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As filed with the Securities and Exchange Commission on September 30, 1999.
File No. 0-30166
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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ConMat Technologies, Inc.
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(Name of Small Business Issuer in its Charter)
Florida 23-2999072
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Franklin Avenue and Grant Streets, Phoenixville, PA 19460
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(Address of Principal Executive Offices) (Zip Code)
(610) 935-0225
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Issuer's Telephone Number
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on
to be so Registered Which Each Class is to be Registered
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Common Stock Nasdaq OTC Bulletin Board
<PAGE>
Item 1. Description of Business.
General
ConMat Technologies, Inc. ("ConMat"), 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 ("Polychem") from The
Eastwind Group, Inc. ("Eastwind"). See "Acquisition of Polychem." ConMat's
strategy is to build a material technology company focused on the development
and manufacture of proprietary custom engineered plastics and composite products
to industrial end users with a special emphasis on the wastewater treatment
marketplace. ConMat's acquisition of Polychem is the first step in executing
this strategy. ConMat plans to execute a growth strategy combining internal new
product development and corporate acquisitions. The principal executive offices
of ConMat are located at Franklin Avenue and Grant Streets, Phoenixville, PA
19460. The telephone number is (610) 935-0225.
As of August 20, 1999, ConMat and Polychem have a total of 77 full-time
employees.
Acquisition of Polychem
On December 8, 1998, ConMat acquired 100% of the common stock of Polychem from
Eastwind. The basic structure and terms of the transaction were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued Series A convertible preferred stock of
ConMat ("Series A Preferred Stock"). 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 Preferred Stock; (ii) $100,000 owed to Clifton
Capital, Ltd., discharged by the payment to Clifton Capital,
Ltd. of $100,000; and (iii) $500,000 owed to Mentor Special
Situation Fund, L.P. ("Mentor"), discharged by the issuance to
Mentor of 166,667 shares of newly issued Series B preferred
stock of ConMat and Series B Warrants to purchase 166,667
shares of common stock. In addition, Mentor Management Company
exchanged warrants to purchase 30,000 shares of Eastwind
common stock for warrants to purchase 30,000 shares of ConMat
common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A Preferred Stock. This
note 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 Preferred Stock issued to
Eastwind in connection with the acquisition of Polychem and in
the number of Series A Preferred Stock outstanding.
In compliance with applicable state law, the transaction was approved by the
Board of Directors and shareholders of ConMat and the Board of Directors of
Eastwind. In addition, General Electric Capital Corporation ("GECC") approved
the transaction as required by the terms of a Loan and Security Agreement
between Polychem and GECC.
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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
("RIM") nylon products and the injected molded products account for between 80%
and 90% of Polychem's sales; compression molded products comprise the balance of
the business. The average life expectancy of Polychem's typical products is ten
years. The cost of Polychem's systems varies based on the scope of the system
and the end user modifications required. The cost of a system generally ranges
from $20,000 to $45,000. In addition to its existing products, Polychem
continues to explore new product applications. Polychem currently has one
product designed for use in the automotive industry entering the test market
phase and two wastewater treatment products in the feasibility study stage.
Wastewater treatment plants are primarily used to clean sewage and return water
to general public use. Wastewater treatment plants are generally owned by
municipalities or water authorities. There are over 15,000 wastewater treatment
plants in the United States. Polychem estimates that globally there are 30,000
to 50,000 plants. In the United States, an estimated $22 billion is spent on
wastewater treatment plants annually, while an estimated $83 billion is spent
annually on a global basis.
Polychem provides quotes to contractors for components for approximately 400
wastewater treatment projects each year. Project contracts typically are awarded
on a competitive bid basis. In some cases, the municipality or its engineer
determines, based on price, reliability, system flexibility or other factors,
that certain components must come from a specific manufacturer. If Polychem
products are so required, the successful bidder has to buy the specified
components from Polychem. In most cases a particular manufacturer is not
specified, and the successful bid is selected on such factors as price, system
adaptability and reputation. Historically, Polychem products are used in
approximately 25% of the projects for which Polychem provides quotes. Polychem
does not bid directly for new projects, but rather supplies its products to a
contracting engineer, who in turn bids for new projects. Polychem bids directly
for replacement products. Of the approximately 400 bids submitted annually,
approximately 60% are for replacement parts and 40% are new projects. New
projects account for approximately 75% of Polychem's revenues.
Manufacturing Processes. Polychem's plant is equipped and organized to
accommodate the manufacturing cycle through which raw materials are converted
into finished product. Raw materials are stored in tanks inside and outside the
facility. The manufacturing cycle begins with the mixing of raw materials, which
are then sent to the Molding Department. In the Molding Department, products are
molded in batches by one of the following three processes:
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o RIM molding, which produces nylon buckets, stub shafts, and
sprockets. In RIM molding, a compound containing a catalyst
and a compound containing a promoter are mixed in the mold
where a reaction takes place; the combination and percentage
of base chemicals and additives determine the properties of
the final product;
o Compression molding, which produces phenolic steel mill
bearings, timing gears, timing pulleys and other molded
products. In the compression molding process, phenolic
macerate or phenolic laminate is placed in heated molds
(approximately 325 degrees) and cured for a specific period of
time at pressures up to 3000 PSI; and
o Injection molding, which produces engineered resin parts used
for wastewater drives, collector chains and tabletop conveyor
chains. In injection molding, engineered plastic materials are
melted and injected into the mold at a controlled temperature
and rate. Once in the mold, the plastic is cooled to a shape
reflecting the cavity.
Products are then sent to the Fabricating Department for machining and assembly.
Polychem's plant operates on a three-shift basis. Most of the employees have
been trained to operate all of the various equipment in their departments, which
gives Polychem additional flexibility in scheduling personnel to meet production
needs as they arise.
Marketing and Customers. Polychem was originally a manufacturer of a complete
line of industrial laminates, automotive timing gears, vulcanized fibre and
teflon and silicon tape. In the early 1980's, Polychem identified the wastewater
treatment industry as a potential market and began to shift its focus to
manufacturing products designed for such market. By 1992, wastewater products
became Polychem's dominant revenue producer and presently the revenues from
wastewater products comprise 85% of Polychem's annual sales volume. The
wastewater treatment market is global in nature, and Polychem presently sells
products internationally in Western Europe, Asia and South America and is
expanding into Eastern Europe, the Middle East and Africa.
In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components,
RIM-processed nylon buckets, phenolic bearings and corrugated fibre products) to
the food processing, electronics, steel, automotive, chemical, printing,
aerospace, and consumer products industries, among others.
Polychem markets its plastic chain, cast nylon buckets, steel mill bearings and
compression molded phenolics primarily through distributors. The balance of its
products, including its wastewater treatment component systems, are sold
primarily through Polychem's internal sales force, which consists of
approximately ten employees. Domestic distributors are paid a percentage of
sales ranging from 5% to 15%. Internationally, distributors are compensated on a
buy and sell arrangement. In effect, Polychem sells to the distributor who, in
turns, resells to the ultimate buyer. The distributor earns the difference
between its purchase price and the sales price to the buyer. Polychem's internal
sales force receives a base salary and a bonus based on their individual and
ConMat's overall performance. In its most recent fiscal year, Polychem's sales
force generated 62.7% of its annual sales revenue, international distributors
accounted for 15.8% and domestic distributors accounted for 21.6%. Domestic
revenues were approximately 71.4% and international revenues were approximately
28.6% in that fiscal year.
