<PAGE>
As filed with the Securities and Exchange Commission on November 30, 1999.
Registration No. 333-___________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ConMat Technologies, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Florida 3089 23-2999072
- -----------------------------------------------------------------------------------------
(State or Other Jurisdiction of (Primary Standard (IRS Employer
Incorporation or Organizat Classification Code Number) Identification Number)
</TABLE>
ConMat Technologies, Inc.
Franklin Avenue and Grant Street
Phoenixville, PA 19460
(610) 935-0225
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(Address and Telephone Number
of Registrant's Principal Executive Offices and Principal Place of Business)
Paul A. DeJuliis
Chairman and Chief Executive Officer
ConMat Technologies, Inc.
Franklin Avenue and Grant Street
Phoenixville, PA 19460
---------------------------------------------------------
(Name, Address and Telephone Number of Agent for Service)
with a copy to:
Lawrence D. Rovin, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 South Broad Street
Philadelphia, PA 19102
(215) 568-6060
---------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the date on which this Registration Statement becomes
effective.
-----------------------------------
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ______________
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. |_|
- --------------
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount To Be Offering Price Per Aggregate Offering Registration
To Be Registered Registered (1) Share (2) Price (2) Fee
==========================================================================================================================
<S> <C> <C> <C> <C>
Common Stock 3,258,333 (1) $4.56 $14,857,998 $4,131
==========================================================================================================================
</TABLE>
(1) This registration statement covers shares which may be offered from
time to time by selling stockholders, including (i) 1,250,000 shares of
common stock issued and outstanding, (ii) 1,386,666 shares of common
stock issuable upon conversion of the registrant's Series A convertible
preferred stock, (iii) 196,667 shares of common stock issuable upon
exercise of warrants, and (iv) 425,000 shares of common stock issuable
upon exercise of options.
(2) Based on the average of the high and low sales prices of the
registrant's common stock as quoted on the Nasdaq OTC Bulletin Board on
November 23, 1999, as estimated solely for the purpose of calculating
the registration fee in accordance with Rule 457 under the Securities
Act.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
ConMat Technologies, Inc.
Up to 3,258,333 Shares
of Common Stock
The selling stockholders of ConMat Technologies, Inc. listed on page
23 under the caption "Selling Stockholders" may offer and resell up to an
aggregate of 3,258,333 shares of our common stock under this prospectus. The
number of shares that the selling stockholders may sell includes shares of
common stock that they may receive if they convert shares of Series A
convertible preferred stock or exercise warrants or options for the purchase of
shares of common stock. The number also includes shares of common stock that are
currently issued and outstanding. ConMat's common stock is quoted on the Nasdaq
OTC Bulletin Board under the symbol "CNMT." On November 23, 1999, the last
reported sale price of ConMat's common stock was $5.00 per share.
The selling stockholders may sell the shares of common stock at any
time at any price. We will not receive any proceeds from the resale of these
securities. We have agreed to pay the expenses of this offering.
-------------------------
See "Risk Factors" beginning on page 2 of this prospectus for a
discussion of certain factors that you should consider before investing.
-------------------------
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
This prospectus is dated November ____, 1999.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ......................................................................1
FORWARD LOOKING STATEMENTS.....................................................2
RISK FACTORS...................................................................2
USE OF PROCEEDS................................................................6
MARKET FOR COMMON STOCK........................................................6
DIVIDEND POLICY................................................................6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................7
CONMAT .....................................................................12
MANAGEMENT....................................................................18
PRINCIPAL STOCKHOLDERS........................................................20
RELATED PARTY TRANSACTIONS....................................................22
SELLING STOCKHOLDERS..........................................................23
DESCRIPTION OF SECURITIES.....................................................24
PLAN OF DISTRIBUTION..........................................................26
LEGAL MATTERS.................................................................27
EXPERTS .....................................................................27
WHERE YOU CAN GET MORE INFORMATION............................................27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus and may not
contain all the information that is important to you. To understand the stock
offering fully, you should carefully read this entire prospectus. References in
this prospectus to "we," "us," and "our" refer to ConMat Technologies, Inc.
and/or Polychem Corporation.
ConMat Technologies, Inc.
Franklin Avenue and Grant Street
Phoenixville, PA 19460
(610) 935-0225
ConMat Technologies, Inc., formerly known as EPL Systems, Inc. and Phoenix
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
Polychem Corporation from The Eastwind Group, Inc. 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 was the first step in executing this strategy. ConMat
plans to execute a growth strategy combining internal new product development
and corporate acquisitions.
Polychem Corporation
Franklin Avenue and Grant Street
Phoenixville, PA 19460
(610) 935-0225
Polychem is a wholly-owned subsidiary of ConMat. Polychem develops and
manufactures custom engineered plastic molded products which are marketed to
wastewater treatment plants and other industrial end users.
The Offering
The selling stockholders listed in this prospectus are offering up to 3,258,333
shares of ConMat's common stock at market prices which may vary from time to
time.
Use of Proceeds
The offering is on behalf of selling stockholders. ConMat will not receive any
proceeds from the sale of the shares of common stock offered by the selling
stockholders pursuant to this prospectus. If the holders of warrants or options
to purchase common stock exercise the warrants or options, the holders will pay
an exercise price to ConMat. ConMat will use any proceeds from the exercise of
warrants or options for working capital and general corporate purposes.
Dividends
We have never paid a cash dividend on our common stock and do not plan to pay
any cash dividends on our common stock in the foreseeable future.
Market for the Common Stock
There is a limited market for the common stock, which is quoted on the Nasdaq
OTC Bulletin Board under the symbol "CNMT."
Important Risks in Owning ConMat's Common Stock
Before you decide to purchase shares of common stock offered pursuant to this
prospectus, you should read the "Risk Factors" section of this prospectus
beginning on page 2.
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements contained in this prospectus 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.
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.
RISK FACTORS
An investment in ConMat's common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors
before making an investment.
Our acquisition strategy may be unsuccessful.
Although we continue to devote significant efforts to improving our current
operations and profitability, ultimately, the success of our business strategy
depends upon the acquisition of complimentary material technology businesses. No
assurances can be made that we will be successful in identifying and acquiring
such businesses or that any such acquisitions will result in operating profits.
In addition, any additional equity financing required in connection with such
acquisitions may be dilutive to stockholders, and debt financing may impose
additional substantial restrictions on our ability to operate and raise capital.
In addition, the negotiation of potential acquisitions may require management to
divert their time and resources away from our operations.
We continually evaluate potential acquisition opportunities, particularly those
that could be material in size and scope. Acquisitions involve a number of
special risks, including:
o the focus of management's attention to the assimilation of the
acquired companies and their employees and on the management
of expanding operations;
o the incorporation of acquired products into our product line;
o the increasing demands on our operational systems;
o adverse effects on our reported operating results;
o the amortization of acquired intangible assets; and
o the loss of key employees and the difficulty of presenting a
unified corporate image.
We may not be able to obtain adequate financing for working capital and future
acquisitions.
We have financed our working capital requirements and capital expenditures
primarily through bank debt and cash flow generated from operations. In order to
satisfy our existing obligations and support our future growth strategy, we may
require additional capital. There can be no assurance that additional capital
will be available or that, if available, we can obtain such capital on
satisfactory terms. Any additional equity financing may be dilutive to
stockholders, and debt financing may impose substantial restrictions on our
ability to operate and raise additional funds.
We have a large amount of debt which we may not be able to service and which
restricts our activities.
We have a large amount of debt in relation to our assets and our revenues. As of
November 17, 1999, our aggregate amount of indebtedness was $5.4 million. We may
also incur additional debt from time to time to finance acquisitions or capital
expenditures or for other purposes, subject to the restrictions in our existing
debt instruments. Our existing debt entails significant risks, including the
following:
2
<PAGE>
o It may be difficult for us to satisfy our substantial debt
service obligations;
o Our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be
available on favorable terms;
o We will need a substantial portion of our cash flow to pay the
principal and interest on our debt, including debt that we may
incur in the future;
o Payments on our debt will reduce the funds that would
otherwise be available for our operations and future business
opportunities;
o A substantial decrease in our net operating cash flow could
make it difficult for us to meet our debt service requirements
and force us to modify our operations;
o We may be more highly leveraged than our competitors, which
may place us at a competitive disadvantage; and
o We may be more generally vulnerable to a downturn in our
business or the economy generally.
If we are unable to service our debt or obtain additional financing, as needed,
our business and financial condition would be materially adversely affected. Our
ability to satisfy our debt obligations will depend upon our future financial
and operating performance as well as the availability of revolving credit
borrowings under our credit facility, which is dependent on, among other things,
our compliance with covenants and specified borrowing base prerequisites.
If we cannot service our debt, we will be forced to take actions such as
reducing or delaying acquisitions or capital expenditures, selling assets,
restructuring or refinancing our debt, or seeking additional equity capital or
bankruptcy protection. We cannot assure you that any of these remedies can be
effected on satisfactory terms, if at all.
Restrictive debt covenants in our loan instruments restrict our activities.
Our loan instruments restrict, among other things, our ability to:
o incur additional debt;
o pay dividends;
o redeem capital stock;
o create liens, dispose of assets, engage in mergers; and
o make contributions, loans or advances.
We are controlled by a small group of stockholders.
Our common stock is held by a small group of stockholders. Therefore, our public
stockholders may not have the power to elect ConMat's directors and direct the
policies of ConMat.
There is a limited public market for our common stock.
There is no established active public trading market for our common stock. Our
common stock is traded in the over-the-counter market and "bid" and "asked"
quotations regularly appear on the Nasdaq OTC Bulletin Board under the symbol
"CNMT". As of November 23, 1999, the last reported sale price of ConMat's common
stock was $5.00, and there were 10 firms listed as market makers for our common
stock. There can be no assurance that our common stock will trade at prices at
or about its present level, and an inactive or illiquid trading market may have
an adverse impact on the market price. Moreover, price fluctuations and the
trading volume in our common stock may not necessarily be dependent upon or
reflective of our financial performance.
Holders of our common stock may experience substantial difficulty in selling
their securities. The trading price of our common stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in the analysts' estimates, announcements of technological
innovations, general industry conditions.
The public sale of shares eligible for future sale may adversely affect the
price of our common stock.
The 3,258,333 shares of common stock offered pursuant to this prospectus were
subject to resale restrictions, but are now registered for public sale by the
selling stockholders. Future sales of shares by current stockholders, including
the selling stockholders, could cause the market price of our common stock to
decline.
3
<PAGE>
If we do not adapt to technological advances in our industry as quicky as our
competitors, our operating results and financial condition could be adversely
affected.
We compete in markets and industries that require sophisticated manufacturing
systems and other advanced technology to deliver state-of-the-art products.
These systems and technologies will have to be refined and updated as the
underlying technologies advance. We cannot assure you that, as systems and
technologies become outdated, we will be able to replace them, to replace them
as quickly as our competitors or to develop and market new and better products
in the future. Higher overhead and manufacturing costs due to a failure to
update and improve processes could limit our competitive position. In addition,
failure to make technological advances could adversely affect our ability to
successfully market custom engineered plastics and composite products.
Concentration of order backlog in a single project could expose us to operating
losses and cash flow problems.
From time to time we have a significant percentage of our order backlog
concentrated in a single project. If construction or payment for shipped
materials is delayed on such a significant project, we could be exposed to
operating losses and restrictive cash flow problems. This could also hamper our
ability to pursue new business opportunities or result in credit shortages.
We are subject to risks related to our international operations.
We anticipate that international sales will increasingly account for a
significant portion our net sales and revenue. We intend to expand our export
sales to markets in Asia, Europe, South America and the Middle East and to enter
additional countries in these international markets which may require
significant management attention and financial resources. Our operating results
will be increasingly subject to risks related to international sales, including:
o regulatory requirements;
o political and economic changes and disruptions;
o transportation delays;
o national preferences for locally manufactured products; and
o import duties or other taxes which may affect the prices of
our products in other countries relative to competitors.
We do not have firm contracts with plastic resin suppliers and our operating
results may be adversely affected by shortages or price increases.
Our operations are dependent on adequate supplies of plastic resins. We source
plastic resin primarily from major industry suppliers, such as BASF and ALM
Industries. We have long-standing relationships with some of these suppliers but
have not entered into a firm supply contract with any of our resin vendors. We
may not be able to obtain plastic resins in adequate supply or at an acceptable
cost in the event of an industry-wide general shortage of resins, or a shortage
or discontinuation of certain types of grades of resin purchased from one or
more of our suppliers.
In addition, plastic resins are subject to cyclical price fluctuations,
including those arising from supply shortages and changes in the prices of
natural gas, crude oil and other petrochemical intermediates from which resins
are produced. An increase in resin prices may have a material adverse effect on
our financial condition and results of operations.
Industry consolidation may result in pricing pressures or our exclusion from
bidding on larger projects, which could have an adverse affect on our operating
results.
Major corporations with an international presence continue to consolidate
products and services within the wastewater treatment industry on a global
basis. This trend may result in more single source bidding for large scale new
wastewater treatment construction and may result in pricing pressures for our
core products or our exclusion from larger projects. In response to this trend,
we intend to expand our product offerings to the wastewater treatment industry
through acquisitions of or joint ventures with smaller companies offering
complimentary products and to develop or acquire product lines serving
industries other than wastewater treatment. However, no assurances can be made
that we will be successful in these pursuits.
4
<PAGE>
Privatization of municipal wastewater treatment plants may limit our ability to
bid on projects.
Until recently most wastewater facilities were owned and operated by the
municipal governments. As a result of a drop in federal funding, municipalities
are beginning to consider private management or ownership as a financially
attractive alternative. Consequently, some large international corporations are
becoming more involved in ownership or management. Such arrangements could
impact the exclusive supplier relationships with our competitors thereby
precluding us from bidding on projects. We are in discussions with a number of
these management companies in an attempt to become an exclusive supplier.
