the minimum bid price of the Common
Stock be $1.00 per share, (iii) there be at least 100,000 shares in the public
float valued at $200,000 or more, (iv) the Common Stock have at least two active
market makers, and (v) the Common Stock be held by at least 300 holders.
If the Company is unable to satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Units, Common Stock and Warrants would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's securities could
be impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of the Company, and lower
prices for the Company's securities than might otherwise be attained.
Risks of Low-Priced Stock. If the Company's securities were delisted from
Nasdaq (See "-- Possible Delisting of Securities from the Nasdaq Stock Market"),
they could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in the Offering to sell in
the secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-
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<PAGE>
dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,700,000 Units
offered hereby, after deducting underwriting discounts and commissions and other
expenses of the Offering, are estimated to be approximately $6,804,500
($7,922,675 if the Underwriter's over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
Approximate Amount Percentage of
Application of Net Proceeds Net Proceeds
-------- --------------- ---------
<S> <C> <C>
Repayment of Bridge Notes (1) ................................ $2,080,000 30.57%
Product Design and Development (2) .......................... 700,000 10.29
Sales and Marketing (3) ...................................... 700,000 10.29
Payment of Accumulated Dividends(4)........................... 150,000 2.20
Working Capital (5) .......................................... 3,174,500 46.65
--------- ------
Total ................................................... $6,804,500 100.00%
========= ======
</TABLE>
- --------
(1) Represents the principal amount and accrued interest at the rate of 10% per
annum (estimated at approximately $85,000 through September 30, 1996) of
Bridge Notes issued in the Bridge Financing in April and May 1996. The
proceeds of the Bridge Financing were and are being used primarily for the
repayment of certain indebtedness and working capital purposes. See
"Capitalization -- Bridge Financing" and "Concurrent Offering."
(2) Includes costs associated with the proposed independent testing of the
Company's products.
(3) Includes costs associated with sales personnel, support and the production
of product samples. See "Business -- Sales and Marketing."
(4) Represents dividends accumulated on the outstanding Series A Preferred
Stock held by D.H. Blair Capital Corp., which Series A Preferred Stock will
convert into Common Stock on the closing of this Offering. See "Certain
Transactions" and "Underwriting."
(5) Includes general and administrative expenses, including approximately
$357,000 for salaries of the current executive officers for the next twelve
months. In addition, Michael E. Noonan, the Company's Chairman, President
and Chief Executive Officer, has agreed to provide to the Company certain
working capital advances up to an aggregate of $50,000. Such advances, if
extended, will be repaid with interest at a rate of 8% per annum out of the
proceeds of this Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering. This estimate is based on certain assumptions
relating to the progress of the Company's development design and marketing
strategies, the results of testing activities, the timing of patent applications
and responses, technological advances, market acceptance of the Company's
products and other factors. Expenditures will also be dependent upon the
establishment of strategic alliances with other companies. Future events, as
well as changes in economic, regulatory or competitive conditions or the
Company's business and the results of the Company's sales and marketing
activities, may make shifts in the allocation of funds necessary or desirable.
In addition, the Company may seek to utilize funds allocated to working capital,
in part, for acquisitions of new products or product lines or other companies
and to fund inventory purchases prior to collection of receivables. The Company
does not currently have any agreements, commitments or arrangements with respect
to any proposed acquisitions and there can be no assurance that any acquisition
will be consummated.
The Company currently estimates that the net proceeds of this Offering will
be sufficient to fund its planned operations for approximately twelve months.
However, the Company may require additional funds during such period in the
event of delays in product development, cost overruns or other unanticipated
expenses commonly associated with a company in an early stage of development. In
addition, the Company will need substantial additional financing following such
twelve-month period. In the event such financing is not obtained, the Company
may be materially adversely affected and may have to cease or substantially
reduce operations.
Any additional proceeds received upon exercise of the over-allotment
option, the Warrants or the Selling Securityholder Warrants will be added to
working capital. Pending utilization, the net proceeds will be invested in
short-term, interest-bearing investments.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996 (after giving retroactive effect to a 2.7102-for-one reverse stock
split effected in April 1996); and the conversion of the 250,000 shares of
outstanding Series A Preferred Stock into 184,486 shares of Common Stock); and
(ii) as adjusted to reflect the sale of the Units offered hereby at an initial
public offering price of $5.00 per Unit and the application of the net proceeds
therefrom to repay the Bridge Notes and the corresponding charge to operations.
This table should be read in conjunction with the Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
----------------------------
Actual As Adjusted
---------- ----------
<S> <C> <C>
Bridge Notes, net of discount(1)........................... $ 1,455,712 $ --
Other debt................................................. 43,483 43,483
---------- ----------
Total debt................................................. 1,499,195 43,483
---------- ----------
Stockholders' Equity:
Preferred Stock, $.01 par value;
5,000,000 shares authorized;
no shares issued and outstanding ...................... -- --
Common Stock, $.01 par value;
20,000,000 shares authorized;
1,230,000 shares issued and outstanding
actual; 2,930,000 shares
issued and outstanding as adjusted (2)(3).............. 12,300 29,300
Additional paid in capital................................. 3,889,742 10,527,242
Deficit accumulated during
development stage........................................ (5,166,506) (5,996,245)(4)
---------- ----------
Total stockholders equity (deficiency)................ (1,264,464) 4,560,297
---------- ----------
Total capitalization............................... $ 234,731 $ 4,603,780
========== ==========
</TABLE>
- --------
(1) The Bridge Notes are payable on the earlier of closing of this Offering or
April 1997. See "Use of Proceeds."
(2) Excludes (i) up to 1,020,000 shares of Common Stock issuable upon exercise
of the Underwriter's over-allotment option and the underlying Warrants;
(ii) 5,100,000 shares of Common Stock issuable upon exercise of the
Warrants included in or underlying the Units offered hereby; (iii)
1,995,000 shares of Common Stock issuable upon exercise of the Selling
Securityholder Warrants and the underlying Warrants; (iv) 36,897 shares of
Common Stock issuable upon the exercise of warrants issued to the
Underwriter in March 1994; (v) 680,000 shares of Common Stock issuable upon
exercise of the Unit Purchase Option and the Warrants included in or
underlying such option; and (vi) 250,000 shares of Common Stock reserved
for issuance under the Company's Amended and Restated 1996 Stock Option
Plan, under which options to purchase 190,000 shares of Common Stock are
outstanding (including 40,000 options to be granted on the date of this
Prospectus). See "Management--Stock Options," "Certain Transactions,"
"Description of Capital Stock" and "Concurrent Offering."
(3) Includes 410,000 Escrow Shares. See "Principal Stockholders-- Escrow
Shares."
(4) Gives effect to recognition of $539,288 of expense upon the closing of this
Offering relating to the value of the Bridge Warrants issued in the Bridge
Financing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
17
<PAGE>
Bridge Financing
In April and May 1996, the Company completed the Bridge Financing of an
aggregate of $1,995,000 principal amount of Bridge Notes and 997,500 Bridge
Warrants in which it received net proceeds of approximately $1,185,000 (after
deducting expenses of the Offering and after giving effect to the conversion of
$495,000 of outstanding indebtedness of the Company into Bridge Notes and Bridge
Warrants, for which the Company received no cash proceeds). The Bridge Notes are
payable, together with interest at the rate of 10% per annum, on the earlier of
April 1997 or the closing of the Offering. See "Use of Proceeds." The Bridge
Warrants entitled the holders thereof to purchase one share of Common Stock
commencing in April or May 1997 respectively, but will be exchanged
automatically on the closing of the Offering for the Selling Securityholder
Warrants, each of which will be identical to the Class A Warrants included in
the Units offered hereby. The Selling Securityholder Securities have been
registered for resale in the Registration Statement of which this Prospectus
forms a part, subject to the contractual restriction that the Selling
Securityholders have agreed not to exercise the Selling Securityholder Warrants
for a period of one year from the closing of the Offering and not to sell the
Securityholder Warrants except after specified periods commencing 90 days after
the closing date of the Offering. See "Concurrent Offering."
18
<PAGE>
DILUTION
At June 30, 1996, the Company had a negative net tangible book value of
$(1,746,761) or $(2.13) per share based on 820,000 shares outstanding (excluding
the 410,000 Escrow Shares) after giving effect to the conversion of the 250,000
outstanding shares of Series A Preferred Stock into 184,486 shares of Common
Stock. Net tangible book value per share represents the amount of the Company's
total assets minus the amount of its intangible assets, liabilities and the
liquidation value of the Series A Preferred Stock, divided by the number of
shares of Common Stock outstanding. Dilution represents the difference between
the initial public offering price paid by the purchasers in the Offering and the
net tangible book value per share at June 30, 1996, as adjusted to give effect
to the Offering. After giving effect to the sale of 1,700,000 Units offered
hereby at an initial public offering price of $5.00 per Unit and the receipt of
the net proceeds therefrom, the net tangible book value of the Company, as
adjusted, at June 30, 1996 would have been $4,559,778 or $1.81 per share. This
represents an immediate increase in net tangible book value of $3.94 per share
to existing stockholders and an immediate dilution of $3.19 per share to persons
purchasing shares at the initial public offering price ("New Investors"). The
following table illustrates this per share dilution:
The following table illustrates this dilution to New Investors on a per
share basis:
Initial public offering price per Unit ................. $5.00(1)
Negative net tangible book value per share
before Offering..................................... $(2.13)
Increase per share attributable to New Investors........ $ 3.94
------
Net tangible book value per share after Offering........ $1.81
-----
Dilution to New Investors .............................. $3.19
=====
- --------
(1) Assumes no allocation of the offering price to the Warrants included in the
Units.
If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.05 per share (excluding the
Escrow Shares), resulting in dilution to New Investors in the Offering of $2.95
per share.
The following table summarizes the differences between existing
stockholders and New Investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by New
Investors:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Paid Average
------------------ ---------------------- Price Per
Number Percent Amount(1) Percent Share
-------- ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ...................... 1,230,000(2) 41.98% $ 2,501,085(3) 22.73% $2.03
New Investors .............................. 1,700,000 58.02 $ 8,500,000 77.27 $5.00
--------- ------ ----------- ------
Total .............................. 2,930,000 100.00% $11,001,085 100.00%
========= ====== =========== ======
</TABLE>
- --------
(1) Prior to deduction of costs of issuance.
(2) Includes the 410,000 Escrow Shares. See "Principal Stockholders-- Escrowed
Shares."
(3) Includes (i) shares valued at $273,763 issued in exchange for employment
services rendered and (ii) shares valued at $1,113,572 issued upon
conversion of indebtedness.
The foregoing tables do not give effect to the exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to New Investors. See "Capitalization -- Bridge
Financing," "Management --Stock Option Plans" and "Description of Securities."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
financial statements of the Company. The financial statements of the Company as
at March 31, 1996 and for the years ended March 31, 1995 and 1996, together with
the notes thereto and the report of Richard A. Eisner & Company, LLP,
independent auditors, are included elsewhere in this Prospectus. The selected
financial data as of and for the three-month period ended June 30, 1995 and June
30, 1996 and the period from April 19, 1993 (Commencement of Operations) to June
30, 1996 are derived from the Company's unaudited financial statements. The
Company's unaudited financial statements include all adjustments, consisting of
only normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1997 or for any other period. The selected financial data set forth
below should be read in conjunction with the financial statements of the Company
and the related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
April 19, 1993 April 19, 1993
(Commencement Year Three Months (Commencement
of Operations) Ended Ended of Operations)
Through March 31, June 30, Through
March 31, --------------------------- ----------------------- June 30,
1994 1995 1996 1995 1996 1996
----------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales .............................. $ 135,887 $ 86,486 $ 119,412 $ 46,453 $ -- $ 341,785
Gross (loss) profit .................... (302,355) (213,591) (158,042) 1,997 (673,988)
Selling, general and
administrative expenses .............. 1,037,711 1,223,044 1,042,290 201,907 666,220 3,969,265
----------- ----------- ----------- --------- --------- -----------
Operating loss ......................... (1,340,066) (1,436,635) (1,200,332) (199,910) (666,220) (4,643,253)
Net (loss) ............................. (1,361,215) (1,530,061) (1,228,745) (211,529) (790,533) (4,910,554)
Cumulative dividend on
preferred stock ...................... 25,000 50,000 50,000 12,500 12,500 137,500
----------- ----------- ----------- --------- --------- -----------
Net (loss) attributable to
common stockholders .................. $(1,386,215) $(1,580,061) $(1,278,745) $(224,029) $(803,033) $(5,048,054)
=========== =========== =========== ========= ========= ===========
Net (loss) per share of
common stock ......................... $ (2.41) $ (2.70) $ (2.02)
=========== =========== ===========
Weighted average number
of common
shares outstanding ................... 575,519 586,269 632,719
=========== =========== ===========
Supplementary pro forma:
Net (loss) per share
of common stock (1) .................. $ (1.69) $ (1.93) $ (1.56) $ (.27) $ (.98)
=========== =========== =========== ========= =========
Weighted average number
of common shares
outstanding ........................ 820,000 820,000 820,000 820,000 820,000
=========== =========== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
---------- -----------
Balance Sheet Data:
<C> <C>
<S>
Working capital (deficiency) ............................. $(2,089,725) $(1,615,548)
Total assets ............................................. 20,529 750,561
Total liabilities ........................................ 2,536,739 2,015,025
Deficit accumulated during the development stage.......... (4,375,973) (5,166,506)
Total stockholders's equity (deficiency).................. (2,516,210) (1,264,464)
</TABLE>
- ----------
(1) Gives effect to (i) the Debt Conversion, except for the three months ended
June 30, 1996 which already reflects such conversion, (ii) the automatic
conversion of the Preferred Stock into Common Stock upon the closing of
this Offering, and (iii) issuance of common stock for compensation, and
excludes the Escrow Shares.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a development stage company organized to develop, design and
market value-added packaging and specialty display products. Since its
inception, the Company's efforts have been principally devoted to research,
development and design of products, marketing activities and raising capital.
The Company has had only limited sales, has generated minimal revenues from
operations and has incurred substantial operating losses from these activities.
Most of the Company's sales to date did not involve significant orders and
the Company believes that these customers were primarily evaluating the
commercial potential of the Company's products. The Company also incurred
significant costs associated with such sales in part because a large percentage
of finished product was distributed free of charge as samples. The Company's
sales efforts have also been adversely affected by periods with no operations, a
lack of continuity of management and inadequate capital.
The following discussion should be read in conjunction with the Selected
Financial Data and the Financial Statements and notes thereto included elsewhere
in this Prospectus.
Results of Operations
Three Months Ended June 30, 1995 and 1996. Net sales decreased from
approximately $46,000 to zero during the three months ended June 30, 1995 ("1995
Three Months") and June 30, 1996 ("1996 Three Months"), respectively. The
Company did not have any sales during the 1996 Three Months primarily as a
result of limited staffing and working capital to purchase supplies, as well as
a focus by management on completing the Bridge Financing and preparing for this
Offering. Gross profit, which includes the costs of items manufactured as well
as the cost of samples, was approximately $2,000 in the 1995 Three Months as
compared to zero in the 1996 Three Months.
Selling, general and administrative expenses increased by 235% from
approximately $200,000 in the 1995 Three Months to approximately $666,000 in the
1996 Three Months, primarily as a result of non-recurring charges of (i)
approximately $386,000 relating to the fair market value of stock options
granted by two principal stockholders of the Company to the Company's Chairman,
President and Chief Executive Officer and (ii) approximately $235,000 relating
to the Bridge Financing and the repayment of the Bridge Notes, including $68,899
for amortization of deferred financing costs, $125,712 for amortization of the
value of the Bridge Warrants and $40,000 for accrued interest through June 30,
1996. See "Capitalization -- Bridge Financing," "Certain Transactions" and
"Principal Stockholders."
Net loss increased 274% from approximately $212,000 in the 1995 Three
Months to approximately $791,000 in the 1996 Three Months, as a result of the
foregoing factors.
Fiscal Years Ended March 31, 1995 and 1996. Net sales increased 38% from
approximately $86,500 to approximately $119,500 during the fiscal years ended
March 31, 1995 ("fiscal 1995") and March 31, 1996 ("fiscal 1996"), respectively.
Gross loss, which includes the costs of items manufactured as well as the cost
of samples, decreased 26% from approximately $213,600 in fiscal 1995 to
approximately $158,000 in fiscal 1996, primarily as a result of the increase in
net sales and a decrease in the cost of goods sold which was attributable to a
decrease in product given away as samples.