Competition and Strategy. Polychem's competition tends to be fragmented. Many
other companies, domestically and internationally, produce one or more products
similar to one or more of Polychem's products. Experienced competition exists in
each of Polychem's major markets and many of Polychem's competitors enjoy
excellent working relationships with their customers, produce a variety of
quality products and have access to significant resources. Such resources,
including capital, labor and product support, can result in faster response time
and cheaper prices. These factors, along with product characteristics,
reliability, servicing, and pricing form the major competitive factors in
Polychem's markets.
Polychem believes that it has four significant competitors in the area of
non-metallic rectangular wastewater clarifier systems, of which it considers
Envirex to be the most significant. Polychem believes that it and Envirex each
possess approximately 35% of this market. However, while Polychem provides
products only to clarifier systems in wastewater plants, Envirex has a much
broader line of wastewater treatment products that encompasses all of the major
processes in a treatment plant. Envirex's broader line allows it to bid for
larger portions or projects and to use certain products as loss leaders. FMC and
NRG are Polychem's other less substantial (in terms of market share)
competitors, and a fifth company is attempting to enter the market. Both Envirex
and FMC are significantly larger than Polychem. Polychem believes that it has
three competitors in the market for nylon buckets and five competitors in the
market for table-top chains. Polychem has an approximate 50% share of the nylon
bucket market, while its closest competitor has an approximate 30% market share.
The dominant competitor in the table top chain market, Rexnard, holds an
approximate 80% market share, while Polychem has an approximate 5% share.
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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 has submitted a revised spill
prevention and response plan to the Pennsylvania Department of Environmental
Resources in May 1994 to which no comments have been received as of the date of
this registration statement.
Polychem has occupied its Phoenixville, Pennsylvania property since 1974. The
property was first used as a silk mill in the early part of this century and
then as a manufacturing site for felt carpet padding. Three environmental audits
that have been conducted over the past four years as part of customary due
diligence in financing transactions have not revealed contamination. An
environmental audit was commissioned by Congress Financial Corporation in
conjunction with the purchase of Polychem by The Eastwind Group in 1995. A
second environmental study was commissioned by Fidelity Funding in connection
with a financing commitment in 1997. A third environmental study was
commissioned by GE Capital Corporation in connection with their refinancing in
1998.
Employees. Polychem employs approximately 77 employees, of whom approximately 43
are employed on an hourly basis. Hourly employees are members of United Textile
Workers of America, AFL-CIO, Phoenixville Plastic Makers' Union, Local No. 130
(the "Union"). Most are semi-skilled workers. The current Union contract expires
at the end of September 1999. While the Union has not yet provided the required
notice of their intent to negotiate, management expects that negotiations with
the Union will commence during the third quarter.
ConMat has assumed all of Polychem's continuing obligations under its collective
bargaining agreement with the Union, which includes assumption of obligations
under a defined benefit retirement plan for hourly rated employees at its
Phoenixville, Pennsylvania plant. The plan is fully funded in accordance with
certain actuarial assumptions and to meet ERISA funding requirements. However,
there can be no assurances that market performance of plan investments will be
sufficient to meet all plan liabilities as they arise.
Equipment. Polychem owns or leases, through capital leases, all of the equipment
required to conduct its business. The equipment is comprised of compression
molding presses, transfer molding presses, injection molding presses, reactors,
dispensers and RIM press lines for nylon-6 operations, a complete fabrication
shop with computerized numerical control equipment and a computer aided design
center.
Research and Development. Polychem is the owner of a number of United States and
foreign patents and patent applications relating to water treatment plastic
products, chain conveyor links, conveyor chain bearings, sprockets with locking
mechanisms and a bucket grit elevator system. The ownership of such patents
helps Polychem from a marketing standpoint by securing its continued reputation
as an innovative competitor in its industry.
Polychem employs eight application engineers who use computer aided design
equipment to design custom wastewater treatment non-metallic rectangular
clarifier systems or to alter existing clarifiers to meet changing specification
requirements.
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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 $76,000 and $79,000 during the six month
periods ended June 30, 1999 and June 30, 1998, respectively.
Debt and Encumbrances. On September 30, 1998, Polychem entered into a Loan and
Security Agreement with GECC 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 PSERB 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, 9.85% at August 20, 1999, and 6.50% in excess of the 30 day dealer
commercial paper rate for the term loan, 11.60% at August 20, 1999.
Interest on the revolving line of credit and term loan is payable monthly.
Polychem's collections of accounts receivable are deposited with GECC under a
lockbox arrangement and applied to paydown the balance of the revolving line of
credit, which then may be drawn against subject to availability. The principal
balance of, and all accrued interest on, the revolving line of credit is due and
payable September 30, 2001. In the event that Polychem has cash flow for any
fiscal year in excess of capital expenditures paid for from operations, interest
expense, taxes and scheduled debt repayments, 25% of such excess must be applied
first to repay the term loan and then to reduce the outstanding balance under
the revolving line of credit. As of August 25, 1999, availability under the line
of credit was $2,438,000 and outstanding borrowings were $2,041,000.
On August 25, 1999, Polychem received a $1,880,000 term loan from the Public
School Employes' Retirement Board ("PSERB"), 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 GECC term loan to
$412,000 and the remaining $996,000 of net proceeds was applied to reduce the
outstanding balance of the GECC revolving line of credit. The PSERB loan is for
a term of 10 years. The interest rate on the PSERB 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 baloon payment September 1, 2009 equal to the outstanding
principal balance plus accrued interest.
In connection with the PSERB loan, GECC agreed to release the mortgage lien
securing its term loan. GECC also agreed to restructure the payment schedule on
the remaining $412,000 balance of its term loan to provide for 25 monthly
payments of $8,000 and a final payment September 30, 2001 of $212,000.
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 August 20, 1999 was $1,138,000.
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.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward Looking Statements
Some of the statements contained in this registration statement discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.
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Important factors that may cause actual results to differ from projections
include, for example:
o general economic conditions, including their impact on
capital expenditures;
o business conditions in the material technology and wastewater
treatment industries;
o the regulatory environment;
o rapidly changing technology and evolving industry standards;
o new products and services offered by competitors; and
o price pressures.
Background and Basis of Presentation
On December 8, 1998, ConMat, a non-operating company with immaterial net assets,
acquired 100% of the outstanding common stock of Polychem from Eastwind. The
acquisition resulted in the owners and management of Polychem having effective
operating control of the combined entity.
The acquisition has been accounted for as a capital transaction in substance,
rather than a business combination. The acquisition is equivalent to the
issuance of stock by Polychem for the net monetary assets of ConMat, accompanied
by a recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the post reverse-acquisition comparative historical
financial statements of the "legal acquirer" (ConMat), are those of the "legal
acquiree" (Polychem).
