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As filed with the Securities and Exchange Commission on June 16, 1999.
File No. 1-14963
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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ConMat Technologies, Inc
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(Name of Small Business Issuer in its Charter)
Florida 23-2999072
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Franklin Avenue and Grant Streets, Phoenixville, PA 19460
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(Address of Principal Executive Offices) (Zip Code)
(610) 935-0225
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Issuer's Telephone Number
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on
to be so Registered Which Each Class is to be Registered
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Common Stock Nasdaq OTC Bulletin Board
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Item 1. Description of Business.
General
ConMat Technologies, Inc. ("ConMat"), formerly known as EPL Systems, Inc., was
incorporated in Florida in 1986. ConMat is not an operating company and does not
have significant assets or conduct significant business except through its
wholly-owned subsidiary. In December 1998, ConMat acquired 100% of the common
stock of Polychem Corporation ("Polychem") from The Eastwind Group, Inc.
("Eastwind"). See "Acquisition of Polychem." ConMat's strategy is to build a
material technology company focused on the development and manufacture of
proprietary custom engineered plastics and composite products to industrial end
users with a special emphasis on the wastewater treatment marketplace. ConMat's
acquisition of Polychem is the first step in executing this strategy. ConMat
plans to execute a growth strategy combining internal new product development
and corporate acquisitions. The principal executive offices of ConMat are
located at Franklin Avenue and Grant Streets, Phoenixville, PA 19460. The
telephone number is (610) 935-0225.
As of June 10, 1999, ConMat and Polychem have a total of 77 full-time employees.
Acquisition of Polychem
On December 8, 1998, ConMat acquired 100% of the common stock of Polychem from
Eastwind. The basic structure and terms of the transaction were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued Series A convertible preferred stock of
ConMat ("Series A Preferred Stock").
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A Preferred Stock; (ii) $100,000 owed to Clifton
Capital, Ltd., discharged by the payment to Clifton Capital,
Ltd. of $100,000; and (iii) $500,000 owed to Mentor Special
Situation Fund, L.P. ("Mentor"), discharged by the issuance to
Mentor of 166,667 shares of newly issued Series B preferred
stock of ConMat and Series B Warrants to purchase 166,667
shares of common stock. In addition, Mentor Management Company
exchanged warrants to purchase 30,000 shares of Eastwind
common stock for warrants to purchase 30,000 shares of ConMat
common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A Preferred Stock. This
Note accrues interest at 8% per year and principal and
interest are due and payable November 30, 2000. ConMat has
determined that in lieu of receiving repayment of the prior
distributions, it will obtain most if not all of the pledged
shares. The amounts previously paid to Eastwind have been
accounted for as distributions by Polychem to Eastwind in the
form of dividends. Under the pledge, Polychem has the right to
sell the pledged shares subject to applicable law.
Polychem
General. Polychem is a wholly-owned subsidiary of ConMat. Polychem was
originally formed in February 1995 by its former owner for the purpose of
acquiring substantially all of the assets and business of The Polychem Division
of The Budd Company. Polychem, which has been in business since 1955, develops
and manufactures custom engineered plastic molded products which are marketed
primarily to wastewater treatment plants, as well as to other industrial users.
Products. Polychem engineers and produces an extensive line of plastic molded
products that are used in a variety of industrial markets. Polychem's typical
products include, among others, complete non-metallic rectangular clarifier
component systems for water and wastewater treatment operations. Polychem's
clarifier component systems are primarily used for the removal of sediment and
solids from wastewater. The clarifier systems are, in effect, settling tanks
through which water passes, allowing suspended solids to settle. These systems
are comprised of non-metallic
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chain, sprockets, stub shafts, wear shoes and other products fabricated to
customer specifications. Polychem also produces cast nylon elevator buckets for
the handling of foundry sand, aggregate, and glass cullet; phenolic sprockets
and pulleys for agricultural and mining equipment; bearings for steel mills;
extruded thermoset profiles for aircraft applications; and molded conveyor
chains and accessories for food packaging, water and wastewater treatment and
other material handling applications. Most of the nylon buckets, steel mill
bearings and table-top conveyor chains are sold as off-the-shelf items to steel
mills and distributors. The majority of the balance of Polychem's products are
produced for use in a complete system of wastewater treatment clarifier
equipment that Polychem sells to its customers. Such a complete system is
usually built to customer specifications and sold under an order selected from
competitive bids. The reaction injection molded ("RIM") nylon products and the
injected molded products account for between 80% and 90% of Polychem's sales;
compression molded products comprise the balance of the business. The average
life expectancy of Polychem's typical products is ten years. The cost of
Polychem's systems varies based on the scope of the system and the end user
modifications required. The cost of a system generally ranges from $20,000 to
$45,000. In addition to its existing products, Polychem continues to explore new
product applications. Polychem currently has one product designed for use in the
automotive industry entering the test market phase and two wastewater treatment
products in the feasibility study stage.
Wastewater treatment plants are primarily used to clean sewage and return water
to general public use. Wastewater treatment plants are generally owned by
municipalities or water authorities. There are over 15,000 wastewater treatment
plants in the United States. Polychem estimates that globally there are 30,000
to 50,000 plants. In the United States, an estimated $22 billion is spent on
wastewater treatment plants annually, while an estimated $83 billion is spent
annually on a global basis.
Polychem provides quotes to contractors for components for approximately 400
wastewater treatment projects each year. Project contracts typically are awarded
on a competitive bid basis. In some cases, the municipality or its engineer
determines, based on price, reliability, system flexibility or other factors,
that certain components must come from a specific manufacturer. If Polychem
products are so required, the successful bidder has to buy the specified
components from Polychem. In most cases a particular manufacturer is not
specified, and the successful bid is selected on such factors as price, system
adaptability and reputation. Historically, Polychem products are used in
approximately 25% of the projects for which Polychem provides quotes. Polychem
does not bid directly for new projects, but rather supplies its products to a
contracting engineer, who in turn bids for new projects. Polychem bids directly
for replacement products. Of the approximately 400 bids submitted annually,
approximately 60% are for replacement parts and 40% are new projects. New
projects account for approximately 75% of Polychem's revenues.
Manufacturing Processes. Polychem's plant is equipped and organized to
accommodate the manufacturing cycle through which raw materials are converted
into finished product. Raw materials are stored in tanks inside and outside the
facility. The manufacturing cycle begins with the mixing of raw materials, which
are then sent to the Molding Department. In the Molding Department, products are
molded in batches by one of the following three processes:
o RIM molding, which produces nylon buckets, stub shafts, and
sprockets. In RIM molding, a compound containing a catalyst
and a compound containing a promoter are mixed in the mold
where a reaction takes place; the combination and percentage
of base chemicals and additives determine the properties of
the final product;
o Compression molding, which produces phenolic steel mill
bearings, timing gears, timing pulleys and other molded
products. In the compression molding process, phenolic
macerate or phenolic laminate is placed in heated molds
(approximately 325 degrees) and cured for a specific period of
time at pressures up to 3000 PSI; and
o Injection molding, which produces engineered resin parts used
for wastewater drives, collector chains and tabletop conveyor
chains. In injection molding, engineered plastic materials are
melted and injected into the mold at a controlled temperature
and rate. Once in the mold, the plastic is cooled to a shape
reflecting the cavity.
Products are then sent to the Fabricating Department for machining and assembly.
Polychem's plant operates on a three-shift basis. Most of the employees have
been trained to operate all of the various equipment in their departments, which
gives Polychem additional flexibility in scheduling personnel to meet production
needs as they arise.
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Marketing and Customers. Polychem was originally a manufacturer of a complete
line of industrial laminates, automotive timing gears, vulcanized fibre and
teflon and silicon tape. In the early 1980's, Polychem identified the wastewater
treatment industry as a potential market and began to shift its focus to
manufacturing products designed for such market. By 1992, wastewater products
became Polychem's dominant revenue producer and presently the revenues from
wastewater products comprise 85% of Polychem's annual sales volume. The
wastewater treatment market is global in nature, and Polychem presently sells
products internationally in Western Europe, Asia and South America and is
expanding into Eastern Europe, the Middle East and Africa.
In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components,
RIM-processed nylon buckets, phenolic bearings and corrugated fibre products) to
the food processing, electronics, steel, automotive, chemical, printing,
aerospace, and consumer products industries, among others.
Polychem markets its plastic chain, cast nylon buckets, steel mill bearings and
compression molded phenolics primarily through distributors. The balance of its
products, including its wastewater treatment component systems, are sold
primarily through Polychem's internal sales force, which consists of
approximately ten employees. Domestic distributors are paid a percentage of
sales ranging from 5% to 15%. Internationally, distributors are compensated on a
buy and sell arrangement. In effect, Polychem sells to the distributor who, in
turns, resells to the ultimate buyer. The distributor earns the difference
between its purchase price and the sales price to the buyer. Polychem's internal
sales force receives a base salary and a bonus based on their individual and
ConMat's overall performance. In its most recent fiscal year, Polychem's sales
force generated 62.7% of its annual sales revenue, international distributors
accounted for 15.8% and domestic distributors accounted for 21.6%. Domestic
revenues were approximately 71.4% and international revenues were approximately
28.6% in that fiscal year.
Competition and Strategy. Polychem's competition tends to be fragmented. Many
other companies, domestically and internationally, produce one or more products
similar to one or more of Polychem's products. Experienced competition exists in
each of Polychem's major markets and many of Polychem's competitors enjoy
excellent working relationships with their customers, produce a variety of
quality products and have access to significant resources. Such resources,
including capital, labor and product support, can result in faster response time
and cheaper prices. These factors, along with product characteristics,
reliability, servicing, and pricing form the major competitive factors in
Polychem's markets.
Polychem believes that it has four significant competitors in the area of
non-metallic rectangular wastewater clarifier systems, of which it considers
Envirex to be the most significant. Polychem believes that it and Envirex each
possess approximately 35% of this market. However, while Polychem provides
products only to clarifier systems in wastewater plants, Envirex has a much
broader line of wastewater treatment products that encompasses all of the major
processes in a treatment plant. Envirex's broader line allows it to bid for
larger portions or projects and to use certain products as loss leaders. FMC and
NRG are Polychem's other less substantial (in terms of market share)
competitors, and a fifth company is attempting to enter the market. Both Envirex
and FMC are significantly larger than Polychem. Polychem believes that it has
three competitors in the market for nylon buckets and five competitors in the
market for table-top chains. Polychem has an approximate 50% share of the nylon
bucket market, while its closest competitor has an approximate 30% market share.
The dominant competitor in the table top chain market, Rexnard, holds an
approximate 80% market share, while Polychem has an approximate 5% share.
Polychem's long-term goals include solidifying its reputation as a leading
provider of quality wastewater treatment equipment products; increasing sales of
its traditional products by improving existing product lines; and seeking new
products to supplement its current line, both from internal research and
development and by acquisition.
Materials and Supplies. Polychem's business of manufacturing a broad line of
engineered plastic products requires the ability to obtain various sources of
raw materials. Polychem maintains approximately three to five suppliers for each
of its raw materials. Approximately 80% of the raw materials purchased by
Polychem are resins. Polychem also purchases capolactin and pultrusions for use
in manufacturing. Polychem's two largest suppliers of resins are BASF and ALM
Industries. Its two largest suppliers of capolactin are Dutch State Mines and
BASF, while its two largest suppliers of pultrusions are Creative Pultrusions
and Morrison Fiberglass. At present, Polychem does not maintain more than one
month's supply of raw materials beyond the amount required for its scheduled
production work.
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Environmental Regulations. While no assurances can be given, Polychem does not
anticipate any material expenses for environmental remediation projects. In the
ordinary course of its business, Polychem incurs some cost for oil reclamation,
hauling of waste products and normal energy costs associated with recycling and
waste disposal. Polychem spends approximately $50,000 annually to comply with
environmental laws, including hauling costs as well as general monitoring and
compliance costs. Polychem maintains two environmental permits, one for a dust
collection system and the other for its after burner heater. The collected dust
is transported by traditional waste management handlers to domestic landfills.
The after burner heater is used to mix cotton fabric with phenolic resins, which
are then processed into specific products. Methanol from the heater is processed
through an after burner and emits little in the way of contaminants. Polychem
maintains seven above ground storage tanks. Two are used to store phenolic
resins inside the plant; two store fuel oil; and three outside tanks are used to
store other chemicals. There are spill containment systems in place throughout
the facility.
Occasionally, there are minor and isolated spills of heat transfer oil,
capolactin and phenolic resins. The latter two quickly solidify at room
temperature and the hardened material is removed to an approved landfill; spills
of heat transfer oil are cleaned and properly disposed of with other waste
products by a licensed outside processor. Polychem has submitted a revised spill
prevention and response plan to the Pennsylvania Department of Environmental
Resources in May 1994 to which no comments have been received as of the date of
this registration statement.
Polychem has occupied its Phoenixville, Pennsylvania property since 1974. The
property was first used as a silk mill in the early part of this century and
then as a manufacturing site for felt carpet padding. Three environmental audits
that have been conducted over the past four years as part of customary due
diligence in financing transactions have not revealed contamination. An
environmental audit was commissioned by Congress Financial Corporation in
conjunction with the purchase of Polychem by The Eastwind Group in 1995. A
second environmental study was commissioned by Fidelity Funding in connection
with a financing commitment in 1997. A third environmental study was
commissioned by GE Capital Corporation in connection with their refinancing in
1998.
Employees. Polychem employs approximately 77 employees, of whom approximately 43
are employed on an hourly basis. Hourly employees are members of United Textile
Workers of America, AFL-CIO, Phoenixville Plastic Makers' Union, Local No. 130
(the "Union"). Most are semi-skilled workers. The current Union contract expires
at the end of September 1999. While the Union has not yet provided the required
notice of their intent to negotiate, management expects that negotiations with
the Union will commence during the third quarter.
ConMat has assumed all of Polychem's continuing obligations under its collective
bargaining agreement with the Union, which includes assumption of obligations
under a defined benefit retirement plan for hourly rated employees at its
Phoenixville, Pennsylvania plant. The plan is fully funded in accordance with
certain actuarial assumptions and to meet ERISA funding requirements. However,
there can be no assurances that market performance of plan investments will be
sufficient to meet all plan liabilities as they arise.
Equipment. Polychem owns or leases, through capital leases, all of the equipment
required to conduct its business. The equipment is comprised of compression
molding presses, transfer molding presses, injection molding presses, reactors,
dispensers and RIM press lines for nylon-6 operations, a complete fabrication
shop with computerized numerical control equipment and a computer aided design
center.
Research and Development. Polychem is the owner of a number of United States and
foreign patents and patent applications relating to water treatment plastic
products, chain conveyor links, conveyor chain bearings, sprockets with locking
mechanisms and a bucket grit elevator system. The ownership of such patents
helps Polychem from a marketing standpoint by securing its continued reputation
as an innovative competitor in its industry.
Polychem employs eight application engineers who use computer aided design
equipment to design custom wastewater treatment non-metallic rectangular
clarifier systems or to alter existing clarifiers to meet changing specification
requirements. All new products are evaluated for patent protection. Recently,
Polychem was granted a patent for a grit bucket system which is now undergoing
marketing development. To date, five successful applications for the system have
been found, the most significant of which is to function as part of a grit
collection system in wastewater treatment where it will be used to remove sand
and gravel from effluent before it reaches the clarifier. Polychem spent
$141,000 and $155,000 on research and development during the years ended January
2, 1999 and January 3, 1998, respectively.
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Debt and Encumbrances. On September 30, 1998, Polychem entered into a Loan and
Security Agreement with General Electric Capital Corporation ("GECC") which
provides for a three-year, $3,500,000 revolving line of credit and a three-year
term loan of $1,500,000. The revolving line of credit and the term loan are
secured by a mortgage on Polychem's Phoenixville, Pennsylvania facility. The
term loan is also secured by equipment. The revolving line of credit is also
secured by accounts receivable and inventory. Advances under the revolving line
of credit are subject to a lending formula limiting the availability of funds to
the total of (i) 80% of eligible accounts receivable, less the amount by which
contractual holdbacks (i.e., amounts that customers are entitled to hold back
until completion of a project) in favor of account debtors on eligible accounts
exceeds $250,000, plus (ii) the lesser of $750,000 or 50% of eligible inventory
(less a $300,000 reserve). Interest rates on the loan are at a rate of 4.75% in
excess of the 30 day dealer commercial paper rate on the revolving line of
credit, 9.55% at June 1, 1999, and 6.50% in excess of the 30 day dealer
commercial paper rate for the term loan, 11.30% at June 1, 1999. Interest on the
revolving line of credit and term loan is payable monthly. Polychem's
collections of accounts receivable are deposited with GECC under a lockbox
arrangement and applied to paydown the balance of the revolving line of credit,
which then may be drawn against subject to availability. The principal balance
of, and all accrued interest on, the revolving line of credit is due and payable
September 30, 2001. In the event that Polychem has cash flow for any fiscal year
in excess of capital expenditures paid for from operations, interest expense,
taxes and scheduled debt repayments, 25% of such excess must be applied first to
repay the term loan and then to reduce the outstanding balance under the
revolving line of credit. As of June 1, 1999, availability under the line of
credit was $135,000 and outstanding borrowings were $2,544,000. The principal
balance of the term loan is payable in monthly instalments of $25,000 with a
$600,000 final payment due September 30, 2001. As of June 1, 1999, the
outstanding balance of the term loan was $1,250,000.
Polychem executed a $1,626,294 promissory note to The Budd Company on March 10,
1995 as part of the purchase price of the Polychem Division of Budd. The
outstanding principal balance of this note as of June 1, 1999 was $1,219,270.
The note accrues interest at 8%, payable quarterly. The principal balance is
payable in 20 equal quarterly installments, commencing March 31, 1998, provided
that Polychem may defer up to 25% of any payment if the payment would exceed
Polychem's net cash flow for the preceding fiscal quarter. No payments have been
deferred. The Budd note is unsecured.
Potential Future Acquisitions
ConMat may seek to acquire other operating companies with complimentary product
lines or incremental distribution or production capabilities. Such companies
would likely have a competitive position in the wastewater treatment
marketplace, but need not service this market exclusively. Acquisition
candidates would likely have a value ranging from $5 million to $15 million. The
market for such acquisition candidates is fragmented and is presently undergoing
significant consolidation.
ConMat is not presently negotiating any specific acquisitions. ConMat has
identified a series of complimentary product and production needs and is
presently searching for acquisition candidates that would meet those particular
needs. ConMat may acquire other operating companies with cash, stock or a
combination of cash and stock.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward Looking Statements
Some of the statements contained in this registration statement discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.
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Important factors that may cause actual results to differ from projections
include, for example:
o general economic conditions, including their impact on capital
expenditures;
o business conditions in the material technology and wastewater
treatment industries;
o the regulatory environment;
o rapidly changing technology and evolving industry standards;
o new products and services offered by competitors; and
o price pressures.
Background and Basis of Presentation
On December 8, 1998, ConMat, a non-operating company with immaterial net assets,
acquired 100% of the outstanding common stock of Polychem from Eastwind. The
acquisition resulted in the owners and management of Polychem having effective
operating control of the combined entity.
The acquisition has been accounted for as a capital transaction in substance,
rather than a business combination. The acquisition is equivalent to the
issuance of stock by Polychem for the net monetary assets of ConMat, accompanied
by a recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the post reverse-acquisition comparative historical
financial statements of the "legal acquirer" (ConMat), are those of the "legal
acquiree" (Polychem).
Accordingly, the consolidated financial statements of ConMat included in this
registration statement are the historical financial statements of Polychem for
the same periods adjusted for the following transactions contained in the Share
Exchange Agreement executed at consummation of the acquisition. The basic
structure and terms of the acquisition, together with the applicable accounting
effects, were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued cumulative, 2%, Series A convertible
preferred stock of ConMat. The common stock and Series A
Preferred Stock exchanged, in addition to the existing ConMat
shares outstanding, collectively resulted in the
recapitalization of Polychem. Earnings per share calculations
include Polychem's change in capital structure for all periods
presented.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A Preferred Stock; (ii) $100,000 owed to Clifton
Capital, Ltd., discharged by the payment to Clifton Capital,
Ltd. of $100,000; and (iii) $500,000 owed to Mentor Special
Situation Fund, L.P. ("Mentor"), discharged by the issuance to
Mentor of 166,667 shares of newly issued Series B preferred
stock of ConMat and Series B Warrants to purchase 166,667
shares of common stock. In addition, Mentor Management Company
exchanged warrants to purchase 30,000 shares of Eastwind
common stock for warrants to purchase 30,000 shares of ConMat
common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A Preferred Stock. This
Note accrues interest at 8% per year and principal and
interest are due and payable November 30, 2000. ConMat has
determined that in lieu of receiving repayment of the prior
distributions, it will obtain most if not all of the pledged
shares. The amounts previously paid to Eastwind have been
accounted for as distributions by Polychem to Eastwind either
in the form of dividends or returns of capital. Under the
pledge, Polychem has the right to sell the pledged shares
subject to applicable law.
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o In connection with the acquisition, ConMat assumed certain
liabilities of Eastwind. Such liabilities are considered to be
"contributed" to Polychem by Eastwind upon consummation of the
acquisition resulting in a reduction of Polychem's
stockholders equity. ConMat's securities issued in connection
with the acquisition to satisfy these liabilities are recorded
at the amounts of the related liabilities relieved.
o Amounts owed to Polychem by Eastwind and its subsidiary in the
form of notes receivable are considered uncollectible and
accounted for as distributions in the form of dividends on
common stock to Eastwind in the periods the distributions were
made. These amounts will be restored to shareholders' equity
if they are collected.
Results of Operations
Three Month Periods Ended March 31, 1999 and March 31, 1998
The following table sets forth certain statement of operation items as a
percentage of total net sales for the period indicated:
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Sales....................................... 100.0% 100.0%
Cost of Sales............................... 76.1 82.4
Gross Profit................................ 23.9 17.6
Selling and Administrative.................. 17.1 22.6
Interest Expense............................ 3.3 5.2
Other Expense............................... .5 3.5
Income Tax.................................. 2.1 --
------ ------
Income (Loss)............................... 1.9 (13.7)
====== ======
Total revenues increased by $935,000 or 44%, to $3,077,000 for the quarter ended
March 31, 1999 ("Current Quarterly Period") from $2,141,000 for the quarter
ended March 31, 1998 ("Comparable Quarterly Period"). This increase is
attributable to Polychem's successful efforts to increase market penetration
internationally where it has previously done business as well as increased
volume from the domestic market. In the Current Quarterly Period, Polychem
realized revenues in excess of $500,000 from international markets in which it
had previously never consummated sales. This included $400,000 in South America,
primarily Columbia, and over $100,000 in the Middle East, including Egypt and
Dubai. Additionally, Polychem realized increased domestic revenues, primarily
out of the West and Southwestern regions of the United States where there has
been increased spending on water treatment projects and where Polychem has a
strong marketing presence.
