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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
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Commission file number 000-30166
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ConMat Technologies, Inc.
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(Name of Small Business Issuer in Its Charter)
Florida 232999072
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Franklin Avenue and Grant Street, 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, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB
The Issuer's revenues for its most recent fiscal year were $11,499,236.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 10, 2000 was $3,372,000, based on the average
of the closing bid and asked prices of the Registrant's common stock as reported
by the Nasdaq OTC Bulletin Board.
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As of March 10, 2000, the Registrant had outstanding, 2,175,000 shares
of common stock.
Transitional Small Business Disclosure Format (check one).
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be utilized in connection with the
2000 Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
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ConMat Technologies, Inc.
Form 10-KSB
INDEX
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Page
PART I
<S> <C> <C>
Forward Looking Statements...................................................................... 2
Risk Factors.................................................................................... 2
Item 1. Description of Business......................................................................... 6
Item 2. Description of Property......................................................................... 12
Item 3. Legal Proceedings............................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............................................. 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........................................ 14
Item 6. Management's Discussion and Analysis............................................................ 14
Item 7. Financial Statements............................................................................ 19
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................... 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act............................................................. 19
Item 10. Executive Compensation.......................................................................... 19
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................. 19
Item 12. Certain Relationships and Related Transactions.................................................. 19
Item 13. Exhibits List and Reports on Form 8-K........................................................... 20
Index to Financial Statements.............................................................................. F-1
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FORWARD LOOKING STATEMENTS
Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.
Important factors that may cause actual results to differ from
projections include, for example,
o general economic conditions, including their impact on capital
expenditures;
o business conditions in the material technology and wastewater
treatment industries;
o the regulatory environment;
o rapidly changing technology and evolving industry standards;
o new products and services offered by competitors; and
o price pressures.
In addition, in this report, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect", "plan", and similar
expressions, as they relate to ConMat's business or management, are intended to
identify forward-looking statements.
ConMat undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
RISK FACTORS
An investment in ConMat's common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors
before making an investment.
Our acquisition strategy may be unsuccessful.
Although we continue to devote significant efforts to improving our
current operations and profitability, ultimately, the success of our business
strategy depends upon the acquisition of complimentary material technology
businesses. No assurances can be made that we will be successful in identifying
and acquiring such businesses or that any such acquisitions will result in
operating profits. In addition, any additional equity financing required in
connection with such acquisitions may be dilutive to stockholders, and debt
financing may impose additional substantial restrictions on our ability to
operate and raise capital. In addition, the negotiation of potential
acquisitions may require management to divert their time and resources away from
our operations.
We continually evaluate potential acquisition opportunities,
particularly those that could be material in size and scope. Acquisitions
involve a number of special risks, including:
o the focus of management's attention to the assimilation of the
acquired companies and their employees and on the management
of expanding operations;
o the incorporation of acquired products into our product line;
o the increasing demands on our operational systems;
o adverse effects on our reported operating results;
o the amortization of acquired intangible assets; and
o the loss of key employees and the difficulty of presenting a
unified corporate image.
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We may not be able to obtain adequate financing for working capital and
future acquisitions.
We have financed our working capital requirements and capital
expenditures primarily through bank debt and cash flow generated from
operations. In order to satisfy our existing obligations and support our future
growth strategy, we may require additional capital. There can be no assurance
that additional capital will be available or that, if available, we can obtain
such capital on satisfactory terms. Any additional equity financing may be
dilutive to stockholders, and debt financing may impose substantial restrictions
on our ability to operate and raise additional funds.
We have a large amount of debt which we may not be able to service and
which restricts our activities. We have a large amount of debt in relation to
our assets and our revenues. At December 31, 1999, our aggregate amount of
indebtedness was $5.5 million. We may also incur additional debt from time to
time to finance acquisitions or capital expenditures or for other purposes,
subject to the restrictions in our existing debt instruments. Our existing debt
entails significant risks, including the following:
o It may be difficult for us to satisfy our substantial debt
service obligations;
o Our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be
available on favorable terms;
o We will need a substantial portion of our cash flow to pay the
principal and interest on our debt, including debt that we may
incur in the future;
o Payments on our debt will reduce the funds that would
otherwise be available for our operations and future business
opportunities;
o A substantial decrease in our net operating cash flow could
make it difficult for us to meet our debt service requirements
and force us to modify our operations;
o We may be more highly leveraged than our competitors, which
may place us at a competitive disadvantage; and
o We may be more generally vulnerable to a downturn in our
business or the economy generally.
If we are unable to service our debt or obtain additional financing, as
needed, our business and financial condition would be materially adversely
affected. Our ability to satisfy our debt obligations will depend upon our
future financial and operating performance as well as the availability of
revolving credit borrowings under our credit facility, which is dependent on,
among other things, our compliance with covenants and specified borrowing base
prerequisites.
If we cannot service our debt, we will be forced to take actions such
as reducing or delaying acquisitions or capital expenditures, selling assets,
restructuring or refinancing our debt, or seeking additional equity capital or
bankruptcy protection. We cannot assure you that any of these remedies can be
effected on satisfactory terms, if at all.
Restrictive debt covenants in our loan instruments restrict our
activities.
Our loan instruments restrict, among other things, our ability to:
o incur additional debt;
o pay dividends;
o redeem capital stock;
o create liens, dispose of assets, engage in mergers; and
o make contributions, loans or advances.
We are controlled by a small group of stockholders.
Our common stock is held by a small group of stockholders. Therefore,
our public stockholders may not have the power to elect ConMat's directors and
direct the policies of ConMat.
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There is a limited public market for our common stock. There is no
established active public trading market for our common stock. Our common stock
is traded in the over-the-counter market and "bid" and "asked" quotations
regularly appear on the Nasdaq OTC Bulletin Board under the symbol "CNMT". As of
March 10, 2000, the last reported sale price of ConMat's common stock was $3.63,
and there were 10 firms listed as market makers for our common stock. There can
be no assurance that our common stock will trade at prices at or about its
present level, and an inactive or illiquid trading market may have an adverse
impact on the market price. Moreover, price fluctuations and the trading volume
in our common stock may not necessarily be dependent upon or reflective of our
financial performance.
Holders of our common stock may experience substantial difficulty in
selling their securities. The trading price of our common stock could be subject
to significant fluctuations in response to variations in quarterly operating
results, changes in the analysts' estimates, announcements of technological
innovations, general industry conditions.
The public sale of shares eligible for future sale may adversely affect
the price of our common stock. Future sales of shares by current stockholders,
including the selling stockholders, could cause the market price of our common
stock to decline.
If we do not adapt to technological advances in our industry as quickly
as our competitors, our operating results and financial condition could be
adversely affected.
We compete in markets and industries that require sophisticated
manufacturing systems and other advanced technology to deliver state-of-the-art
products. These systems and technologies will have to be refined and updated as
the underlying technologies advance. We cannot assure you that, as systems and
technologies become outdated, we will be able to replace them, to replace them
as quickly as our competitors or to develop and market new and better products
in the future. Higher overhead and manufacturing costs due to a failure to
update and improve processes could limit our competitive position. In addition,
failure to make technological advances could adversely affect our ability to
successfully market custom engineered plastics and composite products.
Concentration of order backlog in a single project could expose us to
operating losses and cash flow problems.
From time to time we have a significant percentage of our order backlog
concentrated in a single project. If construction or payment for shipped
materials is delayed on such a significant project, we could be exposed to
operating losses and restrictive cash flow problems. This could also hamper our
ability to pursue new business opportunities or result in credit shortages.
We are subject to risks related to our international operations.
We anticipate that international sales will increasingly account for a
significant portion our net sales and revenue. We intend to expand our export
sales to markets in Asia, Europe, South America and the Middle East and to enter
additional countries in these international markets, which may require
significant management attention and financial resources. Our operating results
will be increasingly subject to risks related to international sales, including:
o regulatory requirements;
o political and economic changes and disruptions;
o transportation delays;
o national preferences for locally manufactured products; and
o import duties or other taxes which may affect the prices of
our products in other countries relative to competitors.
We do not have firm contracts with plastic resin suppliers and our
operating results may be adversely affected by shortages or price increases.
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Our operations are dependent on adequate supplies of plastic resins. We
source plastic resin primarily from major industry suppliers. We have
long-standing relationships with some of these suppliers but have not entered
into a firm supply contract with any of our resin vendors. We may not be able to
obtain plastic resins in adequate supply or at an acceptable cost in the event
of an industry-wide general shortage of resins, or a shortage or discontinuation
of certain types of grades of resin purchased from one or more of our suppliers.
In addition, plastic resins are subject to cyclical price fluctuations,
including those arising from supply shortages and changes in the prices of
natural gas, crude oil and other petrochemical intermediates from which resins
are produced. An increase in resin prices may have a material adverse effect on
our financial condition and results of operations.