Accordingly, the consolidated financial statements of ConMat included in this
registration statement are the historical financial statements of Polychem for
the same periods adjusted for the following transactions contained in the Share
Exchange Agreement executed at consummation of the acquisition. The basic
structure and terms of the acquisition, together with the applicable accounting
effects, were as follows:
o ConMat acquired all of the outstanding shares of common stock of
Polychem from Eastwind in exchange for (i) 1,000,000 shares of
newly issued common stock of ConMat (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 Preferred
Stock exchanged, in addition to the existing ConMat shares
outstanding, collectively resulted in the recapitalization of
Polychem. Earnings per share calculations include Polychem's
change in capital structure for all periods presented.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's former
Chairman and Chief Executive Officer, who is the current Chairman
and Chief Executive Officer of ConMat, discharged by the issuance
to Mr. DeJuliis of 53,333 shares of Series A Preferred Stock; (ii)
$100,000 owed to Clifton Capital, Ltd., discharged by the payment
to Clifton Capital, Ltd. of $100,000; and (iii) $500,000 owed to
Mentor discharged by the issuance to Mentor of 166,667 shares of
newly issued Series B preferred stock of ConMat and Series B
Warrants to purchase 166,667 shares of common stock. In addition,
Mentor Management Company exchanged warrants to purchase 30,000
shares of Eastwind common stock for warrants to purchase 30,000
shares of ConMat common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To reflect
this agreement, Eastwind issued to Polychem a promissory note in
the amount of $940,000, secured by the pledge of 313,333 shares of
Series A Preferred Stock. This note 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
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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.
Results of Operations
Six Month Periods Ended June 30, 1999 and June 30, 1998
The following table sets forth certain statement of operation items as a
percentage of total net sales for the period indicated:
Six Months Ended June 30,
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1999 1998
---- ----
Sales....................................... 100.0% 100.0%
Cost of Goods Sold.......................... 73.0 77.3
Gross Profit................................ 27.0 22.7
Selling and Administrative.................. 18.8 22.3
Interest Expense............................ 4.0 5.0
Other Expense............................... 0.4 3.3
Income Tax.................................. 1.3 --
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Income (Loss)............................... 2.5 (7.9)
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Cost of Goods Sold is determined as the sum of material costs, direct
manufacturing labor costs, and an allocation of utilities and other overhead
costs attributable to manufacturing activities.
Total revenues increased by $1,591,000 or 36% to $5,993,000 for the six month
period ended June 30, 1999 ("Current Period") from $4,402,000 for the six month
period ended June 30, 1998 ("Comparable Period"). This increase is attributable
to Polychem's successful efforts to increase market penetration internationally
where it has previously done business as well as increased volume from the
domestic market. In the Current Period, Polychem realized revenues in excess of
$500,000 from international markets in which it had previously never consummated
sales. This included $400,000 in South America, primarily Columbia, and over
$100,000 in the Middle East, including Egypt and Dubai. Additionally, Polychem
realized increased domestic revenues of approximately $1,000,000 from contracts
in 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 $617,000 or 61% to $1,616,000 for the Current Period
from $999,000 for the Comparable Period. Gross profit increased as a percentage
of sales to 27.0% for the Current Period from 22.7% for the Comparable Period.
These increases are a result of increased utilization of existing plant capacity
as the result of which increased production did not require substantial
increases in manufacturing costs, as well as the ongoing effect of several cost
saving measures implemented by management. These measures include improved
productivity as a result of mechanization through new equipment purchases. This
increase in productivity allows Polychem to maintain the same level of
production with lower direct labor costs (wages expended on skilled and
unskilled workers that are allocated directly to a particular unit). While
difficult to quantify, improved productivity arising from the purchase of new
automated machinery should yield approximately $100,000 to $150,000 in annual
cost savings. Further, Polychem has internalized previously outsourced
production resulting in lower material costs. Management estimates cost savings
of $50,000 to $100,000 annually from this reduced outsourcing.
Selling and administrative expenses increased by $147,000, or 15% to $1,129,000
for the Current Period from $982,000 for the Comparable Period. This increase is
a direct result of increased revenue. As a percentage of revenues, however,
selling and administrative expenses decreased to 18.8% for the Current Period
from 22.3% of total revenues for the Comparable Period. Management is closely
monitoring selling and administrative expenses and expects such expenses to
decrease as a percentage of sales in future periods due to expected increased
revenues due to the realization of benefits from expenditures made in late 1997
and early 1998 in an effort to increase Polychem's global focus, including the
hiring of additional sales personnel. As the efforts of Polychem's global sales
force progress, Polychem anticipates increased revenues
7
<PAGE>
without significant increases in selling and administrative expenses. This is
reflected in the decrease in selling and administrative expenses as a percentage
of revenue experienced in Current Period.
Interest expense for the Current Period increased $27,000 or 12%, to $244,000
from $217,000 for the Comparable Period. 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 of
total revenues declined to 4% in the Current period compared to 5% in the
Comparable Period.
ConMat realized a profit of $141,000 and a net cash surplus of $38,000 for the
Current Period. For the Comparable Period, ConMat experienced a loss of $344,000
and a net cash deficit of $19,000. The improved profitability is a direct result
of increased revenues. At the current level of revenues, ConMat is operating
above its break-even point. The small increase in net cash realized is the
result of an increase in profitability resulting from increased volume.
Fiscal Years Ended January 2, 1999 and January 3, 1998
The following table sets forth, for each of the aforementioned periods, certain
statement of operations items as a percentage of total net sales for the periods
indicated:
Fiscal Years Ended
-----------------------------------------
January 2, 1999 January 3, 1998
--------------- ---------------
Net Sales 100.0% 100.0%
Cost of 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 ("Current Annual Period") from $12,130,000 for the
fiscal year ended January 3, 1998 ("Comparable Annual Period"). This decline is
attributable in large measure to delays in processing $3.0 million in contracts
in the United States, which were not realized in 1998. The domestic projects
came back on line in 1999 and are part of Polychem's current backlog. In
addition, an anticipated increase in Asian revenues did not occur as the result
of a severe liquidity crisis in the region which made funding of projects very
difficult. As a result of this liquidity crisis, approximately 30 projects worth
approximately $15 million on which Polychem had open quotes were delayed.
Polychem products are specified in approximately $4 million of such projects.
ConMat believes, however, that a substantial portion of these projects will
ultimately be awarded due to their environmental significance. While Management
had expected an increase in revenues derived from activities in Asia of
approximately $4 million, such revenues increased $300,000 to $1.4 million
during the Current Annual Period compared to $1.1 million in the Comparable
Annual Period. ConMat has reduced its reliance on Asia by shifting its sales
focus to projects in other parts of the world where project start dates are more
certain due to better economic stability. As a result of the problems in Asia,
Polychem's international sales force began emphasizing areas of the world where
Polychem had not previously made any sales. These areas included the Middle
East, Mediterranean, South America and parts of Eastern and Western Europe. In
each of these areas there was greater certainty with respect to a project start
date because of the ability of organizations to obtain the necessary funding for
these projects. As a result, ConMat ended the Current Annual Period with a
booked order backlog (confirmed orders with specific shipping dates) of
$5,400,000, or an increase of 135% over the $2,300,000 backlog at the end of the
Comparable Annual Period.