Gross profit increased by $354,000, or 94%, to $733,000 for the Current
Quarterly Period from $378,000 for the Comparable Quarterly Period. Gross profit
increased as a percentage of sales to 23.9% for the Current Quarterly Period
from 17.6% for the Comparable Quarterly Period. These increases are a result of
increased utilization of existing plant capacity as the result of which
increased production did not require substantial increases in manufacturing
costs, as well as the ongoing effect of several cost saving measures implemented
by management. These measures include improved productivity as a result of
mechanization through new equipment purchases. This increase in productivity
allows Polychem to maintain the same level of production with lower direct labor
costs (wages expended on skilled and unskilled workers that are allocated
directly to a particular unit). While difficult to quantify, improved
productivity arising from the purchase of new automated machinery should yield
approximately $100,000 to $150,000 in annual cost savings. Further, Polychem has
internalized previously outsourced production resulting in lower material costs.
Management estimates cost savings of $50,000 to$100,000 annually from this
reduced outsourcing.
Selling and administrative expenses increased by $43,000, or 9%, to $527,000 for
the Current Quarterly Period from $484,000 for the Comparable Quarterly Period.
This increase is a direct result of increased revenue. As a percentage of
revenues, however, selling and administrative expenses decreased to 17.1% of
total revenues for the Current Quarterly Period from 22.6% of total revenues for
the Comparable Quarterly Period. Management is closely monitoring selling and
administrative expenses and expects such expenses to decrease as a percentage of
sales in future periods due to expected increased revenues due to the
realization of benefits from expenditures made in late 1997 and early 1998 in an
effort to increase Polychem's global sales focus, including the hiring of
additional sales personnel. As the efforts of Polychem's global sales force
begin to result in awarded projects, Polychem expects to realize increased
revenues without significant increases in selling and administrative expenses.
This is reflected in the decrease in selling and administrative expenses as a
percentage of revenues experienced in Current Quarterly Period.
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Interest expense for the Current Quarterly Period decreased $11,000, or 10%, to
$102,000 from $113,000 for the Comparable Quarterly Period. This lower cost
reflects ConMat's lower cost of debt resulting from the refinancing with GE
Capital Corporation in September 1998.
ConMat realized a profit of $57,000 and a net cash surplus of $64,000 for the
Current Quarterly Period. For the Comparable Quarterly Period, ConMat
experienced a loss of $293,000 and a net cash surplus of $78,000. The improved
profitability is a direct result of increased revenues. At the current level of
revenues, ConMat is operating above its break-even point. The small decrease in
net cash realized is the result of an increase in inventory requirements and
accounts receivable as a result of increased sales.
Fiscal Years Ended January 2, 1999 and January 3, 1998
The following table sets forth, for each of the aforementioned periods, certain
statement of operations items as a percentage of total net sales for the periods
indicated:
Fiscal Years Ended
---------------------------------------
January 2, 1999 January 3, 1998
--------------- ---------------
Net Sales 100.0% 100.0%
Cost of Sales 73.7 75.4
Gross Profit 26.3 24.6
Selling and Administrative 22.7 17.5
Interest Expense 6.7 3.4
Other Expense 3.2 4.2
Income (Loss) (6.3) (0.5)
Total revenues decreased by $3,060,000, or 25%, to $9,070,000 for the fiscal
year ended January 2, 1999 ("Current Annual Period") from $12,130,000 for the
fiscal year ended January 3, 1998 ("Comparable Annual Period"). This decline is
attributable in large measure to delays in processing $3.0 million in contracts
in the United States, which were not realized in 1998. The domestic projects
came back on line in 1999 and are part of Polychem's current backlog. In
addition, an anticipated increase in Asian revenues did not occur as the result
of a severe liquidity crisis in the region which made funding of projects very
difficult. As a result of this liquidity crisis, approximately 30 projects worth
approximately $15 million on which Polychem had open quotes were delayed.
Polychem products are specified in approximately $4 million of such projects.
ConMat believes, however, that a substantial portion of these projects will
ultimately be awarded due to their environmental significance. While Management
had expected an increase in revenues derived from activities in Asia of
approximately $4 million, such revenues increased $300,000 to $1.4 million
during the Current Annual Period compared to $1.1 million in the Comparable
Annual Period. ConMat has reduced its reliance on Asia by shifting its sales
focus to projects in other parts of the world where project start dates are more
certain due to better economic stability. As a result of the problems in Asia,
Polychem's international sales force began emphasizing areas of the world where
Polychem had not previously made any sales. These areas included the Middle
East, Mediterranean, South America and parts of Eastern and Western Europe. In
each of these areas there was greater certainty with respect to a project start
date because of the ability of organizations to obtain the necessary funding for
these projects. As a result, ConMat ended the Current Annual Period with a
booked order backlog (confirmed orders with specific shipping dates) of
$5,400,000, or an increase of 135% over the $2,300,000 backlog at the end of the
Comparable Annual Period.
Gross profit decreased by $604,000, or 20%, to $2,384,000 for the Current Annual
Period from $2,988,000 for the Comparable Annual Period as a result of the
decrease in total revenues. Gross profit increased as a percentage of sales to
26.3% for the Current Annual Period from 24.6% for the Comparable Annual Period.
The percentage increase reflects a combination of several cost saving measures
implemented by management which are expected to have increased benefits in the
future as costs increase more slowly than revenues. While difficult to quantify,
improved productivity arising from the purchase of new automated machinery
should yield approximately $100,000 to $150,000 in annual cost reductions.
Further, the internalization of formerly outsourced production should yield
estimated cost savings of $50,000 to 100,000 annually.
8
<PAGE>
Reduced outsourcing results in fewer outside purchases of finished product and
accompanying cost savings due to the lower cost of converting raw materials
versus the cost of purchasing finished products. Management expects gross
profits to increase in the near term reflecting an improved mix of more
profitable international versus domestic sales, lower material costs, and
continued improvements in production efficiencies.
Selling and administrative expenses decreased by $64,000, or 3.0%, to $2,055,000
for the Current Annual Period from $2,119,000 for the Comparable Annual Period.
As a percentage of revenues, selling and administrative expenses increased to
22.7% for the Current Annual Period from 17.5% for the Comparable Annual Period.
The level of selling and administrative expenses during the Current Annual
Period reflects costs associated with the penetration of new markets around the
world and the moderation of Polychem's reliance on Asian markets for new
revenues.
Interest expense for the Current Annual Period includes a one-time charge of
$143,000 relating to deferred financing costs associated with the September 1998
refinancing. Excluding this one-time charge, interest expense increased $61,000,
or 15%, to $467,000 for the Current Annual Period from $406,000 for the
Comparable Annual Period. Increased average borrowings as a result of the
aforementioned refinancing were the primary reason for the increase. Management
expects future interest costs to remain fairly stable.
For the Current Annual Period, ConMat experienced a loss of $575,000, which
included corporate charges from Polychem's former parent company of $480,000.
The corporate charges represent assessments to provide for the parent company's
corporate overhead expenses, including legal and accounting costs, regulatory
compliance costs, insurance costs, administrative overhead as well as other
unforeseen costs. For the Comparable Annual Period, ConMat realized a net loss
of $64,000, which included corporate charges from Polychem's former parent
company of $640,000. ConMat anticipates that its corporate overhead expenses
will be approximately $350,000 per year. The larger loss experienced in the
Current Annual Period reflects, as described above, a significant decrease in
revenues which was not offset by a comparable decrease in manufacturing costs.
Liquidity and Capital Resources
ConMat's primary source of working capital is a credit facility of up to $3.5
million secured by Polychem's assets with borrowings limited to a percent of
eligible receivables and inventory. As of March 31, 1999, the maximum borrowing
amount was $2,439,000 and the outstanding balance was $2,343,000. At January 2,
1999, ConMat was not in compliance with certain financial covenants associated
with the current facility. These instances of noncompliance were waived by the
commercial lender. By the end of the first quarter of 1999, ConMat was back in
compliance with such financial covenants and anticipates continued compliance
moving forward. However, there can be no assurance that ConMat will remain in
compliance or that the lender will continue to waive any noncompliance.
Management believes that ConMat has sufficient assets, equipment and facility to
attain and absorb forecasted growth in revenues. ConMat has no commitments for
significant capital expenditures in the foreseeable future. Management believes
that ConMat's cash and capital resources, together with cash flow from
operations, will be sufficient to finance current and forecasted operations
including its capital spending and research and development needs. ConMat is,
however, actively seeking potential strategic acquisitions and, depending on the
size and terms of any such acquisitions, additional financing, including equity
infusions for ConMat, may be required.
ConMat is in discussions with GECC and several potential lenders about the
possibility of refinancing its Phoenixville, Pennsylvania property. The
refinancing would include the prepayment of the majority of the balance of the
term loan and the release of the existing mortgage lien. If successful, such a
financing would result in lower debt service costs and increased capital
reserves. However, no assurances can be given that such financing efforts will
be successful.
9
<PAGE>
In addition, at January 2, 1999, ConMat had approximately $500,000 of net
operating loss carryforwards which expire in 2018. ConMat has recorded a
valuation allowance to reflect a net deferred tax asset that management believes
is realizable in future tax years from income from operations. Management's
expectations with respect to the realization of the net deferred tax asset are
based on the realization of a net profit for the Current Quarterly Period, the
current operation of ConMat above its break-even point and Polychem's
significant booked order backlog. However, no assurances can be given that
ConMat will generate sufficient profits to utilize the net operating loss
carryforwards. If ConMat is unable to realize the net deferred tax asset, it
will be charged off as an expense and removed as an asset from ConMat's
consolidated balance sheet.
Three Month Period Ended March 31, 1999
During the Current Quarterly Period, ConMat realized net cash from all sources
of $65,000, generated principally by its net earnings for the quarter. During
the Current Quarterly Period, ConMat saw an increase in operating capital
requirements of $646,000. This increased requirement was generated primarily
from an increase in accounts receivable of $1,099,000. This increase in accounts
receivable was offset by an increase in accounts payable of $466,000. ConMat's
operating capital needs for the first quarter of 1999 were sufficiently financed
by its current credit facility. Cash flow from investing activities included
expenditures for new equipment of $33,000. Financing activities included the
repayment of principal on outstanding debt of $183,000. ConMat had net
borrowings of $1,013,000 reflecting primarily draws on its working capital line
to fund its working capital requirements.
Fiscal Years Ended January 2, 1999 and January 3, 1998
Despite incurring a loss for the Current Annual Period, ConMat realized net cash
from operating activities of $462,000 related primarily to decreases in accounts
receivable and inventory aggregating $887,000, a reduction in prepaid expenses
of $80,000 and non-cash charges for depreciation and amortization of $313,000.
These inflows were reduced by an increase in deferred finance costs of $167,000
and combined decreases in accounts payable and accrued expense of $51,000.
Accounts receivable decreased 26% from the Comparable Annual Period to $2.6
million from $3.5 million, due principally to a 25% reduction in revenues. Cash
flow from investing activities included expenditures for new equipment of
$177,000. Financing activities used net cash of $330,000, reflecting net
borrowings arising from a new financing after payment of existing debt plus the
scheduled amortization of term debt, plus a capital distribution to the former
parent of $250,000 and recapitalization costs in connection with the acquisition
of Polychem of $173,000.
For the Comparable Annual Period, ConMat realized cash from operating activities
of $422,000 related primarily to decreases in accounts receivable of $467,000
and inventory of $434,000, plus increases in accounts payable of $188,000 and
non-cash charges for depreciation and amortization of $233,000. These inflows
were reduced by decreases in accrued liabilities of $446,000 and deferred
revenues of $92,000. Cash flow from investing activities included purchases of
new equipment for $126,000. Net cash of $284,000 used in financing activities
reflects the excess of net borrowings under the line of credit above scheduled
principal repayments of the term debt, less repayment of $360,000 on
subordinated notes and dividends to the former parent of $768,000.
Year 2000 Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems. The Year 2000 date change can
affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of Polychem's programs that are time sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. At Polychem, computer systems are used to run all
administrative and key design and manufacturing functions. Computer software and
computer chips also are used to run security systems, communications networks
and other essential equipment. Because of its reliance on these systems,
Polychem is following a process to assure that such systems are ready for the
Year 2000 date change.
10
<PAGE>
In June 1998, Polychem entered into an agreement with IBM Corporation and IBM's
authorized software licensee for systems, CNA Systems, Incorporated. Polychem
entered into the agreement, in part, to initiate a Year 2000 plan to ensure that
Polychem's existing information systems were Year 2000 compliant. In connection
with the agreement, Polychem has upgraded its computer system from an IBM System
36 to an IBM AS/400 and has purchased new software applications relating to
sales and marketing, manufacturing, financial management, materials management,
quality control and management information support systems.
During the fourth quarter of 1998, Polychem commenced the editing and
reprogramming of its existing databases. During the first quarter of 1999,
Polychem commenced testing of inter-modular software applications using the
revised databases. Polychem intends to parallel these systems during the second
quarter of 1999 and to complete its Year 2000 preparation by July 1, 1999. In
connection with the foregoing, Polychem has completed its assessment of which
systems and equipment are most prone to placing Polychem at risk if they are not
Year 2000 compliant (i.e., mission critical systems).
Significant vendors have been requested to advise Polychem in writing of their
Year 2000 readiness, including actions to become compliant if they are not
already compliant. Vendors who provide significant technology-related services
to Polychem have modified their systems to become Year 2000 compliant. The
monitoring of certain vendors will continue into 1999.
Polychem is preparing a contingency plan for how Polychem would resume business
if unanticipated problems arise from non-performance by vendors. Such plans are
expected to be completed by July 1, 1999.
Polychem spent $125,000 during the year ending December 31, 1998 relating to
costs incurred as a result of its Year 2000 Plan. Polychem anticipates incurring
approximately $50,000 in additional costs related to the implementation of the
Year 2000 plan. Management presently believes the Year 2000 issue will not pose
significant operating problems for Polychem. However, if implementation and
testing plans are not completed in a satisfactory and timely manner by Polychem
or third parties on which Polychem is dependent, or other unforeseen problems
arise, the Year 2000 issue could potentially have an adverse effect on the
operations of Polychem.
Item 3. Description of Property.
Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with GECC securing a
revolving line of credit and term loan. See "Description of
Business-Polychem-Debt and Encumbrances." In July 1998, the property was
appraised at $2.4 million by AccuVal Associates Incorporated, an independent
appraiser. Polychem uses approximately 120,000 square feet for manufacturing and
warehousing, and 20,000 square feet for offices. Polychem leases approximately
42,500 square feet of its facility as warehouse space to Windsor Designs, a
wholesale distributor of imported outdoor furniture. The Windsor Designs lease
continues until December 1999 at a rental rate of $133,980 per year ($3.15 per
square foot), net of utilities. Polychem expects this lease to be renewed.
Polychem leases an additional 4,740 square feet of the facility as equipment
storage space to Ethan Horowitz, a residential cabinet maker. That lease
continues until January, 2003 at a rental rate of $15,100 per year ($3.19 per
square foot). Polychem also leases a tower located on the facility to a group of
cellular phone operators including ComCast Metrophone, PageNet, Nextel and
Omnipoint. Combined annual lease income from the tower is $48,000. The leases
continue through March 2004. An additional 40,000 square feet of warehouse space
is available for lease at the facility. Management believes that Polychem's
properties are adequately insured.
11
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information concerning the beneficial ownership
of ConMat's common stock as of June 10, 1999, by each director and executive
officer, all directors and officers as a group, and each person known to ConMat
to beneficially own 5% or more of its outstanding common stock. Except as
otherwise noted, the address for each such person is Franklin Avenue and Grant
Streets, Phoenixville, Pennsylvania 19460.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of
Title of Class Beneficial Owner Beneficial Ownership (1) Class (1)
- -------------- ---------------- ------------------------ ---------
<S> <C> <C> <C>
Common Stock, par value Paul A. DeJuliis 1,553,333 (2) 60.8
$.001 per share
Edward F. Sager, Jr. 196,667 (3) 8.0
P.O. Box 560
Yardley, PA 19067
The Eastwind Group, Inc. 1,333,333 (4) 37.2
275 Geiger Road
Philadelphia, PA 19115
The DAR Group, Inc. 240,000 10.7
30 Broad Street
43rd Floor
New York, NY 10004
Directors and Executive Officers 1,750,000 (2)(3) 63.6
(4 persons)
Series A Preferred Stock, par Paul A. DeJuliis 53,333 3.8
value $.001
The Eastwind Group, Inc. 1,333,333 96.2
275 Geiger Road
Philadelphia, PA 19115
Series B Preferred Stock, par Mentor Special Situation Fund, 166,667 (5) 100.00
value $.001 L.P.
P.O. Box 560
Yardley, PA 19067
</TABLE>
- -----------------
(1) Based upon 2,250,000 shares of common stock issued and outstanding as of
June 10, 1999, calculated in accordance with Rule 13d-3 promulgated under
the Securities Exchange Act of 1934. It also includes shares owned by (i) a
spouse, minor children or by relatives sharing the same home, (ii) entities
owned or controlled by the named person and (iii) other persons if the named
person has the right to acquire such shares within 60 days by the exercise
of any right or option. Unless otherwise noted, shares are owned of record
and beneficially by the named person. On a fully diluted basis, ConMat had
4,083,333 shares outstanding as of June 10, 1999.
(2) Includes 53,333 shares issuable upon conversion of Series A Preferred Stock
and 250,000 issuable upon the exercises of options. (See "Executive
Compensation - Employment Agreements" for conditions of exercise.) Includes
1,000,000 shares held by The Eastwind Group, Inc. Shareholder Trust, of
which Mr. DeJuliis is Trustee, as to which he disclaims beneficial
ownership. If such 1,000,000 shares were not included in calculating Mr.
DeJuliis' beneficial ownership, Mr. DeJuliis would be deemed to beneficially
own 21.7% of ConMat's common stock.
(3) Includes 166,667 shares issuable upon the exercise of warrants to Mentor
Special Situation Fund, L.P., of which Mr. Sager is a general partner, and
30,000 shares issuable upon the exercise of warrants to Mentor Management
Company, of which Mr. Sager is President.
(4) Includes 1,333,333 shares issuable upon conversion of Series A Preferred
Stock.
(5) Edward F. Sager, Jr., a director of ConMat is a general partner of Mentor
Special Situation Fund, L.P.
12
<PAGE>
Item 5. Directors, Executive Officers Promoters and Control Persons.
Certain information concerning the directors and executive officers of ConMat is
set forth below.
<TABLE>
<CAPTION>
Name Position with Corporation Age
- ---- ------------------------- ---
<S> <C> <C>
Paul A. DeJuliis Chief Executive Officer, Secretary and Chairman of the Board of Directors 43
Theodore R. Rutkowski President and a Director 63
Edward F. Sager, Jr. Director 51
William J. Crighton Vice President and Treasurer 52
</TABLE>
Each director has served since December 8, 1998 and serves for a term of office
of one year. The following is a brief summary of the business experience of
ConMat's directors and executive officers.
Paul A. DeJuliis - Chairman of the Board of Directors and Chief Executive
Officer - Prior to assuming his current role and since 1991, Mr. DeJuliis was
Chairman and Chief Executive Officer of The Eastwind Group, Inc., a publicly
traded holding company. Previously, Mr. DeJuliis was a partner in Phoenix
Management Services, Inc., a turnaround consulting firm (1989-91),
Vice-President, Corporate Finance for Colmen & Co., a national investment
banking firm (1987-89), and Manager, Corporate Turnaround Consulting Group for
Coopers & Lybrand (1986-87). Mr. DeJuliis has a B.S. in finance and accounting
from the University of Delaware. He is also a certified public accountant.
Theodore R. Rutkowski - President and a Director of ConMat and President of
Polychem - Prior to his current role and since 1975, Mr. Rutkowski served as the
General Manager of the Polychem Division of the Budd Company. Mr. Rutkowski
previously served as President of the Budd Company Trailer Division, which was
subsequently sold to a third party in 1985. In addition, Mr. Rutkowski was
responsible for the restructuring of Greening Donald in Hamilton, Ontario, a
Budd Company subsidiary. Mr. Rutkowski graduated with a bachelor's degree in
accounting from Rutgers University.
Edward F. Sager, Jr. - Director - Mr. Sager has been the President of Mentor
Management Company, general partner of Mentor Special Situation Fund LP, an
investment fund, and President of Mentor Capital Partners Ltd., a venture
capital firm, since 1994. From 1985 to 1994 Mr. Sager was President of Sager &
Associates, a merchant banking firm providing access to venture capital for
small to medium size companies. He is a graduate of Lafayette College with a
B.S. degree in Mechanical Engineering and he received an MBA in finance from New
York University.
William J. Crighton - Vice President and Treasurer of ConMat and Polychem -
Prior to his current role and since 1975, Mr. Crighton served as the divisional
controller of The Polychem division of The Budd Company. Prior to joining
Polychem, Mr. Crighton was employed in the automotive division and technical
center of The Budd Company. Mr. Crighton graduated with a bachelor's degree in
accounting from LaSalle University and holds an MBA from Widener University.
13
<PAGE>
The following is a brief summary of the business experience (with the exception
of Mr. Rutkowski and Mr. Crighton, whose biographical information is set forth
above) of the additional members of management of Polychem, ConMat's operating
subsidiary.
J.R. Hannum - Manager of Internal Sales, Product Development and Engineering -
Mr. Hannum has served in his current role since 1995. Prior thereto, Mr. Hannum
served as General Manager of the Polychem Division of The Budd Company and as
manager of domestic sales, research and development and manufacturing
engineering. Mr. Hannum graduated with a bachelor's degree in engineering from
Villanova University and graduated with a master's degree in engineering from
Penn State University.
Donald L. Hutton - National Sales Manager - Mr. Hutton has served in his current
position since 1995. Prior thereto, he was employed with The Budd Company for 36
years in several roles including advertising manager, manager of distributor
sales and manager of customer services. Mr. Hutton is a graduate of the
University of Delaware.
Item 6. Executive Compensation.