Industry consolidation may result in pricing pressures or our exclusion
from bidding on larger projects, which could have an adverse affect on our
operating results.
Major corporations with an international presence continue to
consolidate products and services within the wastewater treatment industry on a
global basis. This trend may result in more single source bidding for large
scale new wastewater treatment construction and may result in pricing pressures
for our core products or our exclusion from larger projects. In response to this
trend, we intend to expand our product offerings to the wastewater treatment
industry through acquisitions of or joint ventures with smaller companies
offering complimentary products and to develop or acquire product lines serving
industries other than wastewater treatment. However, no assurances can be made
that we will be successful in these pursuits.
Privatization of municipal wastewater treatment plants may limit our
ability to bid on projects. Until recently most wastewater facilities were owned
and operated by the municipal governments. As a result of a drop in federal
funding, municipalities are beginning to consider private management or
ownership as a financially attractive alternative. Consequently, some large
international corporations are becoming more involved in ownership or
management. Such arrangements could impact the exclusive supplier relationships
with our competitors thereby precluding us from bidding on projects. We are in
discussions with a number of these management companies in an attempt to become
an exclusive supplier. However, there can be no assurance that Polychem will be
successful in establishing such relationships.
The markets in which Polychem competes are highly competitive.
Experienced competition exists in each of Polychem's major markets, and
many of Polychem's competitors maintain good working relationships with their
customers, produce quality products and have access to significantly greater
financial resources. There can be no assurance that we will be able to keep pace
with the technological demands of the marketplace or successfully enhance our
products or develop new products, which are demanded by the industry. Our
operations and properties may expose us to material costs or liabilities related
to environmental regulations. Our operations and properties are subject to a
wide variety of federal, state and local laws and regulations, including those
governing the use, storage and handling, generation, treatment, emission,
remediation of contaminated soil and ground water, and the health and safety of
employees. There is no assurance that our operations or properties will comply
with applicable regulations. As such, our operations and properties expose us to
the risk of claims with respect to such matters and we may incur material costs
or liabilities in connection with such claims.
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PART I
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. Operating under its
new trade name, conmattech.com, ConMat is converting to an e-business platform
providing business-to-business internet capability for its wholly-owned
subsidiaries. ConMat is not an operating company and does not have significant
assets or conduct significant business except through its wholly-owned
subsidiary. In December 1998, ConMat acquired 100% of the common stock of
Polychem Corporation from The Eastwind Group, Inc. ConMat's strategy is to
provide a corporate structure and e-commerce platform that optimizes the
business potential of acquired products and companies through conversion to
fast, flexible organizations with an e-business customer focus. ConMat is
focused on material technologies with an emphasis on proprietary
custom-engineered plastics and composite products sold to industrial end users.
Product categories emphasized include those, which make the environment cleaner,
operations safer and improve operating efficiencies. ConMat's acquisition of
Polychem was the first step in executing this strategy. ConMat plans to execute
a growth strategy combining internal new product development and corporate
acquisitions.
The principal executive offices of ConMat are located at Franklin Avenue and
Grant Street, Phoenixville, PA 19460. The telephone number is (610) 935-0225.
Acquisition of Polychem
On December 8, 1998, ConMat acquired 100% of the common stock of Polychem from
Eastwind. The basic structure and terms of the transaction were as follows:
o ConMat acquired all of the outstanding shares of common stock
of Polychem from Eastwind in exchange for (i) 1,000,000 shares
of newly issued common stock of ConMat and (ii) 1,333,333
shares of newly issued Series A convertible preferred stock of
ConMat. Eastwind subsequently transferred the 1,000,000 shares
of common stock to The Eastwind Group, Inc. Shareholder Trust,
a trust for the benefit of Eastwind's shareholders in which
Eastwind has no interest.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A convertible preferred stock; (ii) $100,000 owed to
Clifton Capital, Ltd., discharged by the payment to Clifton
Capital, Ltd. of $100,000; and (iii) $500,000 owed to Mentor
Special Situation Fund, L.P., discharged by the issuance to
Mentor Special Situation Fund, L.P. of 166,667 shares of newly
issued Series B preferred stock of ConMat and warrants to
purchase 166,667 shares of common stock. In addition, Mentor
Management Company exchanged warrants to purchase 30,000
shares of Eastwind common stock for warrants to purchase
30,000 shares of ConMat common stock.
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o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A preferred stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A convertible preferred
stock. This note accrued interest at 8% per year and principal
and interest were due and payable November 30, 2000. 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. 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. For
financial accounting purposes, the return of the pledged
shares was treated as a reduction in the number of shares of
Series A convertible preferred stock issued to Eastwind in
connection with the acquisition of Polychem and in the number
of Series A convertible preferred stock outstanding.
In compliance with applicable state law, the transaction was approved by the
Board of Directors and stockholders of ConMat and the Board of Directors of
Eastwind. In addition, General Electric Capital Corporation and Odyssey Capital
Partners approved the transaction as required by the terms of a Loan and
Security Agreement between Polychem and General Electric Capital Corporation,
and the terms of the Eastwind Series A Preferred Stock held by Odyssey.
ConMat
Business Strategy. ConMat's strategy is to create value by improving the
performance of acquired companies. ConMat intends to create value by applying
sound management practices, information technology and electronic commerce
capabilities to acquired companies, converting such acquisitions to fast,
flexible organizations with an e-business customer focus. The intent is to
develop the business model at Polychem, ConMat's first acquisition, and apply
the methodology to future acquisitions more quickly and efficiently. ConMat is
currently directing the selection and installation of an Enterprise Resource
Planning ("ERP") system (including new software, hardware and business
practices) and business-to-business ("B2B") capabilities that are intended to
create customer and shareholder value by improving Polychem's level of customer
service, competitive position as well as reduce design, production, selling and
administrative costs as a percentage of sales. ConMat is focused on material
technologies with an emphasis on proprietary custom-engineered plastics and
composite products sold to industrial end users. Product categories emphasized
include those that make the environment cleaner, operations safer and improve
operating efficiencies. ConMat's acquisition of Polychem was the first step in
executing this strategy. ConMat plans to execute this growth strategy combining
internal new product development along with corporate acquisitions.
Potential Future Acquisitions. ConMat seeks to acquire other operating companies
with complimentary product lines and technologies or incremental distribution or
production capabilities. Such companies would have proprietary material
technologies and products and would likely have a competitive position in the
wastewater treatment, automotive or other markets, but need not service these
markets 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.
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.
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Products. Polychem engineers and produces an extensive line of plastic molded
products that are used in a variety of industrial markets. Polychem's typical
products include, among others, complete non-metallic rectangular clarifier
component systems for water and wastewater treatment operations. Polychem's
clarifier component systems are primarily used for the removal of sediment and
solids from wastewater. The clarifier systems are, in effect, settling tanks
through which water passes, allowing suspended solids to settle. These systems
are comprised of non-metallic chain, sprockets, stub shafts, wear shoes and
other products fabricated to customer specifications. Polychem also produces:
o cast nylon elevator buckets for handling foundry sand,
aggregate and glass cullet. These buckets are secured to
elevators and used to convey raw materials to their point of
use in the manufacture of steel, glass and other products.
o phenolic sprockets and pulleys used with blade belts in the
cutting housing for agricultural equipment and for securing
electrical cables for mining equipment.
o celeron bearings for the rolling machinery in steel mills.
o extruded thermoset air conditioning ducts for aircraft.
o molded conveyor chains and accessories for conveying cans,
bottles and other packaged materials during production, water
and wastewater treatment and other material handling
industries.
Most of the nylon buckets, steel mill bearings and table-top conveyor chains are
sold as off-the-shelf items to steel mills and distributors. The majority of the
balance of Polychem's products are produced for use in a complete system of
wastewater treatment clarifier equipment that Polychem sells to its customers.
Such a complete system is usually built to customer specifications and sold
under an order selected from competitive bids. The "reaction injection molded"
nylon products and the injected molded products account for between 80% and 90%
of Polychem's sales; compression molded products comprise the balance of the
business. The average life expectancy of Polychem's typical products is ten
years. The cost of Polychem's systems varies based on the scope of the system
and the end user modifications required. The cost of a system generally ranges
from $20,000 to $45,000. In addition to its existing products, Polychem
continues to explore new product applications. Polychem currently has one
product designed for use in the automotive industry entering the test market
phase and two wastewater treatment products in the feasibility study stage.