Selling, general and administrative expenses decreased by 15% from
approximately $1,223,000 in fiscal 1995 to approximately $1,042,000 in fiscal
1996, primarily as a result of a decrease in payroll and management resulting
from a temporary cessation of operations and a $65,000 financing charge related
to the issuance of stock at below fair market value in connection with a
$250,000 loan.
Net loss decreased 20% from approximately $1,530,000, or $2.70 per share,
in fiscal 1995 to approximately $1,229,000, or $2.02 per share, in fiscal 1996,
as a result of the foregoing factors. Pro forma net loss per share decreased
from $1.93 in fiscal 1995 to $1.56 in fiscal 1996.
Liquidity and Capital Resources
The Company has funded its activities to date through loans from principal
stockholders and private placements of equity and debt securities. As of June
30, 1996, the Company had a working capital deficit of approximately $1,615,000.
Since its inception, the Company has received working capital loans from the
Conversion Investors. In
21
<PAGE>
March 1996, the Conversion Investors agreed to convert, effective on the closing
of the Bridge Financing, approximately $980,000 of the Conversion Debt into
361,061 shares of the Company's Common Stock and the remaining $495,000 of the
Conversion Debt was exchanged for $495,000 in Bridge Notes and 247,500 Bridge
Warrants. See "Capitalization -- Bridge Financing" and "Certain Transactions."
In April 1996, the Company completed the Bridge Financing which consisted
of $1,995,000 principal amount of Bridge Notes bearing interest at an annual
rate of 10% and warrants to purchase an aggregate of 997,500 shares of Common
Stock. The net proceeds of the Bridge Financing, which were approximately
$1,185,000 (net of the $495,000 of exchanged Conversion Debt, for which the
Company received no proceeds, $199,500 in commissions and a $59,850 expense
allowance paid to the Underwriter, which acted as placement agent, and other
expenses of the private placement), have been utilized by the Company for
working capital purposes, including general and administrative expenses and
expenses associated with this Offering, and the repayment of certain debt. The
Company intends to repay the principal and accrued interest on the Bridge Notes
with a portion of the proceeds of the Offering. The Company expects to incur,
during the quarter in which the closing of this Offering occurs, a non-recurring
charge to operations relating to the Bridge Financing and the repayment of the
Bridge Notes aggregating approximately $829,739, including $245,451 for
amortization of deferred financing costs, $539,288 (or approximately $0.67 per
warrant) for amortization of the value of the Bridge Warrants and $45,000 for
interest accrued subsequent to June 30, 30, 1996. See "Capitalization -- Bridge
Financing."
The Company requires the proceeds of this Offering to implement its
business plan, which includes the development and testing of products utilizing
the LTI Processed method and sales and marketing activities. At June 30, 1996,
the Company had no material capital commitments. However, during the 12-month
period following the Offering, the Company is committed to pay approximately
$144,000 in compensation to Michael E. Noonan and intends to pay an additional
$213,000 to other executive officers. See "Management -- Employment Agreements."
The Company expects to continue to incur substantial research, development
and marketing costs in the future. The Company also expects that general and
administrative costs necessary to support manufacturing and the creation of a
marketing and sales organization will increase in the future. Accordingly, the
Company expects to incur increasing operating losses for the foreseeable future.
There can be no assurance that the Company will ever achieve profitable
operations.
In the event of the release of the Escrow Shares, the Company will
recognize during the period in which the earnings thresholds are probable of
being met or such stock price levels achieved, a substantial non-cash charge to
earnings (not deductible for income tax purposes) equal to the fair market value
of such shares on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. There can be no assurance that the Company will attain the
targets which would enable the Escrow Shares to be released from escrow. See
"Principal Stockholders."
The recognition of the potential charges to income described above may have
a depressive effect on the market price of the Company's securities.
At June 30, 1996 the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $4,900,000. The net operating loss
and credit carryforwards expire from March 2008 through March 2011. See Note I
of Notes to Financial Statement. Additionally, the Company's ability to utilize
its net operating loss carryforwards may be subject to annual limitations
pursuant to Section 382 of the Internal Revenue Code as a result of this
Offering.
The report of the independent auditors on the Company's financial
statements as of March 31, 1996 contains an explanatory paragraph regarding an
uncertainty with respect to the ability of the Company to continue as a going
concern. The Company has had no significant revenue and has incurred an
accumulated deficit through June 30, 1996 of approximately $5,167,000. However,
the Company believes that upon the completion of the Offering and the receipt of
the proceeds therefrom, it will have the necessary liquidity and capital
resources to sustain planned operations for the 12 month period following the
Offering. In the event that the Company's internal estimates relating to its
planned expenditures prove materially inaccurate, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company anticipates that it will require
substantial additional financing after such time. There can be no assurance as
to the availability or terms of any required additional financing, when and if
needed. In the event that the Company fails to raise any funds it requires, it
may be necessary for the Company to significantly curtail its activities or
cease operations. See "Use of Proceeds."
22
<PAGE>
BUSINESS
General
The Company is a development stage company which has been organized to
research, develop, design and market value-added packaging and specialty display
products which are manufactured using the Company's proprietary processing
method ("LTI Processed"). LTI Processed is a procedure by which polyester film
is laminated onto single thickness paper ("linerboard") prior to corrugation.
The Company believes that the LTI Processed method is the only process currently
available in which polyester film can be laminated onto linerboard such that the
resulting laminate can withstand the heat and stress of corrugation. This
procedure results in a packaging material that the Company believes is
physically superior, more attractive and potentially more cost-effective than
many currently existing packaging materials such as polystyrene (styrofoam),
plastic, metal and certain corrugated cardboard products, including those that
are laminated with paper and/or coated after corrugation.
The LTI Processed method can be utilized to produce a wide variety of
packaging products and specialty displays. To date, the Company has produced a
number of prototype products, including bakery dessert boxes, coolers, frozen
food shippers, point of purchase displays, pizza delivery boxes, medical
product/specimen shippers and microwavable food disks used as pie plates and
pizza slice trays. The Company believes that these products, together with other
potential LTI Processed products, are capable of improving upon existing
packaging products by reducing or eliminating certain limitations associated
with such products. For example, the Company believes that LTI Processed
products may be leakproof, resistant to a variety of solvent and petroleum-based
chemicals, thermally insulating, recyclable, stronger and may have a higher
bursting strength than conventional corrugated products. The Company also
believes that the LTI Processed method permits higher quality printing and
results in more attractive packaging than corrugated materials printed with
traditional printing processes. Such aesthetic qualities have become more
important in recent years as retailers have significantly increased the extent
to which they display and sell products in the same packaging in which they were
shipped.
In addition, the Company believes that while LTI Processed material may be
more costly to produce than traditional corrugated board, it is generally less
expensive than certain other non-corrugated packaging products, including
styrofoam, metal and plastic. Moreover, because LTI Processed containers often
can be reused, and can be collapsed and stored pending reuse (thereby requiring
less storage space than containers made from materials such as styrofoam, metal
and plastic), they may be more cost-effective than other packaging materials,
including traditional corrugated materials. Based on these potential performance
advantages and cost savings, the Company believes that LTI Processed packaging
materials may be preferred to many packaging products currently marketed by
others.
Since its inception, the Company has focused primarily on research and
development, has had only a limited number of sales and has only recently begun
to focus on broader-based marketing. Most of such sales did not involve
significant orders and the Company believes that these customers were primarily
evaluating the commercial application of LTI Processed products. Moreover,
further development of the LTI Processed method may be necessary to satisfy the
requirements of specific end-users or strategic partners.
Strategy
The Company's strategy is to focus principally on (i) designing, developing
and marketing value-added, niche LTI Processed products directly to end-users
and (ii) leveraging its resources by establishing strategic alliances with
vertically integrated corrugators ("converters") for whom the Company intends to
supply LTI Processed linerboard for further manufacture and sale by such
converters. The principal elements of the Company's strategy are as follows:
Design, Develop and Market Products Directly. The Company intends to
design, develop and market value-added, niche LTI Processed products directly to
end-users. The Company believes that this strategy will provide more flexibility
to (i) identify quickly certain end-users for whom the physical properties or
potential cost-effectiveness of LTI Processed materials may provide a
significant advantage over their current packaging or display products and (ii)
design specific products that satisfy such end-user's requirements.
Out-Source Manufacturing Activities. With the exception of design
activities and certain printing operations, the Company currently intends to
out-source substantially all of its manufacturing to existing laminating,
corrugating, printing and sheet plant companies with whom the Company expects to
establish informal relationships. The Company believes that such out-sourcing
may be more cost-effective and will enable it to maintain the flexibility to
both accommodate the varied product needs of a wide array of customers and
adjust rapidly to developments in the Company's product designs.
23
<PAGE>
Seek Strategic Alliances for Production and Marketing. The Company intends
to seek strategic alliances with vertically integrated converters for whom the
Company intends to supply LTI Processed linerboard for further manufacture and
sale by such converters. The Company believes that such relationships will
enable the Company to more effectively penetrate the national market and
persuade larger end-users of the value of LTI Processed products without
disrupting existing supplier relationships. The Company expects that such
alliances, if entered into, would involve the purchase by such converters of LTI
Processed linerboard (either printed or unprinted) from the Company and the
completion (i.e., die-cutting and printing, if necessary) and sale of finished
products by such converters.
Licensing of LTI Processed Technology. The Company may in the future also
seek to license its LTI Processed technology to manufacturers who would produce
LTI Processed linerboard and finished products independently. Such licensing
agreements might provide for up-front licensing fees and/or royalty payments.
Industry Background
The corrugated packaging industry is divided into three basic groups:
integrated converters, non-integrated converters and sheet plants. Integrated
converters are the largest manufacturers and grow and harvest their own timber
and process it in high volume into large, pre-sized linerboard rolls in various
basic grades. Linerboard produced for in-house corrugation is then moved to
corrugating lines where it is processed, cut and printed if desired. Integrated
converters are extremely competitive and focus primarily on high speed, high
volume manufacture of commodity-type paper and packaging products with low
profit margins. Accordingly, they generally avoid production of value-added
products which typically require costlier materials, more manual labor,
interruptions in production and have shorter manufacturing runs. Integrated
converters have the advantage of being largely self-sufficient for supplies of
raw materials and can guarantee continuity of production and thus compete with
value-added products largely by providing basic corrugated packaging at low
prices.
Non-integrated corrugating converters do not produce their own linerboard
but purchase linerboard roll-stock and corrugate it into sheets from which
finished packaging and other products are produced, either by them or by sheet
plants. Non-integrated converters generally compete on a smaller scale, are
regional in scope, focus their operations on shorter runs and produce more
value-added products than integrated converters.
Sheet plants do not produce or corrugate rolls of linerboard but rather
purchase finished corrugated sheets from converters and then design, cut,
customize and process these sheets into finished packaging, displays and other
specialty items, including post-corrugation laminated products such as
point-of-purchase displays. Sheet plants generally market to local or regional
end-users who require higher cost, special design or value-added packaging and
have shorter run needs.
Product Background
Since the late 1960s, the corrugating industry has focused its
technological research and development largely on generating faster and more
efficient production of basic corrugated products through the use of high speed
corrugation, die-cutting and processing equipment designed to reduce labor
costs. Few advances have been made in the design or construction of the actual
corrugated packaging materials. The Company believes that there is a market for
corrugated products with physical properties such as insulation, improved
strength, resistance to chafing of the package surface, reduced abrasion of
packaged products, resistance to water and other liquids and improved graphics,
print resolution and gloss finishes. However, although film-on-film and
film-on-paper laminates exist for items such as snack-food bags and specialty
products, the Company believes that there currently exists no other corrugated
film laminates that can withstand the heat, pressure and stress of corrugation.
There currently exist certain alternative methods for producing value-added
corrugated products. For example, wax and other chemical coatings allow
corrugated board to be water resistant and scuff and abrasion resistant.
However, wax and chemical coatings are often absorbed by the linerboard over
time, thereby affecting its structural integrity. Increased bursting strength
can be achieved by increasing the weight of the linerboard or through "double
wall" and "triple wall" construction in which two or three layers of corrugating
"flutes" are sandwiched between layers of linerboard, creating a bulkier
material which is difficult to bend. To the extent that packaging is required
which exceeds the capabilities of traditional corrugated boards, other materials
such as styrofoam, metal and plastic can be used. However, in addition to
limited physical advantages, many currently available value-added corrugated
products are often not purchased by national end-users because they are
typically manufactured by non-integrated converters whose focus is more
regional.
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<PAGE>
The most advanced printing method currently available for high volume
production of corrugated material is pre-printing on linerboard before
corrugating. Pre-printed linerboard is produced in roll form and then corrugated
into sheets. This type of printing has certain problems associated with it such
as chafing of the exposed printed surface and cracking along the "score line" (a
crease placed into a product to allow easy bending). Additionally, because this
process entails printing on a porous, exposed surface, it requires more ink to
be used and thus allows somewhat limited graphics quality and gloss
capabilities. Pre-printing on linerboard also typically requires that higher
quality, and therefore more expensive, linerboard be used.
An alternative printing method, litho-laminating, involves the lamination
of lithographically printed paper (lithographic printing produces a higher
quality image and is commonly referred to as offset printing) onto already
corrugated rigid sheets. Both the lithographic printing and the handling of the
rigid corrugated sheets are relatively slow and labor intensive and thus more
costly, but are generally required for items which demand the most advanced
graphics available such as point-of-purchase displays. Litho-laminated products
also suffer from the problems of chafing of the printed surface and cracking
along the score lines because the printed surface is exposed.
LTI Processed
The Company believes that the application of the LTI Processed method,
which is a proprietary process involving the lamination of polyester film onto
linerboard before corrugation, results in a corrugated packaging and display
product that is physically superior, more attractive and potentially more
cost-effective than traditional corrugated products and certain non-corrugated
packaging products, including styrofoam, metal and plastic. The Company believes
that the LTI Processed method is the only currently available procedure that
permits the lamination of linerboard prior to corrugation.
The corrugating process entails using stream, heat and pressure to mold
paper into the interior flutes of the corrugated board and these flutes are then
sandwiched between two layers of linerboard using a starch bonding agent and the
further application of heat and pressure. The stress inherent in the corrugating
process can cause improperly laminated film to distort, shrink, melt, burn or
delaminate over time and can cause improper bonding agents to bubble or
crystallize. The Company believes that the LTI Processed method avoids these
problems by utilizing a proprietary combination or combinations of film,
linerboard and polymer bonding agents and by laminating using proprietary
laminating techniques. The Company believes that, with the proper direction by
the Company's personnel, independent companies possessing the proper machinery
can produce LTI Processed products with little or no modification of existing
equipment and with only minor interruption in production and thus with minimal
added cost. The resulting laminate can then be corrugated using traditional
methods and virtually no modification of existing machinery, thereby permitting
high volume production of LTI Processed corrugated material.
The Company believes that the LTI Processed laminate provides a protective
barrier allowing corrugated board to be leakproof and resistant to a variety of
solvents, paints, petroleum-based products and other chemicals for extended
periods of time. The Company also believes that this film allows corrugated
board to be more thermally insulating than traditional corrugated material of
the same thickness and may allow its insulating properties to be comparable to
other materials such as styrofoam while being thinner, collapsible and more
printable. The Company believes that this film allows the board to have a higher
bursting strength (bursting strength refers to the ability of the board surface
to withstand pressure before tearing) than traditional corrugated board. LTI
Processed materials may also be recyclable, a significant advantage over
styrofoam, which may pose certain environmental hazards and has been restricted
in certain areas, including the European Union. Notwithstanding the above, the
Company currently has no independent laboratory studies or test results to
verify its claims as to the physical properties of LTI Processed materials.
The Company believes that the LTI Processed method can also significantly
improve on the ability to print corrugated board, especially for high volume
production orders. The Company expects that high volume printing of LTI
Processed materials will be done in one of two ways, either by reverse-printing
the polyester film before laminating and corrugating or by printing onto
linerboard before laminating and corrugating. Both of these methods afford
higher quality, more durable graphics than is possible on traditional corrugated
material while maintaining the economies of scale not possible with
litho-lamination.
Reverse printing the polyester film ("reverse printing") before laminating
produces the highest quality image because the smooth surface of the film allows
extremely detailed, high resolution printing using minimal quantitiesof ink.
Laminating polyester film onto pre-printed linerboard ("pre-printing") also
allows high quality, high resolution and more detailed images because the layer
of film protects the printed surface and, again, allows less ink to be
used.However, the quality of the images are somewhat diminished relative to
reverse printing due to the porous nature of the linerboard. Pre-printing is
used when the width of the product to be printed exceeds the width of film
printers
25
<PAGE>
which are generally used for items such as snack-food bags and are generally not
designed for larger dimension printing. Both of these methods have high gloss
capabilities and are expected to solve the chafing and cracking problems
associated with traditional printing methods because the printed surface is
protected by the external layer of film. These processes can reduce the cost of
high quality printing on corrugated products by effectively integrating printing
into the corrugator's high-speed, high-volume production lines. Moreover, in
either case, there is no need for the corrugator to utilize higher quality
linerboard as is the case with traditional corrugated printing processes.