Gross profit decreased by $604,000, or 20%, to $2,384,000 for the Current Annual
Period from $2,988,000 for the Comparable Annual Period as a result of the
decrease in total revenues. Gross profit increased as a percentage of sales to
26.3% for the Current Annual Period from 24.6% for the Comparable Annual Period.
The percentage increase reflects a combination of several cost saving measures
implemented by management which are expected to have increased benefits in the
future as costs increase more slowly than revenues. While difficult to quantify,
improved productivity arising from the purchase of new automated machinery
should yield approximately $100,000 to $150,000 in annual cost reductions.
Further, the internalization of formerly outsourced production should yield
estimated cost savings of $50,000 to 100,000 annually. Reduced outsourcing
results in fewer outside purchases of finished product and accompanying cost
savings due to the lower cost of converting raw materials versus the cost of
purchasing finished products. Management expects gross profits to increase in
the near term reflecting an improved mix of more profitable international versus
domestic sales, lower material costs, and continued improvements in production
efficiencies.
8
<PAGE>
Selling and administrative expenses decreased by $64,000, or 3.0%, to $2,055,000
for the Current Annual Period from $2,119,000 for the Comparable Annual Period.
As a percentage of revenues, selling and administrative expenses increased to
22.7% for the Current Annual Period from 17.5% for the Comparable Annual Period.
The level of selling and administrative expenses during the Current Annual
Period reflects costs associated with the penetration of new markets around the
world and the moderation of Polychem's reliance on Asian markets for new
revenues.
Interest expense for the Current Annual Period includes a one-time charge of
$143,000 relating to deferred financing costs associated with the September 1998
refinancing. Excluding this one-time charge, interest expense increased $61,000,
or 15%, to $467,000 for the Current Annual Period from $406,000 for the
Comparable Annual Period. Increased average borrowings as a result of the
aforementioned refinancing were the primary reason for the increase. Management
expects future interest costs to remain fairly stable.
For the Current Annual Period, ConMat experienced a loss of $575,000, which
included corporate charges from Polychem's former parent company of $480,000.
The corporate charges represent assessments to provide for the parent company's
corporate overhead expenses, including legal and accounting costs, regulatory
compliance costs, insurance costs, administrative overhead as well as other
unforeseen costs. For the Comparable Annual Period, ConMat realized a net loss
of $64,000, which included corporate charges from Polychem's former parent
company of $640,000. ConMat anticipates that its corporate overhead expenses
will be approximately $350,000 per year. The larger loss experienced in the
Current Annual Period reflects, as described above, a significant decrease in
revenues which was not offset by a comparable decrease in manufacturing costs.
Liquidity and Capital Resources
ConMat's primary source of working capital is a credit facility of up to $5
million 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 GECC facility.
These instances of noncompliance were waived by GECC. 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 GECC will continue to
waive any noncompliance. As of August 25, 1999, the maximum borrowing amount was
$2,438,000 and the outstanding balance was $2,041,000. 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.
On August 25, 1999 Polychem received a $1.88 million term loan from PSERB,
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 GECC term loan to $412,000 and the remaining $996,000 of net
proceeds was applied to reduce the outstanding balance of the GECC revolving
line of credit.
In addition, at January 2, 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 Current Period, the current
operation of ConMat above its break-even point and Polychem's significant booked
order backlog. However, no assurances can be given that ConMat will generate
sufficient profits to utilize the net operating loss 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.
Six Month Period Ended June 30, 1999
During the Current Period, ConMat realized net cash from all sources of $38,000.
During the Current Period, ConMat saw an increase in operating capital
requirements of $1,223,000. This increased requirement was generated primarily
from an increase in accounts receivable of $2,001,000. This increase in accounts
receivable was offset by an increase in accounts payable of $511,000. ConMat's
operating capital needs for the Current Period were sufficiently financed by its
current credit facility. Cash flow from investing activities included
expenditures for new equipment of $37,000. Financing activities included the
repayment of principal on outstanding debt of $325,000. ConMat had net
borrowings of $1,292,000 reflecting primarily draws on its working capital line
to fund its working capital requirements.
9
<PAGE>
Fiscal Years Ended January 2, 1999 and January 3, 1998
Despite incurring a loss for the Current Annual Period, ConMat realized net cash
from operating activities of $462,000 related primarily to 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 Comparable Annual Period 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 Comparable
Annual Period. 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 Comparable Annual Period, ConMat realized cash from operating activities
of $422,000 related primarily to decreases in accounts receivable of $467,000
and inventory of $434,000, plus increases in accounts payable of $188,000 and
non-cash charges for depreciation and amortization of $233,000. These inflows
were reduced by decreases in accrued liabilities of $446,000 and deferred
revenues of $92,000. Cash flow from investing activities included purchases of
new equipment for $126,000. Net cash of $284,000 used in financing activities
reflects the excess of net borrowings under the line of credit above scheduled
principal repayments of the term debt, less repayment of $360,000 on
subordinated notes and dividends to the former parent of $768,000.
Year 2000 Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in data
processing and other date-sensitive systems. The Year 2000 date change can
affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of Polychem's programs that are time sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. At Polychem, computer systems are used to run all
administrative and key design and manufacturing functions. Computer software and
computer chips also are used to run security systems, communications networks
and other essential equipment. Because of its reliance on these systems,
Polychem is following a process to assure that such systems are ready for the
Year 2000 date change.
In June 1998, Polychem entered into an agreement with IBM Corporation and IBM's
authorized software licensee for systems, CNA Systems, Incorporated. Polychem
entered into the agreement, in part, to initiate a Year 2000 plan to ensure that
Polychem's existing information systems were Year 2000 compliant. In connection
with the agreement, Polychem has upgraded its computer system from an IBM System
36 to an IBM AS/400 and has purchased new software applications relating to
sales and marketing, manufacturing, financial management, materials management,
quality control and management information support systems.
During the fourth quarter of 1998, Polychem commenced the editing and
reprogramming of its existing databases. During the first quarter of 1999,
Polychem commenced testing of inter-modular software applications using the
revised databases. Polychem intends to parallel these systems during the third
quarter of 1999 and to complete its Year 2000 preparation by October 1, 1999. In
connection with the foregoing, Polychem has completed its assessment of which
systems and equipment are most prone to placing Polychem at risk if they are not
Year 2000 compliant (i.e., mission critical systems).
Significant vendors have been requested to advise Polychem in writing of their
Year 2000 readiness, including actions to become compliant if they are not
already compliant. Vendors who provide significant technology-related services
to Polychem have modified their systems to become Year 2000 compliant. The
monitoring of certain vendors will continue into the remainder of 1999.
Polychem is preparing a contingency plan for how Polychem would resume business
if unanticipated problems arise from non-performance by vendors. Such plans are
expected to be completed by September 1, 1999.
Polychem spent $125,000 during the year ending December 31, 1998 and $35,000
during the six months ended June 30, 1999, relating to costs incurred as a
result of its Year 2000 Plan. Polychem anticipates incurring approximately
$15,000 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.
10
<PAGE>
Item 3. Description of Property.
Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with GECC securing a
revolving line of credit and term loan. See "Description of
Business-Polychem-Debt and Encumbrances." In July 1998, the property was
appraised at $2.4 million by AccuVal Associates Incorporated, an independent
appraiser. Polychem uses approximately 120,000 square feet for manufacturing and
warehousing, and 20,000 square feet for offices. Polychem leases approximately
42,500 square feet of its facility as warehouse space to Windsor Designs, a
wholesale distributor of imported outdoor furniture. The Windsor Designs lease
continues until December 1999 at a rental rate of $133,980 per year ($3.15 per
square foot), net of utilities. Polychem expects this lease to be renewed.
Polychem leases an additional 4,740 square feet of the facility as equipment
storage space to Ethan Horowitz, a residential cabinet maker. That lease
continues until January, 2003 at a rental rate of $15,100 per year ($3.19 per
square foot). Polychem also leases a tower located on the facility to a group of
cellular phone operators including ComCast Metrophone, PageNet, Nextel and
Omnipoint. Combined annual lease income from the tower is $48,000. The leases
continue through March 2004. An additional 40,000 square feet of warehouse space
is available for lease at the facility. Management believes that Polychem's
properties are adequately insured.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information concerning the beneficial ownership
of ConMat's common stock as of August 20, 1999, by each director and executive
officer, all directors and officers as a group, and each person known to ConMat
to beneficially own 5% or more of its outstanding common stock. Except as
otherwise noted, the address for each such person is Franklin Avenue and Grant
Streets, Phoenixville, Pennsylvania 19460.
11
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage of
Title of Class Beneficial Owner Beneficial Ownership (1) Class (1)
- -------------- ---------------- ------------------------ ---------
<S> <C> <C> <C>
Common Stock, par value Paul A. DeJuliis 1,478,333(2) 57.9
$.001 per share Frankiln Avenue & Grant Sts.
Phoenixville, PA 19460
Edward F. Sager, Jr. 196,667(3) 8.0
P.O. Box 560
Yardley, PA 19067
The Eastwind Group, Inc. 735,000(4) 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(5)(6) 13.8
950 West Valley Rd., Suite 2902
Wayne, PA 19087
Polychem Corporation 313,333(4) 12.2
Franklin Avenue & Grant Sts.
Phoenixville, PA 19460
The Eastwind Group, Inc. 925,000 41.1
Shareholder Trust
c/o Paul A. DeJuliis
Franklin Avenue & Grant Sts.
Phoenixville, PA 19460
Directors and Executive Officers 1,750,000(2)(3) 63.6
(4 persons)
Series A Preferred Stock, par Paul A. DeJuliis 53,333 3.8
value $.001 Franklin Avenue & Grant St.
Phoenixville, PA 19460
The Eastwind Group, Inc. 735,000 53.0
275 Geiger Road
Philadelphia, PA 19115
Polychem Corporation 313,333 22.6
Franklin Avenue & Grant Sts.
Phoenixville, PA 19460
Odyssey Capital Group, L.P. 285,000(6) 20.6
950 West Valley Rd., Suite 2902
Wayne, PA 19087
Series B Preferred Stock, par Mentor Special Situation Fund, 166,667(7) 100.00
value $.001 L.P.
P.O. Box 560
Yardley, PA 19067
</TABLE>
- ---------------
(1) Based upon 2,250,000 shares of common stock issued and outstanding as
of August 20, 1999, calculated in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934. It also includes
shares owned by (i) a spouse, minor children or by relatives sharing
the same home, (ii) entities owned or controlled by the named person
and (iii) other persons if the named person has the right to acquire
such shares within 60 days by the exercise of any right or option.
Unless otherwise noted, shares are owned of record and beneficially by
the named person. On a fully diluted basis, ConMat had 4,083,333 shares
outstanding as of August 20, 1999.
(2) Includes 53,333 shares issuable upon conversion of Series A Preferred
Stock and 250,000 issuable upon the exercises of options. (See
"Executive Compensation - Employment Agreements" for conditions of
exercise.) Includes 925,000 shares held by The Eastwind Group, Inc.
Shareholder Trust, of which Mr. DeJuliis is sole 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 21.7% of ConMat's common
stock.
12
<PAGE>
(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 conversion of Series A Preferred
Stock.
(5) Includes 285,000 shares of common stock issuable upon conversion of
Series A Preferred Stock.
(6) Acquired in July 1999 from the Eastwind Group, Inc. 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.
(7) Edward F. Sager, Jr., a director of ConMat is a general partner of
Mentor Special Situation Fund, L.P.
Item 5. Directors, Executive Officers Promoters and Control Persons.
Certain information concerning the directors and executive officers of ConMat is
set forth below.
Name Position with Corporation Age
- ---- ------------------------- ---
Paul A. DeJuliis Chief Executive Officer, Secretary and
Chairman of the Board of Directors 43
Theodore R. Rutkowski President and a Director 63
Edward F. Sager, Jr. Director 51
William J. Crighton Vice President and Treasurer 52
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.
13
<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.
Item 6. Executive Compensation.
The following summary compensation table sets forth the total annual
compensation paid to the Chief Executive Officer and each other Executive
Officer of ConMat whose total compensation for the fiscal year ended January 2,
1999 exceeded $100,000:
<TABLE>
<CAPTION>
Long Term Securities
Name and Position Salary ($) Bonus ($) Other ($) Compensation Match Options
- ----------------- ---------- --------- --------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Paul A. DeJuliis, Chairman &
Chief Executive Officer (1) 14,167 0 0 0 250,000
Theodore F. Rutkowski 135,000 0 0 0 0
</TABLE>
- -----------------
(1) Represents one month of salary at $170,000 per year. 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.
Item 7. Certain Relationships and Related Transactions.
On December 8, 1998, ConMat acquired 100% of the common stock of Polychem from
Eastwind. The basic structure and terms of the transaction were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued Series A Preferred Stock.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A Preferred Stock; (ii) $100,000 owed to Clifton
Capital, Ltd., discharged by the payment to Clifton Capital,
Ltd. of $100,000; and (iii) $500,000 owed to Mentor,
discharged by the issuance to Mentor of 166,667 shares of
newly issued Series B preferred stock of ConMat and Series B
Warrants to purchase 166,667 shares of common stock. In
addition, Mentor Management Company exchanged warrants to
purchase 30,000 shares of Eastwind common stock for warrants
to purchase 30,000 shares of ConMat common stock.
14
<PAGE>
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A Preferred Stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A Preferred Stock. This
note 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 Preferred Stock issued to
Eastwind in connection with the acquisition of Polychem and in
the number of Series A Preferred Stock outstanding.
Item 8. Legal Proceedings.
ConMat is currently a defendant in a Pennsylvania state court action filed on
January 28, 1999, captioned John R. Thach v. The Eastwind Group, et al.
(Montgomery County C.C.P., Civil Action No. 99- 01195). Plaintiff maintains that
Eastwind, his former employer, breached the terms of his severance agreement and
that the sale of Polychem to ConMat was part of a conspiracy to avoid payments
to him and has violated Pennsylvania's Uniform Fraudulent Transfer Act. The
plaintiff seeks damages of at least $350,0000 and punitive damages of at least
$500,000. In addition, the plaintiff seeks to have the acquisition of Polychem
declared null and void and to have a receiver appointed to oversee the affairs
of Eastwind, Polychem and ConMat. Among the other named defendants is Paul A.