Wastewater treatment plants are primarily used to clean sewage and return water
to general public use. Wastewater treatment plants are generally owned by
municipalities or water authorities. There are over 15,000 wastewater treatment
plants in the United States. Polychem estimates that globally there are 30,000
to 50,000 plants. In the United States, 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 50% are for replacement parts and 50% are new projects. New
projects account for approximately 60% 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 "Reaction injection molded" molding, which produces nylon
buckets, stub shafts, and sprockets. In "reaction injection
molded" molding, a compound containing a catalyst and a
compound containing a promoter are mixed in the mold where a
reaction takes place; the combination and percentage of base
chemicals and additives determine the properties of the final
product;
o Compression molding, which produces phenolic steel mill
bearings, timing gears, timing pulleys and other molded
products. In the compression molding process, phenolic
macerate or phenolic laminate is placed in heated molds
(approximately 325 degrees) and cured for a specific period of
time at pressures up to 3000 PSI; and
o Injection molding, which produces engineered resin parts used
for wastewater drives, collector chains and tabletop conveyor
chains. In injection molding, engineered plastic materials are
melted and injected into the mold at a controlled temperature
and rate. Once in the mold, the plastic is cooled to a shape
reflecting the cavity.
Products are then sent to the Fabricating Department for machining and assembly.
Polychem's plant operates on a three-shift basis, yet has sufficient available
capacity for growth in most product lines. 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 fiber and
teflon and silicon tape. In the early 1980's, Polychem identified the wastewater
treatment industry as a potential market and began to shift its focus to
manufacturing products designed for such market. By 1992, wastewater products
became Polychem's dominant revenue producer and presently the revenues from
wastewater products comprise 85% of Polychem's annual sales volume. The
wastewater treatment market is global in nature, and Polychem presently sells
products internationally in Western Europe, Asia and South America and is
expanding into Eastern Europe, the Middle East and Africa.
In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components, "reaction
injection molded"-processed nylon buckets, phenolic bearings and corrugated
fiber 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 ten
employees. Domestic distributors are paid a percentage of sales ranging from 5%
to 15%. Internationally, distributors are compensated principally on a buy and
sell basis. 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
approximately 50% of its annual sales revenue, international distributors
accounted for approximately 25% and domestic distributors accounted for
approximately 25%. Domestic revenues were approximately 74% and international
revenues were approximately 26% in the 1999 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 lower prices. These factors, along with product characteristics,
reliability, servicing, and pricing form the major competitive factors in
Polychem's markets.
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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 of projects and to use certain products as loss leaders.
Tropodyne and NRG are Polychem's other competitors, and have smaller shares of
the clarifier market. Polychem believes that it has three competitors in the
market for nylon buckets and five competitors in the market for table-top
chains. Polychem has an approximate 50% share of the nylon bucket market, while
its closest competitor has an approximate 30% market share. The dominant
competitor in the table top chain market, Rexnard, holds an approximate 80%
market share, while Polychem has an approximate 5% share.
Polychem's long-term goals include solidifying its reputation as a leading
provider of quality wastewater treatment equipment products; increasing sales of
its traditional products by improving existing product lines; and seeking new
products to supplement its current line.
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 Performance
Polymers and TP Composites. Its two largest suppliers of capolactin are Dutch
State Mines and BASF, while its two largest suppliers of pultrusions are
Creative Pultrusions and Plastic Center Inc. 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 costs for environmental remediation projects. In the
ordinary course of its business, Polychem incurs some cost for oil reclamation,
hauling of waste products and normal energy costs associated with recycling and
waste disposal. Polychem spends approximately $50,000 annually to comply with
environmental laws, including hauling costs as well as general monitoring and
compliance costs. Polychem maintains two environmental permits, one for a dust
collection system and the other for its after burner heater. The collected dust
is transported by traditional waste management handlers to domestic landfills.
The after burner heater is used to mix cotton fabric with phenolic resins, which
are then processed into specific products. Methanol from the heater is processed
through an after burner and emits little in the way of contaminants. Polychem
maintains seven above ground storage tanks. Two are used to store phenolic
resins inside the plant; two store fuel oil; and three outside tanks are used to
store other chemicals. There are spill containment systems in place throughout
the facility.
Occasionally, there are minor and isolated spills of heat transfer oil,
capolactin and phenolic resins. The latter two quickly solidify at room
temperature and the hardened material is removed to an approved landfill; spills
of heat transfer oil are cleaned and properly disposed of with other waste
products by a licensed outside processor. Polychem submitted a revised spill
prevention and response plan to the Pennsylvania Department of Environmental
Resources in May 1994 to which no comments have been received as of the date of
this prospectus.
Polychem has occupied its Phoenixville, Pennsylvania property since 1974. The
property was first used as a silk mill in the early part of this century and
then as a manufacturing site for felt carpet padding. Three environmental audits
that have been conducted over the past four years as part of customary due
diligence in financing transactions have not revealed contamination. An
environmental audit was commissioned by Congress Financial Corporation in
conjunction with the purchase of Polychem by The Eastwind Group in 1995. A
second environmental study was commissioned by 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 77 employees, of whom 42 are employed on an hourly
basis. Hourly employees are members of United Textile Workers of America,
AFL-CIO, Phoenixville Plastic Makers' Union, Local No. 130. Most are
semi-skilled workers. The current union contract expires at the end of September
2002.
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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.
Information Technology. ConMat is leading Polychem's information technology
advancement by providing guidance and direction in the development of a B2B
e-commerce platform that will be integrated with the primary ERP system Polychem
intends to install. The B2B e-commerce platform is being designed to enable
customers to interact directly with Polychem and will include features that will
automate requests for quotes, order processing as well as order, invoice and
payment inquiries. The B2B e-commerce platform will also include a portal for
vendors to communicate with Polychem improving vendor performance and reducing
costs. ConMat and Polychem are currently evaluating ERP systems and expect to
complete the installation of the selected system in 2000. Management expects the
ERP system will reduce material costs, improve manufacturing efficiencies and
provide better information for decision making.
Equipment. Polychem owns or leases, through capital leases, all of the equipment
required to conduct its business. The equipment is comprised of compression
molding presses, transfer molding presses, injection molding presses, reactors,
dispensers and "reaction injection molded" press lines for nylon-6 operations, a
complete fabrication shop with computerized numerical control equipment and a
computer aided design center.
Research and Development. Polychem is the owner of a number of United States and
foreign patents and patent applications relating to water treatment plastic
products, chain conveyor links, conveyor chain bearings, sprockets with locking
mechanisms and a bucket grit elevator system. The ownership of such patents
helps Polychem from a marketing standpoint by securing its continued reputation
as an innovative competitor in its industry.
Polychem employs eight application engineers who use computer aided design
equipment to design custom wastewater treatment non-metallic rectangular
clarifier systems or to alter existing clarifiers to meet changing specification
requirements. All new products are evaluated for patent protection. Recently,
Polychem was granted a patent for a grit bucket system, which is now undergoing
marketing development. To date, five successful applications for the system have
been found, the most significant of which is to function as part of a grit
collection system in wastewater treatment where it will be used to remove sand
and gravel from effluent before it reaches the clarifier. Polychem incurred
$160,000 and $140,000 on product research, engineering and development costs
during the years ended December 31, 1999 and January 2, 1999, respectively.
Debt and Encumbrances. On September 30, 1998, Polychem entered into a Loan and
Security Agreement with General Electric Capital Corporation, which provides for
a three-year, $3,500,000 revolving line of credit and a three-year term loan of
$1,500,000. On August 25, 1999, the revolving line of credit was increased to
$5,000,000. The revolving line of credit and the term loan originally were
secured by a mortgage on Polychem's Phoenixville, Pennsylvania facility, which
mortgage lien was released in connection with the Public School Employes'
Retirement Board financing described below. The term loan is secured by
Polychem's equipment. The revolving line of credit is secured by accounts
receivable and inventory. Advances under the revolving line of credit are
subject to a lending formula limiting the availability of funds to the total of
(i) 80% of eligible accounts receivable, less the amount by which contractual
holdbacks (i.e., amounts that customers are entitled to hold back until
completion of a project) in favor of account debtors on eligible accounts
exceeding $250,000, plus (ii) the lesser of $750,000 or 50% of eligible
inventory (less a $300,000 reserve). Interest rates on the loan are at a rate of
4.75% in excess of the 30 day dealer commercial paper rate on the revolving line
of credit, 10.55% at March 1, 2000, and 6.50% in excess of the 30 day dealer
commercial paper rate for the term loan, 12.3% at March 1, 2000.
Interest on the revolving line of credit and term loan is payable monthly.
Polychem's collections of accounts receivable are deposited with General
Electric Capital Corporation under a lockbox arrangement and applied to reduce
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
11
<PAGE>
the term loan and then to reduce the outstanding balance under the revolving
line of credit. As of March 10, 2000, availability under the line of credit was
$2,124,943 and outstanding borrowings were $2,053,149. In connection with the
Public School Employes' Retirement Board financing described below, General
Electric Capital Corporation agreed to restructure the payment schedule on the
remaining balance of its term loan to provide for 25 monthly payments of $8,000
and a final payment on September 30, 2001 of $212,000. As of March 10, 2000 the
outstanding balance of the General Electric Capital Corporation term loan was
$356,000.