Because these processes require printing in advance of corrugation and thus the
timely coordination of the entire production process, the Company expects to
utilize these methods only for high volume orders.
For smaller orders, which are expected to constitute most of the Company's
business for the foreseeable future, the Company expects to "screen print" after
corrugation onto previously laminated board. Screen printing entails applying
ink to the film surface of the corrugated board using a silk-screen type
process. While this process can be more expensive than reverse printing and
pre-printing and suffers some of the scuffing problems associated with exterior
surface printing, the Company uses particular inks which allow a superior bond
of the ink to the film, thereby minimizing scuffing. Additionally, screen
printing allows more ink to be used to attain greater opacity and a glossy
finish while the particular screen printing technique maintains high quality
resolution. The Company believes that this market is currently being supplied
largely by litho-laminated products. See "-- Product Background."
Product Development
The Company believes that the LTI Processed method can be utilized to
produce a wide variety of packaging products and specialty displays. For
example, the Company believes that LTI Processed may be utilized to produce
reusable containers for the large scale delivery of cold, frozen and fresh food
which is now frequently shipped in single-use cardboard boxes, as well as for
packaging for specialty and mail-order fresh foods, replacing bulky styrofoam
and plastic containers which are expensive to produce and ship. The Company
believes LTI Processed products can be used as an alternative to styrofoam
coolers and it has produced waterproof, reusable, collapsible and printable
beer, wine and soft drink coolers and containers. The Company has also produced
insulated catering and pizza delivery boxes and believes that LTI Processed can
produce improved alternatives to corrugated products currently used in these
industries. LTI Processed products may also have applications for the shipment
of items with delicate finishes, and where the use of styrofoam has been
curtailed (for example, in the case of products shipped to the European Union).
LTI Processed products may also be employed in the medical industry for
packaging difficult to handle and contaminated items and for containers for
paints, solvents and chemicals which are currently stored in metal cans.
The Company has targeted the prepared desserts segment of the bakery
industry as an initial market and has developed a line of LTI Processed bakery
products that it believes are physically superior and more cost effective than
alternative products currently used in the industry. The Company continues to
design, develop and test alternative packaging designs and products targeted at
other industries. Because the exact specifications of the LTI Processed material
can vary significantly depending on the use to which the product is put, the
Company must continually test sample products designed for specific end use
applications.
Sales and Marketing
The Company's sales force currently consists of two salespersons. The
Company intends to hire approximately two additional salespersons in the near
term and may hire up to three additional salespersons. The Company may also
determine to utilize the services of independent sales representatives. See "--
Employees." The sales force is under the direction of J. Scott Stewart, Senior
Vice President -- Marketing/Sales.
The Company anticipates that its principal customers will be end-users of
LTI Processed finished products and converters who may purchase LTI Processed
linerboard for further production and sale to their customers. The Company
believes that converters, particularly large, integrated converters, will enable
the Company to more effectively penetrate the national market, while direct
sales to end-users will enable the Company to identify and design particular
niche products that may provide a significant advantage over alternative
packaging or display products. To the extent that the Company enters into
relationships with converters, the Company will be dependent to a large degree
upon such converters to market products incorporating LTI Processed technology,
and the success of any such relationships will depend in part upon the
converter's own competitive, marketing and strategic considerations, including
the relative advantages of alternative products being developed or marketed by
such converters. To date, the Company has not entered into any marketing
arrangements with any converter, and the Company anticipates that such
arrangements, if any, will become more likely only if the Company is able to
effectively penetrate the direct sales market.
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The Company believes that much of the corrugated packaging industry is
characterized by long-standing business relationships between manufacturers and
end-users. In addition, the Company will need to convince potential customers
currently utilizing non-corrugated packaging products of the relative advantages
of LTI Processed products. As a result, the Company may encounter significant
resistance in its marketing efforts and expects that it will be required to some
extent to educate the market regarding LTI Processed products. Moreover, the
Company anticipates that it will be required in certain cases to design and
produce at its own expense prototype products prior to consummating a sale,
which activities could have an adverse effect on the Company's results of
operations.
Manufacturing
The Company does not intend to directly manufacture either LTI Processed
roll-stock or finished products. Instead, the Company expects to contract for
manufacture with outside laminators, corrugators and sheet plants with whom the
Company expects to establish informal relationships. However, the Company may,
in the future, consider performing some or all of the manufacturing processes if
it believes it is appropriate under the circumstances. The Company has no
experience in manufacturing products on a commercial scale and does not have the
resources to directly manufacture on a commercial scale any of its products. In
the event the Company decides to engage in any manufacturing activities, the
Company will require substantial additional funds and will be required to hire
and train significant additional personnel.
LTI Processed polyester film can be laminated either on laminating machines
which are currently used largely for film-on-film lamination, or on coating
machines which currently coat single-ply cardboard with polyethylene and other
coatings for finishes such as those on cereal boxes. The Company believes that,
with the proper direction by the Company's personnel, independent companies
possessing the proper laminating or coating machinery can produce LTI Processed
with little or no modification of existing equipment and with only minor
interruption in production and thus with minimal added cost. The Company
believes that there are a sufficient number of laminators and coaters both
locally and nationally to fill the Company's production needs. However, there
can be no assurance that the Company will be able to procure these services on
terms acceptable to the Company.
The Company intends to out-source the corrugation of LTI Processed
roll-stock with corrugators with whom the Company expects to establish informal
relationships. See "-- Strategy." The Company believes that the corrugation of
LTI Processed roll-stock requires little oversight by the Company, that no
modification of existing machinery is required and that corrugators are widely
available. However the Company will be dependent on these corrugators for
production and there can be no assurance that these corrugators will continue to
fill the Company's production needs or, if they cease to do so, that the Company
would be able to secure adequate production on terms acceptable to the Company.
After corrugation, sheets of LTI Processed board will typically be stored
as inventory on the Company's premises to await specific orders. To fill smaller
customer orders, this inventory can be die-cut and printed if necessary by sheet
plants and made into final products. On larger orders for printed products, the
Company expects to laminate onto pre-printed linerboard or laminate with
reverse-printed film and thus run printed roll-stock through the corrugating
process, allowing higher volume and faster and less expensive production.
See"-- LTI Processed."
Competition
Competition in the corrugated and packaging industries is intense and based
significantly on price. Moreover, certain aspects of the Company's business,
including printing, are characterized by rapidly evolving technology that could
result in the technological obsolescence of processes utilized by the Company.
The Company competes with many corrugating firms and manufacturers of other
packaging products, including those made of styrofoam, metal and plastic. Most
of the Company's competitors have substantially greater financial, technical and
human resources than the Company and may be better equipped to develop,
manufacture and market products. These companies also compete with the Company
in recruiting and retaining highly qualified personnel and consultants.
Additionally, there are both corrugated and other packaging and display
materials available which can provide some or all of the physical
characteristics of LTI Processed products as well as high quality aesthetics and
which directly compete with the Company's products. Major corrugating and
integrated converters produce large quantities of corrugated products with wax
and other coatings which are water resistant and can be used, for example, to
pack wet and frozen foods for extended periods and to reduce abrasion of items
with delicate finishes. The Company will face intense competition from these
manufacturers to the extent that these products present viable alternatives to
LTI Processed products. These products may remain attractive to many end-users
as they can be lower priced and end-users will not have to incur the potential
cost of interrupting product lines and supply sources to accommodate different
packaging from a new company. The Company intends to compete with such
manufacturers by offering a
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<PAGE>
product that can be more expensive but which the Company believes will be of
higher quality, and in many circumstances, more cost efficient in the long term.
Additionally, the Company will face competition from non-integrated converters
who supply corrugated products that are laminated with high quality,
lithographically printed paper. While the Company believes that these products
do not have the physical properties of LTI Processed and offer little price
advantage over LTI Processed, they will effectively compete with the Company's
products in the market for quality printed products.
The Company also expects to encounter significant competition as it seeks
to enter markets for other forms of value-added packaging and products such as
styrofoam, metal and plastic. Given the fact that the physical properties of
these other materials have been long established, that end-users are accustomed
to using these materials and that manufacturers have massive national and
international production and marketing efforts as well as sophisticated and well
developed product lines, the Company will need to persuade end-users of the
value of an entirely new material and product design which is purchased from a
new supplier. There can be no assurance that such efforts will be successful.
Moreover, there can be no assurance that other companies will not develop
products which are superior to the Company's or which achieve greater market
penetration.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and abroad. On December
9, 1988, Michael Olvey, Sr., the inventor of the LTI Processed method and a
founder and former President of the Company filed a patent application with the
U.S. Patent and Trademark Office (the "U.S. Patent Office") covering the
Company's LTI Processed technology. On March 15, 1990, the U.S. Patent Office
rejected the claims of the Company's patent application as being too broad in
light of prior art. On April 19, 1993, Mr. Olvey assigned all rights to this
patent application to the Company. The Company expects to submit a modification
of its original application after the completion of this Offering.
There can be no assurance that any patent applications filed by or on
behalf of the Company will result in patents being issued, that patents, if any,
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide any significant competitive
advantage to the Company. Furthermore, there can be no assurance that others
have not independently developed, or will not independently develop, similar
products or technologies or, if patents are issued to the Company, will not
design around such patents.
The Company's potential products may conflict with patents which have been
or may be granted to competitors or others. In particular, the Company is aware
of a patent issued to Adolph Coors Company that relates to certain processes by
which film, including polyester film, is reverse-printed and laminated onto
linerboard. Such patent may affect the ability of the Company to obtain patent
protection for some or all of the claims included in its patent application.
Moreover, there can be no assurance that any application of the Company's
technology will not infringe the Coors patent or any other patents or
proprietary rights of others. Such other persons could bring legal actions
against the Company claiming damages and seeking to enjoin manufacturing and
marketing of the Company's products. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. If the Company becomes involved in
litigation, it could consume a substantial portion of the Company's time and
resources. Moreover, the non-approval of the Company's patent application or the
invalidation of any patent that may be issued to the Company would likely have a
material adverse effect on the Company.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets.
The Company intends to protect its proprietary technology through the use
of licensing, exclusivity and non-disclosure agreements with the laminators,
corrugators, converters and printers with which it may establish strategic
alliances and production relationships. The Company also requires that certain
of its employees and consultants execute a confidentiality agreement upon the
commencement of an employment or consulting relationship with the Company. The
agreements generally provide that trade secrets and all inventions conceived by
the individual and all confidential information developed or made known to the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third parties
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful
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<PAGE>
protection for the Company's proprietary information in the event of
unauthorized use or disclosure of such information.
Suppliers
The Company is dependent on the suppliers of the raw materials used to
produce LTI Processed products, including polyester film and linerboard. The
corrugating industry periodically suffers shortages of linerboard. These
shortages more seriously affect non-vertically integrated corrugating converters
(those that do not own their own timber and produce their own roll-stock) by
raising prices and forcing customers of corrugated board to purchase from
integrated converters. To the extent that the Company intends to utilize
non-integrated converters for the production of LTI Processed packaging, a
shortage-induced price increase could raise the price of such LTI Processed
materials beyond its value margin, causing end-users to seek integrated
suppliers which may not use the Company's products. Although the Company's
requirements for linerboard have to date been limited, the Company has relied,
and will likely continue to rely, upon Ludlow Corporation as a principal
supplier of linerboard.
In the absence of a shortage, the Company believes that there are numerous
sources of supply of its raw materials. However, should the Company be unable to
obtain an adequate supply of necessary raw materials, the Company's ability to
continue to manufacture products in accordance with its business plan would be
adversely affected.
Government Regulation
To the extent that LTI Processed is used in the food service and packaging
industries, the Company will be required to ensure that its products meet
federal Food and Drug Administration (the "FDA") regulations regarding materials
used in contact with food. The Company believes that both the polyester film and
the bonding agents used in LTI Processed products will be in compliance with
approved food additive regulations permitting the types of food contact use
contemplated by the Company. However, there can be no assurance that the
Company's use of the materials included in its products will not require
separate FDA approval. Obtaining FDA approval has historically been a costly and
time-consuming process. The Company may also need to seek regulatory approval
from foreign governments for the use of LTI Processed products shipped to those
countries. For example, the European Union has strict regulations as to the
disposability and recyclability of imported packaging and paper products. There
can be no assurance that such foreign regulations will not restrict or preclude
the Company from engaging in activities in such countries, which could have a
material adverse effect on the Company. The failure to obtain any required
regulatory approvals could have a material adverse effect on the Company.
Employees
The Company currently has six full-time employees, three of whom are
dedicated solely to marketing and two of whom are dedicated to both marketing
and operations, and one part-time employee. The Company also has consulting
agreements with certain individuals such as the Company's founder and inventor
of the LTI Processed proprietary technology, as well as certain former employees
and officers of the Company. The Company intends to hire approximately two
additional salespersons in the near term and may hire up to three additional
salespersons. The Company may also determine to utilize the services of
independent sales representatives. The Company's future success depends in
significant part upon the continued service of its executive officers and its
ability to attract and retain highly qualified sales and marketing and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company can retain its key employees or that it can
attract, assimilate or retain other highly qualified sales and marketing and
managerial personnel in the future. None of the Company's employees is
represented by a labor union and the Company believes its relations with its
employees are satisfactory.
Properties
The Company currently leases approximately 1,000 square feet of office
space for its executive offices pursuant to an oral agreement that provides for
an indefinite term and monthly rent of $1,575. The Company anticipates that such
executive office space will be sufficient for approximately six months, at which
time the Company intends to secure additional executive office space. The
Company is also engaged in discussions with several converters that may sublet
certain warehouse space to the Company in exchange for rental payments and/or
the opportunity to provide converting services to the Company, although the
Company has not entered into any definitive agreements. The Company believes
that adequate space is currently available in the Atlanta area.
Legal Proceedings
The Company is not involved in any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
----- ---- -------
<S> <C> <C>
Michael E. Noonan ....................... 55 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Jerry A. Ross............................ 47 Chief Financial Officer
Robert L. Dover.......................... 61 Senior Vice President -- Marketing/Operations,
Secretary and Director
J. Scott Stewart......................... 43 Senior Vice President -- Marketing/Sales
Ronald L. Christensen.................... 59 Director
Jerome I. Gellman........................ 67 Director
Leonard Toboroff......................... 63 Director
William J. Warren........................ 57 Director
Donakd B. Salle ......................... 53 Director Nominee
</TABLE>
MICHAEL E. NOONAN was appointed Chairman of the Board, President and Chief
Executive Officer on February 1, 1996. From 1994 to February 1, 1996, Mr. Noonan
was self-employed as a business consultant. From 1989 to 1994, Mr. Noonan was
the Chief Executive Officer, President and sole shareholder of Winning Image,
Inc, an apparel marketing and manufacturing firm which was sold to Terry
Manufacturing Co. From 1986 to 1989, Mr. Noonan was a Senior Vice President of
Domestic and North American Operations at the Mead Packaging Division of Mead
Corporation.
JERRY A. ROSS has been the part-time Chief Financial Officer of the Company
since June 15, 1996. Mr. Ross has also served as the Chief Financial Officer of
Warranty Corporation of America, an administrator of extended service contracts,
since June 1996. Mr. Ross intends to devote approximately one-half of his
business time to the Company. From December 1994 to May 1996, Mr. Ross was Vice
President and Chief Financial Officer of Allied Foods, Inc., a manufacturer of
canned pet foods and, from December 1993 to November 1994, he was Vice President
of Finance of Daystar Digital, Inc., a manufacturer of accelerators and digital
imaging hardware and software for Apple/Macintosh computers. From February 1992
to November 1993, he was Chief Financial Officer and Director of Operations of
Klikok Corporation, an international manufacturer of packaging machinery. From
1975 to January 1992, Mr. Ross was a senior manager of the audit, accounting and
Financial Consulting Services of Arthur Andersen & Co. in Atlanta, Georgia. Mr.
Ross is a Certified Public Accountant and received a Masters Degree in
Professional Accountancy from Georgia State University in 1975.