The following summary compensation table sets forth the total annual
compensation paid to the Chief Executive Officer and each other Executive
Officer of ConMat whose total compensation for the fiscal year ended January 2,
1999 exceeded $100,000:
<TABLE>
<CAPTION>
Long Term Securities
Name and Position Salary ($) Bonus ($) Other ($) Compensation Match Options
- ----------------- ---------- --------- --------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Paul A. DeJuliis, Chairman &
Chief Executive Officer (1) 14,167 0 0 0 250,000
Theodore F. Rutkowski 135,000 0 0 0 0
</TABLE>
- -------------
(1) Represents one month of salary at $170,000 per year. On December 10, 1998,
Mr. DeJuliis purchased 250,000 shares of common stock from ConMat for
$50,000.
Employment Agreements
On December 8, 1998, ConMat entered into an Employment Agreement with Paul A.
DeJuliis, ConMat's Chief Executive Officer and Chairman of the Board of
Directors. Under the agreement, Mr. DeJuliis will be paid an annual base salary
ranging from $170,000 to $250,000 depending on ConMat's annual net income. As
additional incentive compensation, upon executing the Employment Agreement, Mr.
DeJuliis received (i) 250,000 shares of common stock for an aggregate purchase
price of $50,000, paid by delivery of a two-year promissory note at 5% interest;
and (ii) 250,000 options to purchase shares of common stock at an exercise price
of $3.00 per share. 50,000 of the options are exercisable upon registration of
the underlying shares of common stock. 100,000 of the options are exercisable
following registration of the underlying shares of common stock if ConMat
realizes $750,000 in pre-tax income during a fiscal year. The remaining 100,000
options are exercisable following registration of the underlying shares of
common stock if ConMat realizes $1,000,000 in pre-tax income during a fiscal
year. All of the options are immediately exercisable upon a merger, sale of
assets or other transaction resulting in a change of control in which the
holders of shares of common stock receive not less than $5.00 per share.
14
<PAGE>
Item 7. Certain Relationships and Related Transactions.
On December 8, 1998, ConMat acquired 100% of the common stock of Polychem from
Eastwind. The basic structure and terms of the transaction were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued Series A Preferred Stock.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A Preferred Stock; (ii) $100,000 owed to Clifton
Capital, Ltd., discharged by the payment to Clifton Capital,
Ltd. of $100,000; and (iii) $500,000 owed to Mentor Special
Situation Fund, L.P. ("Mentor"), discharged by the issuance to
Mentor of 166,667 shares of newly issued Series B preferred
stock of ConMat and Series B Warrants to purchase 166,667
shares of common stock. In addition, Mentor Management Company
exchanged warrants to purchase 30,000 shares of Eastwind
common stock for warrants to purchase 30,000 shares of ConMat
common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A Preferred Stock. This
Note accrues interest at 8% per year and principal and
interest are due and payable November 30, 2000. ConMat has
determined that in lieu of receiving repayment of the prior
distributions, it will obtain most if not all of the pledged
shares. The amounts previously paid to Eastwind have been
accounted for as distributions by Polychem to Eastwind in the
form of dividends. Under the pledge, Polychem has the right to
sell the pledged shares subject to applicable law.
Item 8. Legal Proceedings.
ConMat is currently a defendant in a Pennsylvania state court action filed on
January 28, 1999, captioned John R. Thach v. The Eastwind Group, et al.
(Montgomery County C.C.P., Civil Action No. 99- 01195). Plaintiff maintains that
Eastwind, his former employer, breached the terms of his severance agreement and
that the sale of Polychem to ConMat was part of a conspiracy to avoid payments
to him and has violated Pennsylvania's Uniform Fraudulent Transfer Act. The
plaintiff seeks damages of at least $350,0000 and punitive damages of at least
$500,000. In addition, the plaintiff seeks to have the acquisition of Polychem
declared null and void and to have a receiver appointed to oversee the affairs
of Eastwind, Polychem and ConMat. Among the other named defendants is Paul A.
DeJuliis, President of ConMat and the former Chief Executive Officer of
Eastwind.
Initially, the plaintiff sought a temporary restraining order and preliminary
injunction seeking to set aside the sale of Polychem to ConMat. By Order dated
February 19, 1999, the Court denied plaintiff's request for injunctive relief.
ConMat and Paul A. DeJuliis subsequently filed preliminary objections to the
complaint seeking to have themselves dismissed as parties to the action. The
parties have submitted briefs relating to ConMat's preliminary objections and a
decision by the Court is not expected until July, 1999 at the earliest.
15
<PAGE>
Item 9. Market for Common Equity and Other Stockholder Matters.
Market for Common Stock
The common stock of ConMat is quoted on the Nasdaq OTC Bulletin Board under the
symbol "CNMT" and began trading December 21, 1998. The following table shows
trading prices for the common stock from inception through June 10, 1999:
1999 Low Price High Price
---- --------- ----------
Second Quarter (1) $3.00 $3.00
First Quarter $1.63 $4.00
1998
Fourth Quarter (2) $1.50 $2.125
- ---------------
(1) Through and including June 10, 1999.
(2) Commencing December 21, 1998.
Market quotations reflect inter-dealer prices, without retail markups, markdown
or commissions and may not necessarily reflect actual transactions. As of June
10, 1999, there were approximately 11 holders of record of ConMat's common
stock.
Dividend Policy
ConMat has never paid a cash dividend and does not intend to pay any cash
dividends on its common stock for the foreseeable future.
Item 10. Recent Sales of Unregistered Securities.
In connection with the acquisition of Polychem on December 8, 1998 and pursuant
to Section 4(2) of the Securities Act, ConMat issued (i) 1,000,000 shares of
common stock to Eastwind, (ii) 1,386,666 shares of Series A convertible
preferred stock to Eastwind and Paul A. DeJuliis, (iii) 166,667 shares of Series
B convertible preferred stock and warrants to purchase 196,667 shares of common
stock to Mentor.
On December 10, 1998, Paul A. DeJuliis, President and Chief Executive Officer of
ConMat, purchased 250,000 shares of common stock at a purchase price of $50,000,
paid by delivery to ConMat of Mr. DeJuliis' promissory note in that amount. The
note has a maturity date of December 10, 2000, bears interest at 5% per annum
and is secured by a pledge of the purchased shares.
Item 11. Description of Securities.
General
The following description of ConMat's common stock and preferred stock is a
summary only. This summary is qualified in its entirety by reference to the
applicable instruments and governing law, including without limitation, ConMat's
Articles of Incorporation and Bylaws and the Florida Business Corporation Act.
The authorized capital stock of ConMat consists of 40,000,000 shares of common
stock and 10,000,000 shares of preferred stock. As of June 10, 1999, there were
outstanding 2,250,000 shares of common stock, 1,386,666 shares of Series A
Preferred Stock and 166,667 shares of Series B Preferred Stock.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the dividend preferences attributable to the
preferred stock. Upon the liquidation, dissolution or winding up of ConMat,
holders of common stock are entitled to receive ratably the net assets of ConMat
available for distribution to such holders after preferred distributions to
holders of preferred stock. Holders of common stock have no preemptive or
redemption rights.
16
<PAGE>
Series A Preferred Stock
Shares of the Series A Preferred Stock rank prior to the common stock and pari
passu with the Series B Preferred Stock. The creation of any class or series of
capital stock ranking senior to or pari passu with the Series A Preferred Stock
requires the consent of a majority of the holders of the Series A Preferred
Stock.
The holders of the shares of the Series A Preferred Stock are entitled to
receive cash dividends at a rate of 2% per year, which dividends are payable in
equal, quarterly installments, as and if declared by the Board of Directors out
of funds legally available for the payment of dividends. Such dividends shall
begin to accrue on outstanding shares of Series A Preferred Stock from the date
of issuance and shall accrue from day to day, whether or not earned or declared,
until paid. ConMat may, at its sole discretion, pay any or all dividends in
common stock rather than in cash. In the event of any liquidation, dissolution
or winding up of ConMat, holders of the Series A Preferred Stock shall be
entitled, in preference to the holders of the common stock and pari passu with
the holders of the Series B Preferred Stock, to be paid first out of assets and
funds of ConMat available for distribution to holders of ConMat's capital stock
in the amount of $3.00 per share.
Shares of Series A Preferred Stock are convertible at the option of the holder
at any time following 60 days after the date of issuance at the then effective
conversion price. The conversion price shall be the greater of $3.00 or 80% of
the closing bid price of the common stock on the conversion date, subject to
adjustments due to stock splits, stock dividends, mergers, consolidations and
other events. ConMat has the right, by written notice to each of the holders of
the Series A Preferred Stock, to convert all shares of the Series A Preferred
Stock into shares of common stock at any time on or after the first day on which
the closing bid price has been equal to or in excess of the conversion price for
45 consecutive calendar days. In the case of such a mandatory conversion, each
share of Series A Preferred Stock will be converted into a number of shares of
common stock determined by dividing the stated value by the then effective
conversion price.
The holders of the Series A Preferred Stock will have no voting power, except as
otherwise required by the Florida Business Corporation Act. To the extent
permitted under the Florida Business Corporation Act, the Series A preferred
stock and Series B Preferred Stock will be considered a single class of stock
for voting purposes.
The holders of Series A Preferred Stock have, subject to certain limitations,
registration rights, which obligate ConMat to include shares of common stock
issued or issuable upon conversion of shares of Series A Preferred Stock in a
registration statement filed with the Securities and Exchange Commission.
Series B Preferred Stock
Shares of the Series B Preferred Stock rank prior to the common stock and pari
passu with ConMat's Series A Preferred Stock. The creation of any class or
series of capital stock ranking senior to or pari passu with the Series B
Preferred Stock requires the consent of a majority of the holders of the Series
B Preferred Stock.
Holders of the shares of the Series B Preferred Stock are entitled to receive
cash dividends at a rate of 8% per year, which dividends are payable in equal,
quarterly installments, as and if declared by the Board of Directors out of
funds legally available for the payment of dividends. Such dividends will begin
to accrue on outstanding shares of Series B Preferred Stock from the date of
issuance and will accrue from day to day, whether or not earned or declared,
until paid. In the event of any liquidation, dissolution or winding up of
ConMat, holders of the Series B Preferred Stock will be entitled, in preference
to the holders of the common stock and pari passu with the holders of the Series
A Preferred Stock, to be paid first out of assets and funds of ConMat available
for distribution to holders of ConMat's capital stock in the amount of $3.00 per
share, plus all accrued but unpaid dividends.
17
<PAGE>
ConMat may redeem the Series B Preferred Stock at any time. ConMat is required
to redeem the Series B Preferred Stock on the earliest of, (i) the date Mr.
DeJuliis ceases for any reason to serve as Chairman and Chief Executive Officer
of ConMat, or (ii) the date Mr. DeJuliis, Mr. Rutkowski and the member of
ConMat's Board of Directors elected by the holders of the Series B Preferred
Stock cease to constitute a majority of the Board of Directors. The redemption
price is $3.00 per share, plus all accrued but unpaid dividends.
The holders of the Series B Preferred Stock have the right to elect one member
of ConMat's Board of Directors. Except as otherwise required by the Florida
Business Corporation Act, the holders of the Series B Preferred Stock have no
other voting rights. To the extent permitted under the Florida Business
Corporation Act, the Series A Preferred Stock and Series B Preferred Stock will
be considered a single class of stock for voting purposes.
In connection with the acquisition of Polychem by ConMat, the holders of the
Series B Preferred Stock also received warrants to purchase 166,667 shares of
common stock at an exercise price of $3.00 per share, subject to adjustment in
the case of stock splits, stock dividends, below market issuances or a merger or
consolidation. The warrants are exercisable until December 31, 2005. Subject to
certain limitations, holders of the warrants have "piggy-back" registration
rights which, upon the request of such holders, obligate ConMat to include the
shares of common stock issuable upon exercise of the warrants in a registration
statement filed with the Securities and Exchange Commission.
Item 12. Indemnification of Directors and Officers.
ConMat's charter provides that to the fullest extent permitted by law, no
director or officer of ConMat shall be personally liable to ConMat or its
shareholders for damages for breach of any duty owed to ConMat or its
shareholders and that ConMat may, in its by-laws or in any resolution of its
stockholders or directors, undertake to indemnify the officers and directors of
ConMat against any contingency or peril as may be determined to be in the best
interests of ConMat, and in conjunction therewith, to procure, at ConMat's
expense, policies of insurance. Florida law, under which ConMat is incorporated,
allows a corporation to indemnify its directors and officers if such director or
officer acted in good faith and in a manner such director or officer reasonably
believed to be in , or not opposed to, the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. ConMat maintains a director and officer
liability insurance policy covering each of ConMat's directors and executive
officers.
Item 13. Financial Statements.
The financial statements are attached to this registration statement beginning
on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
18
<PAGE>
Item 15. Financial Statements and Exhibits.
(a) The following financial statements are filed as part of this registration
statement:
Unaudited
Consolidated Balance Sheets as of March 31, 1999 and January 2, 1999
Consolidated Statements of Operations for the three month periods ended
March 31, 1999 and March 31, 1998
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1999 and March 31, 1998
Audited
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998
Consolidated Statements of Operations for the fiscal years ended
January 2, 1999 and January 3, 1998
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended January 2, 1999 and January 3, 1998
Consolidated Statements of Cash Flows for the fiscal years ended
January 2, 1999 and January 3, 1998
(b) The following exhibits are filed as part of this registration
statement. Exhibit numbers correspond to the exhibit requirements of
Regulation S-B.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Articles of Incorporation of ConMat Technologies, Inc., as amended.*
2.2 By-laws of ConMat Technologies, Inc.*
3.1 Specimen common stock certificate.*
3.2 Specimen Series A Preferred Stock certificate.*
3.3 Specimen Series B Preferred Stock certificate.*
3.4 Series A Warrant No. 1 from ConMat to Mentor Special Situation Fund, L.P. dated December 8, 1998.*
3.5 Series B Warrant No. 1 from ConMat to Mentor Management Company dated December 8, 1998.*
3.6 Option Agreement between ConMat and Paul A. DeJuliis dated December 8, 1998.*
10.1 Employment Agreement between ConMat and Paul A. DeJuliis dated December 8, 1998.*
10.2 Loan and Security Agreement between Polychem and General Electric Capital Corporation dated September
30, 1998.*
10.3 $3,500,000 Revolving Credit Note payable by Polychem to General Electric Capital Corporation dated
September 30, 1998.*
10.4 $1,500,000 Term Note payable by Polychem to General Electric Capital Corporation dated September 30,
1998.*
10.5 Stock Pledge Agreement between ConMat and General Electric Capital Corporation dated December 8,
1998.*
10.6 Guarantee dated December 8, 1998 between ConMat and General Electric Capital Corporation.*
10.7 Waiver and Amendment Agreement among General Electric Capital Corporation, ConMat, Polychem and
Eastwind.*
10.8 $1,626,294 Term Note payable by Polychem to The Budd Company dated March 10, 1995.
10.9 Mortgage and Security Agreement between Polychem and General Electric Capital Corporation.
27 Financial Data Schedule.
</TABLE>
- -----------
* Previously filed.
19
<PAGE>
ConMat Technologies, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited
Consolidated Balance Sheets as of March 31, 1999 and January 2, 1999........................................F-2
Consolidated Statements of Operations for the three month periods ended March 31, 1999
and March 31, 1998.....................................................................................F-3
Consolidated Statements of Cash Flows for the three month periods ended March 31, 1999
and March 31, 1998...................................................................................F-4
Notes to Consolidated Financial Statements..................................................................F-5
Audited
Report of Independent Certified Public Accounts..............................................................F-6
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998........................................F-7
Consolidated Statements of Operations for the fiscal years ended January 2, 1999 and January 3, 1998.........F-8
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended January 2, 1999
and January 3, 1998.....................................................................................F-9
Consolidated Statements of Cash Flows for the fiscal years ended January 2, 1999 and January 3, 1998........F-10
Notes to Consolidated Financial Statements..................................................................F-11
</TABLE>
F-1
<PAGE>
ConMat Technologies, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, January 2,
1999 1999
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 93,876 $ 29,430
Accounts receivable - Trade, net of allowance for doubtful accounts 3,720,931 2,622,261
Inventories 1,109,106 1,159,545
Prepaid expenses and other 17,543 14,768
Prepaid income taxes 35,577 35,577
------------ ------------
Total current assets $4,977,033 3,861,581
Property, plant and equipment, at cost less accumulated depreciation 1,159,118 1,188,823
Deferred income taxes 78,493 78,493
Other Assets 401,422 386,128
------------ ------------
Total assets $ 6,616,066 $ 5,515,025
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Line of credit $ 2,367,015 $ 1,398,632
Current portion of long-term debt 625,260 625,260
Current portion of capital lease obligations 113,891 103,744
Accounts payable 1,623,023 1,183,913
Accrued expenses 133,162 302,374
------------ ------------
Total current liabilities 4,862,351 3,613,923
Long-term debt 1,919,461 2,075,775
Obligations under capital leases 126,800 151,761
Other liabilities 159,056 181,900
------------ ------------
Total liabilities 7,067,668 6,023,359
------------ ------------
Series B Preferred Stock, $.001 par value, 166,667 shares issued and outstanding 500,000 500,000
Stockholders' equity (deficiency)
Series A Preferred Stock, $.001 par value, 10,000,000 shares authorized,
1,333,333 shares issued and outstanding 1,386 1,386
Common stock, $.001 par value, 40,000,000 shares authorized,
2,250,000 shares issued and outstanding 2,250 2,250
Additional paid-in capital (472,486) (472,486)
Accumulated earnings (deficit) (432,750) (489,482)
Less note receivable for shares sold (50,000) (50,000)
------------ ------------
Total stockholders' equity (deficiency) (951,602) (1,008,334)
------------ ------------
Total liabilities and stockholders' equity $ 6,616,066 $ 5,515,025
============ ============
</TABLE>
F-2
<PAGE>
ConMat Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Periods Ended March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net Sales to customers $3,076,866 $2,141,729
Cost of goods sold 2,343,938 1,763,117
---------- ----------
Gross profit 732,928 376,612
Selling, general and administrative expenses 527,478 484,450
Corporate support fees 62,754 120,000
---------- ----------
Operating (loss) income 142,696 (225,838)
Interest expense (102,129) (113,393)
Rental income 48,367 46,365
---------- ----------
Profit (loss) before income tax expense 88,934 (292,866)
Income tax expense (32,200) 0
---------- ----------
NET PROFIT (LOSS) $ 56,734 $ (292,866)
========== ==========
Per share data - basic and diluted
Net profit (loss per share) $ 0.03 $ (0.15)
========== ==========
</TABLE>
F-3
<PAGE>
ConMat Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Periods Ended March 31, 1999 and March 31, 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ 56,734 $ (292,866)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization 79,259 61,067
Changes in assets and liabilities, net of effect from acquisitions
(increase) decrease in assets
Accounts receivable (1,098,670) 374,958
Inventories 50,439 198,929
Prepaid expenses (2,775) 189,471
Prepaid income taxes 32,200 0
Patents, net (5,183) (11,375)
Deferred financing charges (40,392) 0
Increase (decrease) in liabilities
Accounts payable 465,774 (400,956)
Accrued expenses (183,176) (159,052)
----------- ----------
Net cash provided by operating activities (645,790) (39,824)
----------- ----------
Cash flows from investing activities
Purchase of property and equipment (33,269) (17,687)
----------- ----------
Net cash used in investing activities (33,269) (17,687)
----------- ----------
Cash flows from financing activities
Net (repayments) borrowings under lines of credit 968,384 243,983
Repayments of term notes (156,315) (88,850)
Repayments of capitalized lease obligations (27,558) (19,196)
Proceeds from capitalized lease obligations 45,000 0
Recapitalization costs (86,006) 0
----------- ----------
Net cash used in financing activities 743,505 135,937
----------- ----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 64,446 78,426
Cash and cash equivalents at beginning of year 29,430 63,840
----------- ----------
Cash and cash equivalents at end of period $ 93,876 $ 142,266
=========== ==========
</TABLE>
F-4
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and March 31, 1998
Interim financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
periods. The January 2, 1999 balance sheet has been derived from the audited
financial statements contained in this registration statement. These interim
financial statements conform with the requirements for interim financial
statements and consequently do not include all the disclosures normally required
by generally accepted accounting principles. The results for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year. Reporting developments have been updated where
appropriate. In this connection, there are no significant changes in
disclosures.
Research and development costs are expensed as incurred. Such expenses
were approximately $38,000 during the quarter ended March 31, 1999 and $40,000
during the quarter ended March 31, 1998.
F-5
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
ConMat Technologies, Inc.