However, there can be no assurance that Polychem will be successful in
establishing such relationships.
The markets in which Polychem competes are highly competitive.
Experienced competition exists in each of Polychem's major markets, and many of
Polychem's competitors maintain good working relationships with their customers,
produce quality products and have access to significantly greater financial
resources. There can be no assurance that we will be able to keep pace with the
technological demands of the marketplace or successfully enhance our products or
develop new products which are demanded by the industry.
Our operations and properties may expose us to material costs or liabilities
related to environmental regulations.
Our operations and properties are subject to a wide variety of federal, state
and local laws and regulations, including those governing the use, storage and
handling, generation, treatment, emission, remediation of contaminated soil and
ground water, and the health and safety of employees. There is no assurance that
our operations or properties will comply with applicable regulations. As such,
our operations and properties expose us to the risk of claims with respect to
such matters and we may incur material costs or liabilities in connection with
such claims.
Any Year 2000 disruptions could adversely affect our financial condition and
results of operations.
Many computer software systems, as well as some hardware and equipment utilizing
date-sensitive data, were designed to use two-digit date fields. Consequently,
these systems, hardware and equipment will not be able to recognize dates
properly beyond the year 1999. If we are unable to complete on a timely and
cost-efficient basis the remediation or replacement of critical systems or
equipment not yet in compliance, or develop alternative procedures, or if our
major suppliers, financial institutions or others with whom we conduct business
are unsuccessful in implementing timely solutions, Year 2000 disruptions could
have a material adverse effect on our financial condition and results of
operations. This adverse effect could result in interruptions in our ability to
manufacture products, process and ship orders and properly bill and collect
accounts receivable.
5
<PAGE>
USE OF PROCEEDS
ConMat will not receive any proceeds from the sale of the shares of common stock
offered by the selling stockholders pursuant to this prospectus. If the holders
of warrants or options to purchase common stock exercise the warrants or
options, the holders will pay an exercise price to ConMat. ConMat will use any
proceeds from the exercise of warrants or options for working capital and
general corporate purposes.
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
quarterly low and high bid information for the common stock from inception
through November 23, 1999:
1999 Low Bid High Bid
---- ------- --------
Fourth Quarter (1) $4.00 $4.125
Third Quarter 5.00 2.25
Second Quarter 3.00 3.00
First Quarter 1.63 4.00
1998
Fourth Quarter (2) 1.50 2.125
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(1) Through and including November 23, 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
November 23, 1999, there were 2,250,000 shares of common stock outstanding held
by approximately 14 holders of record.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and do not plan to pay
any cash dividends on our common stock in the foreseeable future.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
acquisition 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
prospectus 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 (which Eastwind transferred to
The Eastwind Group, Inc. Shareholder Trust) and (ii) 1,333,333
shares of newly issued cumulative, 2% Series A convertible
preferred stock of ConMat. The common stock and Series A
convertible 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 convertible 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. discharged by
the issuance to Mentor Special Situation Fund, L.P. of 166,667
shares of newly issued Series B preferred stock of ConMat and
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 convertible preferred stock. This note accrued interest
at 8% per year and principal and interest were due and payable
November 30, 2000. Eastwind defaulted under the terms of the note
as a result of a default by Eastwind on a guarantee of an
unrelated debt obligation and as a result of a material adverse
change in Eastwind's financial condition. Following such default,
ConMat sought to foreclose on the pledged shares. Pursuant to a
Settlement Agreement dated June 29, 1999, Eastwind transferred the
pledged shares to Polychem in exchange for cancellation of the
note. The amounts previously paid to Eastwind have been accounted
for as distributions by Polychem to Eastwind in the form of
dividends. For financial accounting purposes, the return of the
pledges shares was treated as a reduction in the number of shares
of Series A convertible preferred stock issued to Eastwind in
connection with the acquisition of Polychem and in the number of
Series A preferred stock outstanding.
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.
7
<PAGE>
Results of Operations
Nine Month Periods Ended September 30, 1999 and September 30, 1998
The following table sets forth certain statement of operation items as a
percentage of net sales for the period indicated:
Nine Months Ended Sept 30
1999 1998
---- ----
Net Sales........................... 100.0% 100.0%
Cost of Goods Sold................. 70.9 74.7
Gross Profit........................... 29.1 25.3
Selling and Administrative........... 20.2 23.8
Interest Expense.................... 4.4 4.8
Other Expense...................... 0.5 3.4
Income Tax......................... 1.3 -
----- -----
Income (Loss)...................... 2.5 (6.7)
===== =====
Total revenues increased by $1,878,000 or 27% to $8,798,000 for the nine months
ended September 30, 1999 from $6,920,000 for the nine months ended September 30,
1998. This increase is attributable to Polychem's efforts to increase market
penetration internationally where it has previously done business as well as
increased volume from the domestic market. During the nine months ended
September 30, 1999, 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 $809,000 or 46.3% to $2,557,000 for the nine months
ended September 30, 1999 from $1,748,000 for the comparable period in the prior
year. Gross profit increased as a percentage of sales to 29.1% for the nine
months ended September 30, 1999 from 25.3% for the comparable period in the
prior year. 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 $123,000, or 7.4% to $1,775,000
for the nine months ended September 30, 1999 from $1,652,000 for the comparable
period in the prior year. This increase reflects one-time charges of $88,000
related to the Polychem acquisition. As a percentage of revenues, however,
selling and administrative expenses decreased to 20.2% for the nine months ended
September 30, 1999 from 23.8% of total revenues for the comparable period in the
prior year. Management is closely monitoring selling and administrative expenses
and expects such expenses to decrease as a percentage of sales in future periods
due to anticipated increased revenues. Management anticipates increased revenues
as Polychem realizes the 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 progress, Polychem anticipates 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 during the nine months ended September 30, 1999.
Interest expense for the nine months ended September 30, 1999 increased $45,000
or 13.2%, to $385,000 from $340,000 for the comparable period in the prior year.
This higher cost reflects ConMat's increased borrowing on its working capital
line to finance increased receivables and inventory arising from increased
volume. Interest costs as a percentage
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of total revenues declined to 4.4% in the nine months ended September 30, 1999
compared to 4.8% in the comparable period in the prior year.
Fiscal Years Ended January 2, 1999 and January 3, 1998
The following table sets forth 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 Goods Sold 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 from $12,130,000 for the fiscal year ended January 3,
1998. 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 twelve month period ended January 2, 1999, compared to $1.1 million
in the twelve month period ended January 3, 1998. 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 twelve month period ended January 2, 1999 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
prior annual period.
Gross profit decreased by $604,000, or 20%, to $2,384,000 for the twelve month
period ended January 2, 1999 from $2,988,000 for the prior annual period as a
result of the decrease in total revenues. Gross profit increased as a percentage
of sales to 26.3% for the twelve month period ended January 2, 1999 from 24.6%
for the prior 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. Reduced outsourcing results in fewer outside purchases of finished
products 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 twelve month period ended January 2, 1999 from $2,119,000 for the prior
annual period. As a percentage of revenues, selling and administrative expenses
increased to 22.7% for the twelve month period ended January 2, 1999 from 17.5%
for the prior annual period. The level of selling and administrative expenses
during the twelve month period ended January 2, 1999 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.
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Interest expense for the twelve month period ended January 2, 1999 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 twelve month period ended January
2, 1999 from $406,000 for the prior 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 twelve month period ended January 2, 1999, 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 prior 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 twelve month period ended January 2, 1999 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 $5
million, subject to a lending formula limit, secured by Polychem's assets with
borrowings limited to a percent of eligible receivables and inventory. At
January 2, 1999, ConMat was not in compliance with certain financial covenants
associated with the General Electric Capital Corporation facility. These
instances of noncompliance were waived by General Electric Capital Corporation.
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
General Electric Capital Corporation will continue to waive any noncompliance.
As of November 17, 1999, the maximum borrowing amount was $2,256,000 and the
outstanding balance was $2,101,000. See "ConMat -Polychem- Debt and
Encumbrances." 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, may be required.
At September 30, 1999, ConMat had significant net operating loss carryforwards
which expire in periods up to 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 nine month period ended September 30, 1999,
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 carry
forwards. 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.
Nine Month Period Ended September 30, 1999
ConMat realized a profit of $220,000 and a net cash surplus of $26,000 for the
nine months ended September 30, 1999. For the comparable period in the prior
year, ConMat experienced a loss of $464,000 and a net cash surplus of $186,000.
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
decrease in net cash realized is the result of both a large increase in accounts
receivable resulting from increased volume and a single receivable of
approximately $1.3 million for which payment has been delayed by ninety days.
ConMat expects to collect a material portion of this receivable by year-end.
During the nine months ended September 30, 1999, ConMat realized net cash from
all sources of $26,000. During the same period, ConMat saw an increase in
operating capital requirements of $1,116,000. This increased requirement was
generated primarily from an increase in accounts receivable of $1,849,000
resulting from increased revenues and delay in payment of a single $1.3 million
receivable. This increase in accounts receivable was offset by an increase in
accounts payable of $245,000. ConMat's operating capital needs for the nine
months ended September 30, 1999 was sufficiently financed by its current credit
facility. Cash flow from investing activities included expenditures for new
equipment of $40,000. Financing activities included proceeds from the mortgage
financing of 1,880,000 with a
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corresponding repayment of principal on outstanding debt of $1,248,000. ConMat
had net borrowings of $764,000 reflecting primarily draws on its working capital
line to fund its working capital requirements.
On August 25, 1999, Polychem received a $1.88 million term loan from the Public
School Employes' Retirement Board, secured by a mortgage on Polychem's
Phoenixville, Pennsylvania facility. $813,000 of the net proceeds from the loan
was applied to reduce the outstanding balance of the General Electric Capital
Corporation term loan and the remaining $996,000 of net proceeds was applied to
reduce the outstanding balance of the General Electric Capital Corporation
revolving line of credit.
Fiscal Years Ended January 2, 1999 and January 3, 1998
Despite incurring a loss for the twelve month period ended January 2, 1999,
ConMat realized net cash from operating activities of $462,000 related primarily
to a decrease in accounts receivable of $902,000, 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 twelve month period ended
January 3, 1998, to $2.6 million from $3.5 million, reflecting normal
collections during the period and a lower ending receivables balance reflecting
the 25% decrease in revenues from the twelve month period ended January 3, 1998.
Cash flow from investing activities included expenditures for new equipment of
$177,000. Financing activities used net cash of $330,000, primarily reflecting
net borrowings arising from a financing of $123,000, 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 twelve month period ended January 3, 1998, 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.
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 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 is currently running parallel with this system and
will complete its Year 2000 preparation by December 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
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services to Polychem have modified their system to become Year 2000 compliant.
The monitoring of certain vendors will continue into the remainder of 1999.
Polychem has completed contingency plan for how Polychem would resume business
if unanticipated problems arise from non-performance by vendors.
Polychem spent $125,000 during the year ending December 31, 1998 and $45,000
during the nine months ended September 30, 1999, relating to costs incurred as a
result of its Year 2000 Plan. Polychem anticipates incurring approximately
$10,000 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.
CONMAT
General
ConMat Technologies, Inc., formerly known as EPL Systems, Inc. and Phoenix
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 from The Eastwind Group, Inc.
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 was 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
Street, Phoenixville, PA 19460. The telephone number is (610) 935-0225.
As of November 17, 1999, ConMat and Polychem had 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. Eastwind subsequently transferred the 1,000,000 shares
of common stock to The Eastwind Group, Inc. Shareholder Trust,
a trust for the benefit of Eastwind's shareholders in which
Eastwind has no interest.
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 convertible 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., discharged by the issuance to
Mentor Special Situation Fund, L.P. of 166,667 shares of newly
issued Series B preferred stock of ConMat and 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 convertible preferred
stock. This note accrued interest at 8% per year and principal
and interest were due and payable November 30, 2000. Eastwind
defaulted under the terms of the note as a result of a default
by Eastwind on a guarantee of an
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unrelated debt obligation and as a result of a material
adverse change in Eastwind's financial condition. Following
such default, ConMat sought to foreclose on the pledged
shares. Pursuant to a Settlement Agreement dated June 29,
1999, Eastwind transferred the pledged shares to Polychem in
exchange for cancellation of the note. The amounts previously
paid to Eastwind have been accounted for as distributions by
Polychem to Eastwind in the form of dividends. For financial
accounting purposes, the return of the pledged shares was
treated as a reduction in the number of shares of Series A
convertible preferred stock issued to Eastwind in connection
with the acquisition of Polychem and in the number of Series A
convertible preferred stock outstanding.
In compliance with applicable state law, the transaction was approved by the
Board of Directors and stockholders of ConMat and the Board of Directors of
Eastwind. In addition, General Electric Capital Corporation approved the
transaction as required by the terms of a Loan and Security Agreement between
Polychem and General Electric Capital Corporation.
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 chain, sprockets, stub shafts, wear shoes and
other products fabricated to customer specifications. Polychem also produces:
o cast nylon elevator buckets for handling foundry sand,
aggregate and glass cullet. These buckets are secured to
elevators and used to convey raw materials to their point of
use in the manufacture of steel, glass and other products.
o phenolic sprockets and pulleys used with blade belts in the
cutting housing for agricultural equipment and for securing
electrical cables for mining equipment.
o celeron bearings for the rolling machinery in steel mills.
o extruded thermoset air conditioning ducts for aircraft.
o molded conveyor chains and accessories for conveying cans,
bottles and other packaged materials during production, water
and wastewater treatment and other material handling
industries.
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"
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,
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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 "Reaction injection molded" molding, which produces nylon
buckets, stub shafts, and sprockets. In "reaction injection
molded" 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.
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, "reaction
injection molded"-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,
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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.
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 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 prospectus.
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
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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.