ROBERT L. DOVER has been the Senior Vice President -- Marketing/Operations,
Secretary and a director of the Company since May 1996. From 1966 to April 1995,
Mr. Dover was an executive of Mead Packaging Division of Mead Corporation in
Atlanta, Georgia working in the capacity of Director of Marketing and
Technological Planning, Environmental Technology, Marketing and Sales, for the
Food Industry, Marketing for the Soft Drink Industry, Film Systems, Market
Research and Machinery Systems Development. From May 1995 to May 1996, Mr. Dover
was an independent consultant. Mr. Dover graduated with a Masters of Science
Degree in Industrial Management from the Georgia Institute of Technology.
J. SCOTT STEWART has been Senior Vice President -- Marketing/Sales of the
Company since May 1996. From 1992 to 1996, Mr. Stewart was co-founder and a
sales representative for Simmons Survey, a company involved in leak detection
for underground fuel tanks. From 1981 to 1992, Mr. Stewart worked for the
Royston Division of AWH Corporation in Winston-Salem North Carolina as a Vice
President of the Contract Business Division and of Corporate Marketing. Mr.
Stewart graduated with a Masters Degree in Business Administration from Emory
University in 1977, and with a Bachelor's Degree in Industrial Management from
the Georgia Institute of Technology in 1975.
RONALD L. CHRISTENSEN has been a director of the Company since March 1996.
From 1993 to the present, Mr. Christensen has served as President and Chief
Executive Officer of PrinTech Label Corporation, a printing and converting firm.
Since 1983 he has also served as president of Adrienne Associates, a consulting
services company to the printing and pressure sensitive materials industry. Mr.
Christensen graduated from Georgia Institute of Technology in 1960 with a
Bachelor's Degree in Chemical Engineering.
JEROME I. GELLMAN has been a director of the Company since July 1996. From
1988 to the present, Mr. Gellman has been counsel to the law firm of Cowan,
Liebowitz & Latman. Mr. Gellman has also served as a director of Tyco Toys,
Inc., a publicly-traded toy company, since 1987.
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<PAGE>
LEONARD TOBOROFF has been a director of the Company since July 1996. Mr.
Toboroff has also served as Vice President and a director of Riddell Sports
Inc., a manufacturer and distributor of sporting goods, since April 1988 and
Vice President and Vice-Chairman of the Board of Allis-Chalmers Corp. since May
1989. Mr. Toboroff has been a practicing attorney since 1961 and has served as
(i) a director of American Bakeries Company since August 1987, (ii) a director
of Banner Aerospace, Inc., a supplier of aircraft parts, since September 1992,
(iii) a director of ANMR Corp., a manufacturer of medical diagnostic equipment,
since September 1992 and (iv) Chairman of the Board of Saratoga Springs Beverage
Co. since December 1995.
WILLIAM J. WARREN has been a director of the Company since March 1996. Mr.
Warren founded Mar-Lyn Container Corp., a sheet converter, in 1967 and is the
president and a majority shareholder of Mar-Lyn. Mr. Warren graduated from the
University of California in 1961 with a Bachelor's Degree in Industrial
Management.
DONALD B. SALLEE is expected to become a director of the Company subsequent
to the closing of this Offering. Mr. Sallee is a private investor and a founding
partner and, for more than the past five years, a director of Invesco Capital
Management, Inc., an international money management firm which is a wholly-owned
subsidiary of Invesco P.L.C., London, a publicy-traded holding company of a
number of financial mangement firms. Mr. Sallee received a Master's Degree in
Business Administration from the University of Alabama in Tuscaloosa in 1969.
Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management -- Employment Agreements."
The Company has agreed, if requested by the Underwriter, to nominate a
designee of the Underwriter to the Company's Board of Directors for a period of
five years after the date of this Prospectus. See "Underwriting."
The Board of Directors' intends to establish an Audit Committee which will
review, with the Company's independent auditors, the results and scope of their
audit services and any other services they are asked to perform, their report on
the Company's financial statements following completion of their audit and the
Company's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee will make annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.
Executive Compensation
The following Summary Compensation Table sets forth the compensation earned
by Michael E. Noonan, the Company's Chief Executive Officer, and by Joseph
Neely, the Company's former Chief Executive Officer, for the fiscal year ended
March 31, 1996 (the "named executive officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------------------
Compensation Name Other Annual Long-Term
and Principal Position Year Salary Bonus Compensation Awards/Options(3)
- -------------------- ---- ------------ ------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
Michael E. Noonan .......................... 1996 $ 72,000(1) -- -- --
Joseph Neely ............................... 1996 107,500(2) -- 20,000 --
</TABLE>
- --------------
(1) Represents amounts accrued in the fiscal year ended March 31, 1996 and
includes $60,000 payable pursuant to a consulting arrangement prior to
March 31, 1996.
(2) Includes $42,500 accrued in the fiscal year ended March 31, 1996 and paid
in April 1996.
(3) No options were granted prior to the end of the fiscal year ended March 31,
1996.
Employment and Consulting Agreements
In July 1996, the Company entered into a one year employment agreement with
Michael E. Noonan, Chairman and Chief Executive Officer of the Company. The
agreement provides for an annual base salary of $144,000 per year and is
automatically renewable for successive one year terms unless either party gives
six months' notice to the other. The Company may terminate the agreement without
cause and, upon such termination, Mr. Noonan will be entitled to receive his
base salary for a period of one year (subject to a 50% offset during the second
six months for salary received from subsequent employment). In addition, if the
Company exercises its right not to renew the agreement, Mr. Noonan will be
entitled to six months of severance pay. The agreement contains confidentiality
and non-competition provisions.
31
<PAGE>
In December 1995, the Company entered into a one-year consulting agreement
with Michael W. Olvey, Sr., a founder, a former President and director of the
Company and a stockholder of the Company. The agreement provides for annual
payments of $60,000 and for a $60,000 bonus upon the issuance of a patent under
the Company's current patent application. The bonus is increased to $100,000
upon the issuance of multiple patents under the current patent application.
The Company has agreed with the Underwriter that, notwithstanding the
provisions of the foregoing agreements, the compensation of the Company's
executive officers will not increase from current levels for a period of 13
months after the closing of the Offering.
Director Compensation
Non-employee directors of the Company are entitled to compensation of $500
for each Board of Directors meeting attended and are reimbursed for expenses
actually incurred in connection with such meeting. Directors are not precluded
from serving the Company in any other capacity and receiving compensation
therefor. In addition, directors are entitled to receive Director Options
pursuant to the Company's 1996 Stock Option Plan. See "--Stock Options."
Stock Options
General. In March 1996, the Board of Directors adopted and the Company's
stockholders approved the Amended and Restated 1996 Stock Option Plan (the
"Plan"), which provides for the grant by the Company of options to purchase up
to an aggregate of 250,000 shares of the Company's authorized but unissued
Common Stock. Pursuant to the Plan, employees, officers and directors of, and
consultants or advisers to, the Company and any subsidiary corporations are
eligible to receive incentive stock options ("incentive options") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and/or options that do not qualify as incentive options ("non-qualified
options"). The Plan, which expires in March 2006, will be administered by the
Board of Directors or a committee of the Board of Directors, provided, however,
that with respect to "officers" and "directors," as such terms are defined for
the purposes of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), such committee shall consist of
"disinterested" directors as defined in Rule 16b-3, but only if at least two
directors meet the criteria of "disinterested" directors as defined in Rule
16b-3. The purposes of the Plan are to ensure the retention of existing
executive personnel, key employees, directors, consultants and advisors who are
expected to contribute to the Company's future growth and success and to provide
additional incentive by permitting such individuals to participation the
ownership of the Company, and the criteria to be utilized by the Board of
Directors or the committee in granting options pursuant to the Plan will be
consistent with these purposes. The Plan provides for automatic grants of
options to certain directors in the manner set forth below.
Options granted under the Plan may be either incentive options or
non-qualified options. Incentive options granted under the Plan are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only while the optionee is employed or retained by the
Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the Plan after March 2006.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. As of June 30, 1996,
the number of employees, officers and directors of the Company eligible to
receive grants under the Plan was eleven persons. The number of consultants and
advisors to
32
<PAGE>
the Company eligible to receive grants under the Plan is not determinable. An
optionee may be granted more than one option under the Plan. The Board of
Directors or the committee will, in its discretion, determine (subject to the
terms of the Plan) who will be granted options, the time or times at which
options shall be granted, and the number of shares subject to each option,
whether the options are incentive options or non-qualified options, and the
manner in which options may be exercised. In making such determination,
consideration may be given to the value of the services rendered by the
respective individuals, their present and potential contributions to the success
of the Company and its subsidiaries and such other factors deemed relevant in
accomplishing the purpose of the Plan.
Under the Plan, the optionee has none of the rights of a stockholder with
respect to the shares issuable upon the exercise of the option until such shares
shall be issued upon such exercise. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date of
exercise, except as provided in the Plan. During the lifetime of the optionee,
an option shall be exercisable only by the optionee. No option may be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of decent and distribution.
The Board of Directors may amend or terminate the Plan except that
stockholder approval is required to effect a change so as to increase the
aggregate number of shares that may be issued under the Plan (unless adjusted to
reflect such changes as a result of a stock dividend, stock split,
recapitalization, merger or consolidation of the Company), to modify the
requirements as to eligibility to receive options, to increase materially the
benefits accruing to participants or as otherwise may be required by Rule 16b-3
or Section 422 of the Code. No action taken by the Board may materially and
adversely affect any outstanding option grant without the consent of the
optionee.
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the Plan. Upon exercise of a non-qualified
option, the excess of the fair market value of the shares subject to the option
over the option price (the "Spread") at the date of exercise is taxable as
ordinary income to the optionee in the year it is exercised and is deductible by
the Company as compensation for Federal income tax purposes, if Federal income
tax is withheld on the Spread. However, if the shares are subject to vesting
restrictions conditioned on future employment or the holder is subject to the
short-swing profits liability restrictions of Section 16(b) of the Exchange Act
of (i.e., is an executive officer, director or 10% stockholder of the Company)
then taxation and measurement of the Spread is deferred until such restrictions
lapse, unless a special election is made under Section 83(b) of the Code to
report such income currently without regard to such restrictions. The optionee's
basis in the shares will be equal to the fair market value on the date taxation
is imposed and the holding period commences on such date.
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received on exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is long-term or short-term capital gain or
loss, depending upon the holding period. The holding period for long-term
capital gain or loss treatment is more than one year.
33
<PAGE>
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the Plan. For instance, the
treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.
To date, options to purchase 190,000 shares of Common Stock at exercise
prices of $4.00 and $5.00 per share have been granted under the Plan (including
40,000 options to be granted on the date of this Prospectus).
Directors' Options. The provisions of the Plan provide for the automatic
grant of non-qualified stock options to purchase shares of Common Stock
("Director Options") to directors of the Company who are not employees or
principal stockholders of the Company ("Eligible Directors"). Eligible Directors
of the Company will be granted a Director Option to purchase 10,000 shares of
Common Stock on the date of this Prospectus at a per share exercise price equal
to the initial public offering price of the Units. Future Eligible Directors
will be granted a Director Option to purchase 10,000 shares of Common Stock on
the date that such person is first elected or appointed a director. Further,
commencing on the day immediately following the date of the annual meeting of
stockholders for the Company's fiscal year ending March 31, 1997, each Eligible
Director, other than directors who received an Initial Director Option since the
last annual meeting, will be granted a Director Option to purchase 1,000 shares
of Common Stock ("Automatic Grant") on the day immediately following the date of
each annual meeting of stockholders, as long as such director is a member of the
Board of Directors. The exercise price for each share subject to a Director
Option shall be equal to the fair market value of the Common Stock on the date
of grant, except for directors who receive incentive options and who own more
than 10% of the voting power, in which case the exercise price shall be not less
than 110% of the fair market value on the date of grant. Director Options are
exercisable in four equal annual installments, commencing six months from the
date of grant. Director Options will expire the earlier of 10 years after the
date of grant or 90 days after the termination of the director's service on the
Board of Directors.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such limitation
of liability also does not affect the availability of equitable remedies such as
injunctive relief of recision.
The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a matter he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company has not currently purchased any such insurance policy on behalf on any
of its directors, officers, employees or agents.
34
<PAGE>
CERTAIN TRANSACTIONS
D.H. Blair Capital Corp. beneficially owns an aggregate of 26.25% of the
outstanding shares of Common Stock before this Offering, including (i) 138,365
shares of Common Stock originally issued in April 1993 for $2.71 per share and
(ii) 184,486 shares of Common Stock issuable upon the automatic conversion, upon
the closing of this Offering, of 250,000 shares of Series A Preferred Stock
which were originally issued in September 1993 for $2.00 per share. Upon the
conversion of the Series A Preferred Stock, the Company will pay to D.H. Blair
Capital Corp. approximately $150,000, representing the accumulated dividends on
the Series A Preferred Stock. The sole stockholder of D.H. Blair Capital Corp.
is J. Morton Davis, the sole stockholder of the Underwriter. In September 1993,
the Underwriter loaned $30,000 to the Company and in March 1994, the Underwriter
loaned an additional $100,000 to the Company, each of which loans bore interest
at 10% per annum. The principal amount of all of such indebtedness was repaid in
April 1996 and accrued interest of approximately $30,000 was repaid in August
1996. In March 1994, the Company issued warrants to purchase 36,897 shares of
Common Stock of the Company to the Underwriter in consideration of the extension
of the loan by the Underwriter. The Underwriter also acted as Placement Agent
for the Bridge Financing in April and May 1996. See "Underwriting" for a
description of the compensation received by the Underwriter in connection with
the Bridge Financing.
In April 1996, Steve Gorlin and TransMillennial Resource Corporation
("TMR"), each principal stockholders of the Company, granted to Michael E.
Noonan, Chairman, President and Chief Executive Officer of the Company, options
to purchase an aggregate of 91,319 and 25,027 shares, respectively, of Common
Stock owned by Mr. Gorlin and TMR. The options are exercisable at $0.68 per
share and expire ten years from the date of grant. All of the TMR options and
13,755 of the Gorlin options are immediately exercisable, and the remaining
77,564 options are exercisable in approximately equal annual installments in
April 1997 and April 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company has granted Mr. Noonan demand and piggyback registration
rights with respect to the shares of Common Stock issuable upon exercise of
these options. See "Description of Securities -- Registration Rights."
On August 26, 1994, the stockolders of the Company ratified a preliminary
agreement (the "Memorandum of Understanding") with TMR. Charles Broes, the
President and a principl stockholder of TMR, served as the President and Chief
Executive Officer of the Company from August 1994 to March 1995 and a director
of the Company from August 1994 to February 1996. Pursuant to the Memorandum of
Understanding, TMR agreed to provide certain management, financing and marketing
services to the Company for fees to be established at a later date and the
issuance of certain warrants contingent upon TMR securing certain financing for
the Company within six months. On September 1, 1994, the Company entered into an
Outsourcing Agreement with TMR (the "TMR Outsourcing Agreement") pursuant to
which the Company agreed to pay TMR $20,000 a month for its management services.
On September 1, 1994, the Company also entered into an Outsourcing Agreement
with Revenue Process Development, Inc. ("RPD"), a subsidiary of TMR (the "RPD
Outsourcing Agreement"), pursuant to which RPD would act as exclusive marketing
and sales agent for the Company in exchange for the greater of 20% of gross
sales or RPD's actual costs. On February 2, 1995, the Company agreed with TMR to
amend the Memorandum of Understanding (the "Amendment") and extend the term of
the agreement to ten months, to increase TMR's fees to $22,000 a month, payable,
along with TMR's expenses, in the form of 10% convertible debentures of the
Company and to cancel the RPD Outsourcing Agreement. On June 7, 1995, TMR
informed the Company via letter that it was unable to secure the financing
called for under the Memorandum of Understanding. Accordingly, as per its terms,
the Memorandum of Understanding expired on June 30, 1995 and the Company was
obligated only for fees and expenses due to TMR through such date and no
warrants were issued or issuable to TMR.
On July 1, 1995, the Company sold certain assets to TMR at book value for
$54,279 in exchange for a reduction in the Company's indebtedness to TMR. As of
December 31, 1995, TMR sold certain of these assets to third parties for an
aggregate of $43,750, which amount was collected by the Company and resulted in
an increase in the Company's indebtedness to TMR. This indebtedness was included
in the indebtedness that was converted to equity in April 1996, as described
below. In July 1995, the Company purchased all of the outstanding stock of RPD
from TMR for $2,000.