On August 25, 1999, Polychem received a $1,880,000 term loan from the Public
Employes' Retirement Board, secured by a mortgage on Polychem's Phoenixville,
Pennsylvania facility. $813,000 of the net proceeds of the loan were applied to
reduce the outstanding balance of the General Electric Capital Corporation term
loan and the remaining $996,000 of net proceeds were applied to reduce the
outstanding balance of the General Electric Capital Corporation revolving line
of credit. The Public School Employes' Retirement Board loan is for a term of 10
years. The interest rate on the Public School Employes' Retirement Board loan is
8.5% for the first five years, and thereafter is 350 basis points above the 5
year U.S. Treasury Note Yield Rate as of the end of the first five years.
Principal and interest are payable in equal monthly installments based on a 25
year amortization schedule, with a balloon payment September 1, 2009 equal to
outstanding principal balance plus accrued interest. As of March 10, 2000, the
outstanding balance of the Public School Employes' Retirement Board term loan
was $1,868,862.
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 March 10, 2000 was $975,776.
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.
Item 2. Description of Properties.
Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage. See "ConMat-Polychem-Debt
and Encumbrances." In July 1998, the property was appraised at $2.4 million by
AccuVal Associates Incorporated, an independent appraiser. Polychem uses
approximately 120,000 square feet for manufacturing and warehousing, and 20,000
square feet for offices. Polychem leases approximately 74,000 square feet of
warehouse space to three tenants at rental rates ranging from $2.90 through
$3.12 per square foot. Approximately 50,000 square feet is leased for five years
with the balance leased for one year. Polychem also leases a tower located on
the facility and approximately 1,000 square feet of warehouse space to three
cellular phone operators. Combined annual lease income from the tower is
$48,600. Two of the tower leases have ten year terms and one lease has a five
year term. An additional 5,000 square feet of warehouse space is available for
lease at the facility. Management believes that Polychem's properties are
adequately insured.
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Item 3. 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 $350,000 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 pending.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders during the fourth
quarter of 1999.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The common stock of ConMat has been quoted on the Nasdaq OTC Bulletin
Board since December 21, 1998 under the symbol "CNMT". The following table shows
quarterly low and high bid information for the common stock from December 21,
1998 through March 10, 2000:
Low Bid High Bid
------- --------
2000
----
First Quarter (1) $3.50 $4.375
1999
----
Fourth Quarter $3.50 $5.00
Third Quarter 3.03 5.00
Second Quarter 3.00 3.00
First Quarter 1.63 4.00
1998
----
Fourth Quarter (2) 1.50 2.125
(1) Through and including March 10, 2000.
(2) Commencing December 21, 1998.
Market quotations reflect inter-dealer prices, without retail markups,
markdown or commissions and may not necessarily reflect actual transactions. As
of March 10, 2000, there were 2,175,000 shares of common stock outstanding held
by approximately 12 holders of record.
ConMat has never paid a cash dividend on its common stock and does not
plan to pay any cash dividends on its common stock in the foreseeable future.
Item 6. Management's Discussion and Analysis.
Background and Basis of Presentation
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto contained
elsewhere in this report. The discussion of these results should not be
construed to imply any conclusion that any condition or circumstance discussed
herein will necessarily continue in the future.
Prior to 1999 the Company's fiscal year ended on the closest Saturday to
December 31. In 1999 the Company changed to a calendar year. Accordingly, the
Company's 1998 fiscal year began January 4, 1998 and ended on January 2, 1999
and the 1999 year began January 3, 1999 and ended December 31, 1999.
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On December 8, 1998, ConMat, a non-operating company with immaterial net assets,
acquired 100% of the outstanding common stock of Polychem from Eastwind. The
acquisition resulted in the owners and management of Polychem having effective
operating control of the combined entity.
The acquisition has been accounted for as a capital transaction in substance,
rather than a business combination. The acquisition is equivalent to the
issuance of stock by Polychem for the net monetary assets of ConMat, accompanied
by a recapitalization, and is accounted for as a change in capital structure.
Accordingly, the accounting for the acquisition is identical to that resulting
from a reverse acquisition, except that no goodwill is recorded. Under reverse
acquisition accounting, the post reverse-acquisition comparative historical
financial statements of the "legal acquirer" (ConMat), are those of the "legal
acquiree" (Polychem).
Accordingly, the consolidated financial statements of ConMat 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 Series A convertible
preferred stock of ConMat. The common stock and Series A
convertible preferred stock exchanged, in addition to the
existing ConMat shares outstanding, collectively resulted in
the recapitalization of Polychem. Earnings per share
calculations include Polychem's change in capital structure
for all periods presented.
o ConMat assumed and discharged the following liabilities of
Eastwind: (i) $160,000 owed to Paul A. DeJuliis, Eastwind's
former Chairman and Chief Executive Officer, who is the
current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance to Mr. DeJuliis of 53,333 shares of
Series A convertible preferred stock; (ii) $100,000 owed to
Clifton Capital, Ltd., discharged by the payment to Clifton
Capital, Ltd. of $100,000; and (iii) $500,000 owed to Mentor
Special Situation Fund, L.P. discharged by the issuance to
Mentor Special Situation Fund, L.P. of 166,667 shares of newly
issued Series B preferred stock of ConMat and warrants to
purchase 166,667 shares of common stock. In addition, Mentor
Management Company exchanged warrants to purchase 30,000
shares of Eastwind common stock for warrants to purchase
30,000 shares of ConMat common stock.
o Prior to the acquisition, Eastwind had caused Polychem to
distribute to Eastwind approximately $940,000. As part of the
acquisition, Eastwind agreed to repay these distributions with
interest, or forego a portion of the Series A preferred stock
issued to it as an adjustment to the purchase price. To
reflect this agreement, Eastwind issued to Polychem a
promissory note in the amount of $940,000, secured by the
pledge of 313,333 shares of Series A convertible preferred
stock. This note accrued interest at 8% per year and principal
and interest were due and payable November 30, 2000. 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. 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. For
financial accounting purposes, the return of the pledged
shares was treated as a reduction in the number of shares of
Series A convertible preferred stock issued to Eastwind in
connection with the acquisition of Polychem and in the number
of Series A 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.
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Results of Operations
For the Fiscal Year Ended December 31, 1999 as compared to the Fiscal
Year Ended January 2, 1999.
The following table provides certain statement of operation items as a
percentage of net sales for the fiscal years indicated:
1999 1998
---- ----
Net sales.................................... 100.0% 100.0%
Cost of goods sold........................... 70.3 72.2
Gross profit................................. 29.7 27.8
Selling and administrative expenses.......... 24.0 24.2
Eastwind corporate support fees.............. -- 5.3
Interest expense............................. 4.6 6.7
Rental income................................ 1.8 2.1
Income tax expense........................... 0.9 --
----- -----
Net income (loss)............................ 2.0 (6.3)
===== =====
Net Sales
Net sales for fiscal year 1999 were $11,499,236 compared to $9,069,668 in the
prior fiscal year, representing an increase of $2,429,568 or 27%. As a result of
ConMat's strategic focus and strong sales efforts in 1999, sales of water
treatment products represent the entire sales increase in 1999. Included in the
water treatment sales increase are two significant clarifier contracts: one
within the continental United States and one in Asia. ConMat has recently
negotiated a four year contract for water treatment product sales in Western
Europe and is experiencing increased interest in its water treatment products in
Asia. While no assurances can be given, management expects international sales
in general, and more particularly sales to Asia, to increase as a result of the
improvement in those economies as well as demand for improved water treatment
systems in densely populated areas. ConMat's booked order backlog as of March
15, 2000 was $7,185,000 as compared to $5,400,000 at January 2, 1999,
representing an increase of $1,785,000 or 33%.
Gross Profit
Gross profit for fiscal year 1999 was $3,414,850 as compared to $2,524,167 in
the prior fiscal year representing an increase of $890,683 and an increase in
the gross profit percent of sales from 27.8% in fiscal year 1998 to 29.7% in
fiscal 1999. The increase in gross profit and the gross profit percent of sales
is principally attributable to increased sales of water treatment products as
well as improved manufacturing efficiencies related to improved manufacturing
and labor capacity utilization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $563,660 or 26% to
$2,758,399 for 1999 from $2,194,739 in fiscal year 1998. Selling, general and
administrative expenses as a percentage of net sales remained at 24% in both
years. The increase in selling, general and administrative expenses includes
$256,919 of costs incurred in 1999 to replace services previously provided by
Eastwind and reflected in "Eastwind corporate support fees" in the Statement of
Operations in fiscal year 1998. ConMat was able to provide these services in
1999 at approximately half the cost incurred in the prior year. Other
administrative costs increased $195,762 in 1999 due to additional professional
services associated with financing transactions, system upgrades to ensure Year
2000 compliance, general salary increases and an increase in technical and
engineering costs of $14,603 associated with the increase in sales. Selling
expenses increased $110,979 in fiscal year 1999 due principally to the addition
of a Vice President of
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Marketing and Business Development directed to increase ConMat domestic and
international presence in the marketplace. Selling expenses decreased from 17.5%
of net sales in 1998 to 14.8% of net sales in 1999 as a result of increased
sales and performance improvements associated with organizational changes made
in the prior year. Management is closely monitoring selling and administrative
expenses. While no assurances can be given, management expects such expenses to
decrease as a percentage of sales in future periods due to anticipated increased
revenues. Management does however expect an increase in administrative expenses
in 2000 due to the implementation of an Enterprise Resource Planning and
integrated e-commerce information system, which will require supplemental
training and implementation resources in 2000.