Most are semi-skilled workers. The current union contract expires at the end of
September 2002. 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 "reaction injection molded" 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, and $133,000 and $124,000 during the
ten months ended October 31, 1999 and October 31, 1998, respectively.
Debt and Encumbrances. On September 30, 1998, Polychem entered into a Loan and
Security Agreement with General Electric Capital Corporation which provides for
a three-year, $3,500,000 revolving line of credit and a three-year term loan of
$1,500,000. On August 25, 1999, the revolving line of credit was increased to
$5,000,000. The revolving line of credit and the term loan originally were
secured by a mortgage on Polychem's Phoenixville, Pennsylvania facility, which
mortgage lien was released in connection with the Public School Employes'
Retirement Board financing described below. The term loan is secured by
Polychem's equipment. The revolving line of credit is 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, 10.05% at November 17, 1999, and 6.50% in excess of the 30 day dealer
commercial paper rate for the term loan, 11.80% at November 17, 1999.
Interest on the revolving line of credit and term loan is payable monthly.
Polychem's collections of accounts receivable are deposited with General
Electric Capital Corporation 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 November 17, 1999, availability under the line of credit was $2,556,000
and outstanding borrowings were $2,101,000. In connection with the Public School
Employes' Retirement Board financing described below, General Electric Capital
Corporation agreed to restructure the payment schedule on the remaining balance
of its term loan to provide for 25 monthly payments of $8,000 and a final
payment
16
<PAGE>
on September 30, 2001 of $212,000. As of November 17, 1999, the outstanding
balance of the General Electric Capital Corporation term loan was $388,000.
On August 25, 1999, Polychem received a $1,880,000 term loan from the Public
Employes' Retirement Board , secured by a mortgage on Polychem's Phoenixville,
Pennsylvania facility. $813,000 of the net proceeds of the loan was applied to
reduce the outstanding balance of the General Electric Capital Corporation term
loan and the remaining $996,000 of net proceeds was applied to reduce the
outstanding balance of the General Electric Capital Corporation revolving line
of credit. The Public School Employes' Retirement Board loan is for a term of 10
years. The interest rate on the Public School Employes' Retirement Board loan is
8.5% for the first five years, and thereafter is 350 basis points above the 5
year U.S. Treasury Note Yield Rate as of the end of the first five years.
Principal and interest are payable in equal monthly installments based on a 25
year amortization schedule, with a balloon payment September 1, 2009 equal to
outstanding principal balance plus accrued interest. As of November 17, 1999,
the outstanding balance of the Public School Employes' Retirement Board term
loan was $1,876,000.
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 November 17, 1999 was
$1,057,000. 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.
Property. Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage. See "ConMat-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.
Litigation
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.
17
<PAGE>
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 pending.
MANAGEMENT
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 44
Theodore R. Rutkowski President and a Director 64
Edward F. Sager, Jr. Director 52
William J. Crighton Vice President and Treasurer 53
</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.
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.
18
<PAGE>
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.
Richard R. Shutte - Vice President of Marketing and Business Development - Mr.
Shutte has served in his current position since May, 1999. From 1998 until such
time, Mr. Shutte was a principal in Skipping Stone, Inc., a consulting firm.
From 1996 to 1997, Mr. Shutte was President of Cot'nWash, Inc. , a start-up
consumer products company. From 1995 to 1996, Mr. Shutte was a principal of
Chesword Group, Inc., a consulting firm. Prior to such time and since 1973, Mr.
Shutte held various positions at Kimberly-Clark Company, most recently Global
Category Leader, Wet Wipes Division.
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. None of Mr.
DeJuliis' compensation is deferred. 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.
19
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the beneficial ownership
of ConMat's common stock as of November 23, 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.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percentage
Title of Class Beneficial Owner of Beneficial of Class (1)
- -------------- ---------------- Ownership (1) ------------
-------------
<S> <C> <C> <C>
Common Stock Paul A. DeJuliis 1,478,333 (2) 57.9
Franklin Avenue & Grant Street
Phoenixville, PA 19460
Edward F. Sager, Jr. 196,667 (3) 8.0
P.O. Box 560
Yardley, PA 19067
Theodore R. Rutkowski 75,000 (4) 3.2
Franklin Avenue & Grant Street
Phoenixville, PA 19460
Richard R. Shutte 100,000 (4) 4.3
Franklin Avenue & Grant Street
Phoenixville, PA 19460
The Eastwind Group, Inc. 735,000 (5) 24.6
275 Geiger Road
Philadelphia, PA 19115
The DAR Group, Inc. 240,000 10.7
30 Broad Street
43rd Floor
New York, NY 10004
Odyssey Capital Group, L.P. 360,000 (6)(7) 14.2
950 West Valley Rd., Suite 2902
Wayne, PA 19087
Polychem Corporation 313,333 (5) 12.2
Franklin Avenue & Grant Street
Phoenixville, PA 19460
The Eastwind Group, Inc. 925,000 41.1
Shareholder Trust
c/o Paul A. DeJuliis
Franklin Avenue & Grant Street
Phoenixville, PA 19460
Directors and Executive Officers 1,675,000 (2)(3) 60.9
(4 persons)
Series A Convertible Paul A. DeJuliis 53,333 3.8
Preferred Stock Franklin Avenue & Grant Street
Phoenixville, PA 19460
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
The Eastwind Group, Inc. 735,000 53.0
275 Geiger Road
Philadelphia, PA 19115
Polychem Corporation 313,333 22.6
Franklin Avenue & Grant Street
Phoenixville, PA 19460
Odyssey Capital Group, L.P.
950 West Valley Rd., Suite 2902 285,000 (7) 20.6
Wayne, PA 19087
Series B Preferred Stock Mentor Special Situation Fund, L.P. (8) 166,667 100.0
P.O. Box 560
Yardley, PA 19067
</TABLE>
- ----------
(1) Based upon 2,250,000 shares of common stock issued and outstanding as
of November 23, 1999, calculated in accordance with Rule 13d-3
promulgated under the Exchange Act. 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 4,258,333 shares outstanding as of
November 23, 1999.
(2) Includes 53,333 shares issuable upon conversion of Series A convertible
preferred stock and 250,000 shares issuable upon the exercises of
options. (See "Executive Compensation - Employment Agreements" for
conditions of exercise.) Includes 925,000 shares held by The Eastwind
Group, Inc. Shareholder Trust, of which Mr. DeJuliis is Trustee, as to
which he disclaims beneficial ownership. If such 925,000 shares were
not included in calculating Mr. DeJuliis' beneficial ownership, Mr.
DeJuliis would be deemed to beneficially own 22.3 % 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) Consists of shares issuable upon exercise of options.
(5) Consists of shares issuable upon conversion of Series A convertible
preferred stock.
(6) Includes 285,000 shares of common stock issuable upon conversion of
Series A convertible preferred stock.
(7) Odyssey Capital Group, L.P. acquired 285,000 shares of ConMat Series A
convertible preferred stock and 75,000 shares of ConMat common stock
from The Eastwind Group, Inc. in July 1999 in exchange for 1,000 shares
of Eastwind's Series A preferred stock in settlement of Odyssey's
demand for mandatory redemption of the Eastwind Series A preferred
stock.
(8) Edward F. Sager, Jr., a director of ConMat, is a general partner of
Mentor Special Situation Fund, L.P.
21
<PAGE>
Indemnification of Officers and Directors
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
stockholders for damages for breach of any duty owed to ConMat or its
stockholders 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.
RELATED PARTY 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 convertible 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 convertible 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., discharged by the issuance to
Mentor Special Situation Fund, L.P. of 166,667 shares of newly
issued Series B preferred stock of ConMat and 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 convertible preferred
stock. This note accrued interest at 8% per year and principal
and interest were due and payable November 30, 2000. Eastwind
defaulted under the terms of the note as a result of a default
by Eastwind on a guarantee of an unrelated debt obligation and
as a result of a material adverse change in Eastwind's
financial condition. Following such default, ConMat sought to
foreclose on the pledged shares. Pursuant to a Settlement
Agreement dated June 29, 1999, Eastwind transferred the
pledged shares to Polychem in exchange for cancellation of the
note. The amounts previously paid to Eastwind have been
accounted for as distributions by Polychem to Eastwind in the
form of dividends. For financial accounting purposes, the
return of the pledged shares was treated as a reduction in the
number of shares of Series A convertible preferred stock
issued to Eastwind in connection with the acquisition of
Polychem and in the number of Series A convertible preferred
stock outstanding.
22
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the number
of shares of common stock beneficially owned by the selling stockholders and the
number of shares of common stock which may be offered for sale pursuant to this
prospectus by such selling stockholder. The offered shares of common stock may
be offered from time to time by each of the selling stockholders named below.
See "Plan of Distribution." However, the selling stockholders are under no
obligation to sell all or any portion of the shares of common stock offered, nor
are the selling stockholders obligated to sell such shares of common stock
immediately under this prospectus. Particular selling stockholders may not have
a preset intention of selling their shares and may offer less than the number of
shares indicated. Because the selling stockholders may sell all or part of the
shares of common stock offered hereby, no estimate can be given as to the number
of shares of common stock that will be held by the selling stockholders upon
termination of any offering made hereby. The number of shares of common stock
issuable upon conversion of the Series A convertible preferred stock and upon
exercise of warrants are subject to adjustment by reason of stock splits, stock
dividends and other similar transactions, additional issuances of securities or
variation in the price of ConMat's common stock.
<TABLE>
<CAPTION>
Common Shares Beneficially
Owned After Offering (1)
------------------------------------
Number of Common
Shares Beneficially Common Shares Percent of
Name of Selling Stockholder Owned Prior to Offering Offered Hereby Number Outstanding
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul A. DeJuliis (2) 1,478,333 (3)(4) 553,333 (4) 0 0
Mentor Special Situation
Fund, L.P. (5) 196,667 (6) 196,667 (6) 0 0
The Eastwind Group, Inc. (7) 735,000 (8) 735,000 (8) 0 0
Odyssey Capital Group, L.P. 360,000 (6) 360,000 (6) 0 0
Polychem Corporation (9) 313,333 (8) 313,333 (8) 0 0
The Eastwind Group, Inc.
Shareholder Trust (7) 925,000 925,000 0 0
Theodore R. Rutkowski (10) 75,000 (11) 75,000 (11) 0 0
Richard R. Shutte (12) 100,000 (11) 100,000 (11) 0 0
--------
TOTAL 3,258,333
=========
</TABLE>
- ----------
(1) Assumes the sale of all offered shares of common stock.
(2) Mr. DeJuliis is the Chief Executive Officer, Secretary and Chairman of
the Board of Directors of ConMat and former Chief Executive Officer of
The Eastwind Group.
(3) Includes 925,000 shares held by The Eastwind Group, Inc. Shareholder
Trust, of which Mr. DeJuliis is Trustee, as to which he disclaims
beneficial ownership.
(4) Includes 53,333 shares issuable upon conversion of Series A convertible
preferred stock and 250,000 shares issuable upon exercise of options.
(5) Edward F. Sager, Jr., a director of ConMat is a general partner of
Mentor Special Situation Fund, L.P.
23
<PAGE>
(6) Includes 285,000 shares of Common Stock issuable upon conversion of
Series A convertible preferred stock.
(7) On December 8, 1998, ConMat acquired Polychem from The Eastwind Group.
See "ConMat-Acquisition of Polychem."
(8) Consists of shares issuable upon conversion of Series A convertible
preferred stock.
(9) Polychem is a wholly-owned subsidiary of ConMat.
(10) Mr. Rutkowski is the President and a director of ConMat and President
of Polychem.
(11) Consists of shares issuable upon exercise of options.
(12) Mr. Shutte is Vice President of Marketing and Business Development of
Polychem.
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 November 23, 1999, there
were outstanding 2,250,000 shares of common stock, 1,386,666 shares of Series A
convertible preferred stock, 166,667 shares of Series B preferred stock and no
shares of Series C preferred stock. In addition, as of November 23, 1999, there
were outstanding options and warrants to purchase 621,667 shares of common
stock.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, 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.
Series A Convertible Preferred Stock
Shares of the Series A convertible preferred stock rank prior to the common
stock and pari passu with the Series B preferred stock and the Series C
preferred stock. The creation of any class or series of capital stock ranking
senior to or pari passu with the Series A convertible preferred stock or the
Series C preferred stock requires the consent of a majority of the holders of
the Series A convertible preferred stock.
The holders of the shares of the Series A convertible preferred stock are
entitled to receive non-cumulative, 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. 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 convertible 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 and the Series C
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.
24
<PAGE>
Shares of Series A convertible 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 is equal to 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 convertible preferred stock, to convert all
shares of the Series A convertible 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 convertible
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 convertible preferred stock have no voting rights,
except as otherwise required by the Florida Business Corporation Act. The
holders of Series A convertible 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
convertible 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 convertible preferred stock and Series C preferred
stock. The creation of any class or series of capital stock ranking senior to or
pari passu with the Series B preferred stock or the Series C 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 convertible preferred stock and the Series C 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.
ConMat may redeem the Series B preferred stock at any time. 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.
Series C Preferred Stock
Shares of the Series C preferred stock rank prior to the common stock and pari
passu with the Series A convertible preferred stock and the Series B preferred
stock. The creation of any class or series of capital stock ranking senior to or
pari passu with the Series C preferred stock or the Series B preferred stock
requires the consent of a majority of the holders of the Series C preferred
stock.
Holders of the shares of the Series C preferred stock are entitled to receive
cash dividends at a rate of 8% per year for three years and increasing 2% per
year up to a maximum of 16%, payable in equal, quarterly installments. During
the first year, dividends on the Series C preferred stock may be paid in
additional shares of Series C preferred stock. In the event of any liquidation,
dissolution or winding up of ConMat, holders of the Series C preferred stock
will be entitled in preference to the holders of the common stock and pari passu
with the holders of the Series A convertible preferred stock and 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, plus all accrued but unpaid dividends.