In April 1996, pursuant to an agreement dated March 21, 1996, TMR
contributed to the capital of the Company $307,457 of indebtedness owed by the
Company to TMR for management services, expenses and other indebtedness under
the Memorandum of Understanding and the TMR Outsourcing Agreement and converted
the remaining $428,346 of Company indebtedness into 158,048 shares of Common
Stock at a rate of one share for every $2.7102
35
<PAGE>
of indebtedness. In April 1996, pursuant to additional debt conversion
agreements dated March 21, 1996 (the "Debt Conversion Agreements"), the
Conversion Investors also converted an aggregate of $550,210 of indebtedness of
the Company into 203,013 shares of Common Stock at a rate of one share for every
$2.7102 of indebtedness.
In April 1996, Donald B. Sallee, a principal stockholder of the Company,
and other debtholders of the Company converted an aggregate of $495,000
principal amount of indebtedness of the Company into an aggregate of $495,000 in
principal amount of Bridge Notes and 247,500 Bridge Warrants. The Company agreed
to pay the accrued interest on the indebtedness in cash. See "Capitalization --
Bridge Financing." The principal amount of the Bridge Notes and interest thereon
at a rate of 10% per annum will be paid to the holders of the Bridge Notes upon
the closing of this Offering.
In June 1995, the Company purchased from Michael W. Olvey, Sr., a founder,
stockholder and former President and a director of the Company, 126,114 shares
of Common Stock of the Company for $150,000, which amount was paid in
installments through April 1996. In July 1995, the Company sold 126,114 shares
of Common Stock to Donald Sallee for $85,000 in connection with a $250,000 loan
by Mr. Sallee to the Company in June 1995. As a result, the Company recorded a
financing cost of approximately $65,000 which was charged to earnings in the
year ended March 31, 1996. See Note J of Notes to Financial Statements.
Additionally, in June 1995, the Company issued 33,208 shares of Common Stock to
Mr. Olvey in consideration for the cancellation of $90,000 of the Company's
indebtedness to him. In March 1996, Mr. Olvey cancelled 7,379 of these shares.
In December 1995, the Company entered into a one year consulting agreement with
Mr. Olvey. The agreement provides for annual payments of $60,000 and a $60,000
bonus upon the issuance of a patent under the Company's current patent
application. The bonus is increased to $100,000 upon the issuance of multiple
patents under the current patent application.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) each director and named executive
officer of the Company and (iii) all executive officers and directors of the
Company as a group, (a) prior to the Offering giving effect to the Debt
Conversion, the automatic conversion of the Series A Preferred Stock into Common
Stock upon the closing of the Offering and (b) as adjusted to give effect to the
sale of the 1,700,000 Units offered hereby.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
--------------------------
Number of Shares Before After
Name and Address of Beneficial Owner(1)(2) Beneficially Owned(1) Offering Offering
- --------------------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Michael E. Noonan ....................................... 38,782(3) 3.06% 1.31%
Robert L. Dover .......................................... 13,334(4) 1.07 *
Ronald L. Christensen..................................... -- (5) * *
Jerome I. Gellman......................................... -- (5) * *
Leonard Toboroff.......................................... -- (5) * *
William J. Warren......................................... -- (5) * *
J. Morton Davis........................................... 359,748(6) 28.40 12.13
D.H. Blair Capital Corp.. ............................... 322,851(7) 26.25 11.02
Steve Gorlin ............................................. 202,012(8) 16.42 6.89
TransMillennial Resource Corporation ..................... 158,048(9) 12.85 5.39
Donald B. Sallee ......................................... 126,114(10) 10.25 4.30
All executive officers and directors
as a group (8 persons).................................. 79,310(11) 6.09 2.64
</TABLE>
- ------------
* Less than 1%
(1) Except as otherwise indicated, each of the parties listed above has sole
voting and investment power over the shares owned. Unless otherwise
indicated, the address is c/o Laminating Technologies, Inc., 7730 Roswell
Road, Atlanta, Georgia 30350-4862.
(2) Includes Escrow Shares. See "-- Escrow Shares" below.
(3) Includes 25,027 shares issuable upon exercise of immediately exercisable
options granted to Mr. Noonan by TMR and 13,755 shares issuable upon
exercise of immediately exercisable options granted by Steve Gorlin. Does
not include an additional 77,564 shares issuable upon exercise of options
granted to Mr. Noonan by Mr. Gorlin that are not exercisable within 60
days.
(4) Includes 13,334 immediately exercisable options to purchase Common Stock.
Does not include 26,666 shares issuable upon exercise of options that are
not exercisable within 60 days.
(5) Does not include 10,000 shares issuable upon exercise of options that are
not exercisable within 60 days.
(6) Includes 322,851 shares owned by D.H. Blair Capital Corp. and 36,897 shares
issuable upon exercise of immediately exercisable warrants issued to the
Underwriter. Mr. Davis is the sole stockholder of each of D.H. Blair
Capital Corp. and the Underwriter. The address of Mr. Davis is 44 Wall
Street, New York, New York 10005.
(7) Does not include 36,897 shares issuable upon the exercise of immediately
exercisable warrants issued to the Underwriter in March 1994. The sole
stockholder of D.H. Blair Capital Corp. is J. Morton Davis, the sole
stockholder of the Underwriter. The address of D.H. Blair Capital Corp. is
44 Wall Street, New York, New York 10005.
(8) Includes 91,319 shares subject to options granted by Mr. Gorlin to Michael
E. Noonan. The address of Mr. Gorlin is 5115 Peachtree Road, Suite 200,
Chamblee, Georgia 30341.
(9) Includes 25,027 shares subject to options granted by TMR to Michael E.
Noonan. The address of TMR is 31847 W. Sea Level Drive, Malibu, California
90265.
(10) The address of Mr. Sallee is c/o Invesco Capital Management, 1315
Peachtree, N.E., Suite 500, Atlanta, Georgia 30309.
(11) Includes 72,117 shares issuable upon exercise of options that are
immediately exercisable. Does not include 184, 229 shares issuable upon
exercise of options that are not exercisable within 60 days. Steve Gorlin
may be deemed a "founder" of the Company, as such term is defined in the
Securities Act.
37
<PAGE>
Escrow Shares
In connection with the Offering, the holders of Common Stock have agreed to
place, on approximately a pro rata basis, 410,000 shares, or one-third of the
outstanding shares of Common Stock of the Company before the Offering, into
escrow pursuant to an escrow agreement (the "Escrow Agreement") between such
holders and American Stock Transfer & Trust Company, as escrow agent. The Escrow
Shares are not transferable or assignable; however, the Escrow Shares may be
voted by the beneficial holders thereof. The shares of Common Stock underlying
the options granted to Michael E. Noonan by Steve Gorlin and TMR will not be
Escrow Shares.
The Escrow Shares will be released from escrow if, and only if, one or more
of the following conditions are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the
Company's independent public accountants) (the "Minimum Pretax
Income") amounts to at least $3,100,000 for the fiscal year ending
March 31, 1998;
(b) the Minimum Pretax Income amounts to at least $4,400,000 for the
fiscal year ending March 31, 1999;
(c) the Minimum Pretax Income amounts to at least $5,700,000 for the
fiscal year ending March 31, 2000;
(d) the Closing Price (as defined in the Escrow Agreement) of the Common
Stock averages in excess of $12.50 per share for 30 consecutive
business days during the 18-month period commencing on the date of
this Prospectus;
(e) the Closing Price of the Common Stock averages in excess of $16.75 per
share for 30 consecutive business days during the 18-month period
commencing with the nineteenth month from the date of this Prospectus;
or
(f) during the periods specified in (d) or (e) above, the Company is
acquired by or merged into another entity in a transaction in which
the value of the per share consideration received by the stockholders
of the Company on the date of such transaction or at any time during
the applicable period set forth in (d) or (e), respectively, equals or
exceeds the applicable levels set forth in (d) or (e), respectively.
The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
relating to the Bridge Financing and repayment of the Notes or resulting from
release of the Escrow Shares and (ii) be increased proportionately, with certain
limitations, in the event additional shares of Common Stock or securities
convertible into, exchangeable for or exercisable into Common Stock are issued
after completion of the Offering. The Closing Price amounts set forth above are
subject to adjustment in the event of any stock splits, reverse stock splits or
other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares and including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or Closing Price levels
set forth above have been met by June 30, 2000, the Escrow Shares, as well as
any dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The Company expects
that the release of the Escrow Shares to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge (not deductible for income tax purposes) to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or reduce
or eliminate the Company's net income, if any, for financial reporting purposes
for the period during which such shares and options are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total stockholders'
equity, it may have a negative effect on the market price of the Company's
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note G of Notes to Financial Statements.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Underwriter and should not
be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
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CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling Securityholders
of 997,500 Class A Warrants, 997,500 Class B Warrants and 1,995,000 shares of
Common Stock issuable upon exercise of such Class A and Class B Warrants. The
Selling Securityholder Warrants are being issued to the Selling Securityholders
as of the effective date of the Offering upon the automatic conversion of all of
the Company's outstanding Bridge Warrants. The Class A Warrants are identical to
the Class A Warrants included in the Units offered hereby. All of the Selling
Securityholder Warrants issued upon conversion of the Bridge Warrants, the
Common Stock and Class B Warrants issuable upon exercise of such Class A
Warrants and the Common Stock issuable upon exercise of the Class B Warrants
will be registered, at the Company's expense, under the Securities Act and are
expected to become tradeable on or about the effective date of the Offering,
subject to the following contractual restriction: Each Selling Securityholder
has agreed (i) not to sell, transfer, or otherwise dispose publicly the Selling
Securityholder Warrants except after the time periods and in the percentage
amounts set forth below, on a cumulative basis, and (ii) not to exercise the
Selling Securityholder Warrants for a period of one year from the closing of
this offering. Purchasers of the Selling Securityholder Warrants will not be
subject to such restrictions.
Percentage Eligible
Lock-Up Period for Resale
-------------- ----------------
Before 90 days after Closing ................. 0%
Between 91 and 150 days ...................... 25%
Between 151 and 210 days ..................... 50%
Between 211 and 270 days ..................... 75%
After 270 days ............................... 100%
After the one year period following the effective date of the Offering, the
Selling Securityholders may exercise and sell the Common Stock issuable upon
exercise of the Selling Securityholder Warrants without restriction if a current
prospectus relating to such Common Stock is in effect and the securities are
qualified for sale. The Company will not receive any proceeds from the sale of
the Selling Securityholder Warrants. Sales of Selling Securityholder Warrants
issued upon conversion of the Bridge Warrants or the securities underlying such
Class A Warrants or even the potential of such sales could have an adverse
effect on the market prices of the Units, the Common Stock and the Warrants.
With the exception of Donald B. Sallee, Melvin Stein, the Malcolm Levenson
Trust and The Steiro Company, each of which is a Conversion Investor and/or
principal stockholder of the Company and who purchased an aggregate of $495,000
principal amount of Bridge Notes and 247,500 Bridge Warrants, there are no
material relationships between any of the Selling Securityholders and the
Company, nor have any such material relationships existed within the past three
years. The Company has been informed by the Underwriter that there are no
agreements between the Underwriter and any Selling Securityholder regarding the
distribution of the Selling Securityholder Warrants or the underlying
securities.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder Warrants may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable "cooling-off" period (at least two and
possibly nine business days)
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prior to the commencement of such distribution. Accordingly, in the event the
Underwriter or Blair & Co. is engaged in a distribution of the Selling
Securityholder Warrants, neither of such firms will be able to make a market in
the Company's securities during the applicable restrictive period. However,
neither the Underwriter nor Blair & Co. has agreed to nor is either of them
obligated to act as broker-dealer in the sale of the Selling Securityholder
Warrants and the Selling Securityholders may be required, and in the event Blair
& Co. is a market-maker, will likely be required, to sell such securities
through another broker-dealer. In addition, each Selling Securityholder desiring
to sell Warrants will be subject to the applicable provisions of the Exchange
Act and the rules and regulations thereunder, including without limitation Rules
10b-6 and 10b-7, which provisions may limit the timing of the purchases and
sales of shares of the Company's securities by such Selling Securityholder.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws, the Warrant Agreement among the Company, the Underwriter and
American Stock Transfer & Trust Company, as warrant agent, pursuant to which the
Warrants will be issued, and the Underwriting Agreement between the Company and
the Underwriter, copies of all of which have been filed with the Commission as
exhibits to the Registration Statement of which this Prospectus is a part.
Effective upon the closing of this Offering, the authorized capital stock
of the Company will consist of 20,000,000 shares of Common Stock, par value $.01
per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share.
Units
Each Unit consists of one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrant. Each Class A Warrant entitles the
holder thereof to purchase one share of Common Stock and one redeemable Class B
Warrant. Each Class B Warrant entitles the holder thereof to purchase one share
of Common Stock. The Common Stock and Warrants comprising the Units are
separately transferable immediately upon issuance.
Common Stock
Immediately prior to the date hereof there were 1,230,000 shares of Common
Stock outstanding held by 26 stockholders of record. Holders of Common Stock
have the right to cast one vote for each share held of record on all matters
submitted to a vote of holders of Common Stock, including the election of
directors. There is no right to cumulate votes for the election of directors.
Stockholders holding a majority of the voting power of the capital stock issued
and outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of the Company's stockholders,
and the vote by the holders of a majority of such outstanding shares is required
to effect certain fundamental corporate changes such as liquidation, merger or
amendment of the Company's Certificate of Incorporation.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.
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Redeemable Warrants
Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.50 at any time until 5:00 P.M., New York City time, on October 8, 2001.
Commencing one year from the date of this Prospectus, the Class A Warrants are
redeemable by the Company on 30 days' written notice at a redemption price of
$.05 per Class A Warrant if the "closing price" of the Company's Common Stock
for any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $9.10 per share. "Closing price" shall mean the
closing bid price if listed in the over-the-counter market on Nasdaq or
otherwise or the closing sale price if listed on the Nasdaq National Market or a
national securities exchange. All Class A Warrants must be redeemed if any are
redeemed.
Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Common Stock at an exercise price of $8.75 at any time
after issuance until 5:00 P.M. New York City Time, on October 8, 2001.
Commencing one year from the date of this Prospectus, the Class B Warrants are
redeemable by the Company on 30 days' written notice at a redemption price of
$.05 per Class B Warrant, if the closing price (as defined above) of the
Company's Common Stock for any 30 consecutive trading days ending within 15 days
of the notice of redemption averages in excess of $12.25 per share. All Class B
Warrants must be redeemed if any are redeemed.
General. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York, as
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the Common Stock or upon issuance of
shares of Common Stock at prices lower than the market price of the Common
Stock, with certain exceptions.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Class A Warrants and the Class B Warrants. A Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of the Warrant Agent, with the form of
"Election to Purchase" on the reverse side of the Warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. Shares issued upon
exercise of Warrants and payment in accordance with the terms of the Warrants
will be fully paid and non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Preferred Stock
Immediately prior to the date hereof the Company was authorized to issue up
to 5,250,000 shares of Preferred Stock, of which 250,000 shares of Series A
Preferred Stock were outstanding. Effective upon the closing of this offering,
the Series A Preferred Stock will be automatically converted into Common Stock
and retired, and the Company will be authorized to issue up to 5,000,000 shares
of "blank-check" Preferred Stock. The Board of Directors will have the authority
to issue this Preferred Stock in one or more series and to fix the number of
shares and the relative rights, conversion rights, voting rights and terms of
redemption (including sinking fund provisions) and liquidation preferences,
without further vote or action by the stockholders. If shares of Preferred Stock
with
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voting rights are issued, such issuance could affect the voting rights of the
holders of the Company's Common Stock by increasing the number of outstanding
shares having voting rights, and by the creation of class or series voting
rights. If the Board of Directors authorizes the issuance of shares of Preferred
Stock with conversion rights, the number of shares of Common Stock outstanding
could potentially be increased by up to the authorized amount. Issuance of
Preferred Stock could, under certain circumstances, have the effect of delaying
or preventing a change in control of the Company and may adversely affect the
rights of holders of Common Stock. Also, Preferred Stock could have preferences
over the Common Stock (and other series of preferred stock) with respect to
dividend and liquidation rights. The Company currently has no plans to issue any
Preferred Stock.
Unit Purchase Options
The Company has agreed to grant to the Underwriter, upon the closing of the
Offering, the Unit Purchase Option to purchase up to 170,000 Units. These Units
will, when issued, be identical to the Units offered hereby, except that the
Class A Warrants and the Class B Warrants included in the Unit Purchase Options
are subject to redemption by the Company, in accordance with the terms of the
Warrant Agreement, at any time after the Unit Purchase Options have been
exercised and the underlying Warrants are outstanding. The Unit Purchase Options
cannot be transferred, sold, assigned or hypothecated for two years, except to
any officer of the Underwriter or members of the selling group or their
officers. The Unit Purchase Options are exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$6.00 per Unit (120% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The holders of the Unit Purchase
Options have certain demand and piggyback registration rights. See
"Underwriting."