Eastwind Corporate Support Fees
Eastwind corporate support fees were not incurred in 1999 as a result of
ConMat's acquisition of Polychem from Eastwind on December 8, 1998. The company
incurred $480,000 of Eastwind corporate support fees in 1998 for legal,
accounting, regulatory compliance, insurance and administrative services
provided to Polychem by Eastwind. ConMat incurred $256,919 of administrative
costs in 1999 (discussed above), which replaced those services provided by
Eastwind in 1998. These administrative costs are included in selling, general
and administrative expenses within the 1999 Statement of Operations.
Interest Expense
Interest expense decreased $79,818 to $530,178 in fiscal 1999 as compared to
$609,996 in the prior fiscal year. The decrease is due to the one-time charge of
$143,000 in fiscal year 1998 relating to a September 1998 refinancing, partially
offset by an increase in interest expense associated with additional borrowings
used to finance increased working capital supporting the higher level of sales
in 1999. The increase in interest expense related to additional borrowings was
partially mitigated by the use of lower rate mortgage debt to finance ConMat's
needs as compared to higher rate revolving and term debt. Interest expense, net
of the one-time charge of $143,000 in 1998, declined from 5.1% of sales in 1998
to 4.6% of sales in 1999.
Rental Income
Rental income increased $20,165 from $185,877 in 1998 to $206,042 in 1999 due to
an increase in warehouse space rented to third parties.
Income Tax Expense
ConMat had no income taxes during 1998 as a result of its operating loss. Income
tax expense for fiscal year 1999 of $108,000 represents an effective income tax
rate of 32%, and reflects the utilization of net operating loss carryforwards.
Net Income (Loss)
Net income for fiscal 1999 was $224,315 reflecting an increase of $799,006 from
the net loss of $574,691 incurred in 1998. This improvement is attributable to
the significant increase in sales and resulting increase in gross profit of
$890,683.
Liquidity and Capital Resources
ConMat's primary source of working capital is a credit facility of up to $5
million, subject to a lending formula limit, secured by Polychem's assets with
borrowings limited to a percent of eligible receivables and inventory. At
January 2, 1999 and December 31, 1999, ConMat was not in compliance with certain
financial covenants associated with the General Electric Capital Corporation
facility. These instances of noncompliance were waived by General Electric
Capital Corporation. ConMat expects to comply with these covenants as sales and
earnings are further developed in the business. However, there can be no
assurance that ConMat will remain in compliance or that
17
<PAGE>
General Electric Capital Corporation will continue to waive any noncompliance.
As of March 10, 2000, the maximum borrowing amount was $2,124,943 and the
outstanding balance was $2,053,149. Management believes that ConMat has
sufficient assets, equipment and facility to attain and absorb forecasted growth
in revenues at PolyChem. 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.
In this section, the term "Current Ratio" means current assets divided by
current liabilities. "Working Capital" means current assets less current
liabilities.
The company's Current Ratio and Working Capital for the years ended 1999 on
December 31, 1999 and 1998 on January 2, 1999 were as follows:
1999 1998
-------- --------
Current Ratio 1.24 1.07
Working Capital $1,166,529 $247,658
For the Fiscal Year Ended December 31, 1999
ConMat's cash position increased $72,162 during fiscal year 1999. Net cash used
in operating activities during fiscal year 1999 was $836,071 as compared to net
cash provided by operating activities in fiscal year 1998 of $487,539. The
change is principally attributable to the increase in accounts receivable
associated with the increase in sales during the second half of fiscal year 1999
as compared to the second half of fiscal year 1998. Net cash used in investing
activities decreased from $191,771 in 1998 to $41,910 in fiscal year 1999 as a
result of lower levels of capital spending on property and equipment at Polychem
in fiscal year 1999. During fiscal year 1999, net cash provided by financing
activities was $950,143 as compared to $330,178 net cash used in financing
activities in fiscal year 1998. This change principally reflects additional
borrowings used to finance operating activities in fiscal year 1999.
Year 2000
ConMat has not experienced any material business interruptions or supplier
delays from Year 2000 computer issues to date and has not discovered any Year
2000 problems in internal computer systems material to our operations. However,
the failure of ConMat's internal systems or those of any of our customers,
vendors, suppliers or service providers could have a material adverse affect on
our operations.
Subsequent Event
On February 29, 2000, pursuant to an Exchange Agreement between ConMat and
Odyssey Capital Group, L.P., ConMat issued 382,500 shares of ConMat Series C
Preferred Stock and a warrant to purchase 382,500 shares of ConMat common stock
to Odyssey in exchange for 285,000 shares of ConMat Series A Preferred Stock and
75,000 shares of ConMat common stock which were owned by Odyssey. As additional
consideration to ConMat, Odyssey agreed to provide, subject to ConMat's
financial performance, additional financing of $1,500,000 to ConMat in the
future by purchasing subordinated notes with attached warrants or convertible
preferred stock. Odyssey also agreed to assist ConMat in obtaining additional
financing to the extent ConMat's growth or acquisitions require such.
18
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Item 7. Financial Statements.
ConMat's financial statements are attached to this report and begin on
page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 26, 2000, ConMat's board of directors approved the dismissal
of Grant Thornton LLP, the principal accountant previously engaged to audit
ConMat's financial statements. Neither of the reports provided by Grant Thornton
LLP for the past two years contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope, or
accounting principles. During ConMat's two most recent fiscal years and the
subsequent period, there were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreement, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreement in connection with its report.
On January 26, 2000, ConMat's board of directors approved the
engagement of Cogen Sklar LLP as the principal accountant to audit ConMat's
financial statements. During ConMat's two most recent fiscal years and the
subsequent period prior to such appointment, ConMat has not consulted Cogen
Sklar LLP regarding either the application of accounting principles to a
specified transaction or the type of audit opinion that might be rendered on the
Company's financial statements, nor on any matter that was either the subject of
a disagreement or a reportable event.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this Item is incorporated by reference from
ConMat's definitive proxy materials to be filed with the Commission in
connection with ConMat's 2000 Annual Meeting of Shareholders.
Item 10. Executive Compensation.
The information required by this Item is incorporated by reference from
ConMat's definitive proxy materials to be filed with the Commission in
connection with ConMat's 2000 Annual Meeting of Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference from
ConMat's definitive proxy materials to be filed with the Commission in
connection with ConMat's 2000 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference from
ConMat's definitive proxy materials to be filed with the Commission in
connection with ConMat's 2000 Annual Meeting of Shareholders.
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Item 13. Exhibits List and Reports on Form 8-K.
(A) Exhibits
The following exhibits are filed as part of this report. Exhibit numbers
correspond to the exhibit requirements of Regulation S-B.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation of ConMat Technologies, Inc.***