We have audited the accompanying consolidated balance sheets of ConMat
Technologies, Inc. and Subsidiary (a Florida corporation) as of January 2, 1999,
and January 3, 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the fiscal years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ConMat Technologies, Inc. and Subsidiary as of January 2, 1999, and January 3,
1998, and the consolidated results of their operations and their consolidated
cash flows for the fiscal years then ended, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 25, 1999
F-6
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
January 2, January 3,
1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 29,430 $ 63,840
Accounts receivable, net 2,622,261 3,524,622
Due from related parties - 10,900
Inventories 1,159,545 1,144,202
Prepaid expenses 14,768 105,911
Prepaid income taxes 35,577 24,677
----------- -----------
Total current assets 3,861,581 4,874,152
Property, plant and equipment, net 1,188,823 1,232,162
Deferred income taxes 78,493 78,493
Other assets 386,128 286,438
----------- -----------
$ 5,515,025 $ 6,471,245
=========== -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Lines of credit $ 1,398,632 $ 1,492,511
Current portion of long-term debt 625,260 680,660
Current portion of capitalized lease obligations 103,744 68,947
Accounts payable 1,183,913 1,162,738
Accrued expenses 302,374 247,620
----------- -----------
Total current liabilities 3,613,923 3,652,476
Long-term debt 2,075,775 1,897,597
Capitalized lease obligations 151,761 122,293
Other liabilities 181,900 209,170
----------- -----------
Total liabilities 6,023,359 5,881,536
----------- -----------
Series B Preferred Stock, $.001 par value, 166,667 shares issued and outstanding 500,000 -
Stockholders' equity (deficiency)
Series A Preferred stock, $.001 par value, 10,000,000 shares authorized,
1,386,666 shares issued and outstanding 1,386 -
Common stock, $.001 par value, 40,000,000 shares authorized, 2,250,000
shares issued and outstanding 2,250 -
Common stock, $.01 par value, 5,000,000 shares authorized, 1,000
shares issued and outstanding - 10
Additional paid-in capital (472,488) 504,490
Accumulated earnings (deficit) (489,482) 85,209
Less note receivable for shares sold (50,000) -
----------- -----------
Total stockholders' equity (deficiency) (1,008,334) 589,709
----------- -----------
$ 5,515,025 $ 6,471,245
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------
January 2, January 3,
1999 1998
---------- -----------
<S> <C> <C>
Net sales $9,069,668 $12,129,981
Cost of goods sold 6,685,177 9,142,517
---------- -----------
Gross profit 2,384,491 2,987,464
Selling, general and administrative expenses 2,055,063 2,119,615
Eastwind corporate support fees 480,000 640,000
----------
Operating (loss) income (150,572) 227,849
Interest expense (609,996) (406,021)
Rental income 185,877 177,832
---------- -----------
Loss before income tax expense (574,691) (340)
Income tax expense -- (63,573)
---------- -----------
NET LOSS $ (574,691) $ (63,913)
========== ==========
Per share data - basic and diluted
Net loss per share $ (0.28) $ (0.03)
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Fiscal years ended January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
Series A
Common stock Preferred stock
--------------------------- ----------------------------
Shares Amount Shares Amount
---------- -------- --------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 1,000 $ 10 -- $ --
Cash dividends on common stock -- -- -- --
Net loss -- -- -- --
--------- -------- --------- ----------
Balance, January 3, 1998 1,000 10 -- --
Reclassification of $.01 common stock (1,000) (10) -- --
Issuance of $.001 common stock and Series A
Preferred Stock in connection with
reclassification of equity 2,000,000 2,000 1,333,333 1,333
Assumption of stockholders' liabilities -- -- -- --
Issuance of Series A preferred stock -- -- 53,333 53
Issuance of common stock 250,000 250 -- --
Receivable from stockholder -- -- -- --
Capital repayment -- -- -- --
Net loss -- -- -- --
--------- ------- --------- ----------
Balance, January 2, 1999 2,250,000 $ 2,250 1,386,666 $ 1,386
========= ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Note Total
Additional Accumulated receivable stockholders'
paid-in earnings for shares equity
capital, net (deficit) sold (deficiency)
------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 504,490 $ 917,068 $ $ 1,421,568
Cash dividends on common stock -- (767,946) -- (767,946)
Net loss -- (63,913) -- (63,913)
----------- ----------- --------- -----------
Balance, January 3, 1998 504,490 85,209 -- 589,709
Reclassification of $.01 common stock -- -- -- (10)
Issuance of $.001 common stock and Series A
Preferred Stock in connection with
reclassification of equity (176,675) -- -- (173,342)
Assumption of stockholders' liabilities (760,000) -- -- (760,000)
Issuance of Series A preferred stock 159,947 -- -- 160,000
Issuance of common stock 49,750 -- -- 50,000
Receivable from stockholder -- -- (50,000) (50,000)
Capital repayment (250,000) -- -- (250,000)
Net loss -- (574,691) -- -
----------- ----------- --------- -----------
Balance, January 2, 1999 $ 472,488 $ (489,482) $ (50,000) $(1,008,334)
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-9
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal year ended
-----------------------------
January 2, January 3,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (574,691) $ (63,913)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 312,980 233,354
Changes in assets and liabilities, net of effect from acquisitions
(Increase) decrease in assets
Accounts receivable 902,361 467,378
Inventories (15,343) 434,495
Prepaid expenses 91,143 (212,334)
Prepaid income taxes (10,900) (33,076)
Patents, net (25,666) (54,668)
Deferred financing charges (166,660) -
Increase (decrease) in liabilities
Accounts payable 21,175 188,082
Accrued expenses (45,256) (220,391)
Other current liabilities - (225,607)
Other liabilities (27,270) (91,589)
------------ ----------
Net cash provided by operating activities 461,873 421,731
------------ ----------
Cash flows from investing activities
Purchase of property and equipment (177,005) (125,651)
Advances to affiliated companies 10,900 (10,900)
Other - (80,000)
------------ ----------
Net cash used in investing activities (166,105) (216,551)
------------ ----------
Cash flows from financing activities
Net (repayments) borrowings under lines of credit (93,879) 1,182,372
Borrowings on term notes 1,800,000 -
Repayments of term notes (1,677,222) (356,400)
Repayments of capitalized lease obligations (84,155) (52,012)
Proceeds from capitalized lease obligations 148,420 69,922
Recapitalization costs (173,342) -
Repayment of subordinated debenture - (360,000)
Dividends on common stock - (767,946)
Capital distribution (250,000) -
------------ ----------
Net cash used in financing activities (330,178) (284,064)
------------ ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (34,410) (78,884)
Cash and cash equivalents at beginning of year 63,840 142,724
------------ ----------
Cash and cash equivalents at end of year $ 29,430 $ 63,840
============ ===========
Supplemental cash flow information
Cash paid for interest $ 609,996 $ 406,021
============ ===========
Cash paid for taxes $ - $ 25,000
============ ===========
Noncash transactions
Assumption of stockholders' liabilities $ 760,000 $ -
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 2, 1999 and January 3, 1998
NOTE A - NATURE OF BUSINESS
ConMat Technologies, Inc. (ConMat or the Company), organized under the
laws of the State of Florida, is engaged in the development and manufacture of
proprietary custom engineered plastics and composite products for industrial end
users with a special emphasis on the wastewater treatment marketplace. ConMat
conducts its operations through its wholly owned subsidiary, the Polychem
Corporation (Polychem), located in Phoenixville, Pennsylvania. Polychem
manufactures and sells clarifier components for wastewater treatment
applications and other plastic-molded products, including buckets, sprockets,
and bearings. The wastewater treatment market is global in nature, and Polychem
presently sells products internationally in Western Europe, Asia and South
America, as well as in the United States.
NOTE B - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ConMat
and its wholly owned subsidiary, Polychem.
On December 8, 1998, ConMat, a non-operating public company with
1,000,000 common shares outstanding and immaterial net assets, acquired 100% of
the outstanding common stock of Polychem from The Eastwind Group, Inc.
(Eastwind) (the Acquisition). The Acquisition resulted in the owners and
management of Polychem having effective operating control of the combined
entity.
Under generally accepted accounting principles, the Acquisition is
considered to be a capital transaction in substance, rather than a business
combination. That is, the Acquisition is equivalent to the issuance of stock by
Polychem for the net monetary assets of ConMat, accompanied by a
recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the Acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the post reverse-acquisition comparative historical
financial statements of the "legal acquirer" (ConMat), are those of the "legal
acquiree" (Polychem) (i.e. the accounting acquirer).
Accordingly, the consolidated financial statements of ConMat as of
January 2, 1999, and January 3, 1998, and for the fiscal years then ended, are
the historical financial statements of Polychem for the same periods adjusted
for the following transactions contained in the Share Exchange Agreement
executed at consummation of the Acquisition. The basic structure and terms of
the Acquisition, together with the applicable accounting effects, were as
follows:
o ConMat acquired all of the outstanding shares of common stock of
Polychem from Eastwind in exchange for (I) 1,000,000 shares of
newly issued common stock of ConMat and (II) 1,333,333 shares of
newly issued cumulative, 2%, Series A convertible preferred stock
of ConMat (Series A Preferred Stock). The common stock and Series
A Preferred Stock exchanged, in addition to the existing ConMat
shares outstanding, collectively resulted in the recapitalization
of the Company. Earnings per share (EPS) calculations include the
Company's change in capital structure for all periods presented.
o ConMat assumed and, in certain instances, discharged the following
liabilities of Eastwind: (I) $160,000 owed to Eastwind's former
Chairman and Chief Executive Officer, who is the current Chairman
and Chief Executive Officer of ConMat, discharged by the issuance
of 53,333 shares of Series A Preferred Stock; (II) $100,000 owed
to Clifton Capital, Ltd.; and (III) $500,000 owed to Mentor
Special Situation Fund, L.P. (Mentor), discharged by the issuance
to Mentor of 166,667 shares of newly issued cumulative, 8%, Series
B Preferred Stock of ConMat plus warrants to purchase 166,667
shares of ConMat common stock, at $3.00 per share. The general
partner of Mentor is a member of ConMat's Board of Directors.
ConMat issued an option to purchase 30,000 shares of common stock
to this director for $1.00 per share.
<PAGE>
o At closing, Eastwind issued to Polychem a promissory note in the
amount of $940,000 to evidence certain outstanding amounts owed by
Eastwind to Polychem for prior advances, secured by the pledge of
313,333 shares of Series A Preferred Stock. This amount, in
addition to other amounts owed to Polychem by Eastwind, was
accounted for as distributions in the form of dividends on common
stock to Eastwind in the periods the distributions were made.
The Company incurred $173,342 of costs related to the Acquisition.
These costs were recorded as reductions to additional paid-in capital in
connection with the reclassification of equity resulting from the
recapitalization.
F-11
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
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.
2. Cash and Cash Equivalents
The Company's cash management system provides for the short-term
investment of cash and the transfer or deposit of sufficient funds to cover
checks as they are submitted for payment. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
3. Inventories
Inventories consist of raw materials, work-in-process, and finished
goods. Work-in-process and finished goods include raw materials, direct labor,
and a portion of manufacturing overhead. The Company's inventory is stated at
the lower of cost or market, with cost determined by the last-in, first-out
(LIFO) method.
4. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is recorded using the straight-line and accelerated
depreciation methods over the estimated useful lives of the assets. Leasehold
improvements are amortized over the term of the lease or estimated useful life,
whichever is shorter.
5. Research and Development Costs
The Company expenses research and development costs as incurred.
Research and development costs were approximately $140,000 for the year ended
January 2, 1999 and $155,000 for the year ended January 3, 1998.
6. Income Taxes
The Company accounts for its income taxes under the liability method
specified by Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
7. Loss Per Share
The Company reports earnings per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
F-12
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following are the basic and diluted earnings per share calculations
for the periods presented:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
------------ -----------
<S> <C> <C>
Loss per share
Net loss $ (574,691) $ (63,913)
=========== ===========
Weighted average shares outstanding 2,017,170 2,000,000
----------- -----------
Basic and diluted loss per share $ (0.28) $ (0.03)
=========== ============
</TABLE>
Series A Preferred Stock, convertible into 1,386,666 and 1,333,333
shares of common stock, were outstanding during the fiscal years ended January
2, 1999, and January 3, 1998, respectively, which were not included in the
computation of diluted earnings per share because to do so would be
antidilutive.
There were stock options outstanding at January 2, 1999, to purchase
280,000 shares of common stock which were not included in the computation of
diluted earnings per share because to do so would be antidilutive.
NOTE D - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
------------ ------------
<S> <C> <C>
Trade receivables $ 2,241,801 $ 3,401,519
Retainage receivables 608,481 361,124
Allowance for doubtful accounts (75,000) (85,000)
----------- -----------
2,775,282 3,677,643
Less retainage receivables due in over one year 153,021 153,021
----------- -----------
$ 2,622,261 $ 3,524,622
=========== ===========
</TABLE>
The Company sells clarifier components to general contractors for use
in building and maintaining wastewater treatment facilities operated by
government municipalities. Sales of these components under contracts generally
require retainage provisions which become due upon completion of the entire
contract. Retainage receivables expected to be collected after one year are
included in other assets in the accompanying balance sheets.
NOTE E - INVENTORIES
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $ 327,412 $ 320,826
Work-in-process 362,255 356,763
Finished goods 469,878 466,613
---------- ----------
$1,159,545 $1,144,202
========== ==========
</TABLE>
Had the FIFO method of valuing inventory been used, the value of
inventories would not have been significantly different as of January 2, 1999,
and January 3, 1998.
F-13
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE F - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated January 2, January 3,
useful lives 1999 1999
------------- ---------- ----------
<S> <C> <C> <C>
Land - $ 56,000 $ 56,000
Buildings and improvements 10 - 15 years 976,155 968,826
Machinery and equipment 3 - 7 years 860,612 690,935
---------- ----------
1,892,767 1,715,761
Less accumulated depreciation 703,944 483,599
1,188,823 1,232,162
========== ==========
</TABLE>
Depreciation expense was $220,345 and $199,668 for the fiscal years
ended January 2, 1999, and January 3, 1998, respectively.
Machinery and equipment as of January 2, 1999, and January 3, 1998,
includes $448,236 and $299,816, respectively, of equipment under capital leases,
with accumulated depreciation of $192,731 and $108,576, respectively.
NOTE G - OTHER ASSETS
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Retainage receivables due in over one year $153,021 $153,021
Deferred financing, net 152,773 78,749
Patents, net 80,334 54,668
-------- --------
$386,128 $286,438
======== ========
</TABLE>
F-14
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE H - LINES OF CREDIT AND LONG-TERM DEBT
On September 30, 1998, Polychem entered into a three year loan and security
agreement (the Agreement) with a commercial lender which provided to Polychem a
revolving credit line up to $3,500,000 based upon eligible accounts receivable
and inventory, as defined. The revolving credit line bears interest at the index
rate, based on the rate for 30-day dealer paper, plus 4.75% (9.65% at January 2,
1999). The Agreement also provided for a term loan for $1,500,000, secured by
real estate and equipment, with interest at the index rate plus 6.5% (11.4% at
January 2, 1999). At January 2, 1999, the Company was not in compliance with
certain financial covenants contained in the Agreement with respect to
$2,798,632 of obligations. These instances of noncompliance were waived by the
commercial lender.
At January 2, 1999, there was approximately $286,000 available for advances
under the revolving line of credit.
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- ----------
<S> <C> <C>
Polychem term note payable to the Budd Company, interest at 8%, principal
payable in quarterly installments of $81,305, commencing
March 1998 through March 2003 $1,301,035 $1,626,093
Polychem note payable, interest at index rate plus 6.5% (11.4% at January 2,
1999), payable in 36 monthly installments of $25,000 plus
interest, with a final payment in September 2001 1,400,000 --
Polychem note payable to bank, interest at the bank's prime rate plus 1.5% (10%
at January 3, 1998), payable in 18 monthly installments of $21,155 and 41
monthly installments of $29,617 plus interest, with a
final payment in March 2000 -- 952,164
---------- ----------
2,701,035 2,578,257
Less current portion 625,260 680,660
$2,075,775 $1,897,597
========== ==========
</TABLE>
Maturities on these obligations at January 2, 1999 are as follows:
2000 625,260
2001 625,260
2002 1,125,259
2003 325,256
---- ---------
2,701,035
The carrying amounts of the Company's long-term debt approximate their
fair value as of January 2, 1999, and January 3, 1998. The fair value of the
Company's long-term debt is estimated using discounted cash flow analyses based
on the Company's incremental borrowing rate for similar types of borrowing
arrangements.
Interest expense of $414,123 and $266,831 on the term notes was charged
to operations for the years ended January 2, 1999, and January 3, 1998,
respectively.
F-15
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE I - CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. The weighted
average interest rate was 9.96% and 14.2% for the years ended January 2, 1999,
and January 3, 1998, respectively. Interest expense of $23,184 and $24,553 on
the capitalized lease obligations was charged to operations for the years ended
January 2, 1999, and January 3, 1998, respectively. Future minimum lease
payments as of January 2, 1999, are as follows:
1999 $ 122,958
2000 88,168
2001 44,356
2002 25,439
2003 10,600
----------
Total minimum lease payments 291,521
Less amounts representing interest 36,016
----------
Present value of future minimum lease payments 255,505
Less current portion 103,744
----------
$ 151,761
==========
NOTE J - EMPLOYEE BENEFIT PLANS
1. Defined Contribution Plans
Management and nonunion employees of Polychem participate in a
qualified 401(k) savings plan. Participants can contribute a portion of their
pretax compensation, and Polychem matches 50% of the first 4% of compensation
contributed by the employee. Contributions to the plan for the years ended
January 2, 1999, and January 3, 1998, were $29,093 and $30,270, respectively.
Participants vest in Polychem's contributions pro rata over two to five years.
At the direction of the Board of Directors, Polychem may elect to contribute a
maximum of 9% of each employee's compensation, in addition to the regular match,
if sufficient profits are generated. Discretionary contributions were $-0- and
$93,964 for the years ended
January 2, 1999, and January 3, 1998, respectively.
2. Defined Benefit Pension Plan
Polychem maintains a non-contributory defined benefit pension plan for
hourly union employees. The pension benefits are based on years of service and
the benefit rate in effect at the date of retirement.
F-16
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE J - EMPLOYEE BENEFIT PLANS - Continued
The plan status was as follows:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 2,213,711 $ 2,146,767
Service cost 31,139 28,445
Interest cost 148,996 155,221
Actual gain 120,755 102,831
Benefits paid (185,822) (219,553)
----------- -----------
Benefits obligation at end of year 2,328,779 2,213,711
Change in plan assets
Fair value of plan assets at beginning of year 2,157,972 1,907,362
Actual return on plan assets 316,663 470,163
Employer contribution -- --
Benefits paid (185,822) (219,553)
----------- -----------
Fair value of plan assets at end of year 2,288,813 2,157,972
Funded status 39,966 55,739
Unrecognized net actuarial gain 233,319 221,635
Unrecognized prior service cost (55,872) (61,393)
----------- -----------
Prepaid (accrued) benefit cost $ 217,413 $ 215,981
=========== ===========
Weighted average assumptions as of December 31
Discount rate 6.75% 7.00%
Expected return on plan assets 9.00% 9.00%
Components of net periodic benefit cost
Service cost $ (31,139) $ (28,445)
Interest cost (148,996) (155,221)
Expected return on plan assets 316,663 470,163
Amortization of prior service cost (5,521) (5,521)
Recognized net actuarial loss (132,439) (308,375)
----------- -----------
Net periodic benefit cost $ (1,432) $ (27,399)
=========== ===========
</TABLE>
3. Postretirement Life Insurance Benefits
Polychem provides postretirement life insurance benefits to all union
employees. The life insurance plan provides coverage ranging from $3,000 to
$6,000 for qualifying retired employees. A discount rate of 7% was used in
determining the actuarial present value of the obligations as of January 2,
1999, and January 3, 1998. The unfunded accumulated postretirement benefit
obligation as of January 2, 1999, and January 3, 1998, was $20,000 and $25,782,
respectively, and the net periodic postretirement benefit cost for the years
ended January 2, 1999, and January 3, 1998, was immaterial.
F-17
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE K - INCOME TAXES
The components of income tax expense are as follows:
January 2, January 3,
1999 1998
---------- ----------
Current
Federal $ - $ -
State - 7,240
------- --------
- 7,240
------- --------
Deferred
Federal $ - $ 6,333
State - -
------- --------
- 56,333
------- --------
56,333
$ - $ 63,573
======= ========
The reconciliation of the statutory federal rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
----------- -----------
<S> <C> <C>
Statutory tax (benefit) provision $(195,395) $ (116)
State income tax provision, net of federal tax benefit - 4,778
Increase (decrease) in valuation allowance 189,492 46,944
Nondeductible expense 4,027 5,841
Other 1,876 6,126
--------- -------
$ - $63,573
========= =======
</TABLE>
Under SFAS No. 109, Accounting for Income Taxes, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates.
The tax effect of temporary differences that give rise to deferred
income taxes is as follows:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Accruals and reserves $ 25,500 $ 28,900
Inventory 62,906 49,498
Net operating loss carryforwards 166,406 -
Valuation allowance on deferred tax asset (236,436) (46,944)
Other 60,117 47,039
----------- -----------
$ 78,493 $ 78,493
=========== ===========
</TABLE>
At January 2, 1999, the Company had approximately $500,000 of net
operating loss carryforwards expiring in 2018. A valuation allowance has been
recorded to reflect a net deferred tax asset that management believes is
realizable in future tax years from income from operations.
F-18
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Company leases certain facilities and equipment under
noncancellable operating leases that expire through May 2001. Rent expense of
$31,148 and $30,458 has been charged to operations for the years ended January
2, 1999, and January 3, 1998, respectively. Minimum future rental payments under
leases as of January 2, 1999, are as follows:
1999 $ 27,204
2000 16,695
2001 490
---------
$ 44,389
=========
2. Litigation
ConMat is currently a defendant in a Pennsylvania state court action
filed on January 28, 1999. The plaintiff maintains that Eastwind, his former
employer, breached the terms of his severance agreement, and that the sale of
Polychem to ConMat was part of a conspiracy to avoid payments to him and has
violated Pennsylvania's Uniform Fraudulent Act. Among the other named defendants
is the Chairman and Chief Executive Officer of ConMat who was the former Chief
Executive Officer of Eastwind.
Initially, the plaintiff sought a temporary restraining order and
preliminary injunction seeking to set aside the sale of Polychem to ConMat.
However, by Order dated February 19, 1999, the Court denied plaintiffs' request
for injunctive relief. ConMat subsequently filed preliminary objections to the
complaint seeking to have itself dismissed as a party to the action. Currently,
the parties are preparing briefs relating to ConMat's preliminary objections and
a decision by the Court is not expected until July 1999 at the earliest.
From time to time, ConMat and its subsidiary are parties to routine
litigation which arises in the normal course of business. In the opinion of
management, the resolution of these lawsuits would not have a material adverse
effect on the Company's consolidated financial position or consolidated results
of operations.
NOTE M - EMPLOYMENT AGREEMENTS
In conjunction with the Acquisition, ConMat entered into an Employment
Agreement with ConMat's Chief Executive Officer and Chairman of the Board of
Directors. Under the agreement, he will be paid an annual base salary ranging
from $170,000 to $250,000, depending on ConMat's annual net income. As
additional incentive compensation, upon executing the Employment Agreement, he
received (i) 250,000 shares of common stock for an aggregate purchase price of
$50,000, paid by delivery of a two-year promissory note at 5% interest; and (ii)
250,000 options to purchase shares of common stock at an exercise price of $3.00
per share (the Stock Option Award). 50,000 of the options are exercisable
following registration of the underlying shares of common stock. 100,000 of the
options are exercisable following registration of the underlying common stock if
ConMat realizes $750,000 in pre-tax income during a fiscal year. The remaining
100,000 options are exercisable following registration of the underlying shares
of common stock if ConMat realizes $1,000,000 in pre-tax income during a fiscal
year. All of the options expire ten years from the grant date and are
immediately exercisable upon a merger, sale of assets, or other transaction
resulting in a change of control in which the holders of shares of common stock
receive not less than $5.00 per share.
The Stock Option Award is accounted for under Accounting Principles
Board (APB) Opinion No. 25 and related interpretations. Had compensation cost
for the options been determined based on the fair value of the options on the
grant date consistent with the method of SFAS No. 123, Accounting for Stock
Based Compensation, the Company's net loss per share for the fiscal year ended
January 2, 1999, would not be materially different from the amount reported.
F-19
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE N - INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION
Management has determined that it operates in one industry segment (see
note A).