DeJuliis, President of ConMat and the former Chief Executive Officer of
Eastwind.
Initially, the plaintiff sought a temporary restraining order and preliminary
injunction seeking to set aside the sale of Polychem to ConMat. By Order dated
February 19, 1999, the Court denied plaintiff's request for injunctive relief.
ConMat and Paul A. DeJuliis subsequently filed preliminary objections to the
complaint seeking to have themselves dismissed as parties to the action. The
parties have submitted briefs relating to ConMat's preliminary objections and a
decision by the Court is not expected until November, 1999 at the earliest.
Item 9. Market for Common Equity and Other Stockholder Matters.
Market for Common Stock
The common stock of ConMat is quoted on the Nasdaq OTC Bulletin Board under the
symbol "CNMT" and began trading December 21, 1998. The following table shows
quarterly low and high bid information for the common stock from inception
through August 20, 1999:
1999 Low Bid High Bid
---- ------- --------
Third Quarter (1) $2.25 $4.00
Second Quarter $3.00 $3.00
First Quarter $1.63 $4.00
1998
----
Fourth Quarter (2) $1.50 $2.125
- ---------------
(1) Through and including August 20, 1999.
(2) Commencing December 21, 1998.
15
<PAGE>
Market quotations reflect inter-dealer prices, without retail markups, markdown
or commissions and may not necessarily reflect actual transactions. As of August
20, 1999, there were approximately 13 holders of record of ConMat's common
stock.
Dividend Policy
ConMat has never paid a cash dividend and does not intend to pay any cash
dividends on its common stock for the foreseeable future.
Item 10. Recent Sales of Unregistered Securities.
In connection with the acquisition of Polychem on December 8, 1998 and pursuant
to Section 4(2) of the Securities Act, ConMat issued (i) 1,000,000 shares of
common stock to Eastwind, (ii) 1,386,666 shares of Series A convertible
preferred stock to Eastwind and Paul A. DeJuliis, (iii) 166,667 shares of Series
B convertible preferred stock and warrants to purchase 196,667 shares of common
stock to Mentor.
On December 10, 1998, Paul A. DeJuliis, President and Chief Executive Officer of
ConMat, purchased 250,000 shares of common stock at a purchase price of $50,000,
paid by delivery to ConMat of Mr. DeJuliis' promissory note in that amount. The
note has a maturity date of December 10, 2000, bears interest at 5% per annum
and is secured by a pledge of the purchased shares.
Item 11. Description of Securities.
General
The following description of ConMat's common stock and preferred stock is a
summary only. This summary is qualified in its entirety by reference to the
applicable instruments and governing law, including without limitation, ConMat's
Articles of Incorporation and Bylaws and the Florida Business Corporation Act.
The authorized capital stock of ConMat consists of 40,000,000 shares of common
stock and 10,000,000 shares of preferred stock. As of August 20, 1999, there
were outstanding 2,250,000 shares of common stock, 1,386,666 shares of Series A
Preferred Stock and 166,667 shares of Series B Preferred Stock.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders, including the election of
directors, and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the dividend preferences attributable to the
preferred stock. Upon the liquidation, dissolution or winding up of ConMat,
holders of common stock are entitled to receive ratably the net assets of ConMat
available for distribution to such holders after preferred distributions to
holders of preferred stock. Holders of common stock have no preemptive or
redemption rights.
Series A Preferred Stock
Shares of the Series A Preferred Stock rank prior to the common stock and pari
passu with the Series B Preferred Stock. The creation of any class or series of
capital stock ranking senior to or pari passu with the Series A Preferred Stock
requires the consent of a majority of the holders of the Series A Preferred
Stock.
16
<PAGE>
The holders of the shares of the Series A Preferred Stock are entitled to
receive cash dividends at a rate of 2% per year, which dividends are payable in
equal, quarterly installments, as and if declared by the Board of Directors out
of funds legally available for the payment of dividends. The current terms of
the Series A Preferred Stock provide that such dividends shall begin to accrue
on outstanding shares of Series A Preferred Stock from the date of issuance and
shall accrue from day to day, whether or not earned or declared, until paid. The
holders of the Series A Preferred Stock have agreed to waive the cumulative
dividend feature and ConMat intends to amend the terms of the Series A Preferred
Stock to provide that the dividends on the Series A Preferred Stock will not be
cumulative. ConMat may, at its sole discretion, pay any or all dividends in
common stock rather than in cash. In the event of any liquidation, dissolution
or winding up of ConMat, holders of the Series A Preferred Stock shall be
entitled, in preference to the holders of the common stock and pari passu with
the holders of the Series B Preferred Stock, to be paid first out of assets and
funds of ConMat available for distribution to holders of ConMat's capital stock
in the amount of $3.00 per share.
Shares of Series A Preferred Stock are convertible at the option of the holder
at any time following 60 days after the date of issuance at the then effective
conversion price. The conversion price shall be the greater of $3.00 or 80% of
the closing bid price of the common stock on the conversion date, subject to
adjustments due to stock splits, stock dividends, mergers, consolidations and
other events. ConMat has the right, by written notice to each of the holders of
the Series A Preferred Stock, to convert all shares of the Series A Preferred
Stock into shares of common stock at any time on or after the first day on which
the closing bid price has been equal to or in excess of the conversion price for
45 consecutive calendar days. In the case of such a mandatory conversion, each
share of Series A Preferred Stock will be converted into a number of shares of
common stock determined by dividing the stated value by the then effective
conversion price.
The holders of the Series A Preferred Stock will have no voting power, except as
otherwise required by the Florida Business Corporation Act. To the extent
permitted under the Florida Business Corporation Act, the Series A preferred
stock and Series B Preferred Stock will be considered a single class of stock
for voting purposes.
The holders of Series A Preferred Stock have, subject to certain limitations,
registration rights, which obligate ConMat to include shares of common stock
issued or issuable upon conversion of shares of Series A Preferred Stock in a
registration statement filed with the Securities and Exchange Commission.
Series B Preferred Stock
Shares of the Series B Preferred Stock rank prior to the common stock and pari
passu with ConMat's Series A Preferred Stock. The creation of any class or
series of capital stock ranking senior to or pari passu with the Series B
Preferred Stock requires the consent of a majority of the holders of the Series
B Preferred Stock.
Holders of the shares of the Series B Preferred Stock are entitled to receive
cash dividends at a rate of 8% per year, which dividends are payable in equal,
quarterly installments, as and if declared by the Board of Directors out of
funds legally available for the payment of dividends. Such dividends will begin
to accrue on outstanding shares of Series B Preferred Stock from the date of
issuance and will accrue from day to day, whether or not earned or declared,
until paid. In the event of any liquidation, dissolution or winding up of
ConMat, holders of the Series B Preferred Stock will be entitled, in preference
to the holders of the common stock and pari passu with the holders of the Series
A Preferred Stock, to be paid first out of assets and funds of ConMat available
for distribution to holders of ConMat's capital stock in the amount of $3.00 per
share, plus all accrued but unpaid dividends.
ConMat may redeem the Series B Preferred Stock at any time. ConMat is required
to redeem the Series B Preferred Stock on the earliest of, (i) the date Mr.