3.2 By-laws of ConMat Technologies, Inc.*
4.1 Specimen common stock certificate.*
4.2 Specimen series A preferred stock certificate.*
4.3 Specimen series B preferred stock certificate.*
4.4 Series A warrant from ConMat to Mentor Special Situation Fund, L.P.
dated December 8, 1998.*
4.5 Series B warrant 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 General Electric
Capital Corporation dated September 30, 1998.*
10.3 $3,500,000 Revolving Credit Note payable by Polychem to General
Electric Capital Corporation dated September 30, 1998.*
10.4 $1,500,000 Term Note payable by Polychem to General Electric Capital
Corporation dated September 30, 1998.*
10.5 Stock Pledge Agreement between ConMat and General Electric Capital
Corporation dated December 8, 1998.*
10.6 Guarantee dated December 8, 1998 between ConMat and General Electric
Capital Corporation.*
10.7 Waiver and Amendment Agreement among General Electric Capital
Corporation, ConMat, Polychem and Eastwind.*
10.8 $1,626,294 Term Note payable by Polychem to The Budd Company dated
March 10, 1995.*
10.9 Mortgage and Security Agreement between Polychem and General Electric
Capital Corporation.*
10.10 Share Exchange Agreement between ConMat and Eastwind dated December 8,
1996.**
10.11 Eastwind Stockholder Trust Agreement between Eastwind and Paul A.
DeJuliis dated December 7, 1998.**
10.12 Waiver and Amendment Agreement between General Electric Capital
Corporation and Polychem dated August 25, 1999.**
10.13 Amended and Restated Term Note dated August 25, 1999 payable by
Polychem to General Electric Capital Corporation.**
10.14 Amended and Restated Revolving Credit Note dated August 25, 1999
payable by Polychem to General Electric Capital Corporation.**
10.15 Guarantor Reaffirmation Agreement dated August 25, 1999 between ConMat
and General Electric Capital Corporation.**
10.16 Balloon Mortgage Note dated August 25, 1999 payable to Public School
Employes' Retirement Board by Polychem.**
10.17 Open End Mortgage and Security Agreement between Polychem and Public
School Employes' Retirement Board dated August 24, 1999.**
10.18 Loan Guaranty and Suretyship Agreement between Polychem and Public
School Employes' Retirement Board dated August 24, 1999.**
10.19 Mortgagee's Waiver and Consent dated August 25, 1999 between Public
School Employes' Retirement System, Polychem and General Electric
Capital Corporation.**
11 Computation of Per Share Earnings (included in Financial Statements on
Pages F-4 and F-9
21 Subsidiaries of ConMat.***
20
<PAGE>
- -------------------
* Incorporated by reference to Form 10-SB file no. 0-30114 filed April
27, 1999 and Amendment No. 1 filed June 16, 1999.
** Incorporated by reference to Amendment No. 1 to Form 10-SB file no.
0-30166 filed August 30, 1999.
*** Incorporated by reference to Registration Statement on Form SB-2 (File
No. 333-91753) filed on November 30, 1999.
(B) Reports on Form 8-K
ConMat filed a Current Report on Form 8-K on February 4, 2000 relating
to the matters described in Item 8 of this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania on March 28, 2000.
CONMAT TECHNOLOGIES, INC.
By: /s/ Paul A. DeJuliis
--------------------
Paul A. DeJuliis, Chairman of the Board of
Directors and Chief Executive Officer
By: /s/ William J. Crighton
-----------------------
William J. Crighton, Vice President and Treasurer
(Principal Accounting and Financial Officer)
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on March 28, 2000.
/s/ Paul A. DeJuliis Chairman of the Board of Directors and
- ------------------------ Chief Executive Officer
Paul A. DeJuliis
/s/ Edward F. Sager, Jr. Director
- ------------------------
Edward F. Sager, Jr.
21
<PAGE>
ConMat Technologies, Inc. and Subsidiary
Index to Consolidated Financial Statements
Years ended December 31, 1999 and January 2, 1999
With Reports of Independent Auditors
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors.............................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets........................................................................F-3
Consolidated Statements of Operations .............................................................F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) ...........................F-5
Consolidated Statements of Cash Flows..............................................................F-6
Notes to Consolidated Financial Statements.........................................................F-7
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
ConMat Technologies, Inc.
We have audited the accompanying consolidated balance sheet of ConMat
Technologies, Inc. and Subsidiary (a Florida corporation) as of December 31,
1999 and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year then ended. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides 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 December 31, 1999 and the consolidated
results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
March 2, 2000
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
ConMat Technologies, Inc.
We have audited the accompanying consolidated balance sheet of
ConMat Technologies, Inc. and subsidiary (a Florida corporation) as of January
2, 1999, and the related consolidated statement of operations, changes in
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ConMat
Technologies, Inc. and subsidiary as of January 2, 1999, and the consolidated
results of their operations and their consolidated cash flows for the fiscal
year then ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
-----------------------
Philadelphia, Pennsylvania
March 25, 1999
F-2
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, January 2,
1999 1999
------------ -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 101,592 $ 29,430
Accounts receivable, net 4,569,426 2,622,261
Inventories 1,275,042 1,159,545
Prepaid expenses 58,341 50,345
------------ ------------
Total current assets 6,004,401 3,861,581
Property, plant and equipment, net 1,010,748 1,188,823
Deferred income taxes 78,493 78,493
Other assets 264,696 386,128
------------ ------------
$ 7,358,338 $ 5,515,025
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Lines of credit $ 2,127,628 $ 1,398,632
Current portion of long-term debt 444,641 625,260
Current portion of capitalized lease obligations 95,461 103,744
Accounts payable 1,722,364 1,183,913
Accrued expenses 447,778 302,374
------------ ------------
Total current liabilities 4,837,872 3,613,923
Long-term debt 2,775,771 2,075,775
Capitalized lease obligations 86,625 151,761
Other liabilities 176,900 181,900
------------ ------------
Total liabilities 7,877,168 6,023,259
------------ ------------
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 and 1,386,666 shares issued and outstanding at December 31,
1999 and January 2, 1999, respectively 1,073 1,386
Series C preferred stock, $.001 par value, 446,150
shares authorized, none issued and outstanding -- --
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, net (666,986) (472,488)
Accumulated (deficit) (305,167) (489,482)
Less note receivable for shares sold (50,000) (50,000)
------------ ------------
Total stockholders' equity (deficiency) (1,018,830) (1,008,334)
------------ ------------
$ 7,358,338 $ 5,515,025
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal years ended
--------------------------------
December 31, January 2,
1999 1999
------------ -----------
<S> <C> <C>
Net sales $ 11,499,236 $ 9,069,668
Cost of goods sold 8,084,386 6,545,501
------------ -----------
Gross profit 3,414,850 2,524,167
Selling, general and administrative expenses 2,758,399 2,194,739
Eastwind corporate support fees -- 480,000
------------ -----------
Operating income (loss) 656,451 (150,572)
Interest expense 530,178 609,996
Rental income 206,042 185,877
------------ -----------
Income (loss) before income tax expense 332,315 (574,691)
Income tax expense 108,000 --
------------ ----------
Net income (loss) $ 224,315 $ (574,691)
============ ==========
Net income (loss) per common share - basic $ 0.08 $ (0.28)
Net income (loss) per common share - diluted $ 0.07 $ (0.28)
Shares used in per share calculation - basic 2,250,000 2,017,170
Shares used in per share calculation - diluted 3,211,912 2,017,170
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Fiscal years ended December 31, 1999 and January 2, 1999
<TABLE>
<CAPTION>
Series A
Common stock Preferred stock
----------------------------- -----------------------------
Shares Amount Shares Amount
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
Cash dividend on series A preferred stock -- -- -- --
Return of pledged series A preferred stock -- -- (313,333) (313)
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1999 2,250,000 $ 2,250 1,073,333 $ 1,073
========== ========== ========== ==========
Note Total
Additional Accumulated receivable stockholders'
paid-in earnings for shares equity
capital, net (deficit) sold (deficiency)
------------ ----------- ---------- ------------
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)
Cash dividend on series A preferred stock -- (40,000) -- (40,000)
Return of pledged series A preferred stock 313 -- -- --
Recapitalization costs (194,811) -- -- (194,811)
Net income -- 224,315 -- 224,315
----------- ----------- ---------- -----------
Balance, December 31, 1999 $ (666,986) $ (305,167) $ (50,000) $(1,018,830)
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ConMat Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal years ended
--------------------------------
December 31, January 2,
1999 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 224,315 $ (574,691)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 308,210 312,980
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable (1,794,144) 902,361
Inventories (115,497) (15,343)
Prepaid expenses (7,996) 80,243
Other assets (119,814) (166,660)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 673,855 (24,081)
Other liabilities (5,000) (27,270)
------------ -----------
Net cash provided by (used in) operating activities (836,071) 487,539
------------ -----------
Cash flows from investing activities
Purchase of property and equipment (34,153) (177,005)
Patent costs (7,757) (25,666)
Other -- 10,900
------------ -----------
Net cash (used in) investing activities (41,910) (191,771)
------------ -----------
Cash flows from financing activities
Net borrowings (repayments) under lines of credit 728,996 (93,879)
Borrowings on term notes -- 1,800,000
Repayments of term notes (1,353,259) (1,677,222)
Proceeds from mortgage obligation 1,880,000 --
Proceeds from capitalized lease obligations 45,000 148,420
Repayments of capitalized lease obligations (118,419) (84,155)
Recapitalization costs (194,811) (173,342)
Dividends on preferred stock (30,000) --
Capital distribution -- (250,000)
Other (7,364) --
------------ -----------
Net cash provided by (used in) financing activities 950,143 (330,178)
------------ -----------
Net increase (decrease) in cash equivalents 72,162 (34,410)
Cash and cash equivalents at beginning of year 29,430 63,840
------------ -----------
Cash and cash equivalents at end of year $ 101,592 $ 29,430
============ ===========
Supplemental cash flow information
Cash paid for interest $ 527,155 $ 609,996
============ ===========
Noncash transactions
Assumption of stockholders' liabilities $ -- $ 760,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 1- 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, the Middle East,
Asia and South America, as well as in the United States.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ConMat
and its wholly owned subsidiary, Polychem. Certain reclassifications to prior
year amounts, none of which effect the net loss, have been made to conform to
the current year presentation.