25
<PAGE>
ConMat may redeem the Series C preferred stock at any time. The redemption price
is $3.00 per share, plus all accrued but unpaid dividends.
Except as otherwise required by the Florida Business Corporation Act, the
holders of the Series C preferred stock have no voting rights.
Warrants
As of November 23, 1999, there were outstanding warrants to purchase 196,667
shares of ConMat 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.
Options
As of November 23, 1999, there were outstanding 425,000 options to purchase
shares of ConMat common stock at an exercise price of $3.00 per share, subject
to adjustment in the case of stock splits, stock dividends, or a merger or
consolidation.
PLAN OF DISTRIBUTION
The shares being offered hereby by the selling stockholders may be acquired from
time to time, upon conversion of our Series A convertible preferred stock or
exercise of warrants or options. The shares of common stock include 925,000
shares held by The Eastwind Group, Inc. Shareholder Trust which will be
distributed to the shareholders of Eastwind as of December 8, 1998, 250,000
shares held by Paul A. DeJuliis, our Chief Executive Officer, 621,667 shares
issuable upon the exercise of warrants or options and 1,386,666 shares issuable
upon the conversion of our Series A convertible preferred stock. The actual
number of shares of our common stock issued or issuable upon conversion of the
Series A convertible preferred stock or exercise of warrants or options is
subject to adjustment depending on factors which cannot be predicted by us at
this time, including the future market price of our common stock.
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange market or trading facility on which our
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
26
<PAGE>
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 promulgated under
the Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated.
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares. In some circumstances, we have agreed to indemnify the selling
stockholders against certain losses and liabilities, including liabilities under
the Securities Act.
EXPERTS
The financial statements for the fiscal years ended January 2, 1999 and January
3, 1998 included in this prospectus have been so included in reliance on the
report of Grant Thornton LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
WHERE YOU CAN GET MORE INFORMATION
This prospectus is part of a registration statement filed with the Securities
and Exchange Commission. At your request, we will provide you, without charge, a
copy of any exhibits to the registration statement. If you would like more
information, write or call us at:
ConMat Technologies, Inc.
Franklin Avenue and Grant Street
Phoenixville, PA 19460
(610) 935-0225
Attn: Chief Executive Officer
We intend to provide to our stockholders annual reports containing audited
financial statements and other appropriate reports. In addition, we file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information we file at the Securities and Exchange
Commission's public reference room in Washington, D.C. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the Securities
and Exchange Commission. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public
27
<PAGE>
reference rooms. Our Securities and Exchange Commission filings are also
available to the public free of charge on the Securities and Exchange
Commission's Internet site at http:\\www.sec.gov.
28
<PAGE>
ConMat Technologies, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited
- ---------
Consolidated Balance Sheets as of September 30, 1999 and January 2, 1999........................................F-2
Consolidated Statements of Operations for the nine month periods ended September 30, 1999
and September 30, 1998.....................................................................................F-3
Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1999
and September 30, 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
September 30, 1999 & January 2, 1999
<TABLE>
<CAPTION>
ASSETS SEPT. 30, 1999 JAN. 2, 1999
------ -------------- ------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 55,641 $ 29,430
Accounts receivable - Trade, net of allowance for
doubtful accounts 4,624,494 2,622,261
Inventories 992,008 1,159,545
Prepaid expenses and other 60,342 14,768
Prepaid income taxes 14,777 35,577
---------- ----------
Total current assets $5,747,262 $3,861,581
Property, plant and equipment, at cost $1,929,871 $1,892,768
Less accumulated depreciation (824,165) (703,945)
---------- ----------
1,105,706 1,188,823
Deferred income taxes 78,493 78,493
Other assets 406,518 386,128
---------- ----------
Total assets $7,337,979 $5,515,025
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit $2,162,462 $1,398,632
Current portion of long-term debt 444,151 625,260
Current portion of capital lease obligations 101,783 103,744
Accounts payable 1,429,259 1,183913
Accrued expenses 283,514 302,374
Dividends payable 30,000 0
---------- ----------
Total current liabilities 4,451,169 3,613,923
Long-term debt 2,887,118 2,075,775
Obligations under capital leases 111,339 151,761
Other liabilities 206,400 181,900
---------- ----------
Total liabilities 7,656,026 6,023,359
---------- ----------
Preferred stock, Series B - 166,667 shares issued and outstanding 500,000 500,000
Stockholders' equity (deficiency)
Preferred stock, $.001 par value 10,000,000 shares authorized
Series A preferred stock, 1,073,333 shares and 1,386,666
issued and outstanding, respectively 1,073 1,386
Common stock, $.0001 par value, 40,000,000 shares authorized,
2,250,000 shares issued and outstanding 2,250 2,250
Additional paid-in capital (472,175) (472,486)
Accumulated earnings (deficit) (299,195) (489,482)
Less note receivable for shares sold (50,000) (50,000)
---------- ----------
Total stockholders' equity (deficiency) (818,047) (1,008,332)
---------- ----------
Total liabilities and stockholders' equity $7,337,979 $5,515,025
========== ==========
</TABLE>
F-2
<PAGE>
CONMAT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Revenue:
Sales to customers $8,797,902 $6,919,162
Cost of goods sold 6,240,828 5,171,466
---------- ----------
Gross profit 2,557,074 1,747,696
Selling, general and administrative expenses 1,775,822 1,651,921
Corporate expense 183,816 360,000
---------- ----------
Operating (loss) income 597,436 (264,225)
Interest expense (385,391) (340,830)
Rental income 141,241 141,044
---------- ----------
Profit (loss) before income tax expense 353,286 (464,011)
Income tax expense (133,000) 0
---------- ----------
NET EARNINGS (LOSS) $220,286 ($464,011)
========== ==========
Dividend requirements on Series B preferred
stock 30,000 0
Basic earnings per share $0.08 $0.23
Weighted average number of common shares
outstanding 2,250,000 2,000,000
Diluted earnings per share $0.08 ($0.23)
Weighted average number of common and
common equivalent shares outstanding 2,691,746 2,000,000
</TABLE>
F-3
<PAGE>
CONMAT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $220,286 ($464,011)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 197,353 244,899
Changes in assets and liabilities, net of effect from
acquisitions
(Increase) decrease in assets
Accounts receivable (1,849,212) 216,624
Inventories 167,537 312,158
Prepaid expenses (45,574) 58,342
Prepaid income taxes 132,700 0
Patents, (net) (15,242) (40,629)
Deferred finance charges (92,705) (166,661)
Increase (decrease) in liabilities
Accounts payable 245,346 40,597
Accrued expenses (106,258) (100,583)
---------- ----------
Net cash provided by (used in)
operating expenses (1,145,769) 100,736
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (40,035) (163,528)
---------- ----------
Net cash used in investing activities (40,035) (163,528)
---------- ----------
Cash flows from financing activities:
Net (repayment) borrowing under lines of credit 763,830 141,482
Repayment of term notes (1,247,944) (1,520,907)
Repayment of capital lease obligations (87,538) (59,774)
Proceeds from mortgage obligation 1,878,178 0
Proceeds from capital lease obligations 45,000 138,420
Proceeds from term notes 0 1,800,000
Recapitalization costs (139,511) 0
Capital distribution 0 (250,000)
---------- ----------
Net cash provided by financing activities
1,212,015 249,221
---------- ----------
NET INCREASE IN CASH & CASH EQUIVALENTS 26,211 186,429
Cash and cash equivalents at beginning of year 29,430 63,840
---------- ----------
Cash and cash equivalents at end of period $55,641 $250,269
========== ==========
</TABLE>
F-4
<PAGE>
ConMat Technologies, Inc and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - INTERIM FINANCIAL INFORMATION
The financial statements of ConMat as of September 30, 1999 and for the nine and
three months ended September 30, 1999 and 1998 and related footnote information
are unaudited. All adjustments (consisting only of normal recurring adjustments)
have been made which, in the opinion of management, are necessary for a fair
presentation. Results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for any
future period.
NOTE B - CHANGES IN SECURITIES
On June 29, 1999, Polychem, foreclosed on a note due it from The Eastwind Group,
Inc. due to default by The Eastwind Group on the obligation. As settlement,
Polychem took possession of 313,333 shares of Series A convertible preferred
stock of ConMat which had been pledged as collateral. The transaction was
recorded as a reduction in outstanding Series A convertible preferred shares.
NOTE C - EARNINGS (LOSS) PER SHARE
ConMat 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 stockholders 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.
The following are basic and diluted earnings per share calculations for the nine
month period ended September 30, 1999:
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net Earnings $220,286
Less Preferred Stock
Dividends (30,000)
--------
Basic EPS
Income available to Common
stockholders 190,286 2,255,000 $.08
====
Effect of dilutive securities
Convertible Preferred Stock Dividends 30,000 413,333
Warrants 7,937
Options 20,476
-------- ---------
Diluted EPS
Income available to Common
stockholders $220,286 2,691,746 $.08
======== ========= ====
</TABLE>
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
========== ========== ========== ==========
Note Total
Additional Accumulated receivable stockholders'
paid-in earnings for shares equity
capital, net (deficit) sold (deficiency)
------------ ----------- ----------- -----------
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) -- (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:
<PAGE>
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., discharged by the payment to Clifton
Capital, Ltd. of $100,000; and (iii) $500,000 owed to Mentor
Special Situation Fund, L.P., discharged by the issuance to Mentor
Special Situation Fund, L.P. 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 Special Situation Fund, L.P.
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.
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 stockholders 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:
January 2, January 3,
1999 1998
----------- -----------
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)
=========== ===========
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 $ -- $56,333
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
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. The parties
have completed filing briefs relating to ConMat's preliminary objections and a
decision by the Court is not expected until September 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>
================================================================================
-----------------------
Up to 3,258,333 Shares
of Common Stock
-----------------------
ConMat Technologies, Inc.
-----------------------
-----------------------
PROSPECTUS
-----------------------
November ____ , 1999
-----------------------
You should rely only on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. The information in this prospectus may not be
accurate beyond the date indicated above, regardless of when this prospectus is
delivered or when the securities described in this prospectus are sold. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. 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
stockholders for damages for breach of any duty owed to ConMat or its
stockholders 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 25. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the shares of
common stock offered hereby, other than underwriting discounts and commissions:
Registration Fee--Securities and Exchange Commission $ 4,131
*Accountants' fees and expenses ..................... $ 2,000
*Legal fees and expenses ............................ $ 7,500
*Printing and EDGAR expenses ........................ $ 2,000
*Miscellaneous ...................................... $ 1,000
-------
Total ...................................... $16,631
=======
- ------------------
* Estimate
Item 26. 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 Special Situation Fund, L.P.
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.
II-1
<PAGE>
Item 27. Exhibits
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>
3.1 Articles of Incorporation of ConMat Technologies, Inc.
3.2 By-laws of ConMat Technologies, Inc.*
4.1 Specimen common stock certificate.*
4.2 Specimen series A preferred stock certificate.*
4.3 Specimen series B preferred stock certificate.*
4.5 Series A warrant from ConMat to Mentor Special Situation Fund, L.P. dated December 8, 1998.*
4.6 Series B warrant from ConMat to Mentor Management Company dated December 8, 1998.*
4.8 Option Agreement between ConMat and Paul A. DeJuliis dated December 8, 1998.*
5 Legal Opinion of Atlas, Pearlman, Trop & Borkson, PA***
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.*
10.10 Share Exchange Agreement between ConMat and Eastwind dated December 8, 1996.**
10.11 Eastwind Stockholder Trust Agreement between Eastwind and Paul A. DeJuliis dated December 7, 1998.**
10.12 Waiver and Amendment Agreement between General Electric Capital Corporation and Polychem dated
August 25, 1999.**
10.13 Amended and Restated Term Note dated August 25, 1999 payable by Polychem to General Electric Capital
Corporation.**
10.14 Amended and Restated Revolving Credit Note dated August 25, 1999 payable by Polychem to General
Electric Capital Corporation.**
10.15 Guarantor Reaffirmation Agreement dated August 25, 1999 between ConMat and General Electric Capital
Corporation.**
10.16 Balloon Mortgage Note dated August 25, 1999 payable to Public School Employes' Retirement Board by
Polychem.**
10.17 Open End Mortgage and Security Agreement between Polychem and Public School Employes' Retirement
Board dated August 24, 1999.**
10.18 Loan Guaranty and Suretyship Agreement between Polychem and Public School Employes' Retirement
Board dated August 24, 1999.**
10.19 Mortgagee's Waiver and Consent dated August 25, 1999 between Public School Employes' Retirement
System, Polychem and General Electric Capital Corporation.**
11 Computation of Per Share Earnings (included in Financial Statements on Pages F-5, F-12 and F-13).
21 Subsidiaries of ConMat.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of Atlas, Pearlman, Trop & Borkson (included in Exhibit 5).
23.2 Consent of Grant Thornton LLP.
24 Power of Attorney (included on signature page).
</TABLE>
- ----------
* Incorporated by reference to Form 10-SB file no. 0-30114 filed April 27, 1999
and Amendment No. 1 filed June 16, 1999.
**Incorporated by reference to Amendment No. 1 to Form 10-SB file no. 0-30166
filed August 30, 1999.
***To be filed by amendment.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10 (a) (3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information set forth in the Registration Statement,
and (iii) include any additional or changed material information with respect to
the plan of distribution.
2. That for the purpose of determining any liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4. That for the purpose of determining any liability under the Securities Act,
to treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issuer.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, Commonwealth of Pennsylvania, on November 26, 1999.
CONMAT TECHNOLOGIES, INC.
By: /s/ Paul A. DeJuliis
------------------------------------------
Paul A. DeJuliis, Chairman of the Board of
Directors and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul A. DeJuliis and William J. Crighton,
and either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on November 26, 1999.