For the year ended January 2, 1999, Polychem's sales to foreign
customers were approximately $2,826,505, or 31.2% of consolidated net sales, and
consist of sales to customers in Asia (15.2%), Europe (11.0%), and North America
(5.0%). Receivables from these customers were approximately $339,096 as of
January 2, 1999.
For the year ended January 3, 1998, Polychem's sales to foreign
customers were approximately $2,722,000, or 22.4% of consolidated net sales, and
consist of sales to customers in Asia (3.6%), Europe (10.7%), and North America
(8.1%).
F-20
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ConMat Technologies, Inc.
Date: June 16, 1999 By: /s/ Paul A. DeJuliis
------------------------------------
Paul A. DeJuliis
Chief Executive Officer and
Chairman of the Board of Directors
F-21
<PAGE>
Index to Exhibits
Exhibit
Number Description
- ------- -----------
10.8 $1,626,294 Term Note payable by Polychem to The Budd Company dated
March 10, 1995.
10.9 Mortgage and Security Agreement between Polychem and General
Electric Capital Corporation.
27 Financial Data Schedule.
F-22
<PAGE>
EXHIBIT 10.8
THE RIGHTS OF THE HOLDER OF THIS NOTE ARE SUBJECT TO THE TERMS AND PROVISIONS OF
THAT CERTAIN INTERCREDITOR AGREEMENT DATED MARCH 10, 1995 BETWEEN THE BUDD
COMPANY AND CONGRESS FINANCIAL CORPORATION.
TERM NOTE
---------
$1,626,294 Philadelphia, Pennsylvania
Dated: March 10, 1995
FOR VALUE RECEIVED, POLYCHEM CORPORATION, a corporation
organized under the laws of the Commonwealth of Pennsylvania, having its
principal office at 275 Geiger Road, Philadelphia, PA 19115 ("Maker"), promises
to pay to the order of THE BUDD COMPANY, a Michigan corporation, having its
principal office at 3155 West Big Beaver Road, Box 2601, Troy, MI 48084
("Payee"), or at such other place as the holder hereof may from time to time
designate in writing, the principal sum of ONE MILLION FIVE HUNDRED AND ELEVEN
THOUSAND DOLLARS ($1,511,000), lawful money of the United States, on or before
March 31, 2003 (the "Maturity Date"), which principal sum shall bear interest as
set forth below.
1. Maker, Payee and The Eastwind Group, Inc. ("Surety") have
entered into an Asset Purchase Agreement of even date herewith ("Asset
Agreement"), pursuant to which Maker has agreed to purchase certain assets and
assume certain liabilities of the Polychem Division of the Payee. This Term Note
evidences Maker's obligation to pay Payee that portion of the Purchase Price in
connection with the Asset Agreement not paid in cash or by delivery of the
Retainage Note at Closing. This Term Note is specifically subject to Section
13.8 of the Asset Agreement, which is incorporated herein by reference.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Asset Agreement.
2. (a) Maker shall pay the principal due hereunder in twenty
(20) equal consecutive quarterly installments ("Regular Quarterly Principal
Payments") commencing on the third (3rd) anniversary of the last day of the
month during which Closing occurs, and continuing on the last day of each third
month thereafter, until the principal amount hereof is fully paid.
(b) Notwithstanding subsection (a) above, but subject to
subsection (c) and Sections 5, 6 and 7 below, if the amount of any Regular
Quarterly Principal Payment exceeds an amount equal to the Net Cash Flow of
Maker for its last fiscal quarter ending prior to the date on which such Regular
Quarterly Principal Payment is due (a "Related Fiscal Quarter"), then Maker may
defer payment of the excess, but not more than twenty-five percent (25%) of the
amount of such Regular Quarterly Principal Payment, which shall be accrued
("Accrual") and shall continue to bear interest as set forth in Section 3 below.
All Accruals and interest thereon shall be paid immediately to the extent that
Maker's Net Cash Flow for any subsequent fiscal
<PAGE>
quarter exceeds the next Regular Quarterly Principal Payment due at or after the
and of such fiscal quarter.
(c) Maker shall calculate its Net Cash Flow and deliver
such calculation to Payee as soon as possible after the end of each of its
fiscal quarters, but in any event within fifteen (15) days thereafter, and shall
deliver to Payee any, work papers, financial statements and other books and
records requested by Payee in connection with such calculation.
(d) Notwithstanding anything contained in subsection (b)
above, the entire principal amount hereof, including all Accruals under
subsection (b) and all interest due hereunder, shall be due and payable on the
Maturity Date.
(e) For purposes of this Term Note, "Net Cash Flow" for any
fiscal quarter shall mean the net income of Maker plus non-cash expenses
included in the calculation of net income, less payments of principal which are
due under the terms of that certain Loan and Security Agreement with Congress
Financial Corporation of even date herewith (or any amendment, restatement or
refinancing thereof) and are actually paid (but not including any prepayment,
accelerated payment or payment made pursuant to any amendment or modification of
such Loan Agreement), plus or minus any net change in working capital from the
prior fiscal quarter, plus the amount of any capital expenditures up to but not
exceeding the amount of depreciation of property, plant and equipment owned by
maker on the date hereof. Such calculations shall be made on a cash basis for
each fiscal quarter. Except to the extent otherwise specifically defined herein,
all financial terms used herein shall have the meanings ascribed thereto under
generally accepted accounting principles, consistently applied ("GAAP"). All
calculations under this Term Note shall be made in accordance with GAAP, in a
consistent manner and consistent with the application of such principles in the
preparation of the Maker's financial statements.
3. The unpaid principal balance under this Term Note shall
bear interest at the rate of eight percent (8%) per annum commencing on the date
hereof through and including the Maturity Date hereof. Interest on the unpaid
principal balance hereof shall be paid quarterly beginning on the last day of
the third month following the end of the month in which Closing occurs and
continuing on the last day of each third month thereafter, until the principal
amount hereof is fully paid. No payment of interest may be deferred or accrued.
4. Notwithstanding Section 3 above, any payment of principal
and, to the extent permitted by law, interest, of or on this Term Note which is
not paid in full when due shall bear interest at a rate per annum of twelve
percent (12%) (the "Default Rate"), payable on demand.
5. Notwithstanding the other provisions of this Term Note to
the contrary, the entire principal amount, including Accruals, as well as all
interest and other amounts due hereunder, shall accelerate and become
immediately due and payable upon (a) the conveyance,
2
<PAGE>
transfer, sale or assignment of a substantial portion of the Maker's business or
assets, (b) the assumption by any person or entity of a substantial portion of
the Maker's liabilities or obligations, or (c) the transfer, sale or assignment
of more than fifty percent (50%) of the Maker's voting securities or equity
securities.
6. Maker shall give written notice to Payee immediately upon
the occurrence of an Event of Default (as hereinafter defined) or of any event
or occurrence which, with the passage of time or the giving of notice would
constitute an Event of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:
(a) if any payment hereunder is not paid when due, whether
principal, interest or otherwise, or any other event of default, default, breach
or violation shall occur under this Term Note; or
(b) if any event of default, default, breach or violation
shall occur with respect to any obligation or liability of the maker or the
Surety to the Payee under the Surety Agreement of even date herewith.
(c) if the Maker becomes insolvent or makes an assignment
for the benefit of creditors, or if any petition is filed by or against the
Maker under any provision of any state or federal law or statute, including
without limitation, any provision of the Bankruptcy Reform Act of 1978, as
amended, alleging that the Maker is insolvent or unable to pay debts as they
mature which, in the case of an involuntary proceeding, shall continue for sixty
(60) days without being stayed, set aside or vacated;
(d) if (A) there shall be declared in writing a breach of
or a default under any other instrument, document or agreement respecting
borrowed money including without limitation the Loan and Security Agreement of
even date herewith between Maker and Congress Financial (and any amendment,
restatement, or refinancing thereof) or (B) the creditor thereunder shall cease
making additional loans and seek to enforce or exercise generally its remedies
with respect thereto against its collateral or otherwise; or
(e) if a judgment for the payment of money in excess of
$50,000 or judgments in the aggregate in excess of $100,000 shall be rendered
against Maker and the same shall remain undischarged for a period of 30 days
during which execution shall not be effectively stayed.
7. Upon the occurrence of an Event of Default, the outstanding
balance of this Term Note, including without limitation all Accruals, interest
and other sums due hereunder, shall be and become due and payable immediately
without presentment, protest, notice or demand to or upon Maker or any surety,
and Payee shall have such rights and remedies in respect of such sums as
provided by applicable law or in equity or under this Term Note. In the event of
any Event of Default, Payee may also recover from Maker all costs and other
expenses in
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connection therewith, together with reasonable attorneys' fees, together with
interest thereon and on any judgment obtained by Payee, at the Default Rate,
including interest at that rate from and after the date of any execution,
judicial or foreclosure sale until actual payment is made to Payee of the full
amount due Payee.
8. Payments hereunder shall be applied first to Accruals,
second to interest and other sums other than principal then due, third to
principal payments due but unpaid, and last to principal in the inverse order of
maturity. No prepayment of principal shall reduce the amounts of scheduled
installments or relieve Maker from the obligation of paying any scheduled
installment on each installment payment date, until the unpaid principal has
been paid in full.
9. Maker, all endorsers hereon and all sureties hereof,
jointly and severally, waive presentment, demand, notice of demand, protest,
notice of protest and notice of nonpayment or dishonor of this Term Note, and
all other notices in connection with the delivery, acceptance, performance,
default or enforcement of the payment of this Term Note. The granting, without
notice, of any extension of time for the payment of any sum due under this Term
Note or for the performance of any covenant, condition or agreement in
connection herewith, or the taking or release of security or other or additional
guaranties with respect thereto, shall in no way release or discharge the
liability of Maker or of any endorsers or any sureties. Maker and all endorsers
and sureties agree that additional makers, endorsers or sureties may become
parties hereto without notice to them or affecting their liability hereunder.
10. This Term Note shall be the joint and several obligation
of maker and all endorsers hereon and all sureties thereof and shall be binding
upon them and their successors and assigns. All of the rights and remedies given
to Payee hereunder and all rights and remedies arising under applicable law
shall be cumulative and concurrent, and may be pursued singly, successively, or
together at the sole discretion of Payee and may be exercised as often as
occasion therefor shall occur. The exercise by Payee of any of the rights and
remedies, to which Payee is entitled hereunder or under applicable law-shall not
constitute a waiver of any other remedy to which Payee may be so entitled. In
addition, the failure of Payee to exercise any right or remedy to which Payee is
entitled hereunder or under applicable law shall in no event be construed as a
waiver or release thereof.
11. Maker hereby waives and releases all errors, defects and
imperfections in any proceedings instituted by Payee under the term of this Term
Note, as well as all benefit that might accrue to Maker by virtue of any present
or future laws exempting any property, real or personal, of Maker, or any part
of the proceeds arising from any sale of any such property, from attachment,
levy, or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered on this Term Note or in any action to foreclose
on any collateral security, exemption from civil process, or extension of time
for payment; and Maker agrees that any real estate that may be levied upon
pursuant to a judgment obtained by virtue hereof, on any writ of execution
issued thereon, may be sold upon any such writ in whole or in part in any order
desired by Payee.
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12. THE MAKER AND THE PAYEE (BY ACCEPTANCE HEREOF) HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY THE
MAKER OR THE PAYEE MAY HAVE IN ANY ACTION OR PROCEEDING, IN LAW, OR IN EQUITY,
IN CONNECTION, WITH THIS AGREEMENT OR THE TRANSACTIONS RELATED THERETO. THE
MAKER REPRESENTS AND WARRANTS THAT NO REPRESENTATIVE OR AGENT OF THE PAYEE HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE PAYEE WILL NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THIS RIGHT TO JURY TRIAL WAIVER. THE MAKER
ACKNOWLEDGES THAT THE PAYEE HAS BEEN INDUCED TO ACCEPT THIS AGREEMENT BY, AMONG
OTHER THINGS, THE PROVISIONS OF THIS SECTION.
13. THE MAKER HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR
ATTORNEYS OR THE PROTHONOTARY OR CLERK OF ANY COURT OF RECORD IN THE
COMMONWEALTH OF PENNSYLVANIA OR ANY OTHER STATE UPON THE FAILURE OF THE MAKER TO
PAY WHEN DUE ANY SUM PAYABLE BY THE MAKER HEREUNDER TO APPEAR FOR AND CONFESS
JUDGMENT AGAINST THE MAKER FOR SUCH SUMS AS SHALL HAVE BECOME DUE UNDER THIS
AGREEMENT, IN EITHER CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT,
WITHOUT STAY OF EXECUTION AND WITH THE GREATER OF FIVE PERCENT (5%) OF SUCH SUMS
OR $7,000 ADDED AS A REASONABLE ATTORNEY'S FEE FOR COLLECTION. THE MAKER HEREBY
WAIVES THE RIGHT OF INQUISITION ON ANY REAL ESTATE LEVIED ON, VOLUNTARILY
CONDEMNS THE SAME, AUTHORIZES THE PROTHONOTARY OR CLERK TO ENTER UPON THE WRIT
OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREES THAT SAID REAL ESTATE MAY BE
SOLD ON A WRIT OF EXECUTION; AND ALSO WAIVES AND RELEASES ALL RELIEF FROM ANY
AND ALL APPRAISEMENT, STAY OR EXEMPTION LAW OF ANY STATE NOW IN FORCE OR
HEREAFTER ENACTED. THE MAKER ALSO HEREBY WAIVES ITS RIGHT TO OBJECT TO AND
RELEASES ALL PROCEDURAL ERRORS IN SUCH PROCEEDINGS. IF A COPY OF THIS AGREEMENT,
VERIFIED BY AFFIDAVIT OF THE PAYEE OR SOMEONE ON BEHALF OF THE PAYEE, SHALL HAVE
BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL
AGREEMENT AS A WARRANT OF ATTORNEY. SUCH AUTHORITY AND POWER TO APPEAR FOR AND
ENTER JUDGMENT AGAINST THE MAKER SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF,
AND JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME AS OFTEN AS THERE
IS OCCASION THEREFOR.
14. All notices and deliveries in connection with this Term
Note shall be given by deposit in the United States mail, return receipt
requested, addressed as set forth on page one hereof, and shall be effective an
receipt by the addressee.
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15. If any provision of this Term Note is held to be invalid
or unenforceable by a court of competent jurisdiction, the other provisions of
this Term Note shall remain in full force and effect and shall be liberally
construed in favor of Payee in order to effect the provisions of this Term Note.
In addition, in no event shall the rate of interest payable under this Term Note
exceed the maximum rate of interest permitted to be charged by applicable law
(including choice of law rules) and any interest paid in excess of such
permitted rate shall be refunded to Maker. Such refund shall be made by
application of the excessive amount of interest paid against any sums
outstanding and shall be applied in such order as Payee may determine. If the
excessive amount of interest paid exceeds the sums outstanding the portion
exceeding the said sums outstanding shall be refunded in cash by Payee. Any such
crediting or refund shall not cure or waive any Event of Default by Maker
hereunder. Maker agrees, however, that in determining whether or not any
interest payable under this Term Note exceeds the highest rate permitted by law,
any non-principal payment including, without limitation, prepayment fees and
late charges, shall be deemed to the extent permitted by law, to be an expense,
fee, premium or penalty rather than interest.
16. Payee shall not be deemed, by any act of omission or
commission, to have waived any of its rights or remedies hereunder unless such
waiver is, in writing and signed by Payee, and then only to the extent
specifically set forth in the writing. A waiver on one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy to a
subsequent event.
17. This Term Note shall be governed by and construed in
accordance with the laws, including equitable principles but without regard to
principles of conflict of laws, of the Commonwealth of Pennsylvania, in all
respects.
MAKER REPRESENTS AND ACKNOWLEDGES THAT IT HAS REVIEWED ALL OF
THE PROVISIONS OF THIS TERM NOTE WITH AN ATTORNEY, INCLUDING WITHOUT LIMITATION
PARAGRAPHS 12 AND 13. THE MAKER UNDERSTANDS THAT THE PROVISIONS OF PARAGRAPHS 12
AND 13 INVOLVE THE WAIVER OF CERTAIN CONSTITUTIONAL RIGHTS, AND ACKNOWLEDGES
THAT THE MAKER HAS KNOWINGLY AND VOLUNTARILY WAIVED SUCH RIGHTS AFTER REVIEWING
THE PROVISIONS OF PARAGRAPHS 12 AND 13 WITH ITS ATTORNEY.
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<PAGE>
IN WITNESS WHEREOF, the Maker, intending to be legally bound
hereby, has executed these presents the day and year first written above.
Attest: (SEAL) POLYCHEM CORPORATION
By: /s/ John R. Thach By: /s/ Paul A. DeJuliis
------------------------- -------------------------
John R. Thach Paul A. DeJuliis
Secretary Chairman, CEO & Treasurer
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EXHIBIT 10.9
Record and Return to:
I hereby certify that the address of Lender is:
201 High Ride Road
Stamford, CT 06927
Attn: Polychem Corpporation Account Manger
/s/
- -----------------------------------------------
On behalf of Lender
THIS IS AN OPEN-END MORTGAGE
SECURING FUTURE ADVANCES UP TO A
MAXIMUM PRINCIPAL AMOUNT OF
$10,300,000 PLUS ACCRUED
INTEREST AND OTHER INDEBTEDNESS AS
DESCRIBED IN 42 PA. C.S.A. ss.8143
OPEN-END MORTGAGE AND SECURITY AGREEMENT
DATE: September 24, 1998
LENDER: General Electric Capital Corporation
201 High Ridge Road
Stamford, CT 06927
Attention: Polychem Corporation
Account Manager
BORROWER: Polychem Corporation
Type of Entity: (Check Applicable Box)
[ ] Individual [X] Corporation
[ ] General Partnership [ ] Limited Partnership
State of Organization: Pennsylvania
Mailing Address: Franklin Avenue & Grant Street, Phoenixville, PA
19460-0527
Attention: Theodore F. Rutkowski, President
MORTGAGED
PREMISES: Street Address: Grant and Franklin Streets
Township/City of: Phoenixville Borough
County of Chester, Commonwealth of Pennsylvania
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1. DEBT; LOAN DOCUMENTS.
Borrower is indebted to Lender in the principal sum of Ten Million Three
Hundred Thousand Dollars ($10,300,000), together with interest thereon, as
evidenced by certain note of even date herewith between Lender and Borrower, as
may be modified, amended, or amended and restated from time to time, together
with certain other notes to be executed (collectively, the "Note").
This indebtedness evidenced by the Note has been or will be advanced
pursuant to a Loan and Security Agreement of even date herewith and certain
other agreements, as may be modified, amended, or amended and restated from time
to time, together with certain other agreements to be executed (collectively the
"Loan Agreement"). This Mortgage is security for the payment and performance to
Lender of the Liabilities (as defined below). Borrower has executed and
delivered to Lender other collateral documents described in or accompanying the
Loan Agreement. This Mortgage, the Loan Agreement, the Note, and all other
guarantees, documents, certificates and instruments executed in connection
therewith as more specifically set forth in the Loan Agreement, as may be
modified, amended or amended and restated from time to time, together with
certain other agreements to be executed are sometimes hereinafter referred to
collectively as the "Loan Documents" or individually as a "Loan Document". The
terms of the Loan Documents are hereby made a part of this Mortgage to the same
extent and with the same effect as if fully set forth herein.
2. LIABILITIES; GRANT OF MORTGAGE. To secure to Lender (i) the repayment of all
sums due under this Mortgage, a guaranty (if any), the Note (and all extensions,
renewals, replacements, substitutions, amendments and modifications thereof) and
the other Loan Documents; (ii) the performance of all terms, conditions and
covenants set forth in the Loan Documents; and (iii) all obligations and
indebtedness of every kind and description of Borrower, as applicable, to Lender
or to any Affiliate (as hereinafter defined), whether primary or secondary,
absolute or contingent, direct or indirect, sole, joint or several, secured or
unsecured, due or to become due, contractual or tortious, arising by operation
of law or other-wise, or now or hereafter existing, and whether incurred by
Borrower, Borrower as principal, surety, endorser, guarantor, accommodation
party or otherwise, including without limitation, principal, interest, fees,
late charges and expenses, including attorneys'fees and/or allocated fees of
Lender's in-house legal counsel (subsections 2 (i), (ii), and (iii)
collectively, the "Liabilities"), Borrower has granted, bargained, sold,
released and conveyed and by these presents does grant, bargain, sell, release
and convey unto Lender, its successors and assigns, all of Borrower's right,
title and interest now owned or hereafter acquired in and to each of the
following (collectively, the "Mortgaged Premises"):
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2.1 All those certain tracts of land set forth above as the Mortgaged
Premises and more particularly described in Schedule "A" attached hereto and
made a part hereof (the "Real Estate");
2.2 Any and all buildings and improvements now or hereafter erected on,
under or over the Real Estate (the "Improvements");
2.3 Any and all estates, rights, tenements, hereditament, privileges,
easements, reversions, remainders and appurtenances of any kind benefitting or
appurtenant to the Real Estate, Improvements or all or any other portion of the
Mortgaged Premises; all means of access to and from the Real Estate,
Improvements or all or any other portion of the Mortgaged Premises, whether
public or private; all streets, alleys, passages, ways, water courses, water and
mineral rights relating to the Real Estate, Improvements or all or any other
portion of the Mortgaged Premises; all rights of Borrower as declarant or unit
owner under any declaration of condominium or association applicable to the Real
Estate, Improvements or all or any other portion of the Mortgaged Premises
including, without limitation, all development rights and special declarant
rights; and all other claims or demands of Borrower, either at law or in equity,
in possession or expectancy of, in, or to the Real Estate, Improvements or all
or any other portion of the Mortgaged Premises (all of the foregoing described
in this Section 2.5 herein called the "Appurtenances"); and
2.4 Any and all fixtures, machinery, equipment and other articles of real,
personal or mixed property, belonging to Borrower, at any time now or hereafter
installed in, attached to or situated in or upon the Real Estate, or the
buildings and improvements now or hereafter erected thereon, or used or intended
to be used in connection with the Real Estate, or in the operation of the
buildings and improvements, plant, business or dwelling situate thereon, whether
or not such real, personal or mixed property is or shall be affixed thereto, and
all replacements, substitutions and proceeds of the foregoing (all of the
foregoing herein called the "Service Equipment"), including without limitation:
(i) all appliances, furniture and furnishings; all articles of interior
decoration, floor, wall and window coverings; all office, restaurant, bar,
kitchen and laundry fixtures, utensils, appliances and equipment; all supplies,
tools and accessories; all storm and screen windows, shutters, doors,
decorations, awnings, shades, blinds, signs, trees, shrubbery and other
plantings; (ii) all building service fixtures, machinery and equipment of any
kind whatsoever; all lighting, heating, ventilating, air conditioning,
refrigerating, sprinkling, plumbing, security, irrigating, cleaning,
incinerating, waste disposal, communications, alarm, fire prevention and
extinguishing systems, fixtures, apparatus, machinery and equipment; all
elevators, escalators, lifts, cranes, hoists and platforms; all pipes, conduits,
pumps, boilers, tanks, motors, engines, furnaces and compressors; all dynamos,
transformers and generators; (iii) all building materials, building machinery
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and building equipment delivered on site to the Real Estate during the course
of, or in connection with any construction or repair or renovation of the
buildings and improvements; (iv) all parts, fittings, accessories, accessions,
substitutions and replacements therefor and thereof; and (v) all files, books,
ledgers, reports and records relating to any of the foregoing;
2.5 Any and all leases, subleases, tenancies, licenses, occupancy agreements
or agreements to lease now or hereafter all or any portion of the Real Estate,
Improvements, Service Equipment or"all or any other portion of the Mortgaged
Premises and all extensions, renewals, amendments, modifications and
replacements thereof, and any options, rights of first refusal or guarantees
relating thereto (collectively, the "Leases"); all rents, income, receipts,
revenues, security deposits, escrow accounts, reserves, issues, profits, awards
and payments of any kind payable under the Leases or otherwise arising from the
Real Estate, Improvements, Service Equipment or all or any other portion of the
Mortgaged Premises including, without limitation, minimum rents, additional
rents, percentage rents, parking, maintenance and deficiency rents
(collectively, the "Rents"); all of the following personal property
(collectively referred to as the "Contracts"): all accounts, general intangibles
and contract rights (including any right to payment thereunder, whether or not
earned by performance) of any nature relating to the Real Estate, Improvements,
Service Equipment or all or any other portion of the Mortgaged Premises or the
use, occupancy, maintenance, construction, repair or operation thereof; all
management agreements, franchise agreements, utility agreements and deposits,
building service contracts, maintenance contracts, construction contracts and
architect's agreements; all maps, plans, surveys and specifications; all
warranties and guaranties; all permits, licenses and approvals; and all
insurance policies, books of account and other documents, of whatever kind or
character, relating to the use, construction upon, occupancy, leasing, sale or
operation of the Real Estate, Improvements, Service Equipment or all or any
other portion of the Mortgaged Premises;
2.6 Any and all "proceeds" of any of the above-described Real Estate,
Improvements, Service Equipment, Leases, Rents, Contracts and Appurtenances,
which term "proceeds" shall have the meaning given to it in the Pennsylvania
Uniform Commercial Code (collectively, the "Proceeds") and shall additionally
include whatever is received upon the use, lease, sale, exchange, transfer,
collection or other utilization or any disposition or conversion of any of the
Real Estate, Improvements, Service Equipment, Leases, Rents, Contracts and
Appurtenances, voluntary or involuntary, whether cash or non-cash, including
proceeds of insurance and condemnation awards, rental or lease payments,
accounts, chattel paper, instruments, documents, contract rights, general
intangibles, equipment and inventory.