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
December 31, 1999 and January 2, 1999, 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 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.
<PAGE>
o ConMat assumed and, in certain instances, discharged the
following liabilities of Eastwind: (i) $160,000 owed to
Eastwind's former Chairman and Chief Executive Officer, who is
the current Chairman and Chief Executive Officer of ConMat,
discharged by the issuance of 53,333 shares of series A
preferred stock; (ii) $100,000 owed to Clifton Capital, Ltd.,
discharged by the payment to Clifton Capital, Ltd. of
$100,000; and (iii) $500,000 owed to Mentor Special Situation
Fund, L.P., discharged by the issuance to Mentor Special
Situation Fund, L.P. of 166,667 shares of newly issued
cumulative, 8%, series B preferred stock of ConMat plus
warrants to purchase 166,667 shares of ConMat common stock, at
$3.00 per share. The general partner of Mentor Special
Situation Fund, L.P. is a member of ConMat's Board of
Directors. ConMat issued an option to purchase 30,000 shares
of common stock to this director for $1.00 per share.
o At closing, Eastwind issued to Polychem a promissory note in
the amount of $940,000 to evidence certain outstanding amounts
owed by Eastwind to Polychem for prior advances, secured by
the pledge of 313,333 shares of series A preferred stock. This
amount, in addition to other amounts owed to Polychem by
Eastwind, was accounted for as distributions in the form of
dividends on common stock to Eastwind in the periods the
distributions were made. 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. For financial
accounting purposes, the return of the pledged shares was
treated as a reduction in the number of shares of Series A
convertible preferred stock issued to Eastwind in connection
with the acquisition of Polychem and in the number of Series A
preferred stock outstanding.
The Company incurred costs of $194,811 and $173,342 for fiscal years ended
December 31, 1999 and January 2, 1999, respectively, 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-7
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year
Prior to 1999 the Company's fiscal year ended on the closest Saturday to
December 31. In 1999 the Company changed to a calendar year. Accordingly, the
Company's 1998 fiscal year began January 4, 1998 and ended on January 2, 1999
and the 1999 fiscal year began January 3, 1999 and ended December 31, 1999.
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.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standard (SFAS No. 130,
"Reporting Comprehensive Income") beginning January 4, 1998. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income (loss). Since the company had no
items of other comprehensive income (loss), no separate statement of
comprehensive income (loss) has been presented.
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.
Fair Value of Financial Instruments
The carrying amount of accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short maturities of such
instruments.
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 first-in, first-out (FIFO)
method.
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.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and
development costs were approximately $160,000 for the year ended December 31,
1999 and $140,000 for the year ended January 2, 1999.
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.
Earnings (Loss) Per Share
The Company reports earnings per share in accordance with the provisions of SFAS
No. 128, Earnings Per Share. SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.
F-8
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The following are the basic and diluted earnings (loss) per share (EPS)
computations for the periods presented:
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Earnings per share - Basic:
Net income (loss) $ 224,315 $ (574,691)
Dividends on preferred shares (40,000) --
----------- -----------
Income (loss) on common shares $ 184,315 $ (574,691)
=========== ===========
Weighted average shares outstanding 2,250,000 2,017,170
=========== ===========
Basic EPS $ 0.08 $ (0.28)
=========== ===========
Earnings per share - Diluted:
Income (loss) on common shares $ 184,315 $ (574,691)
Dividends on preferred shares 40,000 --
----------- -----------
Income (loss) on common shares after
assumed conversions $ 224,315 $ (574,691)
=========== ===========
Weighted average shares outstanding 2,250,000 2,017,170
Dilutive effect of preferred stock 883,332 --
Dilutive effect of stock options and warrants 78,580 --
----------- -----------
Diluted average shares outstanding 3,211,912 2,017,170
=========== ===========
Diluted EPS $ 0.07 $ (0.28)
=========== ===========
</TABLE>
Series A preferred stock, convertible into 1,073,333 and 1,386,666 shares of
common stock was outstanding during the fiscal years ended December 31, 1999 and
January 2, 1999, respectively. Common stock warrants providing for the purchase
of 196,667 common shares were outstanding at December 31, 1999 and January 2,
1999. The Company had stock options for the purchase of 425,000 and 250,000
common shares outstanding at December 31, 1999 and January 2, 1999,
respectively. The Series A preferred stock, the warrants and the stock options
were excluded from the computation of diluted earnings per share for the year
ended January 2, 1999, since these securities were antidilutive as a result of
the company's operating loss in that period.
NOTE 4 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Trade receivables $ 4,122,248 $ 2,241,801
Retainage receivables 507,178 608,481
Allowance for doubtful accounts (60,000) (75,000)
----------- -----------
4,569,426 2,775,282
Less retainage receivables due in over one year -- (153,021)
----------- -----------
$ 4,569,426 $ 2,622,261
=========== ===========
</TABLE>
The Company sells clarifier components to general contractors for use in
building and maintaining wastewater treatment facilities operated by government
municipalities. Sales of these components under contracts generally require
retainage provisions, which become due upon completion of the entire contract.
Retainage receivables with terms due in over one year are included in other
assets in the accompanying balance sheets.
F-9
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Raw materials $ 445,041 $ 327,412
Work-in-process 497,332 362,255
Finished goods 332,669 469,878
----------- -----------
$ 1,275,042 $ 1,159,545
=========== ===========
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated December 31, January 2,
useful lives 1999 1999
----------------- ------------ ------------
<S> <C> <C> <C>
Land - $ 56,000 $ 56,000
Buildings and improvements 10 - 15 years 968,826 976,155
Machinery and equipment 3 - 7 years 902,094 860,612
------------ ------------
1,926,920 1,892,767
Less accumulated depreciation (916,172) (703,944)
------------ ------------
$ 1,010,748 $ 1,188,823
============ ============
</TABLE>
Depreciation expense was $212,228 and $220,345 for the fiscal years ended
December 31, 1999, and January 2, 1999, respectively.
Machinery and equipment as of December 31, 1999, and January 2, 1999, includes
$493,236 and $448,236, respectively, of equipment under capital leases, with
accumulated depreciation of $266,701 and $192,731, respectively.
NOTE 7 - OTHER ASSETS
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Retainage receivables due in over one year $ -- $ 153,021
Deferred financing, net 173,854 152,773
Patents, net 90,842 80,334
----------- ----------
$ 264,696 $ 386,128
=========== ==========
</TABLE>
F-10
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 8 - LINE 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. On August 25, 1999, the revolving credit line was
increased to $5,000,000. The revolving credit line bears interest at the index
rate, based on the rate for 30-day dealer paper, plus 4.75% (10.35% at December
31,1999). The Agreement also provided for a term loan for $1,500,000, secured by
equipment, with interest at the index rate plus 6.5% (12.1% at December 31,
1999). On August 25, 1999, Polychem received proceeds of $1,880,000 pursuant to
a 10-year mortgage loan containing a 25 year amortization schedule and a balloon
payment due September 1, 2009, secured by Polychem's land and building in
Phoenixville, Pennsylvania. The mortgage loan bears interest at 8.5% for the
first five years and is adjusted to 3.5% above the 5-year U.S. Treasury Note
Yield Rate at the end of the first five years. Polychem used $813,000 of the
mortgage proceeds to reduce the term loan and $996,000 to reduce the revolving
credit line. At December 31, 1999 and January 2, 1999, the Company was not in
compliance with certain financial covenants contained in the Agreement with
respect to $2,499,628 of obligations. These instances of noncompliance were
waived by the commercial lender.
At December 31, 1999, there was approximately $130,000 available for advances
under the revolving line of credit.
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Polychem term note payable to the Budd Company, interest at 8%,
principal payable in quarterly installments of $81,315 plus interest,
commencing March 1998 through March 2003 $ 975,776 $ 1,301,035
Polychem note payable, interest at index rate plus 6.5% (12.1% at December
31,1999), principle payable in monthly installments of $8,000 ($25,000 prior to
August 1999) plus interest, with a final payment in September 2001 of $212,000 372,000 1,400,000
Polychem 10-year mortgage note payable, interest at 8.5% for the first five
years, thereafter, 3.5% above the 5-year Treasury Note yield at August 25, 2004,
monthly payments based upon a 25 year amortization schedule with
a balloon payment due September, 2009 of outstanding principal and interest 1,872,636 --
----------- -----------
3,220,412 2,701,035
Less current portion (444,641) (625,260)
----------- -----------
$ 2,775,771 $ 2,075,775
=========== ===========
</TABLE>
Maturities on these obligations at December 31, 1999 are as follows:
2000 $ 444,641
2001 626,709
2002 352,954
2003 30,147
2004 32,800
Thereafter 1,733,161
----------
$3,220,412
==========
The carrying amounts of the Company's long-term debt approximate their fair
value as of December 31, 1999, and January 2, 1999. 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 $266,725 and $414,123 related to long-term debt was charged
to operations for the years ended December 31, 1999, and January 2, 1999,
respectively.