Signature Title
- --------- -----
/s/ Paul A. DeJuliis Chairman of the Board of Directors and
- ------------------------- Chief Executive Officer
Paul A. DeJuliis
/s/ Theodore R. Rutkowski
- -------------------------
Theodore R. Rutkowski President and a Director
/s/ Edward F. Sager, Jr.
- -------------------------
Edward F. Sager, Jr. Director
<PAGE>
Exhibit Index
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of ConMat Technologies, Inc.
23.2 Consent of Grant Thornton LLP.
<PAGE>
FILED
MAR 12 1134 AM '86
SECRETARY OF STATE
TALLAHASSEE, FLORIDA
CERTIFICATE OF INCORPORATION
-- of --
Phoenix Systems, Inc.
WE, THE UNDERSIGNED, hereby associate ourselves together for the
purpose of becoming a corporation under the Laws of the State of Florida, by and
under the provisions of the Statutes of the said State of Florida.
ARTICLE I
The name of this Corporation shall be:
Phoenix Systems, Inc.
ARTICLE II
The Corporation may engage in any activity or business permitted under
the laws of the United States and of the State of Florida.
ARTICLE III
The maximum number of shares of Capital Stock that this Corporation is
authorized to have outstanding at any time is FIVE HUNDRED (500) shares of
Common Stock, having a par value of One Dollar ($1.00) per share.
ARTICLE IV
The amount of capitol with which this Corporation will begin business
shall be the sum of not less than FIVE HUNDRED DOLLARS ($500.00).
ARTICLE V
This Corporation shall exist perpetually unless sooner dissolved
according to law.
1
<PAGE>
ARTICLE VI
The initial street of the principal office of the Corporation shall be:
728 First Street
Miami Beach, Florida 33139
ARTICLE VII
The number of Directors of this Corporation shall be at least one (1)
and no more than five (5).
ARTICLE VIII
The names and street addresses of the members of the first Board of
Directors of this Corporation are as follows:
Dennis Sturm, 728 First Street, Miami Beach, FL 33139
ARTICLE IX
The name and street addresses of the persons signing these Articles of
Incorporation as subscribed is as follows:
Denis Sturm
728 First Street, Miami Beach, FL 33139
ARTICLE X
The Corporate existence of this Corporation shall begin on the date the
Articles of Incorporation are filed of record.
IN WITNESS WHEREOF, the undersigned, Dennis Sturm, being a natural
person, competent to contract, has hereunto set his hand and seal this 11th day
of March, 1986.
/s/ Dennis Sturm (SEAL)
-----------------------------------
Dennis Sturm
STATE OF FLORIDA :
: SS.
COUNTY OF BROWARD :
BEFORE ME, the undersigned Notary Public of the State of Florida,
personally appeared Dennis Sturm, to me well known and known to me to be the
individual described in and who executed the foregoing Articles of
Incorporation, and acknowledged before me that he executed the same freely and
voluntarily for the purposes therein expressed.
2
<PAGE>
WITNESS, my hand and official seal this 11th day of March, 1986.
---------------------------------
Notary Public, State of Florida
My Commission Expires:
3
<PAGE>
FILED
98 AUG - 7 PM 12:40
SECRETARY OF STATE
TALLAHASSEE, FLORIDA
ARTICLES OF AMENDMENT TO
PHOENIX SYSTEMS, INC.
THE UNDERSIGNED, being the President of PHOENIX SYSTEMS, INC., does
hereby amend its Articles of Incorporation, effective August 5, 1998, as
follows:
ARTICLE I
CORPORATE NAME
The name of the Corporation shall be EPL SYSTEMS, INC.
ARTICLE II
PURPOSE
The Corporation shall be organized for any and all purposes authorized
under the laws of the state of Florida.
ARTICLE III
PERIOD OF EXISTENCE
The period during which the Corporation shall continue is perpetual.
ARTICLE IV
SHARES
The Capital Stock of this Corporation shall consist of 50,000,000
shares of Common Stock, $.001 par value.
ARTICLE V
PLACE OF BUSINESS
The address of the principal place of business of this Corporation in
the State of Florida shall be 7695 S.W. 104th Street, Suite 210, Miami, Florida
33156. The Board of Directors may, at any time and from time to time, move the
principal office of this Corporation.
4
<PAGE>
ARTICLE VI
DIRECTORS AND OFFICERS
The business of this Corporation shall be managed by its Board of
Directors. The number of such directors shall be not less than one (1) and,
subject to such minimum, may be increased or decreased from time to time in the
manner provided in the By-Laws.
ARTICLE XI
CONTRACTS
No contract or other transaction between this Corporation and any
person, firm, or corporation shall be affected by the fact that any officer or
director of this Corporation is such other party of is, or at some time in the
future becomes, an officer, director or partner of such other contracting party,
of has now or hereafter a direct or indirect interest in such contract.
I hereby certify that the following was adopted by a majority vote of
the shareholders and directors of the Corporation on August 5, 1998, and that
the number of votes cast was sufficient for approval.
IN WITNESS WHEREOF, I have hereunto subscribed to and executed this
Amendment to Articles of Incorporation this on August 5, 1998.
/s/ Eric P. Littman
- ------------------------------
Eric P. Littman, President
The foregoing instrument was acknowledged before me on August 5, 1998,
by Eric P. Littman, who is personally know to me.
/s/ Isabel J. Cantera
---------------------
Notary Public
My Commission Expires:
5
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CONMAT TECHNOLOGIES, INC.
(present name - FL corp # J03523)
Pursuant to the provisions of Section 607.0602, Florida Statutes, this Florida
profit corporation adopts the following articles of amendment to its articles of
incorporation:
FIRST: Amendment(s) adopted: (indicate article number(s) being amended,
added or deleted)
ARTICLE IV is hereby amended to read in its entirety as follows:
The capital stock of this Corporation shall consist of 40,000,000 shares of
Common Stock, each share with a par value of $0.001 per share; and 10,000,000
shares of Preferred Stock, each share with a par value of $0.001 per share or a
par value as otherwise specified in the Series of Preferred Stock designated as
follows:
A. Series A Convertible Preferred Stock:
1. Designation and Amount
The designation of this series, which consists of 1,500,000 shares of
Preferred Stock, is the Series A Convertible Preferred Stock (the "Series A
Preferred Stock") and the stated value shall be Three Dollars ($3.00) per share
(the "Stated Value").
2. Rank
All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock, par value $0.001 per share (the "Common Stock");
(ii) prior to any class or series of capital stock of the Corporation hereafter
created (unless, with the consent of the holders of Series A Preferred Stock
obtained in accordance with Section A.9 of Article IV of the Articles of
Incorporation of the Corporation, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series A
Preferred Stock) (collectively, with the Common Stock, "Junior Securities");
(iii) pari passu with the Corporation's Series B Preferred Stock and Series C
Preferred Stock and with any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series A Preferred Stock
obtained in accordance with Section A.9 hereof) specifically ranking, by its
terms, on parity with the Series A Preferred Stock (the "Pari Passu
Securities"); and (iv) junior to any class or series of capital stock of the
Corporation hereafter created (with the consent of the holders of Series A
Preferred Stock obtained in accordance with Section A.9 hereof) specifically
ranking, by its terms, senior to the Series A Preferred Stock (the
6
<PAGE>
"Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
3. Dividends
(a) The holders of shares of Series A Preferred
Stock shall be entitled to receive non-cumulative cash dividends at the rate
(the "Dividend Rate") of Two Percent (2.0%) per annum, which dividends shall be
payable if and when declared by the Board of Directors and set aside for payment
to holders of record as they appear on the stock books on such record dates as
are fixed by the Board of Directors out of funds at the time legally available
for the payment of dividends. For purposes of calculation of such cash
dividends, the Series A Preferred Stock shall be valued at the Stated Value.
(b) Notwithstanding Subsection (a) above, the
Corporation may, in its sole discretion, but is not obligated to, pay any or all
dividends in Common Stock rather than cash. The Corporation shall pay such
dividend by issuing to such holder shares of Common Stock that have an aggregate
Market Value (as defined below) equal to the amount of the cash dividends
otherwise payable to such holder on the applicable dividend payment date. For
purposes of this paragraph, the aggregate "Market Value" of the Common Stock
with respect to any dividend payment date shall mean the average of the Closing
Prices (as defined in Section A. 5(b)) of the shares of Common Stock for the 20
consecutive Trading Days preceding the date that is five Trading Days prior to
the dividend payment date, multiplied by the number of shares to be issued to
such holder.
(c) No dividends or other distributions, other
than dividends or other distributions payable solely in shares of capital stock
of the Corporation and liquidating distributions which are subject to the
provisions of Section A.4, shall be paid or set aside for payment on, and no
purchase, redemption or other acquisition shall be made of, any shares of
capital stock of the Corporation (other than any class or series of Senior
Securities, or any class or series of Pari Passu Securities so long as any
dividend payments per share on Pari Passu Securities as a percentage of accrued
and unpaid dividends per share on Pari Passu Securities do not exceed
contemporaneous dividend payments per share on the Series A Preferred Stock as a
percentage of unpaid dividends per share on the Series A Preferred Stock from
the beginning of the year through the payment date), unless and until all unpaid
dividends on the Series A Preferred Stock from the beginning of the year through
the payment date, shall have been declared and paid or a sum sufficient for the
payment thereof set aside for such purposes.
(d) Any reference to "distribution" contained
in this Section A.3 shall not be deemed to include any stock dividend consisting
solely of shares of Common Stock or distributions made in connection with any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
(e) The holders of shares of Series A Preferred
Stock shall not be entitled to receive any dividends or other distributions
except as provided herein.
7
<PAGE>
4. Liquidation Preference
(a) If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of sixty (60) consecutive days and, on account of any such event (a
"Liquidation Event"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of Series A Preferred
Stock, subject to Section A.6, shall have received the Liquidation Preference
(as defined in Section A.4(d)) with respect to each share. If upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series A Preferred Stock and holders of
Pari Passu Securities shall be insufficient to permit the payment to such
holders of the preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to the Series A
Preferred Stock and the Pari Passu Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preference payable on all
such shares.
(b) After payment in full of the Liquidation Preference of the
Series A Preferred Stock, holders of Series A Preferred Stock shall not be
entitled to receive any additional cash, property or other assets of the
Corporation upon liquidation, dissolution or winding up of the Corporation.
(c) Neither the consolidation, merger or other business
combination of the Corporation with or into any other entity, nor the sale,
exchange or transfer of all or substantially all the assets of the Corporation
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for purposes of this Section A.4 unless such sale, exchange or
transfer is in connection with a plan of liquidation, dissolution or winding up
of the Corporation.
(d) For purposes hereof, the "Liquidation Preference" with
respect to a share of the Series A Preferred Stock shall mean an amount equal to
the Stated Value thereof.
8
<PAGE>
5. Redemption of Series A Preferred Stock
(a) Except as provided in Section 5(b) below, the Series A
Preferred Stock is not subject to redemption.
(b). In the event that the Corporation (i) fails to issue
shares of Common Stock to the holders of Series A Preferred Stock upon exercise
by the holders of their conversion rights in accordance with the terms of this
Certificate of Designation (for a period of at least sixty (60) days if such
failure is solely as a result of the circumstances governed by the second
paragraph of Section A.6(d) below and the Corporation is using all commercially
reasonable efforts to authorize a sufficient number of shares of Common Stock as
soon as practicable), or (ii) fails to transfer any certificate for shares of
Common Stock issued to the holders upon conversion of the Series A Preferred
Stock as and when required by this Certificate of Designation (each of the
foregoing failures being a "Mandatory Redemption Event") and any such failure
shall continue uncured for ten (10) business days after the Corporation shall
have been notified thereof in writing by the holder; then, upon the occurrence
and during the continuation of any Mandatory Redemption Event specified in
clauses (i) and (ii) above, at the option of the holders of at least 50% of the
then outstanding shares of Series A Preferred Stock by written notice (the
"Mandatory Redemption Notice") to the Corporation of such Mandatory Redemption
Event, the Corporation shall purchase the holder's shares of Series A Preferred
Stock for an amount per share (the "Mandatory Redemption Amount") equal to 125%
multiplied by the Redemption Price in effect at the time of the redemption
hereunder.
The "Redemption Price" with respect to each share of Series A
Preferred Stock shall mean the amount equal to the greater of (A) the number of
shares of Common Stock to which such failure relates multiplied by the Closing
Price (as defined below) on the Conversion Default Date (as defined below) and
(B) the Stated Value thereof.
"Closing Price" of the Common Stock on any day shall mean the
last reported sale price regular way on such day or, in case no such sale takes
place on such day, the average of the reported closing bid and asked prices
regular way of the Common Stock in each case on a national securities exchange,
or, if the Common Stock is not listed or admitted to trading on any such
exchange, on the NASDAQ National Market, Small Cap Market or other quotation
system on which the Common Stock is listed or admitted to trading or quoted, or,
if not listed or admitted to trading or quoted on any national securities
exchange or quotation system, the average of the closing bid and asked prices of
the Common Stock in the over-the-counter market on the day in question as
reported by the National Quotation Bureau Incorporated, or a similarly generally
accepted reporting service, or, if not so available in such manner, as furnished
by any NASD member firm selected from time to time by the Board of Directors of
the Corporation for that purpose. In the event that the Closing Price as of any
date cannot be determined using any of the foregoing methods, it shall be an
amount equal to the fair market value of a share of Common Stock as determined
by a recognized investment banking firm selected by the Corporation and
reasonably satisfactory to the holder of the Series A Preferred Stock being
redeemed.
9
<PAGE>
If the Corporation fails to pay the Mandatory Redemption
Amount for each share within five (5) business days of written notice that such
amount is due and payable, then each holder of Series A Preferred Stock shall
have the right at any time, so long as the Mandatory Redemption Event continues
to require the Corporation, upon written notice, to immediately issue (in
accordance with the terms of Article 6 below), in lieu of the Mandatory
Redemption Amount, with respect to each outstanding share of Series A Preferred
Stock held by such holder, the number of shares of Common Stock of the
Corporation equal to the Mandatory Redemption Amount divided by the Conversion
Price then in effect.