TO HAVE AND TO HOLD the above granted and conveyed Mortgaged Premises, or
mentioned and intended so to be, with the appurtenances, unto Lender, its
successors and assigns, forever.
3. FUTURE ADVANCES. This Mortgage shall secure any additional loans as well as
any and all present or future advances and readvances under the Liabilities made
by Lender to or for the benefit of Borrower or the Mortgaged Premises, all of
which shall be entitled to the benefits of an Open-End Mortgage under 42
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Pa.C.S.A. ss.8143 and shall have the same lien priority as if the future loans,
advances or readvances were made as of the date hereof including, without
limitation: (i) principal, interest, late charges, fees and other amounts due
under the Liabilities or this Mortgage; (ii) all advances by Lender to Borrower
or any other person to pay costs of outstanding indebtedness; (iii) all advances
made or costs incurred by Lender for the payment of real estate taxes,
assessments or other governmental charges, maintenance charges, insurance
premiums, appraisal charges, environmental inspection, audit, testing or
compliance costs, and costs incurred by Lender for the enforcement and
protection of the Mortgaged Premises or the lien of this Mortgage; and (iv) all
legal fees, costs and other expenses incurred by Lender by reason of any de '
fault or otherwise in connection with the Liabilities. Borrower agrees that if,
at any time during the term of this Mortgage or following a foreclosure hereof,
Borrower fails to perform or observe any covenant or obligation under this
Mortgage including, without limitation, payment of any of the foregoing, Lender
may (but shall not be obligated to) take such steps as are reasonably necessary
to remedy any such nonperformance or nonobservance and provide payment thereof.
All amounts advanced by Lender shall be added to the amount secured by this
Mortgage and the other Loan Documents, and shall be due and payable as set forth
in the Loan Documents. Borrower's obligations hereunder shall be continuing and
shall survive notwithstanding a foreclosure of this Mortgage.
4. ASSIGNMENT OF LEASES.
4.1 Borrower hereby conveys, transfers and assigns to Lender all Leases and
Rents. Borrower shall, upon demand, deliver to Lender an executed copy of each
such Lease. This assignment shall continue in effect until the Liabilities are
paid in full and this Mortgage is satisfied or discharged of record; however, so
long as no Event of Default (as defined below) exists, Borrower shall have a
license to collect, and may retain, use and enjoy the Rents as they become due,
but not prior to accrual, subject to the terms and conditions set forth in the
Assignment of Leases. Such license granted to Borrower shall be immediately
revoked without further notice or demand upon the occurrence of an Event of
Default.
4.2 Borrower shall timely perform all of its obligations under the Leases.
Borrower represents and warrants that: (i) there are no leases or agreements to
lease all or any part of the Real Estate now in effect, except those
specifically set forth in, and assigned to Lender by, the Assignment of Leases;
and (ii) there is no assignment or pledge of any rents, issues or profits of or
from the Mortgaged Premises now in effect, except pursuant to the Assignment of
Leases, and Borrower shall not make any assignment or pledge thereof to anyone
other than Lender until the satisfaction in full of the Liabilities.
4.3 Borrower shall not, without the prior written consent of Lender: (i)
enter into any lease of all or any portion of the Mortgaged Premises; (ii)
amend, modify, terminate or accept a surrender of any Lease; or (iii) collect or
accept rent from any tenant of the Mortgaged Premises for a period of more than
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one month in advance. Should Lender consent to Borrower entering into any such
lease, Borrower agrees to provide any further documents which Lender may
require, in its sole discretion.
5. SECURITY AGREEMENT. This Mortgage constitutes a security agreement under the
Pennsylvania Uniform Commercial Code (the "Code") and shall be deemed to
constitute a fixture financing statement. Borrower hereby grants to Lender a
security interest in the personal and other property included in the Mortgaged
Premises, and all replacements of, substitutions for, and additions to, such
property, and the proceeds thereof. Borrower shall, at Borrower's own expense,
execute, deliver, file and refile any financing or continuation statements or
other security agreements Lender may require from time to time to perfect,
confirm and maintain the lien of this Mortgage with respect to such property.
Without limiting the foregoing, Borrower hereby irrevocably appoints Lender
attorney-in-fact for Borrower to execute, deliver and file such instruments for
or on behalf of Borrower at Borrower's expense, which appointment, being for
security, is coupled with an interest and shall be irrevocable.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS.
6.1 Payment and Performance. Borrower shall (i) pay to Lender all sums
required to be paid by Borrower under the Loan Documents, in accordance with
their stated terms and conditions; (ii) perform and comply with all terms,
conditions and covenants set forth in each of the Loan Documents by which
Borrower is bound; and (iii) perform and comply with all of Borrower's
obligations and duties as landlord under any Leases.
6.2 Title. Borrower possesses an indefeasible estate in fee simple in the
Mortgaged Premises; has good and valid title to all rents, issues and profits
therefrom, and has the right, full power and lawful authority to grant, convey
and assign the same to Lender in the manner and form set forth herein; and this
Mortgage is a valid and enforceable first lien on the Mortgaged Premises.
Borrower hereby covenants that Borrower shall (i) preserve such title and the
validity and priority of the lien of this Mortgage and shall forever warrant and
defend the same to Lender against all lawful claims whatsoever; and (ii)
execute, acknowledge and deliver all such further documents or assurances, and
cause to be done all such further acts as may at any time hereafter be required
by Lender to protect fully the lien of this Mortgage.
6.3 Insurance. (a) Borrower shall obtain and maintain at all times
throughout the term of this Mortgage the following insurance in amounts, with
deductibles and with companies satisfactory to Lender from time to time: (i)
comprehensive general public liability insurance covering all operations of
Borrower; (ii) "All-Risk" fire and extended coverage hazard insurance (together
with vandalism and malicious mischief endorsements) in an aggregate amount not
less than 100% of the full insurable replacement value of the Mortgaged
Premises, including coverage for loss of contents owned by Borrower; (iii)
during the course of any construction, reconstruction, remodeling or repair of
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improvements on the Mortgaged Premises, builders' all- risk extended coverage
insurance in amounts based upon the completed replacement value of the
improvements (excluding roads, foundations, parking areas, paths, walkways and
like improvements), including coverage for loss of contents and endorsed to
provide that occupancy by any person shall not void such coverage; (iv) if the
Mortgaged Premises are required to be insured pursuant to the Flood Disaster
Protection Act of 1973 or the National Flood Insurance Act of 1968, and the
regulations promulgated thereunder, flood insurance in an amount at least equal
to the lesser of the outstanding principal balance of this Mortgage or the
maximum limit of coverage available; (v) insurance which complies with the
workers' compensation and employers' liability laws of all states in which
Borrower shall have employees; (vi) business interruption and/or rent loss
insurance sufficient to pay, for a period of not less than six (6) months,
normal operating expenses of or gross income from the Mortgaged Premises; (vii)
boiler and machinery insurance covering pressure vessels, air tanks, boilers,
machinery, pressure piping, heating, air conditioning and elevator equipment in
such amounts as Lender shall require from time to time, provided that the
Mortgaged Premises contains equipment of such nature; and (viii) such other
insurance as Lender may reasonably require.
(b) Each insurance policy required under this Section 6.3. shall be
written by an insurance company authorized or licensed to do business in
Pennsylvania having an Alfred M. Best Company, Inc. rating of A or higher and a
financial size category of not less than VII, and shall be on such forms and
written by such companies as shall be reasonably approved by Lender.
(c) Each insurance policy required under this Section 6.3. providing
insurance against loss or damage to property, business interruption or rent loss
shall be written or endorsed so as to (i) name Lender as mortgagee under a
Pennsylvania standard mortgagee or secured party endorsement, as the case may
be, or its equivalent; and (ii) make all losses payable directly to Lender,
without contribution (Form 438 BFU or equivalent).
(d) Each insurance policy required under this Section 6.3. providing
public liability coverage shall be written and endorsed so as to name Lender as
a certificate holder with thirty (30) days prior written notice of cancellation.
(e) Each insurance policy required under this Section 6.3. shall contain
a provision (i) requiring the insurer to notify Lender, in writing and at least
thirty (30) days in advance, of any cancellation or material change in the
policy; (ii) waiving all rights of setoff, counterclaim, deduction or
subrogation against Borrower; and (iv) excluding Lender from the operation of
any coinsurance clause.
(f) At least thirty (30) days prior to the expiration of any insurance
policy, Borrower shall furnish evidence satisfactory to Lender that such policy
can be renewed if it is not replaced by its expiration date or is no longer
required by this Section 6.3.
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(g) Borrower shall not take out any separate or additional insurance
with respect to the Mortgaged Premises which is contributing in the event of
loss unless approved by Lender and in conformity with the requirements of this
Section 6.3.
(h) Notwithstanding the foregoing, in the event that Borrower fails to
maintain insurance in accordance with this Section 6.3., and Lender elects to
obtain insurance to protect its interests hereunder, Lender may obtain insurance
in any amount and of any type Lender deems appropriate to protect Lender's
interest only and Lender shall have no duty or obligation to Borrower to
maintain insurance in any greater amount or of any other type for the benefit of
Borrower. All insurance premiums incurred or paid by Lender shall be at
Borrower's sole cost and expense in accordance with Section 3 hereof. Lender's
election to obtain insurance shall not be deemed to waive any Event of Default
(as hereinafter defined) hereunder.
6.4 Taxes and Other Charges. Borrower shall prepare and timely file all
federal, state and local tax returns required to be filed by Borrower and
promptly pay and discharge all taxes, assessments, water and sewer rents, and
other governmental charges imposed upon Borrower, the Mortgaged Premises or on
any of Borrower's other property when due, but in no event after interest or
penalties commence to accrue thereon or become a lien upon such property, except
for those taxes, assessments, water and sewer rents, or other governmental
charges then being contested in good faith by Borrower by appropriate
proceedings and for which Borrower has established on its books or by deposit of
cash with Lender, at the option of Lender, a reserve for the payment thereof in
such amount as Lender may require, and so long as such contest: (i) operates to
prevent collection, stay any proceedings which may be instituted to enforce
payment of such item, and prevent a sale of the Mortgaged Premises to pay such
item; (ii) is maintained and prosecuted with due diligence; and (iii) shall not
have been terminated or discontinued adversely to Borrower. Borrower shall
submit to Lender, upon request, an affidavit signed by Borrower certifying that
all federal, state and local tax returns have been filed to date and all taxes,
assessments, water and sewer rents, and other governmental charges with respect
to Borrower's properties have been paid to date.
6.5 Escrows. If required by Under after an event of default, Borrower shall
pay to Lender at the time of each installment of principal and interest due
under the Note, and commencing with the first payment due after the date of such
request, a sum equal to (a) the amount of the next installment of taxes, water
and sewer rents and assessments levied or assessed against the Mortgaged
Premises, and/or (b) the premiums which will next become due on the insurance
policies required by this Mortgage, all in amounts as estimated by Lender, less
all sums already paid therefor or deposited with Lender for the payment thereof,
divided by the number of payments to become due before one (1) month prior to
the date when such taxes and assessments and/or premiums, as applicable, will
become due, such sums to be held by Lender to pay the same when due. If such
escrow funds are not sufficient to pay such taxes and assessments and/or
insurance premiums, as applicable, as the same become due, Borrower shall pay to
Lender, upon request, such additional amounts as Lender shall estimate to be
sufficient to make up any deficiency. No amount paid to Lender hereunder shall
be deemed to be trust funds but may be commingled with general funds of Lender
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and no interest shall be payable thereon. Upon the occurrence of an Event of
Default, Lender shall have the right, at its sole discretion, to apply any
amounts so held against the Liabilities. If Borrower is not required to pay tax
escrows pursuant to this Section 6.5., Borrower shall promptly provide to Lender
copies of receipted tax bills, cancelled checks or other evidence satisfactory
to Lender evidencing that such taxes and assessments have been timely paid.
6.6 Transfer of Title. Without the prior written consent of Lender in each
instance, Borrower shall not cause or permit any transfer of the Mortgaged
Premises or any part thereof, whether voluntarily, involuntarily or by operation
of law, nor shall Borrower enter into any agreement or transaction to transfer,
or accomplish in form or substance a transfer, of the Mortgaged Premises. A
"transfer" of the Mortgaged Premises includes: (i) the direct or indirect sale,
transfer or conveyance of the Mortgaged Premises or any portion thereof or
interest therein; (ii) the execution of an installment sale contract or similar
instrument affecting all or any portion of the Mortgaged Premises; (iii) if
Borrower, or any general partner of Borrower, is a corporation, partnership or
limited liability company, the transfer (whether in one transaction or a series
of transactions) of any stock, partnership, limited liability company or other
ownership interests in such corporation, partnership or limited liability
company; (iv) if Borrower, or any general partner of Borrower, is a corporation,
the creation or issuance of new stock by which an aggregate of more than 10% of
such corporation's stock shall be vested in a party or parties who are not now
stockholders; and (v) an agreement by Borrower leasing all or a substantial part
of the Mortgaged Premises for other than actual occupancy by a space tenant
thereunder or a sale, assignment or other transfer of or the grant of a security
interest in and to any Leases.
6.7 No Encumbrances. (a) Borrower shall not create or permit to exist any
mortgage, pledge, lien, security interest (including, without limitation, a
purchase money security interest), encumbrance, attachment, levy, distraint or
other judicial process on or against the Mortgaged Premises or any part thereof
(including, without limitation, fixtures and other personalty), whether superior
or inferior to the lien of this Mortgage, without the prior written consent of
Lender. If any lien or encumbrance is filed or entered without Borrower's
consent, Borrower shall have it removed of record within fifteen (15) days after
it is filed or entered.
(b) By placing or accepting a mortgage, lien or encumbrance of any type,
whether voluntary or involuntary, against the Mortgaged Premises, the holder
thereof shall be deemed to have agreed, without any further act or documentation
being required, that its mortgage, lien or encumbrance shall be subordinate in
lien priority to this Mortgage and to any future amendments, consolidations or
extensions hereof (including, without limitation, amendments which increase the
interest rate on the Note, extend the term of the Liabilities, provide for
future advances secured by this Mortgage, or provide for the release of portions
of the Mortgaged Premises with or without consideration).
(c) The holder of any subordinate mortgage or other lien, whether or not
consented to by Lender, expressly agrees by acceptance of such subordinate
mortgage or other lien that it waives and relinquishes any rights it may have,
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whether under a legal theory of marshalling of assets or any other theory at law
or in equity, to restrain Lender from, or recover damages from Lender as a
result of, Lender exercising, its various remedies hereunder or under any other
documents evidencing or securing the Liabilities, in such order and with such
timing as Lender deems appropriate in its sole discretion.
(d) Lender may, at any time or from time to time, renew, extend or
increase the amount of this Mortgage, alter or modify the terms hereof or of the
Note in any way, waive any of the terms, covenants or conditions hereof or of
the Note in whole or in part, release any portion of the Mortgaged Premises or
any other security, and grant such extensions and indulgences in relation to the
Liabilities as Lender may determine, without the consent of any junior lienor or
encumbrancer or any obligation to give notice of any kind thereto, and without
in any manner affecting the priority or the lien hereof on all or any part of
the Mortgaged Premises.
6.8 Removal of Fixtures. Borrower shall not remove or permit to be removed
from the Mortgaged Premises any fixtures presently or in the future owned by
Borrower as the term "fixtures" is defined by the law in Pennsylvania (unless
such fixtures have been replaced with similar fixtures of equal or greater
utility and value).
6.9 Maintenance and Repair-, Alterations. (a) Borrower shall (i) abstain
from and not permit the commission of waste in or about the Mortgaged Premises;
(ii) keep the Mortgaged Premises, at Borrower's own cost and expense, in good
and substantial repair, working order and condition; (iii) make or cause to be
made, as and when necessary, all repairs and replacements, whether or not
insurance proceeds are available therefor; and (iv) not remove, demolish,
materially alter, discontinue the use of, permit to become vacant or deserted,
or other-wise dispose of all or any part of the Mortgaged Premises. All
alterations, replacements, renewals or additions made pursuant to this Section
6.9 shall automatically become a part of the Mortgaged Premises and shall be
covered by the lien of this Mortgage.
(b) Lender, and any persons authorized by Lender, shall have the right,
but not the obligation, to enter upon the Mortgaged Premises at any reasonable
time to inspect and photograph its condition and state of repair. In the event
any such inspection reveals, in the sole discretion of Lender, the necessity for
any repair, alteration, replacement, cleanup or maintenance, Borrower shall, at
the discretion of Lender, either: (i) cause such work to be effected
immediately; or (ii) promptly establish an interest bearing reserve fund with
Lender in an amount determined by Lender for the purpose of effecting such work.
6.10 Compliance with Applicable Laws. Borrower agrees to observe, conform
and comply, and to cause its tenants to observe, conform and comply with all
federal, state, county, municipal and other governmental or quasi-governmental
laws, rules, regulations, ordinances, codes, requirements, covenants,
conditions, orders, licenses, permits, approvals and zoning and other
restrictions, including without limitation, the Americans with Disabilities Act
of 1990 (collectively, "Legal Requirements"), now or hereafter affecting all or
any part of the Mortgaged Premises, its occupancy or the business or operations
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now or hereafter conducted thereon and the personalty contained therein, within
such time as required by such Legal Requirements. Borrower represents and
warrants that the Mortgaged Premises is in compliance with all Legal
Requirements applicable to the Mortgaged Premises. Borrower further represents
and warrants that Loan proceeds are not being used and are not intended to be
used to facilitate any violations of any Legal Requirements.
6.11 Damage, Destruction and Condemnation. (a) If all or any part of the
Mortgaged Premises shall be damaged or destroyed, or if title to or. the
temporary use of the whole or any part of the Mortgaged Premises shall be taken
or condemned by a competent authority for any- public or quasi-public use or
purpose, there shall be no abatement or reduction in the amounts payable by
Borrower under the Loan Documents and Borrower shall continue to be obligated to
make such payments.
(b) If all or any part of the Mortgaged Premises is partially or
totally damaged or destroyed, Borrower shall give prompt notice thereof to
Lender, and Lender may make proof of loss if not made promptly by Borrower.
Borrower hereby authorizes and directs any affected insurance company to make
payment under such insurance, including return of unearned premiums, to Lender
instead of to Borrower and Lender jointly, and Borrower appoints Lender as
Borrower's attorney-in-fact to endorse any draft thereof, which appointment,
being for security, is coupled with an interest and irrevocable. Lender is
hereby authorized and empowered by Borrower to settle, adjust or compromise, in
consultation and cooperation with Borrower, any claims for loss,'damage or
destruction to the Mortgaged Premises. Borrower shall pay all costs of
collection of insurance proceeds payable on account of such damage or
destruction. Borrower shall have no claim against the insurance proceeds, or be
entitled to any portion thereof, and all rights to the insurance proceeds are
hereby assigned to Lender as additional security for payment of the Liabilities.
Lender shall have the option, in its sole discretion, of paying or applying all
or any part of the insurance proceeds to: (i) reduction of the Liabilities, (ii)
restoration, replacement or repair of the Mortgaged Premises or (iii) Borrower.