F-11
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 9 - CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. The weighted average
interest rate related to these capital leases was 10% in both fiscal 1999 and
1998. Interest expense of $21,944 and $23,184 on the capitalized lease
obligations was charged to operations for the years ended December 31, 1999, and
January 2, 1999, respectively. Future minimum lease payments as of December 31,
1999, are as follows:
2000 $ 107,980
2001 57,564
2002 25,439
2003 10,600
2004 --
Thereafter --
---------
Total minimum lease payments 201,583
Less amounts representing interest (19,497)
---------
Present value of future minimum lease payments 182,086
Less current portion (95,461)
---------
$ 86,625
=========
NOTE 10 - EMPLOYEE BENEFIT PLANS
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
December 31, 1999, and January 2, 1999, were $33,291 and $29,093, 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. There were no discretionary contributions
made in fiscal years 1999 or 1998.
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-12
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 10 - EMPLOYEE BENEFIT PLANS - Continued
The plan status was as follows:
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 2,328,779 $ 2,213,711
Service cost 31,057 31,139
Interest cost 147,497 148,996
Actual gain 137,773 120,755
Benefits paid (231,599) (185,822)
----------- -----------
Benefits obligation at end of year 2,413,507 2,328,779
Change in plan assets
Fair value of plan assets at beginning of year 2,288,813 2,157,972
Actual return on plan assets 260,069 316,663
Employer contribution -- --
Benefits paid (231,599) (185,822)
----------- -----------
Fair value of plan assets at end of year 2,317,283 2,288,813
Funded status (96,224) (39,966)
Unrecognized net actuarial gain (268,444) (233,319)
Unrecognized prior service cost 164,221 55,872
----------- -----------
Prepaid (accrued) benefit cost $ (200,447) $ (217,413)
=========== ===========
Weighted average assumptions as of December 31
Discount rate 6.75% 6.75%
Expected return on plan assets 9.00% 9.00%
Components of net periodic benefit (cost) income
Service cost $ (31,057) $ (31,139)
Interest cost (147,497) (148,996)
Actual return on plan assets 260,069 316,663
Amortization of prior service cost (16,094) (5,521)
Recognized net actuarial loss (48,455) (132,439)
----------- -----------
Net periodic benefit income (cost) $ 16,966 $ (1,432)
=========== ===========
</TABLE>
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 present value of the obligations as of December 31, 1999, and
January 2, 1999. The unfunded accumulated postretirement benefit obligation as
of December 31, 1999, and January 2, 1999, was $15,000 and $20,000,
respectively. The net periodic postretirement benefit cost for the years ended
December 31, 1999, and January 2, 1999, was not material.
F-13
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 11 - INCOME TAXES
The components of income tax expense are as follows:
December 31, January 2,
1999 1999
------------ ----------
Current
Federal $108,000 $ --
State -- --
-------- ----------
108,000 --
-------- ----------
Deferred
Federal $ -- $ --
State -- --
-------- ----------
-- --
-------- ----------
$108,000 $ --
======== ==========
The reconciliation of the statutory federal rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Statutory tax provision (benefit) $ 112,987 $ (195,395)
State income tax provision, net of federal tax benefit -- --
Reduction of net operating loss carryforwards, net 151,671 --
Increase (decrease) in valuation allowance (163,210) 189,492
Nondeductible expense 6,947 4,027
Other (395) 1,876
----------- -----------
$ 108,000 $ --
=========== ===========
</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>
December 31, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Deferred tax assets
Accounts receivable $ 20,400 $ 25,500
Inventory 43,627 62,906
Property, plant and equipment 23,496 (2,001)
Employee benefit plans 60,416 62,118
Net operating loss carryforwards 3,780 166,406
Valuation allowance on deferred tax asset (73,226) (236,436)
----------- -----------
$ 78,493 $ 78,493
=========== ===========
</TABLE>
At December 31, 1999, the Company had approximately $64,000 of state net
operating loss carryforwards expiring in 2001. A valuation allowance has been
recorded to reduce the net deferred tax asset to an amount that management
believes is realizable in future tax years from income from operations.
F-14
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain facilities and equipment under noncancellable
operating leases that expire through May 2001. Rent expense of $27,956 and
$31,148 has been charged to operations for the years ended December 31, 1999,
and January 2, 1999, respectively. Minimum future rental payments under leases
as of December 31, 1999, are as follows:
2000 $16,695
2001 490
-------
$17,185
=======
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 expected within the twelve months.
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 13 - 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 were exercisable as of November 30,
1999. 100,000 of the options after November 30, 1999 if ConMat realizes $750,000
in pre-tax income during a fiscal year. The remaining 100,000 options are
exercisable after November 30, 1999 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. Additionally, during fiscal
1999 ConMat granted 175,000 employee stock options at a price of $3.00 per
share, with 87,500 options vesting if ConMat realizes $750,000 in pre-tax income
during a fiscal year. The balance of 87,500 options vest if ConMat realizes
$1,000,000 in pre-tax income during a fiscal year. The 175,000 options expire in
2009. No employee stock options were exercised or forfeited in fiscal 1999.
The Company accounts for stock options using 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 earnings (loss) per share for the fiscal years ended
December 31, 1999 and January 2, 1999, would not be materially different from
the amounts reported.
F-15
<PAGE>
ConMat Technologies, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the fiscal years ended December 31, 1999 and January 2, 1999
NOTE 14 - INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION
Management has determined that it operates in one industry segment (see Note 1).
For the year ended December 31, 1999, Polychem's sales to foreign customers were
$3,018,761 or 26% of consolidated net sales, and consist principally of sales to
customers in Asia (12%) and Europe (11%). Receivables from foreign customers
were $928,603 as of December 31, 1999.
For the year ended January 2, 1999, Polychem's sales to foreign customers were
approximately $2,826,505, or 31% of consolidated net sales, and consist of sales
to customers in Asia (15%), Europe (11%), and North America (5.0%). Receivables
from these customers were approximately $339,096 as of January 2, 1999.
NOTE 15 - SUBSEQUENT EVENT
On February 29, 2000, pursuant to an Exchange Agreement between ConMat
Technologies Inc. ("ConMat") and Odyssey Capital Group, L.P., ConMat issued
382,500 shares of ConMat Series C Preferred Stock and a warrant to purchase
382,500 shares of ConMat common stock to Odyssey in exchange for 285,000 shares
of ConMat Series A Preferred Stock and 75,000 shares of ConMat common stock
which were owned by Odyssey. As additional consideration to ConMat, Odyssey
agreed to provide, subject to ConMat's financial performance, additional
financing of $1,500,000 to ConMat in the future by purchasing subordinated notes
with attached warrants or convertible preferred stock. Odyssey also agreed to
assist ConMat in obtaining additional financing to the extent ConMat's growth or
acquisitions require such.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION STATEMENT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 JAN-02-1999
<PERIOD-END> DEC-31-1999 JAN-02-1999
<CASH> 101,592 29,430
<SECURITIES> 0 0
<RECEIVABLES> 4,629,426 2,697,261
<ALLOWANCES> (60,000) (75,000)
<INVENTORY> 1,275,042 1,159,545
<CURRENT-ASSETS> 6,004,401 3,861,581
<PP&E> 1,926,920 1,892,767
<DEPRECIATION> (916,172) (703,944)
<TOTAL-ASSETS> 7,358,338 5,515,025
<CURRENT-LIABILITIES> 4,837,872 3,613,923
<BONDS> 0 0
500,000 500,000
1,073 1,386
<COMMON> 2,250 2,250
<OTHER-SE> (1,022,153) (1,011,970)
<TOTAL-LIABILITY-AND-EQUITY> 7,358,338 5,515,025
<SALES> 11,499,236 9,069,668
<TOTAL-REVENUES> 11,499,236 9,069,668
<CGS> 8,084,386 6,545,501
<TOTAL-COSTS> 10,636,743 9,034,363
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 530,178 609,996
<INCOME-PRETAX> 332,315 (574,691)
<INCOME-TAX> 108,000 0
<INCOME-CONTINUING> 224,315 (574,691)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 224,315 (574,691)
<EPS-BASIC> 0.08 (0.28)
<EPS-DILUTED> 0.07 (0.28)
</TABLE>