6. Conversion at the Option of the Holder
(a) Each holder of shares of Series A Preferred Stock may, at
its option, at any time, upon surrender of the certificates therefor, convert
shares of Series A Preferred Stock held by such holder into shares of Common
Stock (an "Optional Conversion"). Each share of Series A Preferred Stock shall
be convertible into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing the Stated Value thereof by the
then-effective Conversion Price (as defined below).
(b) The "Conversion Price" shall be the greater of $3.00 or
80% of the Closing Price on the Conversion Date (defined below), subject to
adjustment from time to time as follows:
(i) Adjustment to Conversion Price Due to Stock
Split, Stock Dividend, Etc. If at any time when the Series A Preferred Stock is
issued and outstanding, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination reclassification or
other similar event, the Conversion Price shall be proportionately reduced, or
if the number of outstanding shares of Common Stock is decreased by a reverse
stock split, combination or reclassification of shares, or other similar event,
the Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.
(ii) Adjustment Due to Merger, Consolidation,
Etc. If, at any time when Series A Preferred Stock is issued and outstanding and
prior to the conversion of all Series A Preferred Stock, there shall be (1) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (2) any
consolidation or merger of the Corporation with any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged), (3) any sale or transfer of all
or substantially all of the assets of the Corporation or (4) any share exchange
pursuant to which all of the outstanding shares of Common Stock are converted
into other securities or property, then the holders of Series A Preferred Stock
shall, upon being given at least thirty (30) days prior written notice of such
transaction, thereafter have the right to purchase and receive upon conversion
of Series A Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such shares
10
<PAGE>
of stock and/or securities or other property as may be issued or payable with
respect to or in exchange for the number of shares of Common Stock immediately
theretofore purchasable and receivable upon the conversion of Series A Preferred
Stock held by such holders had such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event not taken place, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of the holders of the Series A Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
transaction described in this subsection (ii) unless (1) each holder of Series A
Preferred Stock has received written notice of such transaction at least thirty
(30) days prior thereto, and (2) the provisions of this paragraph have been
complied with. The above provisions shall apply regardless of whether or not
there would have been a sufficient number of shares of Common Stock authorized
and available for issuance upon conversion of the shares of Series A Preferred
Stock outstanding as of the date of such transaction, and shall similarly apply
to successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
(iii) No Fractional Shares. If any adjustment
under this Section A.6(b) would create a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon conversion shall be the next higher number of shares.
(c) In order to convert Series A Preferred Stock into full
shares of Common Stock, a holder shall: (1) fax a copy of the fully executed
notice of conversion in the form attached hereto ("Notice of Conversion") to the
Corporation at the office of the Corporation or its designated Transfer Agent,
if any, for the Series A Preferred Stock that the holder elects to convert the
same, which notice shall specify the number of shares of Series A Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (together with a
copy of each certificate to be converted) prior to Midnight, New York City time
(the "Conversion Notice Deadline") on the date of conversion specified on the
Notice of Conversion (the "Conversion Date"); and (2) surrender the original
certificates representing the Series A Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed, along with a copy of the Notice
of Conversion and a signed Lock-Up Agreement ("Lock-Up Agreement") in the form
attached hereto as soon as practicable thereafter to the office of the
Corporation or the Transfer Agent, if any, for the Series A Preferred Stock;
provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless either the Preferred Stock Certificates are delivered to the Corporation
or its Transfer Agent as provided above, or the holder notifies the Corporation
or its Transfer Agent that such certificates have been lost, stolen or destroyed
(subject to the requirements of subparagraph (i) below). In the case of a
dispute as to the calculation of the Conversion Price, the Corporation shall
promptly issue such number of shares of Common Stock to purchase shares of
Common Stock that are not disputed in accordance with subparagraph (ii)
11
<PAGE>
below. The Corporation shall submit the disputed calculations to its outside
accountant via facsimile within two (2) business days of receipt of the Notice
of Conversion. The accountant shall audit the calculations and notify the
Corporation and the holder of the results no later than 48 hours from the time
it receives the disputed calculations. The accountant's calculation shall be
deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt
by the Corporation of evidence of the loss, theft, destruction or mutilation of
any Preferred Stock Certificates representing shares of Series A Preferred
Stock, and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Corporation, and upon surrender and cancellation
of the Preferred Stock Certificate(s), if mutilated, the Corporation shall
execute and deliver new Preferred Stock Certificate(s) of like tenor and date.
However, the Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously requests the
Corporation to convert such Series A Preferred Stock.
(ii) Delivery of Common Stock Upon Conversion.
Upon the surrender of certificates as described above from a holder of Series A
Preferred Stock accompanied by a Notice of Conversion and Lock-Up Agreement, the
Corporation shall issue and, within two (ii) business days (the "Delivery
Period") after such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of agreement and indemnification pursuant to
subparagraph (ii) above), deliver to or upon the order of the holder (1) that
number of shares of Common Stock for the portion of the shares of Series A
Preferred Stock converted as shall be determined in accordance herewith and (2)
a certificate representing the balance of the shares of Series A Preferred Stock
not converted, if any.
(iii) No Fractional Shares. If any conversion of
Series A Preferred Stock would result in a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock shall be the next
higher number of shares.
(iv) Conversion Date. The "Conversion Date"
shall be the date specified in the Notice of Conversion, provided (1) that the
advance copy of the Notice of Conversion is faxed to the Corporation before
Midnight, New York City time, on the Conversion Date, and (2) that the original
Preferred Stock Certificate(s), duly endorsed, are surrendered along with a copy
of the Notice of Conversion as soon as practicable thereafter to the office of
the Corporation or the Transfer Agent for the Series A Preferred Stock. The
person or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such securities as of the Conversion Date and all rights with respect to the
shares of Series A Preferred Stock surrendered shall forthwith terminate except
the right to receive the shares of Common Stock or other securities or property
issuable on such conversion.
(d) A number of shares of the authorized but unissued Common
Stock sufficient to provide for the conversion of the Series A Preferred Stock
outstanding at the then current
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Conversion Price shall at all times be reserved by the Corporation, free from
preemptive rights, for such conversion or exercise. If the Corporation shall
issue any securities or make any change in its capital structure which would
change the number of shares of Common Stock into which each share of the Series
A Preferred Stock shall be convertible at the then current Conversion Price the
Corporation shall at the same time also make proper provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved, free from preemptive rights, for conversion of the outstanding Series
A Preferred Stock on the new basis. If, at any time, a holder of shares of
Series A Preferred Stock submits a Conversion Notice and the Corporation does
not have sufficient authorized but unissued shares of Common Stock available to
effect such conversion in accordance with the provisions of this Section A.6 (a
"Conversion Default"), the Corporation shall issue to the holder all of the
shares of Common Stock which are available to effect such conversion. The number
of shares of Series A Preferred Stock included in the Notice of Conversion which
exceeds the amount which is then convertible into available shares of Common
Stock (the "Excess Amount") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance with the
terms hereof until (and at the holder's option at any time after) the date
additional shares of Common Stock are authorized by the Corporation to permit
such conversion, at which time the Conversion Price in respect thereof shall be
the lesser of (1) the Conversion Price on the first day of the Conversion
Default (the "Conversion Default Date") and (2) the Conversion Price on the
Conversion Date subsequently elected by the holder in respect thereof. The
Corporation shall send notice to the holder of the authorization of additional
shares of Common Stock and the Authorization Date
Nothing herein shall limit the holder's right to pursue actual
damages for the Corporation's failure to maintain a sufficient number of
authorized shares of Common Stock as required pursuant to the terms of this
Section 6(d) or to cause a Mandatory Redemption pursuant to Section A.5(b), and
each holder shall have the right to pursue all remedies available at law or in
equity (including a decree of specific performance and/or injunctive relief).
(e) Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this Section A.6, the Corporation, at its
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series A
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (1) such adjustment or readjustment, (2) the
Conversion Price at the time in effect and (3) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series A Preferred Stock.
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7. Mandatory Conversion
(a) The Corporation shall have the right, by written note to
each holder of Series A Preferred Stock, to convert all shares of Series A
Preferred Stock into shares of Common Stock (a "Mandatory Conversion") at any
time on or after the first day on which the Closing Price (determined without
use of the last sentence of the definition of Closing Price) has been equal to
or in excess of the Conversion Price for forty-five (45) consecutive calendar
days (the Closing Price on any Saturday, Sunday or holiday shall be deemed to be
the Closing Price on the last preceding trading day). Each share of Series A
Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Stated
Value by the then effective Conversion Price.
(b) All shares of Series A Preferred Stock shall be deemed
canceled as of the date of the Corporation's notice of Mandatory Conversion.
8. Registration Rights.
Each present and future holder of Series A Preferred Stock shall be
entitled to the benefits of the registration rights granted pursuant to this
Section A.8.
(a) For purposes of this Section A.8:
(i) The term "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Securities
Act, and the declaration or ordering of effectiveness of such registration
statement or document;
(ii) The term "Registrable Securities" means the
shares of Common Stock into which the shares of Series A Preferred Stock are
convertible and all shares of Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, any of the Series A Preferred Stock excluding in all cases,
however, any Registrable Securities (x) sold by a person in a transaction in
which his rights under this Article 8 are not assigned, (y) sold in a public
offering registered under the Securities Act or (z) sold pursuant to Rule 144
promulgated under the Securities Act;
(iii) The number of shares of "Registrable Securities
then outstanding"
shall be determined by the number of shares of Common Stock issuable upon
conversion of Series A Preferred Stock which are, and the number of shares of
Common Stock issuable pursuant to then exercisable or convertible securities
which are, Registrable Securities;
(iv) The term "Holder" means any person owning or
having the right to acquire Registrable Securities;
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(v) The term "SEC" means the Securities and
Exchange Commission; and
(vi) The term "Securities Act" shall mean the
Securities Act of 1933, as from time to time amended.
(b) (i) No later than December 31, 1999 the Company shall file
with the Securities and Exchange Commission ("SEC") a registration statement
covering the Registrable Securities, and shall use its best offers to cause such
registration statement to become effective on or before ninety (90) days after
the date such registration statement is filed (the "Initial Registration"). If
such Initial Registration is not declared effective by the end of such period or
does not include all Registrable Securities, or the Company is not in compliance
with its obligations under Section A.8(d), the Holders of a majority of the
Registrable Securities shall have the right to require by notice in writing that
the Company register all or any part of the Registrable Securities held by such
Holders (a "Demand Registration") and the Company shall thereupon effect such
registration in accordance herewith. The parties agree that if such Holders
demand registration of less than all of the Registrable Securities, the Company,
at its option, may nevertheless file a registration statement covering all of
the Registrable Securities. Upon the filing by the Company of a Registration
Statement under Section A.8(c) below, and if the Company is in compliance with
its obligations under Sections A.8(c) and (d) below, the Demand Registration
rights granted pursuant to this Section A.8(b) shall cease. If such Registration
statement is not declared effective with respect to all Registrable Securities
or if the Company is not in compliance with such obligations, the Demand
Registration rights described herein shall remain in effect.
(ii) If the Holders initiating the registration
request hereunder (the "Initiating Holders") intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section A.8(b) and the Company shall include such information in the
written notice referred to in Section A.8(b)(i). In such event, the right of any
Holder to include its, his or her Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company as provided in Section A.8(d)(v)) enter into an under writing agreement
in customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders.
Notwithstanding any other provision of this Section A.8(b), if the underwriter
advises the Initiating Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Company shall so
advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares of securities that may be
included in the underwriting shall be allocated among all Initiating Holders and
other Holders who have been provided the notice required by Section A.8(b)(i) in
proportion (as nearly as practicable) to the number of shares of Registrable
Securities requested to be included in such registration by such Holder and
which would be eligible for inclusion in the registration but for the
application of this sentence.
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(iii) Notwithstanding the foregoing, the Company
shall not be required to file a registration statement following the effective
date of any registration of Company securities with respect to which Holders
were given the opportunity to register Registrable Shares under Section A.8(c)
below, or (b) during the period of time beginning on the date the Company files
a registration statement with the SEC described in Section A.8(c) below and
ending on the earlier to occur of (x) the date which is 120 days after such
registration becomes effective, or (y) the date on which the Company withdraws
such registration with the SEC. In addition, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section A.8(b) a
certificate signed by the President of the Company stating that in the good
faith judgment of the board of directors of the Company it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Holders; provided, however, that the Company may not utilize this right more
than once in any twelve (12) month period.
(c) If (but without any obligation to do so) the Corporation
proposes to register (including for this purpose a registration effected by the
Corporation for stockholders other than the Holders) any shares of its Common
Stock under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to employees pursuant to stock option awards and/or to
participants in a Company employee benefit or stock plan, or a registration on
any form which does not include substantially the same information, other than
information related to the selling stockholders or their plan of distribution,
as would be required to be included in a registration statement covering the
sale of the Registrable Securities), the Corporation shall, at such time,
promptly give each Holder written notice of such registration. Upon the written
request of each Holder given within twenty (20) days after mailing of such
notice by the Corporation, the Corporation shall, subject to the provisions of
the immediately preceding sentence and Section A.8(e) hereof, cause to be
registered under the Securities Act all of the Registrable Securities that each
such Holder has requested to be so registered.
(d) Whenever required under this Section A.8 to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to one hundred
twenty (120) days.
(ii) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement.