(c) Immediately upon obtaining knowledge of the institution of any
proceeding for the condemnation of all or any part of the Mortgaged Premises,
Borrower shall give notice to Lender. Borrower shall, at its sole cost and
expense, diligently prosecute any such proceeding and shall consult with Lender,
its attorneys and experts, and shall cooperate with it in the defense of any
such proceeding. Lender may participate in any such proceeding and Borrower
shall from time to time deliver to Lender all instruments requested by it to
permit such participation. Borrower shall not, without Lender's prior written
consent, enter into any agreement (i) for the taking or conveyance in lieu
thereof of all or any part of the Mortgaged Premises, br (ii) to compromise,
settle or adjust any such proceeding. Borrower shall not, without Lender's prior
written consent, enter into any agreement for the taking or conveyance in lieu
thereof of all or any part of the Mortgaged Premises. AJI awards and proceeds of
condemnation are hereby assigned to Lender, and Borrower, upon request by
Lender, agrees to make, execute and deliver any additional assignments or
documents necessary from time to time to enable Lender to collect the same. Such
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awards and proceeds shall be paid or applied by Lender, in its sole discretion,
to: (i) reduction of the Liabilities; (ii) restoration, replacement or repair of
the Mortgaged Premises in accordance with Lender's standard construction loan
disbursement conditions and requirements; or (iii) Borrower.
(d) Nothing in this Section 6.11. shall relieve Borrower of its duty to
repair, restore, rebuild or replace the Mortgaged Premises following damage or
destruction or partial condemnation if no or inadequate insurance proceeds or
condemnation awards are available to defray the cost of repair, restoration,
rebuilding or replacement.
(e) Notwithstanding the provisions of subparagraphs (b) and (c) above,
in the event that all or any part of the Mortgaged Premises is damaged by fire
or other casualty, and Borrower promptly notifies Lender of its desire to repair
and restore the same, then provided that the following terms and conditions are
and remain fully satisfied by Borrower, Lender shall disburse insurance proceeds
for repair and restoration of the Mortgaged Premises (which may be contained in
an agreement which Lender may require Borrower to sign); otherwise, and to the
extent of any excess proceeds, Lender shall have the right to apply the proceeds
toward reduction of the Liabilities:
(i) no Event of Default shall have occurred;
(ii) Borrower shall have delivered evidence satisfactory to Lender
that the Mortgaged Premises can be fully repaired and restored during a period
of time during which all payments coming due under the Liabilities are fully
covered by the proceeds of business interruption or rental loss insurance
applicable to the loss or damage to the Mortgaged Premises;
(iii) The Tenant under each lease aggregating ten percent (10%) or
more of the rentable space in the Mortgaged Premises has waived in writing its
right to cancel such lease which arose or could have arisen from such casualty;
(iv) the work in performed by a reputable general contractor
satisfactory to Lender under a fixed price or guaranteed maximum price contract
satisfactory to Lender in accordance with plans and specifications satisfactory
to Lender and in compliance with all Legal Requirements, and no work shall
commence until waivers of mechanics' liens have been filed by the general
contractor and all those claiming by, through or under the general contractor;
and
(v) Borrower shall have deposited with Lender for disbursement in
connection with the restoration the greater of: (1) the applicable deductible
under the insurance policies covering the loss; or (2) the amount by which the
cost of restoration of the Mortgaged Premises is estimated by Lender to exceed
the insurance proceeds available for restoration; and
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(vi) The insurance proceeds are held by Lender (or an escrowee
satisfactory to Lender) for disbursement periodically as the work progresses in
amounts not exceeding 90% of the value of labor and materials incorporated into
the restoration. The remaining 10% will be released upon final completion of the
work in accordance with the aforesaid plans and specifications, and upon a
receipt of a release of liens from all contractors and subcontractors engaged in
the restoration; and
(vii) Borrower has paid as and when due all of Lender's costs and
expenses incurred in connection with the collection and disbursement of
insurance proceeds, approval of plans, charges of Lender's inspection
representative and such reasonable fee as may be charged by Lender to monitor
the restoration and disburse the insurance proceeds.
(viii) Borrower shall have delivered evidence satisfactory to
Lender that the Mortgaged Premises can be fully repaired and restored during a
period of time which complies with all applicable laws, and upon completion of
the repairs, the Mortgaged Premises, its use and occupancy shall comply with all
applicable laws, including, without limitations, special exceptions, if any.
6.12 Required Notices. Borrower shall notify Lender within three (3) days
of: (i) receipt of any notice from any governmental or quasi-governmental
authority relating to the structure, use or occupancy of the Mortgaged Premises
or alleging a violation of any Legal Requirements; (ii) a substantial change in
the occupancy or use of all or any part of the Mortgaged Premises; (iii)
Borrower's knowledge of receipt of any notice from the holder of any lien or
security interest in all or any part of the Mortgaged Premises; (iv) Borrower's
knowledge of commencement of any litigation affecting or potentially affecting
the financial ability of Borrower or the value of the Mortgaged Premises; (v)
Borrower's knowledge of a pending or threatened condemnation of all or any part
of the Mortgaged Premises; (vi) Borrower's knowledge of a fire or other casualty
causing damage to all or any part of the Mortgaged Premises; (vii) receipt of
any notice with regard to any Release of Hazardous Substances (as such terms are
defined in Section 9.2. hereof) or any other environmental matter affecting the
Mortgaged Premises or Borrower's interest therein; (viii) receipt of any request
for information, demand letter or notification of potential liability from any
entity relating to potential responsibility for investigation or clean-up of
Hazardous Substances on the Mortgaged Premises or at any other site owned or
operated by Borrower; (ix) receipt of any notice from any tenant of all or any
part of the Mortgaged Premises alleging a default, failure to perform or any
right to terminate its lease or to set-off rents; or (x) receipt of any notice
of the imposition of, or of threatened or actual execution on, any lien on or
security interest in all or any part of the Mortgaged Premises.
6.13 No Credits on Account of the Liabilities. Borrower shall not claim or
demand or be entitled to any credit on account of the Liabilities for any part
of the taxes paid with respect to the Mortgaged Premises or any part thereof and
no deduction shall otherwise be made or claimed from the taxable value of the
Mortgaged Premises, or any part thereof, by reason of this Mortgage.
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6.14 Books and Records. Borrower shall keep and maintain complete and
accurate books and records in accordance with generally accepted accounting
principles consistently applied, reflecting all of the financial affairs of
Borrower and all items of income and expense in connection with the operation of
the Mortgaged Premises. Borrower shall permit representatives of Lender. to
examine and audit Borrower's (and its parent's and its subsidiaries') books and
records, to inspect Borrower's facilities and properties, and to discuss
Borrower's financial condition and the contents of Borrower's financial
statements with Borrower's accountants.
6.15 Right to Reappraise. Lender shall have the right to conduct or have
conducted by an independent appraiser acceptable to Lender appraisals of the
Mortgaged Premises in form and substance satisfactory to Lender at the sole cost
and expense of Borrower; provided, however, that Borrower shall not be obligated
to bear the expense of such appraisals so long as (i) no Event of Default
exists, and (ii) such appraisals are not required by applicable law, rule or
regulation or the interpretation or administration thereof by any governmental
authority or comparable agency charged with the interpretation or administration
thereof. The cost of such appraisals, if chargeable to Borrower as aforesaid,
shall be added to the Liabilities and shall be secured by this Mortgage in
accordance with the provisions of Section 3 hereof.
7. DECLARATION OF NO OFFSET. Borrower represents to Lender that Borrower has no
knowledge of any offsets, counterclaims or defenses to the Liabilities either at
law or in equity. Borrower shall, within three (3) days upon request in person
or within seven (7) days upon request by mail, furnish to Lender or Lender's
designee a written statement in form satisfactory to Lender stating the amount
due under the Liabilities and whether there are offsets or defenses against the
same, and if so, the nature and extent thereof.
8. CHANGE IN LAWS. In the event of the passage, after the date of this Mortgage,
of any law changing in any way the laws now in force for the taxation of
mortgages or debts secured thereby, for state or local purposes, or the manner
of the operation of any such taxes, so as to affect the interest of Lender or
impose upon Lender the obligation to pay the whole or any part of any taxes,
assessments, charges or liens ("Charges") herein required to be paid by
Borrower, then Borrower shall pay the full amount of the Charges; provided that
if payment by Borrower of any Charges would be unlawful or usurious, Lender may,
at Lender's option: (i) declare the Liabilities to be immediately due and
payable; or (ii) pay that portion of the Charges as renders the Liabilities
unlawful or usurious, in which event Borrower shall concurrently therewith pay
the remaining lawful and nonusurious portion of said Charges.
9. ENVIRONMENTAL MATTERS.
9.1 Definitions. For purposes of this Section 9, "Applicable Environmental
Laws" shall mean all Federal, state and local laws, statutes, ordinances and
regulations, now or hereafter in effect, and in each case as amended or
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supplemented from time to time, and any applicable judicial or administrative
interpretation thereof relating to the regulation and protection of human
health, safety, the environment and natural resources (including ambient air,
surface water, groundwater, wetlands, land surface or subsurface strata,
wildlife, aquatic species . and vegetation). Environmental Laws include without
limitation the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 (42 U.S.C. ss.ss. 9601, et seq.) ("CERCLA"); the Hazardous Material
Transportation Act (49 U.S.C. ss.ss. 1801, et seq.); the Federal Insecticide,
Fungicide, and Rodenticide Act (7 U.S.C. ss.ss. 136, et seq.); the Resource
Conservation and Recovery Act (42 U.S.C. ss.ss. 6901, et seq.) ("RCRN"); the
Toxic Substance Control Act (15 U.S.C. ss.ss. 2601 p "se .); the Clean Air (42
U.S.C. ss.ss. 740, et seq.); the Federal Water Pollution Control Act (33 U.S.C.
ss.ss. 1251, et seq.); the Occupational Safety and Health Act (29 U.S.C. ss.ss.
651, et seq..) ("OSHA"); and the Safe Drinking Water Act (42 U.S.C. ss.ss.
300(f), et seq.), the Pennsylvania Solid Waste Management Act, as amended, (35
P.S. ss.6018.101, et seq.); the Pennsylvania Clean Streams Law, as amended (35
P.S. ss.691.1, et seq.); the Pennsylvania Hazardous Sites Cleanup Act, as
amended (35 P.S. ss.6020.101, et seq.); the Pennsylvania Storage Tank and Spill
Prevention Act, as amended (35 P.S. ss.6021.101, et seq.); and the Pennsylvania
Hazardous Material Emergency Planning and Response Act, as amended (35 P.S.
ss.6022.101, et seq.) and any and all regulations promulgated thereunder, and
all analogous state and local counterparts or equivalents. Any terms mentioned
in this Section 9 which are defined in any Applicable Environmental Law shall
have the meanings ascribed to such terms in said laws; provided, however, that
if any of such laws are amended so as to broaden any term defined therein, such
broader meaning shall apply subsequent to the effective date of such amendment.
9.2 Representations, Warranties and Covenants. Borrower represents,
warrants, covenants and Agrees:
(a) Neither Borrower nor the Mortgaged Premises or any occupant thereof
are in violation of or subject to any existing, pending or threatened
investigation or inquiry by any governmental authority pertaining to any
Applicable Environmental Law. Borrower shall not cause or permit the Mortgaged
Premises to be in violation of, or do anything which would subject the Mortgaged
Premises to any remedial obligations under, any Applicable Environmental Law,
and shall promptly notify Lender in writing of any existing, pending or
threatened investigation or inquiry by any governmental authority in connection
with any Applicable Environmental Law. In addition, Borrower shall provide
Lender with copies of any and all material Vritten communications with any
governmental authority in connection with any Applicable Environmental Law,
concurrently with Borrower's giving or receiving of same.
(b) There are no underground storage tanks, radon, asbestos materials,
polychlorinated biphenyls or urea formaldehyde insulation present at or
installed in the Mortgaged Premises. Borrower covenants and agrees that if any
such materials are found to be present at the Mortgaged Premises, Borrower shall
remove or remediate the same promptly upon discovery at its sole cost and
expense.
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(c) Borrower has taken all steps necessary to determine and has
determined that there has been no release, spill, discharge, leak, disposal or
emission (individually a "Release" and collectively, "Releases") of any
Hazardous Material, Hazardous Substance or Hazardous Waste, including gasoline,
petroleum products, explosives, toxic substances, solid wastes and radioactive
materials (collectively, "Hazardous Substances") at, upon, under or within the
Mortgaged Premises. The use which Borrower or any other occupant of the
Mortgaged Premises makes or intends to make of the Mortgaged Premises will not
result in a Release of any Hazardous Substances on or to the Mortgaged Premises.
During the term of this Mortgage, Borrower shall take all steps necessary to
determine whether there has been a Release of any Hazardous Substances on or to
the Mortgaged Premises and if Borrower finds a Release has occurred, Borrower
shall remove or remediate the same promptly upon discovery at its sole cost and
expense.
(d) None of the real property owned and/or occupied by Borrower and
located in the Commonwealth of Pennsylvania, including without limitation, the
Mortgaged Premises, has, to Borrower's knowledge, ever been used by the present
or previous owners and/or operators or will be used in the future to refine,
produce, store, handle, transfer, process, transport, generate, manufacture,
heat, treat, recycle or dispose of Hazardous Substances.
(e) Borrower has not received any notice of violation, request for
information, summons, citation, directive or other communication, written or
oral, from the Pennsylvania Department of Environmental Resources or the United
States Environmental Protection Agency concerning any intentional or
unintentional act or omission on Borrower's or any occupant's part resulting in
the Release of Hazardous Substances into the waters or onto the lands within the
jurisdiction of the Commonwealth of Pennsylvania or into the waters outside the
jurisdiction of the Commonwealth of Pennsylvania resulting in damage to the
lands, waters, fish, shellfish, wildlife, biota, air or other resources owned,
managed, held in trust or otherwise controlled by or within the jurisdiction of
the Commonwealth of Pennsylvania.
(f) The real property owned and/or occupied by Borrower and located in
the Commonwealth of Pennsylvania, including without limitation, the Mortgaged
Premises: (i) are being and have been operated in compliance with all Applicable
Environmental Laws, and all permits required thereunder have been obtained and
complied with in all respects; and (ii) do not have any Hazardous Substances
present excepting small quantities of petroleum and chemical products, in proper
storage containers, as are necessary for the construction or operation of the
commercial business of Borrower and its tenants, and the usual waste products
therefrom ("Permitted Substances").
(g) Borrower's grantor was not required to and did not place a notice in
the deed to the Mortgaged Premises relating to the presence of Hazardous
Substances at the Mortgaged Premises as required by 35 P.S. ss.6018.405.
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(h) Borrower will and will cause its tenants to operate the Mortgaged
Premises in compliance with all Applicable Environmental Laws and, other than
Permitted Substances, will not place or permit to be placed any Hazardous
Substances on the Mortgaged Premises.
(i) No lien hag been attached to or threatened to be imposed upon any
revenue or any real or personal property owned by Borrower, including without
limitation, the Mortgaged Premises, and there is no basis for the imposition of
any such lien based on any governmental action under Applicable Environmental
Laws. Neither Borrower nor any other party has been, is or will be involved in
operations at the Mortgaged Premises which could lead to the imposition of
environmental liability on Borrower, or on any subsequent or former owner of the
Mortgaged Premises, or the creation of an environmental lien on the Mortgaged
Premises. In the event that any such lien is filed, Borrower shall, within
thirty (30) days from the date that Borrower is given notice of such lien (or
within such shorter period of time as is appropriate in the event that the
Commonwealth of Pennsylvania or the United States has commenced steps to have
the Mortgaged Premises sold), either: (i) pay the claim and remove the lien from
the Mortgaged Premises; or (ii) furnish a cash deposit, bond or other security
satisfactory in form and substance to Lender in an amount sufficient to
discharge the claim out of which the lien arises.
(j) In the event that Borrower shall cause or permit to exist a Release
of Hazardous Substances into the waters or onto the lands within the
jurisdiction of the Commonwealth of Pennsylvania, or into the waters outside the
jurisdiction of the Commonwealth of Pennsylvania resulting in damage to the
lands, waters, fish, shellfish, wildlife, biota, air or other resources owned,
managed, held in trust or otherwise controlled by or within the jurisdiction of
the Commonwealth of Pennsylvania, without having obtained a permit issued by the
appropriate governmental authorities, Borrower shall promptly clean up such
Release in accordance with the provisions of all Applicable Environmental Laws.
9.3 Right to Inspect and Cure. Lender shall have the right to conduct or
have conducted by its agents or contractors such environmental inspections,
audits and tests as Lender shall deem necessary or advisable from time to time
at the sole cost and expense of Borrower; provided, however, that Borrower shall
not be obligated to bear the expense of such environmental inspections, audits
and tests so long as (i) no Event of Default exists, and (ii) Lender has no
cause to believe in its sole reasonable judgment that there has been a Release
or threatened Release of Hazardous Substances at the Mortgaged Premises or that
Borrower or the Mortgaged Premises is in violation of any Applicable
Environmental Law. The cost of such inspections, audits and tests, if chargeable
to Borrower as aforesaid, shall be added to the Liabilities and shall be secured
by this Mortgage. Borrower shall, and shall cause each tenant of the Mortgaged
Premises to, cooperate with such inspection efforts; such cooperation shall
include, without limitation, supplying all information requested concerning the
operations conducted and Hazardous Substances located at the Mortgaged Premises.
In the event that Borrower fails to comply with any Applicable Environmental
Law, Lender may, in addition to any of its other remedies under this Mortgage,
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cause the Mortgaged Premises to be in compliance with such laws and the cost of
such compliance shall be added to the sums secured by this Mortgage in
accordance with the provisions of Section 3 hereof.
10. INDEMNIFICATION.
10.1 Borrower hereby indemnifies and agrees to protect, defend and hold
harmless Lender, any entity which "controls" Lender within the meaning of
Section 15 of the Securities Act of 1933, as amended, or is under common control
with Lender, and any member, officer, director, official, agent, employee or
attorney of Lender, and their respective heirs, administrators, executors,
successors and assigns (collectively, the "Indemnified Parties"), from and
against any and all losses, damages, expenses or liabilities of any kind or
nature and from any suits, claims or demands, including reasonable attorneys'
fees incurred in investigating or defending such claim, suffered by any of them
and caused by, relating to, arising out of, resulting from, or in any way
connected with the Loan Documents or the transactions contemplated therein
(unless determined by a final judgment of a court of competent jurisdiction to
have been caused solely by the gross negligence or willful misconduct of the
Indemnified Parties) including, without limitation: (i) disputes with any
architect, general contractor, subcontractor, materialman or supplier, or on
account of any act or omission to act by Lender in connection with the Mortgaged
Premises; (ii) losses, damages (including consequential damages), expenses or
liabilities sustained by Lender in connection with any environmental inspection,
monitoring, sampling or cleanup of the Mortgaged Premises required or mandated
by any Applicable Environmental Law; (iii) any untrue statement of a material
fact contained in information submitted to Lender by Borrower or the omission of
any material fact necessary to be stated therein in order to make such statement
not misleading or incomplete; (iv) the failure of Borrower to perform any
obligations herein required to be performed by Borrower; and (v) the ownership,
construction, occupancy, operation, use or maintenance of the Mortgaged
Premises.
10.2 In case any action shall be brought against Lender or any other
Indemnified Party in respect to which indemnity may be sought against Borrower,
Lender or such other Indemnified Party shall promptly notify Borrower and
Borrower shall assume the defense thereof, including the employment of counsel
selected by Borrower and satisfactory to Lender, the payment of all costs and
expenses, and the right to negotiate and consent to settlement. The failure of
Lender to so notify Borrower shall not relieve Borrower of any liability it may
have under the foregoing indemnification provisions or from any liability which
it may otherwise have to Lender or any of the other Indemnified Parties. Lender
shall have the right, at its sole option, to employ separate counsel in any such
action and to participate in the defense thereof, all at Borrower's sole cost
and expense. Borrower shall not be liable for any settlement of any such action
effected without its consent (unless Borrower fails to defend such claim), but
if settled with Borrower's consent, or if there be a final judgment for the
claimant in any such action, Borrower agrees to indemnify and save harmless
Lender from and against any loss or liability by reason of such settlement or
judgment.
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10.3 The provisions of this Section 10 shall survive the repayment of the
Liabilities and the release or satisfaction of this Mortgage.
11. EVENTS OF DEFAULT. Each of the following shall constitute a default (each,
an "Event of Default") hereunder:
11.1 Non-payment when due of any sum required to be paid to Lender by
Borrower or any guarantor or other individual or entity under any of the Loan
Documents, including without limitation, principal and interest;
11.2 A breach of any covenant contained in Sections 6.3., 6.4, 6.6., 6.7. or
6.12. hereof;
11.3 A breach by Borrower of any other term, covenant, condition, obligation
or agreement under this Mortgage, and the continuance of such breach for a
period of thirty (30) days after written notice thereof shall have been given to
Borrower;
11.4 An Event of Default under any of the other Loan Documents;
11.5 Any representation or warranty made by Borrower or by any other person
providing collateral pursuant to or obligated to perform under any Loan Document
and so long as such person is providing collateral ("Other Obligated Party") in
any Loan Document or to induce Lender to enter into the transactions
contemplated hereunder shall prove to be false, incorrect or misleading in any
material respect as of the date when made;
11.6 The filing by or against Borrower or any Other Obligated Party of a
petition seeking relief, or the granting of relief, under the Federal Bankruptcy
Code or any similar federal or state statute; any assignment for the benefit of
creditors made by Borrower or any Other Obligated Party; the appointment of a
custodian, receiver, liquidator or trustee for Borrower or any Other Obligated
Party or for any of the property of Borrower or such Other Obligated Party, or
any action by Borrower or any Other Obligated Party to effect any of the
foregoing; or if Borrower or any Other Obligated Party becomes insolvent
(however defined) or is not paying its debts generally as they become due;
11.7 The death, dissolution, liquidation, merger, consolidation or
reorganization of Borrower or any Other Obligated Party, or the institution of
any proceeding to effect any of the foregoing;
11.8 A default under any other obligation by Borrower or any Other Obligated
Party in favor of Lender, or under any document securing or evidencing such
obligation, whether or not such obligation is secured by the Mortgaged Premises;
11.9 A material deterioration in the financial condition of Borrower or any
Other Obligated Party or the occurrence of any event which, in the reasonable
opinion of Lender, impairs the financial responsibility of Borrower or any Other
Obligated Party and their ability to repay the Liabilities;
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11.10 The filing, entry or issuance of any judgment, execution, garnishment,
attachment, distraint or lien against Borrower or any Other Obligated Party or
their property, subject to the provisions of Section 6.7(a) hereof, if
applicable; or
11.11 A default under any other obligation secured by the Mortgaged Premises
or any part thereof.
12. REMEDIES. If an Event of Default shall have occurred, Lender may take any of
the following actions (without the obligation to marshall):
12.1 Acceleration. Lender may declare the entire amount of the Liabilities
immediately due and payable as set forth in the Loan Agreement, without
presentment, demand, notice of any kind, protest or notice of protest, all of
which are expressly waived, notwithstanding anything to the contrary contained
in any of the Loan Documents. Lender may also exercise all other remedies set
forth in the Loan Agreement as if an event of default occurred under the Loan
Agreement.