DeJuliis ceases for any reason to serve as Chairman and Chief Executive Officer
of ConMat, or (ii) the date Mr. DeJuliis, Mr. Rutkowski and the member of
ConMat's Board of Directors elected by the holders of the Series B Preferred
Stock cease to constitute a majority of the Board of Directors. The redemption
price is $3.00 per share, plus all accrued but unpaid dividends.
The holders of the Series B Preferred Stock have the right to elect one member
of ConMat's Board of Directors. Except as otherwise required by the Florida
Business Corporation Act, the holders of the Series B Preferred Stock have no
other voting rights. To the extent permitted under the Florida Business
Corporation Act, the Series A Preferred Stock and Series B Preferred Stock will
be considered a single class of stock for voting purposes.
In connection with the acquisition of Polychem by ConMat, the holders of the
Series B Preferred Stock also received warrants to purchase 166,667 shares of
common stock at an exercise price of $3.00 per share, subject to adjustment in
the case of stock splits, stock dividends, below market issuances or a merger or
consolidation. The warrants are exercisable until December 31, 2005. Subject to
certain limitations, holders of the warrants have "piggy-back" registration
rights which, upon the request of such holders, obligate ConMat to include the
shares of common stock issuable upon exercise of the warrants in a registration
statement filed with the Securities and Exchange Commission.
17
<PAGE>
Item 12. Indemnification of Directors and Officers.
ConMat's charter provides that to the fullest extent permitted by law, no
director or officer of ConMat shall be personally liable to ConMat or its
shareholders for damages for breach of any duty owed to ConMat or its
shareholders and that ConMat may, in its by-laws or in any resolution of its
stockholders or directors, undertake to indemnify the officers and directors of
ConMat against any contingency or peril as may be determined to be in the best
interests of ConMat, and in conjunction therewith, to procure, at ConMat's
expense, policies of insurance. Florida law, under which ConMat is incorporated,
allows a corporation to indemnify its directors and officers if such director or
officer acted in good faith and in a manner such director or officer reasonably
believed to be in, or not opposed to, the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. ConMat maintains a director and officer
liability insurance policy covering each of ConMat's directors and executive
officers.
Item 13. Financial Statements.
The financial statements are attached to this registration statement beginning
on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) The following financial statements are filed as part of this
registration statement:
Unaudited
Consolidated Balance Sheets as of June 30, 1999 and January 2, 1999
Consolidated Statements of Operations for the six month periods ended
June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1999 and June 30, 1998
Audited
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998
Consolidated Statements of Operations for the fiscal years ended
January 2, 1999 and January 3, 1998
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended January 2, 1999 and January 3, 1998
Consolidated Statements of Cash Flows for the fiscal years ended
January 2, 1999 and January 3, 1998
(b) The following exhibits are filed as part of this registration
statement. Exhibit numbers correspond to the exhibit requirements of
Regulation S-B.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation of ConMat Technologies, Inc., as amended.*
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.*
4.4 Series A Warrant No. 1 from ConMat to Mentor Special Situation Fund,
L.P. dated December 8, 1998.*
4.5 Series B Warrant No. 1 from ConMat to Mentor Management Company dated
December 8, 1998.*
4.6 Option Agreement between ConMat and Paul A. DeJuliis dated December
8, 1998.*
10.1 Employment Agreement between ConMat and Paul A. DeJuliis dated
December 8, 1998.*
10.2 Loan and Security Agreement between Polychem and GECC dated
September 30, 1998.*
10.3 $3,500,000 Revolving Credit Note payable by Polychem to GECC dated
September 30, 1998.*
10.4 $1,500,000 Term Note payable by Polychem to GECC dated September
30, 1998.*
10.5 Stock Pledge Agreement between ConMat and GECC dated December
8, 1998.*
10.6 Guarantee dated December 8, 1998 between ConMat and GECC.*
18
<PAGE>
10.7 Waiver and Amendment Agreement among GECC, 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 GECC.*
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 GECC and Polychem dated August
25, 1999.**
10.13 Amended and Restated Term Note dated August 25, 1999 payable by
Polychem to GECC.**
10.14 Amended and Restated Revolving Credit Note dated August 25, 1999
payable by Polychem to GECC.**
10.15 Guantor Reaffirmation Agreement dated August 25, 1999 between ConMat
and GECC.**
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 GECC.**
- ------------------
* Incorporated by reference to Form 10-SB file no. 0-30114 filed April 27, 1999
and Amendment No. 1 filed June 16, 1999.
** Previously filed.
19
<PAGE>
ConMat Technologies, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
Unaudited
- ---------
<S> <C>
Consolidated Balance Sheets as of June 30, 1999 and January 2, 1999.............................................F-2
Consolidated Statements of Operations for the six month periods ended June 30, 1999
and June 30, 1998..........................................................................................F-3
Consolidated Statements of Cash Flows for the six month periods ended June 30, 1999
and June 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
<TABLE>
<CAPTION>
ASSETS June 30, January 2,
1999 1999
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 67,262 $ 29,430
Accounts receivable - Trade, net of allowance for doubtful accounts 4,776,631 2,622,261
Inventories 1,004,755 1,159,545
Prepaid expenses and other 6,775 14,768
Prepaid income taxes 31,477 35,577
---------- ----------
Total current assets $5,886,900 3,861,581
Property, plant and equipment, at cost less accumulated depreciation 1,117,834 1,188,823
Deferred income taxes 78,493 78,493
Other Assets 271,941 386,128
---------- ----------
Total assets $7,355,168 $5,515,025
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Line of credit $3,074,048 $1,398,632
Current portion of long-term debt 625,260 625,260
Current portion of capital lease obligations 107,925 103,744
Accounts payable 1,694,931 1,183,913
Accrued expenses 195,678 302,374
Dividends payable 17,556 --
---------- ----------
Total current liabilities 5,715,398 3,613,923
Long-term debt 1,763,146 2,075,775
Obligations under capital leases 135,478 151,761
Other liabilities 128,500 181,900
---------- ----------
Total liabilities 7,742,522 6,023,359
---------- ----------
Series B Preferred Stock, $.001 par value, 166,667 shares issued and outstanding 500,000 500,000
Stockholders' equity (deficiency)
Series A Preferred Stock, $.001 par value, 10,000,000 shares authorized,
1,073,333 shares issued and outstanding 1,073 1,386
Common stock, $.001 par value, 40,000,000 shares authorized,
2,250,000 shares issued and outstanding 2,250 2,250
Additional paid-in capital (472,175) (472,486)
Accumulated earnings (deficit) (368,502) (489,482)
Less note receivable for shares sold (50,000) (50,000)
---------- ----------
Total stockholders' equity (deficiency) (887,354) (1,008,334)
---------- ----------
Total liabilities and stockholders' equity $7,355,168 $5,515,025
========== ==========
</TABLE>
F-2
<PAGE>
ConMat Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Month Periods Ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales to customers $5,993,022 $4,402,093
Cost of goods sold 4,376,827 3,402,459
---------- ----------
Gross profit 1,616,195 999,634
Selling, general and administrative expenses 1,129,215 982,564
Corporate support fees 118,542 240,000
---------- ----------
Operating (loss) income 368,438 (222,930)
Interest expense (244,031) (217,639)
Rental income 96,874 96,594
---------- ----------
Profit (loss) before income tax expense 221,281 (343,975)
Income tax expense (80,300) --
---------- ----------
NET PROFIT (LOSS) $ 140,981 $ (343,975)
========== ==========
Dividend requirements on Series B preferred stock $ 20,000 $ --
Per share data - basic and diluted
Net profit (loss) per share $ 0.05 $ (0.17)