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(iii) Furnish to the Holders such numbers of copies
of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(iv) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(v) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(vi) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(vii) In the case of an underwritten public offering,
furnish, at the request of any Holder requesting registration of Registrable
Securities pursuant to this Section A.8, on the date that such Registrable
Securities are delivered to the underwriters for sale in connection with a
registration pursuant to this Section A.8, (A) an opinion, dated such date, of
the counsel representing the Company for the purposes of such registration, in
such form and substance as is customarily given to underwriters in an
underwritten public offering, addressed to the underwriters and (B) a letter
dated such date, from the independent certified public accountants of the
Company, in such form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters.
(e) It shall be a condition precedent to the obligations of
the Corporation to take any action pursuant to this Section A.8 with respect to
the Registrable Securities of any selling Holder that such Holder shall have
furnished to the Corporation such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
(f) Except as set forth in this Section 8.(f), the Company
shall bear and pay all expenses incurred by it in connection with any
registrations, filings or qualifications pursuant to Section A.8(b), including
without limitation all registration, filing and qualification fees, printers,
and accounting fees, and fees and disbursements of counsel for the Company, but
excluding underwriter's commissions and/or discounts with respect to shares sold
by Holders, which shall be
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the responsibility of the Holders; provided, however, that (subject to Section
A.8(b)(ii) hereof) the Holders participating in any registration pursuant to
Section A.8(b) shall reimburse the Company for any expenses of any Demand
Registration proceeding begun pursuant to Section A.8(b) if the registration
request is subsequently withdrawn at the request of the Holders of a majority of
the Registrable Securities to be registered (in which case all Holders
participating in such withdrawn registration shall bear such expenses pro rata
based upon the number of Registrable Securities to be included in such
registration). In no event shall the Company be required to pay any expenses
incurred by a Holder in connection with any registration, filing or
qualification pursuant to Section A.8(b).
(g) The Corporation shall bear and pay all expenses incurred
by it in connection with any registration, filing or qualification of
Registrable Securities with respect to the registrations pursuant to Section
A.8(c), including without limitation all registration, filing, and qualification
fees, printers and accounting fees and all fees and disbursements of counsel for
the Corporation relating or allocable thereto. The Corporation shall not pay any
expenses incurred by a Holder in connection with any such registration, filing
or qualification, including, but not limited to underwriting discounts and
commissions relating to Registrable Securities and the fees and disbursements of
any professional advisors (including attorneys and accountants) utilized by the
selling Holders in connection with such registration, filing or qualification.
(h) In connection with any offering involving an underwriting
of shares being issued by the Corporation, the Corporation shall not be required
under Section A.8(b) or (c) hereof to include any of the Holders' securities in
such underwriting unless they accept the customary and reasonable terms of the
underwriting as agreed upon between the Corporation and the underwriters
selected by it, and then only in such quantity as will not, in the opinion of
the underwriters, jeopardize the success of the offering by the Corporation. If
the total amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Corporation that the underwriters reasonably believe
compatible with the success of the offering, then the Corporation shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters believe will not
jeopardize the success of the offering (the securities so included to be
allocated first among all holders of Other Securities and next apportioned among
the Holders who have provided notice required by Section A.8(b) or (c) and all
other holders of securities subject to registration rights granted by the
Corporation in proportion (as nearly as practicable) to the number of shares of
securities requested to be included in such registration by such Holder and such
other holders and which would have been eligible for inclusion in such
registration but for the application of this sentence, or in such other
proportions as shall mutually be agreed to by such selling stockholders). For
purposes of the provision of the preceding sentence concerning apportionment
amongst the selling stockholders, for any selling stockholder which is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder," and any reduction with respect to
such "selling
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stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
(i) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any registration by the Corporation
as the result of any controversy that might arise with respect to the
interpretation or implementation of this Section A.8.
(j) In the event any Registrable Securities are included
pursuant to a registration statement under this Section A.8:
(i) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, any underwriter (as defined in the
Securities Act) and each person if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act") against any losses, claims, damages or
liabilities (joint or several) to which they or any of them may become subject
under the Securities Act, the Exchange Act or any other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (A) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus (but only if such is not
corrected in the final prospectus) contained therein or any amendments or
supplements thereto, (B) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading (but only if such is not corrected in the final
prospectus), or (C) any violation or alleged violation by the Company in
connection with the registration of Registrable Securities under the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state securities
law; and the Company will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage, lia
bility or action; provided, however, that the indemnity agreement contained in
this Section A.8(j)(i) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Holder, underwriter or controlling person.
(ii) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, the Exchange Act
or other federal or state law, insofar as such losses, claims, damages or
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liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with information furnished
by such Holder for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this Section A.8(j)(ii), in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section A.8(j)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided that in no event shall any indemnity under this Section
A.8(j)(ii) exceed the net proceeds from the offering received by such Holder.
(iii) Promptly after receipt by an indemnified party
under this Section A.8(j) of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section A.8(j),
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section A.8(j), but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
A.8(j).
(iv) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section A.8(j)(i) and (ii) is applicable but for any reason is held to be
unavailable from the Company with respect to all Holders or any Holder, the
Company and the Holder or Holders, as the case may be, shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted) to which
the Company and one or more of the Holders may be subject in such proportion as
is appropriate to reflect the relative fault of the Company on the one hand, and
the Holder or Holders on the other, in connection with statements or omissions
which resulted in such losses, claims, damages or liabilities. Notwithstanding
the foregoing, no Holder shall be required to contribute any amount in excess of
the net proceeds received by such Holder from the Registrable Securities as the
case may be, sold by such Holder pursuant to the registration statement. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
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Each person, if any, who controls a Holder within the meaning of the Securities
Act shall have the same rights to contribution as such Holder.
(v) The obligations of the Company and Holders
under this Section A.8(j) shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section A.8 or
otherwise.
9. Voting Rights
The holders of the Series A Preferred Stock have no voting
power whatsoever, except as otherwise provided by the Florida Business
Corporation Act ("FBCA"), and in this Section A.9, and in Section A.10 below.
Notwithstanding the above, the Corporation shall provide each
holder of Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
To the extent permitted under the FBCA, the Series A Preferred
Stock shall be considered a single class of stock for voting purposes. To the
extent that under the FBCA the vote of the holders of the Series A Preferred
Stock, voting separately as a class or series as applicable, is required to
authorize a given action of the Corporation, the affirmative vote or consent of
the holders of at least a majority of the shares of the Series A Preferred Stock
represented at a duly held meeting at which a quorum is present or by written
consent of a majority of the shares of Series A Preferred Stock (except as
otherwise may be required under the FBCA) shall constitute the approval of such
action by the class. To the extent that under the FBCA holders of the Series A
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one class, each share of Series A Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock into
which it is then convertible using the record date for the taking of such vote
of shareholders as the date as of which the Conversion Price is calculated.
Holders of the Series A Preferred Stock shall be entitled to notice of (and
copies of proxy materials and other information sent to shareholders) all
shareholder meetings or written consents with respect to which they would
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be entitled to vote, which notice would be provided pursuant to the
Corporation's by-laws and the FBCA.
10. Protection Provision
So long as shares of Series A Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the FBCA) of the holders of at least a majority
of the then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights,
preferences or privileges of the Series A Preferred Stock or any Senior
Securities or Pari Passu Securities so as to affect adversely the Series A
Preferred Stock;
(b) create any new class or series of
capital stock having a preference over the Series A Preferred Stock as to
dividends or distribution of assets upon liquidation, dissolution or winding up
of the Corporation (as previously defined in Section A.2 hereof, "Senior
Securities");
(c) create any new class or series of
capital stock ranking pari passu with the Series A Preferred Stock as to
dividends or distribution of assets upon liquidation, dissolution or winding up
of the Corporation (as previously defined in Section A.2 hereof, "Pari Passu
Securities");
(d) increase the authorized number of
shares of Series A Preferred Stock or any class of Pari Passu Securities; or
(e) do any act or thing not authorized
or contemplated by this Certificate of Designation which would result in
taxation of the holders of shares of the Series A Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series A Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series A
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series A Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series A Preferred Stock.
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11. Cancellation of Series A Preferred Stock
In the event any shares of Series A Preferred Stock shall be
converted pursuant to Section A.6, the shares so converted shall be canceled,
shall return to the status of unauthorized, but unissued preferred stock of no
designated series, and shall not be issuable by the Corporation as Series A
Preferred Stock.
B. Series B Preferred Stock:
1. Designation and Amount
The designation of this series, which consists of 166,667
shares of Preferred Stock, is the Series B Preferred Stock (the "Series B
Preferred Stock") and the stated value shall be Three Dollars ($3.00) per share
(the "Stated Value").
2. Rank
All shares of the Series B Preferred Stock shall rank (i)
prior to the Corporation's Common Stock, par value $0.001 per share (the "Common
Stock"); (ii) prior to any class or series of capital stock of the Corporation
hereafter created (unless, with the consent of the holders of Series B Preferred
Stock obtained in accordance with Section B.7 hereof, such class or series of
capital stock specifically, by its terms, ranks senior to or pari passu with the
Series B Preferred Stock) (collectively, with the Common Stock, "Junior
Securities"); (iii) pari passu with the Corporation's Series A Convertible
Preferred Stock and Series C Preferred Stock and with any class or series of
capital stock of the Corporation hereafter created with the consent of the
holders of Series B Preferred Stock obtained in accordance with Section B.7
hereof specifically ranking, by its terms, on parity with the Series B Preferred
Stock (the "Pari Passu Securities"); and (iv) junior to any class or series of
capital stock of the Corporation hereafter created with the consent of the
holders of Series B Preferred Stock obtained in accordance with Section B.7
hereof specifically ranking, by its terms, senior to the Series B Preferred
Stock (the "Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
3. Dividends
(a) The holders of shares of Series B
Preferred Stock shall be entitled to receive cumulative cash dividends at the
rate (the "Dividend Rate") of Eight Percent (8.0%) per annum, which dividends
shall be payable in equal quarterly installments on March 31, June 30, September
30 and December 31 each year (each such date, regardless of whether any
dividends have been paid or declared and set aside for payment on such date,
being a "Dividend Payment Date") to holders of record as they appear on the
stock books on such record dates as are fixed by the Board of Directors, but
only out of funds at the time legally available for the payment of dividends.
For purposes of calculation of such cash dividends, the Series B Preferred Stock
shall be valued at the Stated Value. Such dividends shall begin to accrue on
outstanding shares of Series B Preferred Stock from the date of issuance and
shall be deemed to accrue from day to day whether
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or not earned or declared until paid and shall be cumulative; provided, however,
that dividends accrued or deemed to have accrued for any period shorter than the
full three-month period between Dividend Payment Dates shall be computed based
on the actual number of days elapsed in the three-month period for which such
dividends are payable. Dividends on account of any dividend that has accrued or
been deemed to have accrued but which have not been paid (a "Dividend
Arrearage") may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to holders of record on such
date as may be fixed by the Board of Directors of the Corporation.
(b) No dividends or other distributions,
other than dividends or other distributions payable solely in shares of capital
stock of the Corporation and liquidating distributions which are subject to the
provisions of Section B.4, shall be paid or set aside for payment on, and no
purchase, redemption or other acquisition shall be made of, any shares of
capital stock of the Corporation (other than any class or series of Senior
Securities or Pari Passu Securities so long as any dividend payments per share
on Pari Passu Securities as a percentage of accrued and unpaid dividends per
share on Pari Passu Securities do not exceed contemporaneous dividend payments
per share on the Series B Preferred Stock as a percentage of accrued and unpaid
dividends per share on the Series B Preferred Stock), unless and until all
accrued and unpaid dividends on the Series B Preferred Stock, including the full
dividend for the then current quarterly dividend period and all outstanding
Dividend Arrearages shall have been declared and paid or a sum sufficient for
the payment thereof set aside for such purposes.
(c) Any reference to "distribution"
contained in this Section B.3 shall not be deemed to include any stock dividend
or distributions made in connection with any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary.
(d) The holders of shares of Series B
Preferred Stock shall not be entitled to receive any dividends or other
distributions except as provided herein
4. Liquidation Preference
(a) If the Corporation shall commence a
voluntary case under the Federal bankruptcy laws or any other applicable Federal
or State bankruptcy, insolvency or similar law, or consent to the entry of an
order for relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or State bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of sixty (60) consecutive days and, on
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account of any such event (a "Liquidation Event"), the Corporation shall
liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate,
dissolve or wind up, no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series B Preferred Stock shall have received the Liquidation
Preference (as defined in Section B.4(d)) with respect to each share. If upon
the occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series B Preferred Stock and holders of
Pari Passu Securities shall be insufficient to permit the payment to such
holders of the preferential amounts payable thereon, then the entire assets and
funds of the Corporation legally available for distribution to the Series B
Preferred Stock and the Pari Passu Securities shall be distributed ratably among
such shares in proportion to the ratio that the Liquidation Preference payable
on each such share bears to the aggregate Liquidation Preference payable on all
such shares.
(b) After payment in full of the Liquidation
Preference of the Series B Preferred Stock, holders of Series B Preferred Stock
shall not be entitled to receive any additional cash, property or other assets
of the Corporation upon liquidation, dissolution or winding up of the
Corporation.
(c) Neither the consolidation, merger or other
business combination of the Corporation with or into any other entity, nor the
sale, exchange or transfer of all or substantially all the assets of the
Corporation shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this Section B.4 unless such sale, exchange or
transfer is in connection with a plan of liquidation, dissolution or winding up
of the Corporation.
(d) For purposes hereof, the "Liquidation
Preference" with respect to a share of the Series B Preferred Stock shall mean
an amount equal to the Stated Value thereof plus all accrued but unpaid
dividends thereon.
5. Redemption of Series B Preferred Stock
(a) Except as provided in this Section B.5, the
Series B Preferred Stock is not subject to redemption.