Registration Rights
Beginning one year from the date of this Prospectus, the holders of the
Unit Purchase Options will have demand and piggy-back registration rights
relating to such options and the underlying securities and the Underwriter will
have certain demand and piggy-back registration rights with respect to 36,897
warrants issued to it in March 1994 and the Common Stock into which such
warrants are exercisable. See "Underwriting." The Company has also granted
certain demand and piggyback registration rights to Michael E. Noonan, the
Company's Chairman President and Chief Executive Officer, with respect to the
shares issuable upon exercise of an aggregate of 116,346 options granted to Mr.
Noonan by Steve Gorlin and TMR, which registration rights will be exercisable
beginning 13 months from the date of this Prospectus.
Except as set forth above, no stockholder of the Company, nor any holder of
warrants to purchase shares of the Company's Common Stock, has any registration
rights.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, will act as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under such statute a corporation
may not engage in any business combination with any interested stockholder for a
period of three years after the date such person became an interested
stockholder unless certain conditions are satisfied. The statute contains
provisions enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,930,000 shares of Common Stock. Of these shares, the 1,700,000 shares of
Common Stock included in the Units offered hereby will be freely transferable
without restriction or further registration under the Securities Act, unless
purchased by affiliates of the Company as that term is defined in Rule 144 under
the Securities Act ("Rule 144") described below. The 1,230,000 shares of Common
Stock currently outstanding (giving effect to the Debt Conversion, the
conversion of the Series A Preferred Stock and the reverse stock split) are
"restricted securities" or owned by affiliates within the meaning of Rule 144
and may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
Approximately 137,631 of the Restricted Shares will become eligible for sale
immediately following the date of the Prospectus and, subject to compliance with
Rule 144 under the Securities Act, approximately 483,355 of the Restricted
Shares will be eligible for sale in the public market beginning 90 days from the
date of this Prospectus. The remaining Restricted Shares will become eligible
for sale pursuant to Rule 144 between June 1997 and April 1998. However, holders
of all of the outstanding shares have agreed not to sell or otherwise dispose of
any shares of Common Stock without the Underwriter's prior written consent for a
period of 13 months after the date of this Prospectus. In addition, 410,000 of
such shares are Escrow Shares and are subject to the restrictions on transfer
set forth in the Escrow Agreement. See "Principal Stockholders -- Escrow Shares"
and "Underwriting."
In general, under Rule 144, a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares under Rule 144(k) without regard to the volume or other resale
requirements. The Commission has recently proposed an amendment to the holding
period requirements of Rule 144 to permit resales of restricted securities after
a one-year holding period rather than a two-year holding period, and to permit
unrestricted resales by non-affiliates pursuant to Rule 144(k) after a two-year
holding period rather than a three-year holding period. In the event such
proposal is adopted, the dates upon which certain of the outstanding restricted
securities will become eligible for sale under Rule 144 will be accelerated.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 50,003 shares subject to outstanding vested stock options
may be sold pursuant to such rule at the end of this 90-day period, subject to
an agreement by all option holders not to sell or otherwise dispose of any
shares of Common Stock for a period of 13 months after the date of this
Prospectus without the Underwriter's prior written consent.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf of
the Selling Securityholders, the Selling Securityholder Securities, subject to
the contractual restriction that the Selling Securityholders agreed (i) not to
exercise the Selling Securityholder Warrants for a period of one year for the
closing of the Offering and (ii) not to sell the Selling Securityholder Warrants
except pursuant to the restrictions set forth below:
Percentage Eligible
Lock-Up Period for Resale
-------------- ----------------
Before 90 days after closing ................ 0%
Between 91 and 150 days after closing ....... 25%
Between 151 and 210 days after closing....... 50%
Between 211 and 270 days after closing....... 75%
After 270 days after closing ................ 100%
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The Underwriter also has demand and piggyback registration rights with
respect to the securities underlying the Unit Purchase Option and with respect
to 36,897 warrants issued in March 1994 and the Common Stock underlying such
warrants. The Company has also granted certain demand and piggyback registration
rights to Michael E. Noonan, the Company's Chairman, President and Chief
Executive Officer. See "Description of Securities --Registration Rights" and
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
UNDERWRITING
D. H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company the 1,700,000 Units offered hereby on a "firm commitment" basis, if any
are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Units offered hereby. It is also expected
that Blair & Co. will make a market in the Company's securities following the
Offering. Blair & Co. is substantially owned by family members of J. Morton
Davis. Mr. Davis is the sole stockholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers who are members of the NASD, at such prices
less concessions of not in excess of $0.18 per Unit, of which a sum not in
excess of $0.09 per Unit may in turn be reallowed to other dealers who are
members of the NASD. After the commencement of the Offering, the public offering
price, the concession and the reallowance may be changed by the Underwriter.
The Company has granted to the Underwriter an option exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts, up to 255,000
additional Units for the purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriter's overallotment
option.
All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose publicly any of their
shares of Common Stock for a period of 13 months after the date of this
Prospectus without the prior written consent of the Underwriter.
The Underwriter has the right to designate one individual for nomination to
the Company's Board of Directors for a period of five years after the completion
of the Offering, although it has not yet selected any such designee. Such
designee may be a director, officer, partner, employee or affiliate of the
Underwriter.
During the five-year period after the date of this Prospectus, in the event
the Underwriter originates a financing or a merger, acquisition or transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction ranging from
7% of the first $1,000,000 to 2 1/2% of any consideration in excess of
$9,000,000.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, if (i) the market price of the Company's Common
Stock on the date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was solicited by a
member of the NASD; (iii) the warrant holder designates in writing that the
exercise of the Warrant was solicited by a member of the NASD and designates in
writing the broker-dealer to receive compensation for such exercise; (iv) the
Warrants are not held in a discretionary account; (v) disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Warrants; and (vi) the solicitation of exercise of the Warrant
was not in violation of Rule 10b-6 promulgated under the Exchange Act.
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Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Underwriter of the exercise of Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, Blair &
Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Options to purchase up to 170,000
Units, substantially identical to the Units being offered hereby, except that
the Class A Warrants and Class B Warrants included therein are each subject to
redemption by the Company, in accordance with the terms of the Warrant
Agreement, at any time after the Unit Purchase Options have been exercised and
the underlying warrants are outstanding. The Unit Purchase Options will be
exercisable during the three-year period commencing two years after the date of
this Prospectus at an exercise price of $6.00 per Unit, subject to adjustment in
certain events to protect against dilution, and are not transferable for a
period of two years after the date of this Prospectus except to officers of the
Underwriter or to members of the selling group. The Company has agreed to
register during the four-year period commencing one year after the date of this
Prospectus, on two separate occasions, the securities issuable upon exercise
thereof under the Securities Act, the initial such registration to be at the
Company's expense and the second at the expense of the holders. The Unit
Purchase Option includes a provision permitting the holders to elect a cashless
exercise. The Company has also granted certain "piggy-back" registration rights
to holders of the Unit Purchase Option.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's asset value, net worth or other established criteria of value. Among
the factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's management
and the Company's capital structure.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 5% of the total number of the Units offered
hereby.
The Underwriter acted as Placement Agent for the Bridge Financing in April
and May 1996 for which it received a Placement Agent fee of $199,500 and a
non-accountable expense allowance of $59,850.
In September 1993, the Underwriter loaned $30,000 to the Company and in
March 1994, the Underwriter loaned an additional $100,000 to the Company, each
of which loans bore interest at 10% per annum. The principal amount of all of
such indebtedness was repaid in April 1996 and the accrued interest of
approximately $30,000 was repaid in August 1996. In connection with the March
1994 loan, the Company granted to the Underwriter warrants to purchase 36,897
shares of Common Stock of the Company. Each such warrant entitles the
Underwriter to purchase one share of Common Stock at an exercise price of $2.71
at any time until 5:00 p.m., March 25, 1999, subject to adjustment in certain
events to protect against dilution. The Underwriter has certain demand and
piggyback registration rights with respect to such warrants. See "Description of
Securities -- Registration Rights."
Upon the conversion of the Series A Preferred Stock, the Company will pay
to D.H. Blair Capital Corp., the sole stockholder of which is the sole
stockholder of the Underwriter, approximately $150,000, representing the
accumulated dividends on the Series A Preferred Stock.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which will
distribute substantially all of the Units offered hereby. The investigation
appears to be broad in scope, involving numerous aspects of the Underwriter's
and Blair & Co.'s compliance with the Federal securities laws and compliance
with the Federal securities laws by issuers who securities were underwritten by
the Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. will make a market in the securities
following this offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could affect the liquidity or price of
such securities.
45
<PAGE>
D.H. Blair Capital Corp. beneficially owns 26.25% of the outstanding shares
of Common Stock before this Offering. The sole stockholder of D.H. Blair Capital
Corp. is J. Morton Davis, the sole stockholder of the Underwriter. In addition,
the Underwriter owns warrants to purchase 36,897 shares of Common Stock of the
Company. As a result of such stockholdings, the Underwriter may be deemed to be
an "affiliate" of the Company by the NASD. Accordingly, this Offering is being
made pursuant to Schedule E to the NASD ByLaws. Under Schedule E to the By-Laws
of the NASD, when a member of the NASD, such as the Underwriter, participates in
the public distribution of securities of a company in which it or its affiliates
owns 10% or more of the outstanding voting securities, and where there is no
"bona fide independent market" for such securities, the public offering price
can be no higher than that recommended by a qualified independent underwriter.
The independent investment banking firm of RAS Securities Corp. ("RAS") has
recommended a maximum initial public offering price of $5.00 per Unit. Pursuant
to Schedule E to the NASD By-Laws, the Units are being offered at a price no
greater than the maximum recommended by RAS, which firm has informed the Company
that it has performed "due diligence" with respect to information contained in
the Registration Statement of which this prospectus is a part. The NASD and the
Commission have indicated that, in their view, a qualified independent
underwriter, such as RAS, may be deemed to be an underwriter, as the term is
defined in the Securities Act. The Underwriter will pay a fee of $50,000 to RAS
for its services in connection with recommending the maximum initial public
offering price of the Units in this Offering. The Company has agreed to
indemnify RAS against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriter by Greenberg, Traurig,
Hoffman, Lipoff, Rosen & Quentel, New York, New York. The statements relating to
patents and proprietary rights, including statements in the sections entitled
"Risk Factors -- Dependence on Patents and Proprietary Technology" and "Business
- -- Patents and Proprietary Rights," have been passed upon by William R. Hinds,
Esq., special patent counsel. Bachner, Tally, Polevoy & Misher LLP represents
the Underwriter in other matters.
EXPERTS
The consolidated financial statements of Laminating Technologies, Inc. as
of March 31, 1996 and for each of the fiscal years ended March 31, 1996 and
March 31, 1995 and the period from April 19, 1993 (commencement of operations)
to March 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Richard A. Eisner & Company, LLP, independent auditors, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to the substantial doubt raised about the Company's ability to continue
as a going concern, as discussed in Note A to the Financial Statements)
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently a reporting company under the Exchange Act.
The Company has filed a Registration Statement on Form SB-2 under the Securities
Act with the Commission in Washington, D.C. with respect to the Units offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Units offered hereby, reference is hereby made to the Registration Statement and
such exhibits, which may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois
60661. Copies of such material may also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
46
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
------------
I N D E X
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C>
REPORT OF INDEPENDENT AUDITORS....................................................... F-2
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996 AND
JUNE 30, 1996 (UNAUDITED).......................................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31,
1995, THE YEAR ENDED MARCH 31, 1996 AND THE PERIOD FROM APRIL 19,
1993 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1996, THE THREE
MONTH PERIODS ENDED JUNE 30, 1995 (UNAUDITED) AND JUNE 30, 1996
(UNAUDITED) AND FOR THE PERIOD FROM APRIL 19, 1993 (COMMENCEMENT OF
OPERATIONS) THROUGH JUNE 30, 1996
(UNAUDITED) ....................................................................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY FOR THE PERIOD
FROM APRIL 19, 1993 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31,
1994, THE YEAR ENDED MARCH 31, 1995, THE YEAR ENDED MARCH 31, 1996,
AND FOR
THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED) .................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED MARCH 31,
1995, THE YEAR ENDED MARCH 31, 1996, THE PERIOD FROM APRIL 19, 1993
(COMMENCEMENT OF OPERATIONS) THROUGH MARCH 31, 1996, THE THREE MONTH
PERIODS ENDED JUNE 30, 1995 (UNAUDITED) AND JUNE 30, 1996 (UNAUDITED)
AND FOR THE PERIOD FROM APRIL 19, 1993 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1996
(UNAUDITED) ....................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Laminating Technologies, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Laminating
Technologies, Inc. and subsidiary (a development stage company) as at March 31,
1996, and the related consolidated statements of operations, changes in capital
deficiency and cash flows for each of the years in the two year period ended
March 31, 1996 and for the period from April 19, 1993 (commencement of
operations) through March 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 enumerated above present fairly,
in all material respects, the consolidated financial position of Laminating
Technologies, Inc. and subsidiary at March 31, 1996 and the consolidated results
of their operations, and their consolidated cash flows for each of the years in
the two year period ended March 31, 1996 and for the period from April 19, 1993
through March 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A, to the financial statements, the Company has sustained recurring losses from
operations, has a net capital deficiency and has a working capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
May 17, 1996
F-2
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
A S S E T S
Current assets:
Cash .................................................................... $ 1,347 $ 331,614
Accounts receivable (net of allowance for doubtful
accounts of $20,000)................................................... 9,321 4,478
Other current assets .................................................... 3,000 63,385
---------- ----------
Total current assets .............................................. 13,668 399,477
Deferred financing and offering costs ..................................... 344,278
Fixed assets, net (Notes B[2] and C) ...................................... 6,169 6,287
Organization costs (net of accumulated amortization of $2,768 and $2,941).. 692 519
---------- ----------
T O T A L ......................................................... $ 20,529 $ 750,561
========== ==========
L I A B I L I T I E S
Current liabilities:
Bridge notes payable (net of $539,288 discount).......................... $ 1,455,712
Notes payable-- current ................................................. $ 1,047,842 43,483
Notes payable-- stockholders ............................................ 350,000 --
Due to stockholders ..................................................... 31,036 6,834
Accounts payable ........................................................ 315,156 300,723
Payroll taxes payable ................................................... 89,779 55,742
Accrued expenses ........................................................ 182,798 82,611
Accrued interest ........................................................ 86,782 69,920
---------- ----------
Total current liabilities ......................................... 2,103,393 2,015,025
Notes payable, less current maturities .................................... 5,000 --
Due to related parties (Note J)............................................ 428,346 --
---------- ----------
Total liabilities ................................................. 2,536,739 2,015,025
---------- ----------
Commitments and other matters (Note H)
CAPITAL DEFICIENCY
(Note F)
Series A convertible preferred stock, par value $.01, 5,000,000 shares
authorized, 250,000 shares
issued and outstanding (liquidation value of $625,000 and $637,500)...... 2,500 2,500
Common stock, par value $.01, 20,000,000 shares authorized,
679,764 and 1,045,514 shares issued and outstanding...................... 6,797 10,455
Additional paid-in capital ................................................ 1,850,466 3,889,087
Deficit accumulated during the development stage........................... (4,375,973) (5,166,506)
---------- ----------
Total capital deficiency .......................................... (2,516,210) (1,264,464)
---------- ----------
T O T A L ......................................................... $ 20,529 $ 750,561
========== ==========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to consolidated financial statements.