Common stock (weighted average shares outstanding) 2,250,000 2,000,000
</TABLE>
F-3
<PAGE>
ConMat Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Month Periods Ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 140,981 $ (343,975)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization 140,645 119,970
Changes in assets and liabilities, net of effect from acquisitions
(Increase) decrease in assets
Accounts receivable (2,001,349) 1,040,744
Inventories 154,790 239,723
Prepaid expenses 7,993 161,144
Prepaid income taxes 75,900 --
Patents, net (13,488) (22,936)
Deferred financing charges (25,415) --
Increase (decrease) in liabilities
Accounts payable 511,019 (435,069)
Accrued expenses (231,898) (93,119)
------------- ----------
Net cash provided by (used in) operating activities (1,240,822) 666,479
------------- ----------
Cash flows from investing activities
Purchase of property and equipment (37,084) (23,018)
------------- ----------
Net cash used in investing activities (37,084) (23,018)
------------- ----------
Cash flows from financing activities
Net (repayments) borrowings under lines of credit 1,675,416 (582,891)
Repayments of term notes (312,629) (343,098)
Payments of capitalized lease obligations (57,100) (36,228)
Proceeds from capitalized lease obligations 45,000 --
Proceeds from term notes -- 300,000
Recapitalization costs (32,505) --
Payment of dividends on Series B preferred stock (2,444) --
------------- ----------
Net cash provided by (used in) financing activities 1,315,738 (662,217)
------------- ----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 37,832 (18,756)
Cash and cash equivalents at beginning of period 29,430 63,840
------------- ----------
Cash and cash equivalents at end of period $ 67,262 $ 45,084
============= ==========
</TABLE>
F-4
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and June 30, 1998
Interim financial statements reflect all adjustments which are, in the opinion
of management, necessary to a fair statement of the results for the periods. The
January 2, 1999 balance sheet has been derived from the audited financial
statements contained in this registration statement. These interim financial
statements conform with the requirements for interim financial statements and
consequently do not include all the disclosures normally required by generally
accepted accounting principles. The results for the six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year. Reporting developments have been updated where appropriate. In this
connection, there are no significant changes in disclosures.
Research and development costs are expensed as incurred. Such expenses were
approximately $76,000 during the six month period ended June 30, 1999 and
$79,000 during the six month period ended June 30, 1998.
Other assets include deferred financing costs totaling approximately $183,000.
ConMat is currently in negotiations to refinance a portion of its current debt,
and such costs are included in these deferred costs. Upon successful refinancing
of the term loan, a proportionate share of the deferred financing costs related
to the extinguished debt will be expensed to operations.
On June 29, 1999, Polychem foreclosed on a $940,000 note payable to Polychem by
Eastwind due to a default by Eastwind on the obligation. At settlement, Polychem
took possession of 313,333 shares of Series A Convertible Preferred Stock of
ConMat which had been pledged as collateral.
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 November 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.
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:
o ConMat acquired all of the outstanding shares of common stock of
Polychem from Eastwind in exchange for (I) 1,000,000 shares of
newly issued common stock of ConMat and (II) 1,333,333 shares of
newly issued cumulative, 2%, Series A convertible preferred stock
of ConMat (Series A Preferred Stock). The common stock and Series
A Preferred Stock exchanged, in addition to the existing ConMat
shares outstanding, collectively resulted in the recapitalization
of the Company. Earnings per share (EPS) calculations include the
Company's change in capital structure for all periods presented.
o ConMat assumed and, in certain instances, discharged the following
liabilities of Eastwind: (I) $160,000 owed to Eastwind's former
Chairman and Chief Executive Officer, who is the current Chairman
and Chief Executive Officer of ConMat, discharged by the issuance
of 53,333 shares of Series A Preferred Stock; (II) $100,000 owed
to Clifton Capital, Ltd.; and (III) $500,000 owed to Mentor
Special Situation Fund, L.P. (Mentor), discharged by the issuance
to Mentor of 166,667 shares of newly issued cumulative, 8%, Series
B Preferred Stock of ConMat plus warrants to purchase 166,667
shares of ConMat common stock, at $3.00 per share. The general
partner of Mentor is a member of ConMat's Board of Directors.
ConMat issued an option to purchase 30,000 shares of common stock
to this director for $1.00 per share.
o At closing, Eastwind issued to Polychem a promissory note in the
amount of $940,000 to evidence certain outstanding amounts owed by
Eastwind to Polychem for prior advances, secured by the pledge of
313,333 shares of Series A Preferred Stock. This amount, in
addition to other amounts owed to Polychem by Eastwind, was
accounted for as distributions in the form of dividends on common
stock to Eastwind in the periods the distributions were made.
The Company incurred $173,342 of costs related to the Acquisition.
These costs were recorded as reductions to additional paid-in capital in
connection with the reclassification of equity resulting from the
recapitalization.
F-11
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Cash and Cash Equivalents
The Company's cash management system provides for the short-term
investment of cash and the transfer or deposit of sufficient funds to cover
checks as they are submitted for payment. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
3. Inventories
Inventories consist of raw materials, work-in-process, and finished
goods. Work-in-process and finished goods include raw materials, direct labor,
and a portion of manufacturing overhead. The Company's inventory is stated at
the lower of cost or market, with cost determined by the last-in, first-out
(LIFO) method.
4. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is recorded using the straight-line and accelerated
depreciation methods over the estimated useful lives of the assets. Leasehold
improvements are amortized over the term of the lease or estimated useful life,
whichever is shorter.
5. Research and Development Costs
The Company expenses research and development costs as incurred.
Research and development costs were approximately $140,000 for the year ended
January 2, 1999 and $155,000 for the year ended January 3, 1998.
6. Income Taxes
The Company accounts for its income taxes under the liability method
specified by Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
7. Loss Per Share
The Company reports earnings per share in accordance with the
provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
F-12
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
January 2, 1999 and January 3, 1998
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following are the basic and diluted earnings per share calculations
for the periods presented:
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
January 2, January 3,
1999 1998
----------- -----------
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
========== ==========
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
January 2, January 3,
1999 1998
----------- -----------
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
=========== ===========
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:
<TABLE>
<CAPTION>
January 2, January 3,
1999 1998
---------- -----------
<S> <C> <C>
Current
Federal $ - $ -
State - 7,240
--------- -----------
- 7,240
--------- -----------
Deferred
Federal $ - $ 56,333
State - -
--------- -----------
- 56,333
--------- -----------
56,333
-----------
$ - $ 63,573
========= ===========
</TABLE>
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>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ConMat Technologies, Inc.
Date: September 30, 1999 By: /s/ Paul A. DeJuliis
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Paul A. DeJuliis
Chief Executive Officer and
Chairman of the Board of Directors
s