12.2 Possession; CONFESSION OF JUDGMENT. Lender may enter upon and take
possession of the Mortgaged Premises, with or without legal action, and by force
if necessary, collect therefrom all rentals (which term shall also include sums
payable for use and occupation) and, after deducting all costs of collection and
administration expense, apply the net rentals to any one or more of the
following items in such manner and in such order of priority as Lender, in
Lender's sole discretion, may elect: the payment of any sums due under any prior
lien, taxes, water and sewer rents, charges and claims, insurance premiums and
all other carrying charges, and to the maintenance, repair or restoration of the
Mortgaged Premises, or on account of the Liabilities; in and for that purpose
Borrower hereby assigns to Lender all rentals due and to become due under any
lease or leases or rights to use and occupation of the Mortgaged Premises
hereafter created, as well as all rights and remedies provided in such lease or
leases or at law or in equity for the collection of the rentals. FOR THE PURPOSE
OF OBTAINING POSSESSION OF THE MORTGAGED PREMISES FOLLOWING ANY DEFAULT
HEREUNDER OR UNDER ANY OF THE LIABILITIES, BORROWER IRREVOCABLY AUTHORIZES AND
EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY, CLERK OR SIMILAR OFFICER,
OF ANY COURT IN THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, AS ATTORNEY FOR
BORROWER, AS WELL AS FOR THE PERSONS CLAIMING UNDER, BY, OR THROUGH BORROWER, TO
SIGN AN AGREEMENT FOR ENTERING THEREIN AN APPROPRIATE ACTION IN EJECTMENT FOR
POSSESSION OF THE MORTGAGED PREMISES (WITHOUT THE NECESSITY OF FILING ANY BOND
AND WITHOUT ANY STAY OF EXECUTION OR APPEAL) AGAINST BORROWER AND ALL PERSONS
CLAIMING UNDER, BY, OR THROUGH BORROWER, AND THEREIN CONFESS JUDGMENT FOR THE
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RECOVERY BY LENDER OF POSSESSION OF THE MORTGAGED PREMISES FOR WHICH THIS
INSTRUMENT (OR A COPY THEREOF VERIFIED BY AFFIDAVIT) SHALL BE A SUFFICIENT
WARRANT; WHEREUPON A WRIT OF POSSESSION OF THE MORTGAGED PREMISES MAY BE ISSUED
FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER, BORROWER HEREBY
RELEASING AND AGREEING TO RELEASE LENDER AND ANY SUCH ATTORNEY FROM ALL
PROCEDURAL ERRORS AND DEFECTS WHATSOEVER IN ENTERING SUCH ACTION OR JUDGMENT OR
IN CAUSING SUCH WRIT OR PROCESS TO BE ISSUED OR IN ANY PROCEEDING THEREON OR
CONCERNING THE SAME, PROVIDED THAT LENDER SHALL HAVE FILED IN SUCH ACTION AN
AFFIDAVIT MADE ON LENDER'S BEHALF SETTING FORTH THE FACTS NECESSARY TO AUTHORIZE
THE ENTRY OF SUCH JUDGMENT ACCORDING TO THE TERMS OF THIS INSTRUMENTS OF WHICH
FACTS SUCH AFFIDAVIT SHALL BE PRIMA FACIE EVIDENCE. IT IS HEREBY EXPRESSLY
AGREED THAT IF FOR ANY REASON AFTER ANY SUCH ACTION HAS BEEN COMMENCED, THE SAME
SHALL BE DISCONTINUED MARKED SATISFIED OF RECORD, OR TERMINATED OR POSSESSION OF
THE MORTGAGED PREMISES REMAIN IN OR BE RESTORED TO BORROWER OR ANYONE CLAIMING
UNDER, BY, OR THROUGH BORROWER LENDER MAY, WHEREVER AND AS OFTEN AS LENDER SHALL
HAVE THE RIGHT TO TAKE POSSESSION AGAIN OF THE MORTGAGED PREMISES, BRING ONE OR
MORE FURTHER ACTIONS IN THE MANNER HEREINBEFORE SET FORTH TO RECOVER POSSESSION
OF THE MORTGAGED PREMISES AND TO CONFESS JUDGMENT THEREIN AS HEREINABOVE
PROVIDED, AND THE AUTHORITY AND POWER ABOVE GIVEN TO ANY SUCH ATTORNEY SHALL
EXTEND TO ALL SUCH FURTHER ACTIONS IN EJECTMENT AND CONFESSION OF JUDGMENT
THEREIN AS HEREINABOVE PROVIDED, WHETHER BEFORE OR AFTER AN ACTION OF MORTGAGE
FORECLOSURE IS BROUGHT OR OTHER PROCEEDINGS IN EXECUTION ARE INSTITUTED UPON
THIS MORTGAGE OR UPON ANY INSTRUMENT THEN EVIDENCING ANY OF THE LIABILITIES, AND
AFTER JUDGMENT THEREON OR THEREIN AND AFTER A JUDICIAL SALE OF THE MORTGAGED
PREMISES.
12.3 Foreclosure. Lender may institute any one or more actions of mortgage
foreclosure against all or any part of the Mortgaged Premises, or take such
other action at law or in equity for the enforcement of this Mortgage and
realization on the security herein or elsewhere provided for, as the law may
allow, and may proceed therein to final judgment and execution for the entire
unpaid balance of the Liabilities, together with all future advances and any
other sums due by Borrower in accordance with the provisions of this Mortgage,
together with any other sums due in accordance with the Loan Documents, all
costs of suit and attorneys' fees. In case of any sale of the Mortgaged Premises
by judicial proceedings, the Mortgaged Premises may be sold in one parcel or in
such parcels, manner or order as Lender in its sole discretion may elect.
Borrower, for itself and anyone claiming by, through or under it, hereby agrees
that Lender shall in no manner, in law or in equity, be limited, except as
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herein provided, in the exercise of its rights in the Mortgaged Premises or in
any other security hereunder or otherwise appertaining to the Liabilities or any
other obligation secured by this Mortgage, whether by any statute, rule or
precedent which may otherwise require said security to be marshalled in any
manner and Borrower, for itself and others as aforesaid, hereby expressly waives
and releases any right to or benefit thereof. The failure to make any tenant a
defendant to a foreclosure proceeding shall not be asserted by Borrower as a
defense in any proceeding instituted by Lender to collect the Liabilities or any
deficiency remaining unpaid after the foreclosure sale of the Mortgaged
Premises.
12.4 Appointment of Receiver. Upon or at any time after Lender has the right
to file an action to foreclose this Mortgage, Lender may petition the court in
which such action is or might be filed to appoint a receiver of the Mortgaged
Premises. Such appointment may be made either before or after sale, without
notice, without regard to the solvency or insolvency of Borrower at the time of
application for such receiver, without regard to the then value of the Mortgaged
Premises or whether the Mortgaged Premises shall be then occupied as a homestead
or not, and without regard to whether Borrower has committed waste or allowed
deterioration of the Mortgaged Premises, and Lender or any agent of Lender may
be appointed as such receiver. Borrower hereby agrees that Lender has a special
interest in the Mortgaged Premises and absent the appointment of such receiver
the Mortgaged Premises shall suffer waste and deterioration and Borrower further
agrees that it shall not contest the appointment of a receiver and hereby so
stipulates to such appointment pursuant to this paragraph. Such receiver shall
have the power to perform all of the acts permitted Lender pursuant to Section
12.2. above and such other powers which may be necessary or customary in such
cases for the protection, possession, control, management and operation of the
Mortgaged Premises during such period.
12.5 Rights as a Secured Party. Lender shall have, in addition to other
rights and remedies available at law or in equity, the rights and remedies of a
secured party under the Code. Lender may elect to foreclose such of the
Mortgaged Premises as then comprise fixtures pursuant either to the law
applicable to foreclosure of an interest in real estate or to that applicable to
Personal property under the Code. To the extent permitted by law, Borrower
waives the right to any stay of execution and the benefit of all exemption laws
now or hereafter in effect.
12.6 Excess Monies. Lender may apply on account of the Liabilities any
unexpended monies still retained by Lender that were paid by Borrower to Lender:
(i) for the payment of, or as security for the payment of taxes, assessments or
other governmental charges, insurance premiums, or any other charges; or (ii) to
secure the performance of some act by Borrower.
12.7 Other Remedies. Lender shall have -the right, from time to time, to
bring an appropriate action to recover any sums required to be paid by Borrower
under the terms of this Mortgage, as they become due, without regard to whether
or not any other Liabilities shall be due, and without prejudice to the right of
Lender thereafter to bring an action of mortgage foreclosure, or any Other
action, for any default by Borrower existing at the time the earlier
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action was commenced. In addition, Lender shall have the right to set-off all or
any part of any amount due by Borrower to Lender under any of the Liabilities,
against any indebtedness, liabilities or obligations owing by Lender or any
Affiliate in any capacity to Borrower, including any obligation to disburse to
Borrower any funds or other property on deposit with or otherwise in the
possession, control or custody of Lender.
13. CONTINUING ENFORCEMENT OF MORTGAGE. If, after receipt of any payment of all
or any part of the Liabilities, Lender is compelled or agrees, for settlement
purposes, to surrender such payment to any person or entity for any reason
(including, without limitation, a determination that such payment is void or
voidable as a preference or fraudulent conveyance, an impermissible setoff, or a
diversion of trust funds), then this Mortgage and the other Loan Documents shall
continue in full force and effect, and Borrower shall be liable for, and shall
indemnify, defend and hold harmless Lender with respect to the full amount so
surrendered. The provisions of this Section shall survive the satisfaction or
release of this Mortgage and shall remain effective notwithstanding the payment
of the Liabilities, the cancellation of the Note, the release of an' y security
interest, lien or encumbrance securing the Liabilities or any other action which
Lender may have taken in reliance upon its receipt of such payment for the
period expiring upon the date Lender cannot be compelled to surrender such
payment. Any cancellation, release or other such action by Lender shall be
deemed to have been conditioned upon any payment of the Liabilities having
become final and irrevocable.
14. MISCELLANEOUS.
14.1 Remedies Cumulative. The rights and remedies of Lender as provided in
this Mortgage, in any other Loan Document, and in the warrants of attorney
contained herein and therein, shall be cumulative and concurrent, may be pursued
separately, successively or together, may be exercised as often as occasion
therefor shall arise, and shall be in addition to any other rights or remedies
conferred upon Lender at law or in equity. The failure, at any one or more
times, of Lender to assert the right to declare the Liabilities due, grant any
extension of time for payment of the Liabilities, take other or additional
security for the payment thereof, release any security, change any of the terms
of the Loan Documents, or waive or fail to exercise any right or remedy under
any Loan Document shall not in any way affect this Mortgage or the rights of
Lender.
14.2 Integration. This Mortgage and the other Loan Documents constitute the
sole agreement of the parties with respect to the transaction contemplated
hereby and supersede all oral negotiations and prior writings with respect
thereto.
14.3 Attorneys' Fees and Expenses. If Lender retains the services of counsel
by reason of a claim of a default or an Event of Default hereunder or under any
of the other Loan Documents, or on account of any matter involving Borrower's
title to the Mortgaged Premises or the security interest intended to be granted
hereby, or for examination of matters subject to Lender's approval under the
Loan Documents, all costs of suit and all reasonable attorneys'fees
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(and/or allocated fees of Lender's in-house legal counsel) and such other
reasonable expenses so incurred by Lender shall forthwith become due and
payable, on demand, and shall be secured hereby.
14.4 No Implied Waiver. Lender shall not be deemed to have modified or
waived any of its rights or remedies hereunder unless such modification or
waiver is in writing and signed by Lender, and then only to the extent
specifically set forth therein. A waiver in one event shall not be construed as
continuing or as a waiver of or bar to such right or remedy on a subsequent
event.
14.5 Partial Invalidity. The invalidity or unenforceability of any one or
more provisions of this Mortgage shall not render any other provision invalid or
unenforceable. In lieu of any invalid or unenforceable provision, there shall be
added automatically a valid and enforceable provision as similar in terms to
such invalid or unenforceable provision as may be possible.
14.6 Binding Effect. The covenants, conditions, waivers, releases and
agreements contained in this Mortgage shall bind, and the benefits thereof shall
inure to, the parties hereto and their respective heirs, executors,
administrators, successors and assigns and are intended and shall be held to be
real covenants running with the land; provided, however, that this Mortgage
cannot be assigned by Borrower without the prior written consent of Lender, and
any such assignment or attempted assignment by Borrower shall be void and of no
effect with respect to Lender.
14.7 Modifications. This Mortgage may not be supplemented, extended,
modified or terminated except by an agreement in writing and signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought.
14.8 Affiliate. As used herein, "Affiliate" shall mean any of General
Electric Capital Corporation's direct and indirect affiliates and subsidiaries.
14.9 Commercial Loan. Borrower represents and warrants that the loans or
other financial accommodations included as Liabilities secured by this Mortgage
were obtained solely for the purpose of carrying on or acquiring a business or
commercial investment and not for residential, consumer or household purposes.
14.10 Jurisdiction. Borrower irrevocably appoints each and every owner,
partner and/or officer of Borrower as its attorneys upon whom may be served, by
regular or certified mail at the address set forth in this Mortgage, any notice,
process or pleading in any action or proceeding against it arising out of or in
connection with this Mortgage or any of the other Loan Documents; and Borrower
hereby consents that any action or proceeding against it be commenced and
maintained in any court within the Commonwealth of Pennsylvania or in the United
States District Court for any District of Pennsylvania by service of process on
any such owner, partner and/or officer; and Borrower agrees that the courts of
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the Commonwealth of Pennsylvania and the United States District Court for any
District of Pennsylvania shall have jurisdiction with respect to the subject
matter hereof and the person of Borrower and all collateral securing the
obligations of Borrower. Borrower agrees not to assert any defense to any action
or proceeding initiated by Lender based upon improper venue or inconvenient
forum. Borrower agrees that any action brought by Borrower shall be commenced
and maintained only in a court in the federal judicial district or county in
which Lender has its principal place of business in Pennsylvania.
14.11 Notices. All notices and communications under-this Mortgage shall be
in writing and shall be given by either (a) hand delivery, (b) first class mail
(postage prepaid), or (c) reliable overnight commercial courier (charges
prepaid) to the addresses listed in this Mortgage. Notice shall be deemed to
have been given and received: (i) if by hand delivery, upon delivery; (ii) if by
mail, three (3) calendar days after the date first deposited in the United
States mail; or (iii) if by overnight courier, on the date scheduled for
delivery. A party may change its address by giving written notice to the other
party as specified herein.
14.12 Governing Law. This Mortgage shall be governed by and construed in
accordance with the substantive laws of the Commonwealth of Pennsylvania without
regard to its conflicts of law provisions.
14.13 Joint and Several Liability. If Borrower consists of more than one
person or entity, the word "Borrower" shall mean each of them and their
liability shall be joint and several.
14.14. Waiver of Jury Trial. BORROWER AND LENDER AGREE THAT ANY SUIT, ACTION
OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT BY LENDER OR BORROWER, ON
OR WITH RESPECT TO THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT OR THE DEALINGS OF
THE PARTIES WITH RESPECT HERETO OR THERETO, SHALL BE TRIED ONLY BY A COURT AND
NOT BY A JURY. LENDER AND BORROWER EACH HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY AND INTELLIGENTLY, AND WITH THE ADVICE OF THEIR RESPECTIVE
COUNSEL, WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR
PROCEEDING. FURTHER, BORROWER WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER,
IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE,
CONSEQUENTIAL OR OTHER DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.
BORROWER ACKNOWLEDGES AND AGREES THAT THIS SECTION IS A SPECIFIC AND MATERIAL
ASPECT OF THIS MORTGAGE AND THAT LENDER WOULD NOT EXTEND CREDIT TO BORROWER OR
BORROWER (AS APPLICABLE) IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A
PART OF THIS MORTGAGE.
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IN WITNESS WHEREOF, Borrower, intending to be legally bound, has duly
executed and delivered this Open-End Mortgage and Security Agreement as of the
day and year first above written.
POLYCHEM CORPORATION, a
Pennsylvania corporation
By: /s/ Paul A. DeJuliis
Name: Paul A. DeJuliis
Title: Chairman
ATTEST: /s/ William B. Miller
Name: William B. Miller
Title: Secretary
I hereby certify that the
address of Borrower is:
Grant and Franklin Street
Phoenixville, PA
/s/
-----------------------------
On behalf of Borrower
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CORPORATE ACKNOWLEDGMENT
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF PHILADELPHIA :
On this, the 24th day of September, 1998, before me, the undersigned
officer, personally appeared Paul A. DeJuliis (who acknowledged himself to be
the Chairman of Polychem Corporation, a Pennsylvania corporation), and that he,
as such officer, being authorized to do so, executed the foregoing instrument
for the purposes therein contained by signing the name of the corporation, by
himself as such officer, and desired that the same might be recorded as such.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Loretta Margulies
---------------------
Notary Public
[Notarial Seal]
My Commission Expires:
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Schedule "A"
Description of Mortgaged Premises
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EXHIBIT A
LEGAL DESCRIPTION
ALL THAT CERTAIN lot or parcel of land with the buildings and improvements
thereon erected, situate in the Borough of Phoenixville, County of Chester,
Commonwealth of Pennsylvania, described in accordance with an ALTA Survey, Plan
prepared for The Eastwind Group, Inc., prepared by Yerkes Associates, Inc., West
Chester, Pennsylvania, dated March 3, 1995 (Plan No. C-15-5-9) and being more
particularly described as follows, to wit:
BEGINNING at a point marking the intersection of the northerly right-of-way line
of Grant Street (50 feet wide) with the westerly right-of-way line of Franklin
Avenue (50 feet wide); thence extending along said northerly right-of-way line
of Grant Street, South 78 degrees 00 minutes West, 644.85 feet to a drill hole
found at the intersection of said northerly right-of-way line of Grant Street
and the easterly right-of-way line of Fairview Street (50 feet wide); thence
extending along said easterly right-of-way line of Fairview Street, North 12
degrees 08 minutes 31 seconds West, 326.94 feet to an iron pin set on a curve;
thence partly crossing said Fairview Street, along the arc of a circle curving
to the right, having a radius of 485.80 feet, the arc distance of 70.16 feet,
the chord of said arc bearing North 55 degrees 46 minutes 33 seconds West, 70.10
feet to an iron pin set at a point of tangent; thence crossing the westerly
right-of-way line of said Fair-view Street and along lands now or formerly of
Bethel Baptist Church, North 51 degrees 38 minutes 18 seconds West, 100.05 feet
to an iron pin set at a point of curve; thence continuing along said lands of
Bethel Baptist Church, along lands now or formerly of the Housing Authority .of
Chester County, and partly along lands now or formerly of Joseph Niemczuk, along
the arc of a circle curving to the left, having a radius of 777.00 feet, the arc
distance of 490.46 feet, the chord of said arc bearing North 69 degrees 43
minutes 18 seconds West, 482.36 feet to an iron pin set at a point of tangent;
thence continuing along lands of Joseph Niemczuk and partly along lands now or
formerly of Louis Etter, North 87 degrees 48 minutes 18 seconds West, 476.00
feet to an iron pin set at a point of curve; thence continuing along said lands
of Louis Etter, along the arc of a circle curving to the left, having a radius
of 367.79 feet, the arc distance of 540.67 feet, the chord of said are bearing
South 50 degrees 04 minutes 52 seconds West, 493.28 feet to an iron pin set at a
point of tangent; thence continuing along said lands of Louis Etter and partly
along lands now or formerly of Pollock Corporation, South 07 degrees 58 minutes
02 seconds West, 656.00 feet to an iron pin set in line of lands now or formerly
of the Consolidated Rail Corporation; thence extending along said lands of
Consolidated Rail Corporation the six following courses and distances, to wit:
(1) North 88 degrees 28 minutes 17 seconds West, -77.30 feet to an iron pin set;
thence (2) North 09 degrees 55 minutes 42 seconds West, 133.88 feet to a
railroad monument found; thence (3) North 04 degrees 28 minutes 18 seconds East,
130.61 feet to an iron pin set at a point of curve; thence (4) along the arc of
a circle curving to the right, having a radius of 1,550.29 feet, the arc
distance of 634.87 feet, the chord of said arc bearing North 16 degrees 12
minutes 13 seconds East, 630.44 feet to a railroad monument found; thence (5)
North 57 degrees 56 minutes 04 seconds West, 21.08 feet to a railroad monument
found; and (6) North 25 degrees 59 minutes 20 seconds East, 403.10 feet to an
iron pin found on the title line in Fillmore Street (50 feet wide); thence
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extending along said title line in Fillmore Street the three following courses
and distances, to wit: (1) South 41 degrees 52 minutes 03 seconds East, 74.49
feet to a spike set at a point of curve; thence (2) along the arc of a circle
curving to the left, having a radius of 465.31 feet, the arc distance of 494.92
feet, the chord of said arc bearing South 72 degrees 20 minutes 19 seconds East,
471.92 feet to a spike set at a point of tangent; and (3) North 77 degrees I I
minutes 27 seconds East, 1, 180.01 feet to a spike set; thence leaving Fillmore
Street and extending along the middle of an unnamed street (22.5 feet wide),
running parallel with the aforementioned Franklin Avenue, South 12 degrees 04
minutes 50 seconds East, 355.18 feet to an iron pin set on the southerly
right-of-way line of Dewey Street (+\- 15 feet wide); thence extending along the
southerly right-of-way line of said Dewey Street, North 77 degrees 55 minutes 10
seconds East, 161.25 feet to an iron pin set on the westerly right-of-way line
of the aforementioned Franklin Avenue; thence extending along said westerly
right-of-way line of Franklin Avenue, South 12 degrees 04 minutes 50 seconds
East, 510.03 feet to the first mentioned point and place of BEGINNING.
Containing: Nineteen and eight hundred and ninety-nine one thousandths part of
an acre (19.89 Acres) be the same more or less.
BEING Parcel Nos. 15-4-9 and 15-5-9
BEING a part of the premises which The Budd Company, a Michigan Corporation, by
indenture bearing date the 6th day of March AD, 1995 and recorded at West
Chester in the Office for the Recording of Deeds, in and for the County of
Chester on 13th day of March AD, 1995 in Deed Book No. 3870 page 1064 etc.,
granted and conveyed unto Polychem. Corporation, in fee.
-30-
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