F-3
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
April 19, 1993 April 19, 1993
(Commencement Three Months Ended (Commencement
Year Ended March 31, of Operations) June 30, of Operations)
-------------------------- Through -------------------------- Through
1995 1996 March 31, 1996 1995 1996 June 30, 1996
----------- ----------- -------------- ----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................ $ 86,486 $ 119,412 $ 341,785 $ 46,453 $ 341,785
Cost of goods sold ....................... 300,077 277,454 1,015,773 44,456 1,015,773
----------- ----------- ----------- ----------- -----------
Gross (loss) profit ...................... (213,591) (158,042) (673,988) 1,997 (673,988)
Selling, general and
administrative expenses ................ 1,223,044 1,042,290 3,303,045 201,907 $ 666,220 3,969,265
----------- ----------- ----------- ----------- ----------- -----------
Operating (loss) ......................... (1,436,635) (1,200,332) (3,977,033) (199,910) (666,220) (4,643,253)
Interest expense, net .................... 44,327 100,874 166,350 9,082 177,554 343,904
Cancellation of debt ..................... (121,738) (121,738) (53,241) (174,979)
Loss on abandonment of fixed assets ...... 49,099 49,277 98,376 2,537 98,376
----------- ----------- ----------- ----------- ----------- -----------
NET (LOSS) ............................... (1,530,061) (1,228,745) (4,120,021) (211,529) (790,533) (4,910,554)
Cumulative dividends on preferred stock .. 50,000 50,000 125,000 12,500 12,500 137,500
----------- ----------- ----------- ----------- ----------- -----------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS ........................... $(1,580,061) $(1,278,745) $(4,245,021) $ (224,029) $ (803,033) $(5,048,054)
=========== =========== =========== =========== =========== ===========
Net (loss) per share of common stock ..... $ (2.70) $ (2.02)
=========== ===========
Weighted average number of common shares
outstanding ............................ 586,269 632,719
=========== ===========
Supplementary pro forma(1):
Net (loss) per share of common stock ... $ (1.93) $ (1.56)
=========== =========== $ (.27) $ (.98)
Weighted average number of common shares =========== ===========
outstanding .......................... 820,000 820,000 820,000 820,000
=========== =========== =========== ===========
</TABLE>
- ----------
(1) Gives effect to (i) the debt conversion, except for the three months
ended June 30, 1996 which already reflected such conversion, (ii) the
automatic conversion of the preferred stock to common stock upon the
closing of the initial public offering, and (iii) the issuance of
Common Stock for compensation and excludes 410,000 shares held in
escrow.
Attention is directed to the foregoing accountants' report and to the
accompanying notes to consolidated financial statements.
F-4
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(Note F)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
Par Value $.01 Par Value $.01 Stock
--------------------- -------------------------- Subscription
Shares Amount Shares Amount Receivable
------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued in connection with the
acquisition of the assets of Cool-R Enterprises,
Inc. in April 1993 (Note D)..................... 168,114 $ 1,681
Common stock issued in connection with
obtaining rights to developed technology
in April 1993 (Note D).......................... 150,126 1,501
Issuance of common stock for cash and
settlement of debt in April 1993 (Note D)....... 235,221 2,352
Cash contributed by stockholder ..................
Issuance of convertible preferred stock for cash
in September 1993............................... 250,000 $ 2,500
Common stock issued to an officer in connection
with the signing of an employment agreement
in October 1993................................. 46,122 461 $(1,250)
Net (loss) for the period April 19, 1993
(commencement of operations) through
March 31, 1994..................................
------- -------- -------- --------- ------
Balance-- March 31, 1994 ......................... 250,000 2,500 599,583 5,995 (1,250)
Issuance of common stock for cash in
May 1994........................................ 3,690 37
Common stock issued as consideration for
compensation in August 1994..................... 50,662 507
Services contributed by stockholder ..............
Net (loss) for the year ..........................
------- -------- -------- --------- ------
Balance-- March 31, 1995 ......................... 250,000 2,500 653,935 6,539 (1,250)
Issuance of common stock as settlement of
notes payable to a stockholder in June 1995..... 33,208 332
Receipt of stock subscription receivable ......... 1,250
Common stock purchased for treasury .............. (126,114)
Common stock issued from treasury ................ 126,114
Common stock contributed to treasury and
cancelled (Note D).............................. (7,379) (74)
Contribution to capital (Note J) .................
Net (loss) for the year ..........................
------- -------- -------- --------- ------
Balance-- March 31, 1996 ......................... 250,000 2,500 679,764 6,797 -0-
Warrants issued in connection with Bridge
Notes...........................................
Conversion of debt to common stock ............... 361,061 3,611
Common stock issued as consideration for
compensation ................................... 4,689 47
Stock options issued by stockholders to an
officer as compensation.........................
Net loss for the three months ended June 30, 1996
------- -------- -------- --------- ------
Balance-- June 30, 1996 (Unaudited)............... 250,000 $ 2,500 1,045,514 $ 10,455 $ -0-
======= ======== ======== ========= ======
</TABLE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY (Continued)
(Note F)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-in Treasury Development
Capital Stock Stage Total
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Common stock issued in connection with the
acquisition of the assets of Cool-R Enterprises,
Inc. in April 1993 (Note D)..................... $ (1,681) $ (255,952) $ (255,952)
Common stock issued in connection with
obtaining rights to developed technology
in April 1993 (Note D).......................... (1,501) -0-
Issuance of common stock for cash and
settlement of debt in April 1993 (Note D)....... 635,148 637,500
Cash contributed by stockholder .................. 12,500 12,500
Issuance of convertible preferred stock for cash
in September 1993............................... 497,500 500,000
Common stock issued to an officer in connection
with the signing of an employment agreement
in October 1993................................. 124,539 123,750
Net (loss) for the period April 19, 1993
(commencement of operations) through
March 31, 1994.................................. (1,361,215) (1,361,215)
--------- ---------- ----------
Balance-- March 31, 1994 ......................... 1,266,505 (1,617,167) (343,417)
Issuance of common stock for cash in
May 1994........................................ 19,963 20,000
Common stock issued as consideration for
compensation in August 1994..................... 136,799 137,306
Services contributed by stockholder .............. 30,000 30,000
Net (loss) for the year .......................... (1,530,061) (1,530,061)
--------- ---------- ----------
Balance-- March 31, 1995 ......................... 1,453,267 (3,147,228) (1,686,172)
Issuance of common stock as settlement of
notes payable to a stockholder in June 1995..... 89,668 90,000
Receipt of stock subscription receivable ......... 1,250
Common stock purchased for treasury .............. $ (150,000) (150,000)
Common stock issued from treasury ................ 150,000 150,000
Common stock contributed to treasury and
cancelled (Note D).............................. 74 -0-
Contribution to capital (Note J) ................. 307,457 307,457
Net (loss) for the year .......................... (1,228,745) (1,228,745)
--------- -------- ---------- ----------
Balance-- March 31, 1996 ......................... 1,850,466 -0- (4,375,973) (2,516,210)
Warrants issued in connection with Bridge
Notes........................................... 665,000 665,000
Conversion of debt to common stock ............... 974,961 978,572
Common stock issued as consideration for
compensation ................................... 12,660 12,707
Stock options issued by stockholders to an
officer as compensation......................... 386,000 386,000
Net loss for the three months ended June 30, 1996 (790,533) (790,533)
---------- -------- ---------- ----------
Balance-- June 30, 1996 (Unaudited)............... $3,889,087 $ -0- $ (5,166,506) $(1,264,464)
========== ======== ========== ==========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to consolidated financial statements.
F-5
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
April 19,1993
(Commencement
Year Ended March 31, of Operations)
-------------------------- Through
1995 1996 March 31, 1996
---------- ---------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss).............................................. $ (1,530,061) $ (1,228,745) $ (4,120,021)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Provision for doubtful accounts ...................... 7,000 20,000
Depreciation and amortization ........................ 52,566 34,158 148,145
Compensation recorded for fair value of common
shares issued in excess of price paid by employee... 137,306 261,056
Compensation recorded for stock options issued
by stockholders to an officer.......................
Services contributed by stockholder .................. 30,000 30,000
Noncash finance charge ............................... 19,551 19,551
Loss on disposal of fixed assets ..................... 49,099 49,277 122,375
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ......... 2,215 4,877 (16,891)
(Increase) decrease in inventories ................. (24,657) 70,454 59,701
(Increase) decrease in other assets ................ (4,602) 17,998 13,017
Increase (decrease) in due to related party ........ 718,753 71,329 790,082
Increase in accounts payable and accrued expenses 170,639 228,761 545,810
---------- ---------- ----------
Net cash (used in) operating activities ........ (398,742) (725,340) (2,127,175)
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions of fixed assets ........................... (13,364) (14,733) (234,305)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds of notes payable .............................. 400,000 459,250 1,057,750
(Repayment of) notes payable ........................... (24,498) (52,118) (231,291)
Proceeds of notes payable-- stockholders ............... 38,700 350,000 458,700
(Repayment of) notes payable-- stockholders ............ (10,705) (7,995) (18,700)
Advances from stockholders ............................. 2,000 9,485 11,485
Deferred financing and offering costs...................
(Repayment of) capital leases payable .................. (13,318) (20,288) (41,367)
Proceeds from sale of common stock...................... 20,000 612,500
Proceeds from sale of preferred stock................... 500,000
Proceeds from stock subscription receivable ............ 1,250 1,250
Cash contributed by stockholder ........................ 12,500
---------- ---------- ----------
Net cash provided by financing activities ...... 412,179 739,584 2,362,827
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH .......................... 73 (489) 1,347
Cash-- beginning of period ............................... 1,763 1,836 -0-
---------- ---------- ----------
CASH-- END OF PERIOD ..................................... $ 1,836 $ 1,347 $ 1,347
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 31,190 $ 28,206 $ 80,911
Noncash transactions:
Common stock subscribed .............................. 1,250
Common stock issued for developed technology.......... 406,875
Common stock issued as settlement of note
payable to stockholder.............................. 90,000 135,000
Due to stockholder for shares purchased for treasury.. 19,551 19,551
Cancellation of debt obligation in exchange
for fixed assets........................................ 54,279 54,279
Settlement of related party debt by capital contribution.. 307,457 307,457
Acquisition of assets and assumption of liabilities of
Cool-R Enterprises, Inc. (Note D) .
Conversion of debt to equity..............................
</TABLE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
April 19,1993
Three Months (Commencement
Ended June 30, of Operations)
------------------------- Through
1995 1996 June 30, 1996
---------- ---------- --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss).............................................. $ (211,529) $ (790,533) $(4,910,554)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Provision for doubtful accounts ...................... 5,000 20,000
Depreciation and amortization ........................ 10,547 69,461 217,606
Compensation recorded for fair value of common
shares issued in excess of price paid by employee... 12,707 273,763
Compensation recorded for stock options issued
by stockholders to an officer....................... 386,000 386,000
Services contributed by stockholder .................. 30,000
Noncash finance charge ............................... 125,712 145,263
Loss on disposal of fixed assets ..................... 2,537 122,375
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ......... (28,260) 4,843 (12,048)
(Increase) decrease in inventories ................. (19,604) 59,701
(Increase) decrease in other assets ................ 173 (60,385) (47,368)
Increase (decrease) in due to related party ........ (45,816) (24,202) 765,880
Increase in accounts payable and accrued expenses (71,152) (155,145) 390,665
---------- ---------- ----------
Net cash (used in) operating activities ........ (358,104) (431,542) (2,558,717)
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions of fixed assets ........................... (507) (234,812)
---------- ----------
Cash flows from financing activities:
Proceeds of notes payable .............................. 158,000 1,500,000 2,557,750
(Repayment of) notes payable ........................... (44,118) (324,507) (555,798)
Proceeds of notes payable-- stockholders ............... 250,000 458,700
(Repayment of) notes payable-- stockholders ............ (3,685) (18,700)
Advances from stockholders ............................. 11,485
Deferred financing and offering costs................... (413,177) (413,177)
(Repayment of) capital leases payable .................. (2,035) (41,367)
Proceeds from sale of common stock...................... 612,500
Proceeds from sale of preferred stock................... 500,000
Proceeds from stock subscription receivable ............ 1,250
Cash contributed by stockholder ........................ 12,500
---------- ---------- ----------
Net cash provided by financing activities ...... 358,162 762,316 3,125,143
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH .......................... 58 330,267 331,614
Cash-- beginning of period ............................... 1,836 1,347
---------- ---------- ----------
CASH-- END OF PERIOD ..................................... $ 1,894 $ 331,614 $ 331,614
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 4,965 $ 32,148 $ 113,059
Noncash transactions:
Common stock subscribed .............................. 1,250
Common stock issued for developed technology.......... 406,875
Common stock issued as settlement of note
payable to stockholder.............................. 90,000 135,000
Due to stockholder for shares purchased for treasury.. 19,551
Cancellation of debt obligation in exchange
for fixed assets........................................ 54,279
Settlement of related party debt by capital contribution.. 307,457
Acquisition of assets and assumption of liabilities of
Cool-R Enterprises, Inc. (Note D) .
Conversion of debt to equity.............................. 978,572 978,572
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to consolidated financial statements.
F-6
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE A) -- The Company and Basis of Presentation:
Laminating Technologies, Inc. and subsidiary, (the "Company"), formerly
New Cooler Corp., is a development stage company that markets and sells
packaging and display products, that are designed to retain the temperature of
their contents. The Company was incorporated on March 29, 1993 and in April 1993
completed three significant transactions in conjunction with commencing
operations, including the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of Cool-R Enterprises, Inc.
("Cool-R"), obtaining the rights to developed technology and selling shares of
the Company's common stock to provide working capital (see Note D).
As reflected in the accompanying financial statements, the Company has
incurred losses from operations since inception, resulting in a substantial
working capital deficiency and capital deficiency. While the Company has
realized net proceeds of approximately $1,185,000 from a bridge financing and
has converted $973,135 of debt, interest accrued thereon and $428,346 due to a
related party to equity (Note E), management's business plan will require
financing and it is planning an initial public offering of its common stock for
which it has a letter of intent from an underwriter (see Note G). There is no
assurance that the proposed public offering will be successful or that any other
financing will be available. These factors raise substantial doubt as to the
ability of the Company to continue as a going concern. The financial statements
do not include any adjustment that might be necessary if the Company is unable
to continue as a going concern.
In April 1996, the Board of Directors and stockholders approved a reverse
split of approximately 2.71022 to 1. Such split has been retroactively reflected
in the accompanying financial statements.
(NOTE B) -- Summary of Significant Accounting Policies:
[1] Principles of consolidation:
The accompanying financial statements have been prepared on a consolidated
basis. They include the accounts of the Company and its wholly-owned subsidiary,
Revenue Process Development, Inc. All intercompany transactions and balances
have been eliminated in consolidation.
[2] Fixed assets:
Machinery, furniture and equipment, including property under capital lease
arrangements, are carried at cost. Depreciation is provided using the
straight-line method over the useful lives of the assets.
[3] Inventory:
Inventory is recorded at lower of cost or market.
[4] Cost of goods sold:
Cost of goods sold includes the cost of items manufactured as well as the
cost of samples.
[5] Loss per share of common stock:
Net loss per share of common stock is based on the weighted average number
of shares outstanding during each period. Supplementary pro forma loss per share
gives effect to the conversions of debt to equity and preferred stock into
common stock and excludes 410,000 shares held in escrow (see Note G).
[6] Income taxes:
The Company has applied to the accompanying financial statements
provisions required by accounting standards under which deferred income taxes
are provided for temporary differences between financial statement and taxable
income or loss.
F-7
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE B) -- Summary of Significant Accounting Policies: (continued)
[7] Research and development:
The Company expenses costs of research and development activities as
incurred.
[8] Use of estimates in the preparation of financial statements:
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.
[9] Major customers and concentration of credit risk:
As a result of the Company's limited sales volume, the percentage of net
sales and accounts receivable balances outstanding relating to any one customer
is significant.
[10] Stock based compensation:
The Company accounts for employee stock based compensation including stock
options under the basis of Accounting Principles Board Opinion No. 25 and
expects to do so in the future. The requirements of Financial Accounting
Standards Board No. 123 on stock based compensation will require additional
disclosures.
[11] Fair value of financial instruments:
The carrying value of cash, accounts receivable and accounts payable
approximates fair value because of the short-term maturity of those instruments.
For other debt instruments, the carrying value approximates the fair value
in consideration of the subsequent and pending financings.
[12] Interim financial information:
The accompanying statements as at June 30, 1996 and for the three months
ended June 30, 1996 and June 30, 1995 and for the period April 19, 1993
(commencement of operations) to June 30, 1996 are unaudited but, in the opinion
of managment of the Company, reflect all adjustments (consisting only of normal
and recurring adjustments) necessary for a fair presentation. The results of
operations for the three month period ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the full year ending March
31, 1997.
(NOTE C) -- Fixed Assets:
Fixed assets are summarized as follows:
March 31, June 30,
1996 1996
------- ------
Machinery and equipment............ $ 8,518 $ 8,518
Furniture and fixtures ............ 2,181 2,688
------- -------
Total.......................... 10,699 11,206
Less accumulated depreciation ..... (4,530) 4,919
------- -------
Balance........................ $ 6,169 $ 6,287
======= =======
The machinery and equipment listed above was held under capital lease.
F-8
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE D) -- Formation of the Company:
In April 1993 the Company completed three significant transactions in
conjunction with commencing operations. These include the acquisition of
substantially all of the assets and assumption of substantially all of the
liabilities of Cool-R, obtaining the rights to developed technology and selling
shares of the Company's common stock to provide working capital.