(b) The Corporation may, by written notice to
the holders of Series B Preferred Stock, redeem shares of Series B Preferred
Stock at a price (the "Redemption Price") equal to the Stated Value thereof plus
all accrued but unpaid dividends thereon. Within ten (10) days following receipt
of notice of redemption, the holders of Series B Preferred Stock shall deliver
to the Corporation for cancellation certificates evidencing the Series B Stock,
and the Corporation shall tender the Redemption Price for such shares promptly
upon receipt of such certificates. Upon payment of the Redemption Price, all
shares of Series B Preferred Stock shall be deemed canceled for all purposes.
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<PAGE>
(c) If on a mandatory redemption date the Board
determines that funds of the Corporation legally available for redemption of the
Series B Preferred Stock shall be insufficient to discharge such redemption
requirements in full, such funds as are so available for such purpose shall be
set aside and used for the redemption. Such redemption requirements shall be
cumulative, so that if such requirements shall not be fully discharged as they
accrue because of the insufficiency of funds legally available, legally
available funds shall be applied thereto until such requirements are fully
discharged. There shall be a redemption within 10 days after such funds become
available.
(d) In the event of the redemption of only a
part of the outstanding shares of Series B Preferred Stock, the Corporation
shall effect such redemption pro rata according to the number of shares of
Series B Preferred Stock held by each holder of Series B Preferred Stock as of
10 days before the mandatory redemption date.
(e) Not less than 10 days nor more than 60 days
prior to mandatory redemption date, written notice (the "Mandatory Redemption
Notice") shall be mailed, postage prepaid, to each holder of record of the
Series B Preferred Stock to be redeemed at his post office address last shown on
the records of the Company. The Mandatory Redemption Notice shall state:
(i) The total number of shares of Series
B Preferred Stock being redeemed;
(ii) The total number of shares of Series B
Preferred Stock held by the holder that the Corporation intends to redeem;
(iii) The mandatory redemption date and
the Redemption Price for the Series B Preferred Stock; and
(iv) That the holder is to surrender to
the Corporation, in the manner and at the place designated, his certificate or
certificates representing the shares of Series B Preferred Stock to be redeemed.
(f) If the Mandatory Redemption Notice shall have
been duly given, and if on the mandatory redemption date the Redemption Price is
paid, then notwithstanding that the certificates evidencing any of the shares of
Series B Preferred Stock so called for redemption shall not have been
surrendered, the Redemption Price with respect to such shares shall cease to
increase after the mandatory redemption date and all rights with respect to such
shares shall forthwith after the mandatory redemption date terminate, except
only the right of the holders to receive the Redemption Price upon surrender of
their certificate or certificates therefor.
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6. Voting Rights
(a) The holders of the Series B Preferred Stock
have no voting power whatsoever, except as otherwise provided by the Florida
Business Corporation Act ("FBCA"), and in this Section B.6, and in Section B.7
below.
(b) The holders of the Series B Preferred Stock,
voting as a class, shall have the right to elect one (1) member of the
Corporation's Board of Directors.
(c) The Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such dividend, distribution, right or other event, and
a brief statement regarding the amount and character of such dividend,
distribution, right or other event to the extent known at such time.
7. Protection Provision
So long as shares of Series B Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the FBCA) of the holders of at least a majority
of the then outstanding shares of Series B Preferred Stock, voting as a class:
(a) alter or change the rights, preferences or privileges
of (i) the Series B Preferred Stock in any manner, or (ii) any Senior Securities
or Pari Passu Securities so as to affect adversely the Series B Preferred Stock;
(b) create any new class or series of capital stock having
a preference over the Series B Preferred Stock as to redemption rights or as to
payment of dividends or distribution of assets upon liquidation, dissolution or
winding up of the Corporation (as previously defined in Section B.2 hereof,
"Senior Securities");
(c) create any new class or series of capital stock
ranking pari passu with the Series B Preferred Stock as to redemption rights or
as to payment of dividends or
27
<PAGE>
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined in Section B.2 hereof, "Pari Passu
Securities");
(d) increase the authorized number of
shares of Series B Preferred Stock or issue any additional shares of any class
of Pari Passu Securities
(e) do any act or thing not authorized
or contemplated by this Certificate of Designation which would result in
taxation of the holders of shares of the Series B Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended).
C. Series Preferred Stock:
1. Designation and Amount
The designation of this series, which consists of 446,150
shares of Preferred Stock, is the Series C Preferred Stock (the "Series C
Preferred Stock") and the stated value shall be Three Dollars ($3.00) per share
(the "Stated Value").
2. Rank
All shares of the Series B Preferred Stock shall rank (i)
prior to the Corporation's Common Stock, par value $0.001 per share (the "Common
Stock"); (ii) prior to any class or series of capital stock of the Corporation
hereafter created (unless, with the consent of the holders of Series C Preferred
Stock obtained in accordance with Section C.7 hereof, such class or series of
capital stock specifically, by its terms, ranks senior to or pari passu with the
Series C Preferred Stock, (collectively, with the Common Stock, "Junior
Securities"); (iii) pari passu with the Corporation's Series A Convertible
Preferred Stock, and Series B Preferred Stock and with any class or series of
capital stock of the Corporation hereafter created with the consent of the
holders of Series C Preferred Stock obtained in accordance with Section C.7
hereof specifically ranking, by its terms, on parity with the Series C Preferred
Stock (the "Pari Passu Securities"); and (iv) junior to any class or series of
capital stock of the Corporation hereafter created with the consent of the
holders of Series C Preferred Stock obtained in accordance with Section C.7
hereof specifically ranking, by its terms, senior to the Series C Preferred
Stock (the "Senior Securities"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
3. Dividends
(a) The holders of shares of Series C
Preferred Stock shall be entitled to receive cumulative cash dividends at the
rate (the "Dividend Rate") of Eight Percent (8%) per annum until the third
anniversary date of the issuance of the Series C Preferred Stock and increasing
Two Percent (2%) on the third anniversary date and on each anniversary date
thereafter
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up to a maximum of Sixteen Percent (16%), which dividends shall be payable in
equal quarterly installments on March 31, June 30, September 30 and December 31
each year (each such date, regardless of whether any dividends have been paid or
declared and set aside for payment on such date, being a "Dividend Payment
Date") to holders of record as they appear on the stock books on such record
dates as are fixed by the Board of Directors, but only out of funds at the time
legally available for the payment of dividends. For purposes of calculation of
such cash dividends, the Series C Preferred Stock shall be valued at the Stated
Value. Such dividends shall begin to accrue on outstanding shares of Series C
Preferred Stock from the date of issuance (provided that immediately upon
issuance, each outstanding share of Series C Preferred Stock shall be entitled
to dividends as if such dividends had commenced accruing on July 1, 1999) and
shall be deemed to accrue from day to day whether or not earned or declared
until paid and shall be cumulative; provided, however, that dividends accrued or
deemed to have accrued for any period shorter than the full three-month period
between Dividend Payment Dates shall be computed based on the actual number of
days elapsed in the three-month period for which such dividends are payable.
Dividends on account of any dividend that has accrued or been deemed to have
accrued but which have not been paid (a "Dividend Arrearage") may be declared
and paid at any time, in whole or in part, without reference to any regular
Dividend Payment Date, to holders of record on such date as may be fixed by the
Board of Directors of the Corporation.
(b) Notwithstanding Subsection (a)
above, the Corporation may, out of authorized but unissued shares of the
Corporation's Preferred Stock, in its sole discretion, but is not obligated to,
pay dividends accruing through June 30, 2000 in additional fully paid and
nonassessable shares of Series C Preferred Stock at the annual rate of Eight
Percent (8%) of a share of Series C Preferred Stock on each share of Series C
Preferred Stock then outstanding.
(c) No dividends or other distributions,
other than dividends or other distributions payable solely in shares of capital
stock of the Corporation and liquidating distributions which are subject to the
provisions of Section C.4, shall be paid or set aside for payment on, and no
purchase, redemption or other acquisition shall be made of, any shares of
capital stock of the Corporation (other than any class or series of Senior
Securities or Pari Passu Securities so long as any dividend payments per share
on Pari Passu Securities as a percentage of accrued and unpaid dividends per
share on Pari Passu Securities do not exceed contemporaneous dividend payments
per share on the Series C Preferred Stock as a percentage of accrued and unpaid
dividends per share on the Series C Preferred Stock), unless and until all
accrued and unpaid dividends on the Series C Preferred Stock, including the full
dividend for the then current quarterly dividend period and all outstanding
Dividend Arrearages shall have been declared and paid or a sum sufficient for
the payment thereof set aside for such purposes.
(d) Any reference to "distribution"
contained in this Section C.3 shall not be deemed to include any stock dividend
or distributions made in connection with any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary.
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(e) The holders of shares of Series C
Preferred Stock shall not be entitled to receive any dividends or other
distributions except as provided herein
4. Liquidation Preference
(a) If the Corporation shall commence a
voluntary case under the Federal bankruptcy laws or any other applicable Federal
or State bankruptcy, insolvency or similar law, or consent to the entry of an
order for relief in an involuntary case under any law or to the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or State bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of sixty (60) consecutive days and, on account of any such event (a
"Liquidation Event"), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of Series C Preferred
Stock shall have received the Liquidation Preference (as defined in Section
C.4(d)) with respect to each share. If upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the holders of the
Series C Preferred Stock and holders of Pari Passu Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series C Preferred Stock and the Pari Passu
Securities shall be distributed ratably among such shares in proportion to the
ratio that the Liquidation Preference payable on each such share bears to the
aggregate Liquidation Preference payable on all such shares.
(b) After payment in full of the Liquidation
Preference of the Series C Preferred Stock, holders of Series C Preferred Stock
shall not be entitled to receive any additional cash, property or other assets
of the Corporation upon liquidation, dissolution or winding up of the
Corporation.
(c) Neither the consolidation, merger or other
business combination of the Corporation with or into any other entity, nor the
sale, exchange or transfer of all or substantially all the assets of the
Corporation shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this Article 4 unless such sale, exchange or
transfer is in connection with a plan of liquidation, dissolution or winding up
of the Corporation.
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(d) For purposes hereof, the "Liquidation
Preference" with respect to a share of the Series C Preferred Stock shall mean
an amount equal to the Stated Value thereof plus all accrued but unpaid
dividends thereon.
5. Redemption of Series C Preferred Stock
(a) Except as provided in this Section C.5, the
Series C Preferred Stock is not subject to redemption.
(b) The Corporation may, by written notice to
the holders of Series C Preferred Stock, redeem shares of Series C Preferred
Stock at a price (the "Redemption Price") equal to the Stated Value thereof plus
all accrued but unpaid dividends thereon. Within ten (10) days following receipt
of notice of redemption, the holders of Series C Preferred Stock shall deliver
to the Corporation for cancellation certificates evidencing the Series C Stock,
and the Corporation shall tender the Redemption Price for such shares promptly
upon receipt of such certificates. Upon payment of the Redemption Price, all
shares of Series C Preferred Stock shall be deemed canceled for all purposes.
(c) In the event of the redemption of only a
part of the outstanding shares of Series C Preferred Stock, the Corporation
shall effect such redemption pro rata according to the number of shares of
Series C Preferred Stock held by each holder of Series C Preferred Stock as of
10 days before the redemption date.
6. Voting Rights
(a) The holders of the Series C Preferred Stock
have no voting power whatsoever, except as otherwise provided by the Florida
Business Corporation Act ("FBCA"), and in this Section C.6, and in Section C.7
below.
(b) The Corporation shall provide each holder of
Series C Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or 30 days prior to the consummation of the transaction or
event, whichever is earlier), of the date on which any such record is to be
taken for the purpose of such
31
<PAGE>
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such dividend, distribution, right or other event to
the extent known at such time.
7. Protection Provision
So long as shares of Series C Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the FBCA) of the holders of at least a majority
of the then outstanding shares of Series C Preferred Stock, voting as a class:
(a) alter or change the rights,
preferences or privileges of (i) the Series C Preferred Stock in any manner, or
(ii) any Senior Securities or Pari Passu Securities so as to affect adversely
the Series C Preferred Stock;
(b) create any new class or series of
capital stock having a preference over the Series C Preferred Stock as to
redemption rights or as to payment of dividends or distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Section C.2 hereof, "Senior Securities");
(c) create any new class or series of
capital stock ranking pari passu with the Series C Preferred Stock as to
redemption rights or as to payment of dividends or distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Section C.2 hereof, "Pari Passu Securities");
(d) increase the authorized number of
shares of Series C Preferred Stock or issue any additional shares of Series C
Preferred Stock or any class of Pari Passu Securities; or
(e) do any act or thing not authorized
or contemplated by this Certificate of Designation which would result in
taxation of the holders of shares of the Series C Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended).
SECOND:: Because these Articles of Amendment of the Articles
of the Articles of Incorporation of the Corporation
do not provide for a reclassification of issued and
outstanding shares, no provisions for implementing
any such amendment as to issued and outstanding
shares are contained in these Articles of Amendment.
THIRD: ARTICLES II, III, V, VI, VII, VIII, IX, X and XI
of the Articles of Incorporation of the Corporation
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shall read in their entirety as set forth in Articles
of Amendment filed August 7, 1998 with and by the
Secretary of State of Florida, with no amendments
thereto as of the date of filing of these Articles of
Amendment.
FOURTH: The date of each amendment's adoption: November 1, 1999.
FIFTH: Adoption of Amendment(s):
The amendments were approved by unanimous consent of
the Corporation's Board of Directors pursuant to
authority granted in the Corporation's articles of
Incorporation.
Signed this 1st day of November, 1999
Signature /s/ Paul A. DeJuliis
------------------------------------
By: Paul A. DeJuliis, President
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INDEPENDENT AUDITOR'S CONSENT
We have issued our report dated March 25, 1999 accompanying the
consolidated financial statements of ConMat Technologies, Inc. for the years
ended January 2, 1999 and January 3, 1998 which are included in this
Registration Statement. We consent to the inclusion in the Registration
Statement of the aforementioned report and to the use of our name, as it appears
under the caption "Experts".
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
November 24, 1999