The Company acquired substantially all of the assets and assumed
substantially all of the liabilities of Cool-R for 168,114 shares of its common
stock. The owners of Cool-R, the predecessor entity, became the principal owners
of the Company. Based on the continuity of the acquired entity and common
ownership after this transaction, the combination was recorded at Cool-R's
historical cost basis. In connection therewith the following recorded account
balances were recorded:
Accounts receivable.......................... $ 12,430
Inventory ................................... 59,701
Fixed assets ................................ 86,762
Other assets ................................ 18,093
Accounts payable ............................ (46,908)
Accrued expenses ............................ (81,797)
Notes payable ............................... (219,900)
Notes payable - stockholder.................. (45,000)
Capital leases payable ...................... (39,333)
Deficit ..................................... 255,952
The Company also obtained the rights to developed technology from a
stockholder of Cool-R and the Company for 150,126 shares of its common stock. In
connection with this transaction, the Company treated the developed technology
obtained at the stockholder's historical cost basis which was $0. Subsequently,
7,379 of these shares were contributed to treasury and cancelled by the Company.
Additionally, the Company issued 235,221 shares of its common stock to two
investors for an aggregate amount of $637,500. In connection with the issuance
of stock the Company retired $45,000 of debt due to one of the investors which
is reflected in the accompanying schedule of assets purchased and liabilities
assumed as notes payable -- stockholder. The noteholder owned stock in both
Cool-R and Laminating Technologies, Inc. Net proceeds from this transaction
amounted to $592,500.
(NOTE E) -- Notes Payable and Capital Lease Obligations:
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1996
------------- -------------
<S> <C> <C>
Bridge note payable (net of $539,288 discount).................... $ 1,455,712
Notes payable to bank due April 1996, interest at prime
rate plus 2%, secured by the Company's inventory, fixed
assets and accounts receivable and the personal guaranty
of a stockholder ............................................... $ 220,000 (2)
Note payable to underwriter due on demand, interest
at 10%, unsecured .............................................. 130,000 (3)
Notes payable to third parties past due, interest
at 10%, unsecured............................................... 626,250 (1)
Notes payable to third party past due, interest
at 10%, unsecured .............................................. 40,109 12,000
Capital lease obligations ........................................ 6,483 6,483
Other notes payable .............................................. 30,000 (1) 25,000
---------- ----------
1,052,842 1,499,195
Less current portion ............................................. 1,047,842 1,499,195
---------- ----------
$ 5,000 $ --
========== ==========
</TABLE>
F-9
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE E) -- Notes Payable and Capital Lease Obligations: (continued)
Notes payable to stockholders are summarized as follows:
Note payable past due, interest at
10% unsecured...................................... $ 350,000 (1)
==========
During April and May 1996, the Company completed a private placement for an
aggregate of $1,995,000 (net proceeds of approximately $1,185,000) principal
amount of Bridge Notes bearing interest at an annual rate of 10% and warrants to
purchase an aggregate of 997,500 shares of common stock. The warrants have an
exercise price of $4.00 until completion of the proposed initial public
offering, at which time they will automatically convert into Class A Warrants,
the terms of which will be identical to the Class A Warrants included in the
units expected to be sold in the public offering. The principal amount of Bridge
Notes includes $495,000 of previously existing debt and interest accrued thereon
which was converted to Bridge Notes. In connection with this private placement
the Company paid fees of approximately $315,000 which has been recorded as
deferred financing costs and will be charged to expense over the term of the
notes. The notes are due the earlier of April 1997 or at the closing of the
proposed initial public offering. The Company has valued the Bridge loan
warrants at $.67 each (an aggregate of $665,000) which will be accounted for as
debt discount and will be charged to expense over the term of the notes. If the
Bridge Notes are repaid upon the completion of the proposed public offering the
unamortized balance of deferred financing cost and debt discount will be charged
to expense. Amortization of $125,712 was charged to expense in the three month
period ended June 30, 1996.
- ----------
(1) Converted, in April 1996, together with $63,539 of accrued interest
and $428,346 due to a related party to Bridge Notes ($495,000) and
361,061 shares of common stock valued at $978,572.
(2) Repaid together with interest of $4,449 from proceeds of Bridge Notes.
(3) Repaid from proceeds of Bridge Notes.
(NOTE F) -- Capital Deficiency:
[1] Common stock:
Upon incorporation in March 1993 the Company authorized 10,000,000 shares
of its $.01 par value common stock. The shares of common stock have unlimited
voting rights. In March 1996, the Company increased the number of authorized
common shares to 20,000,000.
[2] Convertible preferred stock:
In September 1993 the Company authorized and issued 250,000 shares of its
$.01 par value Series A convertible preferred stock (the "Preferred"). In August
1994 the Company increased the number of authorized shares of Preferred to
2,500,000. In March 1996, the Company increased the number of authorized
preferred shares to 5,000,000.
The Preferred has no voting rights. The holders of the Preferred are
entitled to cumulative quarterly dividends of $.05 per share which are due upon
the redemption of the shares. The liquidation value of each share of Preferred
is equal to $2.00 plus cumulative dividends (including dividends accrued from
the previous quarterly dividend). The Preferred will have a preference on
liquidation equal to the liquidation value.
Each share of the Preferred will be convertible into two shares of common
stock (subject to anti-dilution protection and stock splits). The Preferred will
only be convertible into common stock in connection with a registered public
offering, the sale of the Company or if the Company declares any dividend or
other distribution to the holders of all of the issued and outstanding shares of
common stock.
Accordingly, should the public offering be consummated, all 250,000 shares
of preferred stock will be converted to 184,486 shares of common stock.
F-10
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE F) -- Capital Deficiency: (continued)
[3] Warrants:
The Company has outstanding warrants to purchase 36,897 shares of its
common stock which are held by the underwriter of the proposed initial public
offering who assisted in raising capital for the Company. The options, which
were issued on March 25, 1994, have an exercise price of $2.71 and are
exercisable through March 25, 1999.
(NOTE G) -- Proposed Public Offering:
The Company has signed a letter of intent with an underwriter with respect
to a proposed public offering of the Company's securities. There is no assurance
that such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.
The Company expects to offer 1,700,000 units at $5.00 per unit. Each unit
consists of one share of common stock, one redeemable Class A warrant and one
redeemable Class B warrant. Each Class A warrant will entitle the holder to
purchase one share of common stock and one Class B warrant at an exercise price
of $6.50. Each Class B warrant will entitle the holder to purchase one share of
common stock at an exercise price of $8.75.
In connection with such offering, the underwriter has required, as a
condition of the offering, that an aggregate of 410,000 shares of the Company's
common stock be designated as forfeitable shares ("forfeitable shares") and
placed in escrow. The forfeitable shares are not assignable nor transferable
until certain earnings or market criteria have been met. If the conditions are
not met by March 31, 2000, all shares remaining in escrow will be returned to
the Company as treasury shares for cancellation thereof as a contribution to
capital. The forfeitable shares will be released, to the stockholders, in the
event specified levels of pretax income of the Company for the years ending
December 31, 1997 to December 31, 1999 are achieved or the market price of the
Company's common stock attains specified targets during the 36 month period
commencing on the effective date of the proposed public offering. There will be
a charge to earnings for the fair value of these shares upon their release. Such
charge will not be deductible for income tax purposes.
Additionally, the Company has granted an option to the underwriter,
exercisable over a period of three years commencing two years from the date of
the offering, to purchase up to 170,000 units at 120% of the initial public
offering price.
(NOTE H) -- Commitments and Other Matters:
[1] Payroll taxes:
The Company has accepted an Offer in Compromise (the "Offer") from the
Internal Revenue Service with respect to withholding and social security taxes
not remitted for the three quarters ended September 30, 1994. The amount due
aggregated approximately $98,000, including penalties and interest of
approximately $30,000. Under the terms of the Offer, interest and penalties
would be waived upon payment of the full amount of taxes due. Accordingly,
$68,000 was paid to the Internal Revenue Service to satisfy the obligation
including approximately $38,000 paid with proceeds of the Bridge financing.
Additionally, the Company received a Notice of Proposed Assessment (the
"Notice") from the Georgia Department of Revenue in August 1995. The Notice
stipulates an amount due of approximately $15,000 plus interest and penalties
for withholding taxes not remitted for the period January 1994 through August
1994. The Company paid the amount during the year ended March 31, 1996.
F-11
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE H) -- Commitments and Other Matters: (continued)
[2] Employment contract:
The Company is negotiating an employment contract with its Chief Executive
Officer. The Officer is also a member of the Board of Directors. The contract is
expected to provide for a one year term and for an annual salary of $144,000.
In April 1996 two principal stockholders of the Company agreed to grant to
an officer options to purchase an aggregate of 116,346 of their shares of common
stock at an exercise price of $.68 per share. Such options, which are fully
vested, contain a predefined schedule for their exercise. In connection
therewith, compensation expense of $386,000 was recognized, reflecting the
difference between the exercise price and the fair value of the shares, on the
date of grant.
[3] Consulting agreements:
The Company has entered into one year agreements with two of its
stockholders to provide management and consulting services for aggregate fees of
$84,000. Additionally, one agreement, which is with the founder of the Company,
provides for a bonus of $60,000 upon securing a patent on the developed
technology and an additional $40,000 upon the stockholder securing multiple
patents.
[4] Contingencies:
The Company is aware of a patent issued to an unrelated entity that relates
to certain processes by which film, including polyester film, is reverse-printed
and laminated onto linerboard. Such patent may affect the ability of the Company
to obtain patent protection for some or all of the claims included in its patent
application. Moreover, there can be no assurance that any application of the
Company's technology will not infringe this or any other patents or proprietary
rights of others. Management believes that the Company has not infringed on any
patents.
A predecessor to the Company may have entered into license agreements
regarding the developed technology owned by the Company. Even though no executed
agreement has been produced by the Company or other parties, there can be no
assurance that such license agreements do not exist or as to the terms of any
such licenses. In the event that any previous license agreements exist, they may
adversely affect the Company's ability to utilize its technology or enter into
additional licenses in the future.
(NOTE I) -- Income Taxes:
At March 31, 1996 the Company had available net operating loss
carryforwards to reduce future taxable income of approximately $4,100,000. The
net operating loss carryforwards expire in various amounts through 2011. The
Company's ability to utilize its net operating loss carryforwards may be subject
to annual limitations pursuant to Section 382 of the Internal Revenue Code if
future changes in ownership occur.
The Company has not filed any income tax returns since its inception.
Accounting standards require the recognition of deferred tax assets and
liabilities for both the expected future tax impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from net operating loss carryforwards.
Additionally, consideration of a valuation allowance is required to reflect the
likelihood of realization of deferred tax assets. At March 31, 1996 the Company
has a deferred tax asset of approximately $1,650,000 representing the benefits
of its net operating loss carryforward which has been fully reserved by a
valuation allowance since realization of its benefit is uncertain. The
difference between the combined federal (34%) and state (6%) statutory tax rate
of 40% and the Company's effective tax rate of 0% is due to the increase in the
valuation allowance of approximately $612,000 and $492,000 for the years ended
March 31, 1995 and March 31, 1996, respectively, and $1,650,000 for the period
from commencement of operations through March 31, 1996.
F-12
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE J) - Related Party Transactions:
TransMillenial Resource Corporation ("TMR") provided management services
to the Company. Management fees incurred for the year ended March 31, 1995 and
March 31, 1996 were $175,000 and $45,000, respectively.
In addition, TMR advanced funds to the Company and paid certain of its
obligations, resulting in a balance of $735,803 due to TMR. TMR agreed to
contribute $307,457 of such debt to the capital of the Company and to convert
the remaining balance at March 31, 1996 of $428,346 into 158,048 shares of the
Company's common stock. The conversion is expected to be completed prior to the
proposed initial public offering. Two of the Company's former officers are
shareholders of TMR.
The Company was located in office space which was leased by TMR. Rent on
such space is included in the indebtedness described above.
In September 1994, the Company entered into an agreement with SourceOne,
Inc., an employment agency which is a wholly owned subsidiary of TMR. All
employees of the Company became employees of SourceOne, which was contracted to
provide such employees to the Company. The agreement has been terminated. Fees
incurred under this agreement are included in the indebtedness described above.
Also in September 1994, the Company entered into an agreement with Revenue
Process Development, Inc. ("RPD"), a marketing firm. TMR owned 100% of RPD. RPD
provides marketing, billing and collection services for the Company. In July
1995, the Company purchased all the outstanding stock of RPD from TMR for
$2,000. The acquisition was accounted for as a purchase (see Note B[1]).
In June 1995 the Company entered into an agreement with one of its
stockholders to repurchase 126,114 shares of common stock for $150,000. The
shares were simultaneously sold for approximately $85,000 to a third party. The
Company sold the shares from treasury at a discount to induce the third party to
loan the Company $250,000. As a result the Company recorded a deferred financing
cost of $65,000, which was amortized over the term of the lend, which was due in
December 1995. Accordingly, the full amount was charged to earnings in the year
ended March 31, 1996.
(NOTE K) -- Stock Option Plan:
In 1996, the Board of Directors adopted and the Company's stockholders
approved the Amended and Restated 1996 Stock Option Plan (the "Plan"). Pursuant
to the Plan, as amended, incentive stock options and nonqualified stock options
may be granted to purchase up to 250,000 shares of the Company's common stock
through March 2006. Incentive stock options are to be granted at a price not
less than the fair market value of the Company's common stock at the date of
grant. If a stockholder owns 10% or more of the Company's outstanding stock, the
exercise price may not be less than 110% of the fair market value of the
Company's common stock at the date of grant and its term must not exceed five
years. Options may be granted to employees, consultants, and directors of the
Company and must be exercised within a ten-year period after the date granted.
Nonqualified stock options are exercised at a price to be determined by the
Board of Directors for a period of ten years after the grant date. To date,
190,000 options have been granted at an exercise price of $4.00 or $5.00 per
share.
Additionally, the provisions of the Plan provide for the automatic grant
of nonqualified stock options to purchase shares of common stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors of the
Company will be granted a Director Option to purchase 10,000 shares of common
stock on the date of this prospectus at a per share exercise price equal to the
initial public offering price of the units. Future Eligible Directors will be
granted a Director Option to purchase 10,000 shares of common stock on the date
of election or appointment. Further, commencing on the day immediately following
the date of the annual meeting of stockholders for the Company's fiscal year
ending March 31, 1997, each Eligible Director, other than directors who received
an Initial Director Option since the last annual meeting, will be granted a
Director Option to purchase 1,000 shares of common stock ("Automatic Grant") on
the
F-13
<PAGE>
LAMINATING TECHNOLOGIES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited with respect to June 30, 1996 and June 30, 1995)
(NOTE K) -- Stock Option Plan: (continued)
day immediately following the date of each annual meeting of stockholders, as
long as such director is a member of the Board of Directors. The exercise price
for each share subject to a Director Option shall be equal to the fair market
value of the common stock on the date of grant, except for directors who receive
incentive options and who own more than 10% of the voting power, in which case
the exercise price shall be not less than 110% of the fair market value on the
date of grant. Director Options are exercisable in four equal annual
installments, commencing six months from the date of grant. Director Options
will expire the earlier of 10 years after the date of grant or 90 days after the
termination of the director's service on the Board of Directors.
F-14
<PAGE>
[LOGO]
[9 Pictures of different packages]
The foregoing illustrations depict several prototypes of the packaging and
specialty display products the Company may produce utilizing the LTI Processed
method. Items shown as included in the Company's packaging and display products
are produced by other companies. To date, the Company has had only limited
sales.
[BORDER]
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................... 3
Risk Factors......................................................... 7
Use of Proceeds...................................................... 16
Dividend Policy...................................................... 16
Capitalization....................................................... 17
Dilution............................................................. 19
Selected Financial Data.............................................. 20
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............................................. 21
Business............................................................. 23
Management........................................................... 30
Certain Transactions................................................. 35
Principal Stockholders............................................... 37
Concurrent Offering.................................................. 39
Description of Securities............................................ 40
Shares Eligible for Future Sale...................................... 43
Underwriting......................................................... 44
Legal Matters........................................................ 46
Experts.............................................................. 46
Additional Information............................................... 46
Index to Financial Statements........................................ F-1
------------
Until November 3, 1996, 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.
================================================================================
1,700,000 Units
[LOGO]
LAMINATING
TECHNOLOGIES, INC.
Consisting of
1,700,000 shares of Common Stock,
1,700,000 Redeemable Class A
Warrants and
1,700,000 Redeemable Class B
Warrants
----------------
PROSPECTUS
----------------
D.H. BLAIR INVESTMENT BANKING CORP.
October 9, 1996
================================================================================
