<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
XX Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934.
For the period ended June 30, 1996 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- -- Exchange Act of 1934.
For the transition period from to .
----- -----
COMMISSION FILE NUMBER: 0-16128
BIODYNAMICS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3100165
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10500 UNIVERSITY CENTER DRIVE, SUITE 130, TAMPA, FLORIDA 33612
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 979-0016
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 NASDAQ
(Title of Class) (Name of Each Exchange on Which Registered)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
As of August 9, 1996 there were outstanding 8,319,721 shares of Biodynamics
International, Inc. Common Stock, par value $.01.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1996 1995
----------------- ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 216 $ 184
Accounts receivable 2,008 1,397
Inventories 3,687 4,878
Other current assets 163 92
-------- --------
6,074 6,551
PROPERTY, PLANT AND EQUIPMENT, NET 3,889 4,474
INTANGIBLE AND OTHER ASSETS, NET 4,436 5,861
-------- --------
TOTAL ASSETS $ 14,399 $ 16,886
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 675 $ 790
Accrued interest 313 341
Other accrued expenses 745 1,010
Current portion of debt 1,907 2,700
--------- -------
3,640 4,841
OTHER LIABILITIES
Long-term debt 7,443 9,788
Deferred interest - - 787
--------- --------
7,443 10,575
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 3,316 1,470
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,399 $ 16,886
========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 3
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
JUNE 30, JUNE 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Revenue $8,722 $8,710 $3,184 $3,004
Cost of Revenue 5,508 4,719 1,850 1,673
----------- ---------- ---------- ----------
Gross Margin 3,214 3,991 1,334 1,331
OPERATING EXPENSES
General and administrative 1,772 2,061 746 662
Sales and marketing 1,578 2,193 528 683
Research and development 191 476 84 199
Depreciation and amortization 1,172 1,511 350 351
----------- ---------- ---------- ----------
4,713 6,241 1,708 1,895
OPERATING LOSS (1,499) (2,250) (374) (564)
Loss in equity of joint venture
and minority interest -- 109 -- 14
Other income ( 142) (101) (4) (56)
Interest expense 590 585 202 206
Deferred interest expense 48 231 -- 79
---------- --------- --------- ---------
496 824 198 243
NET LOSS BEFORE INCOME TAXES (1,995) (3,074) (572) (807)
---------- --------- --------- ---------
Income taxes -- -- -- --
---------- --------- --------- ---------
NET LOSS $ (1,995) $ (3,074) $ (572) $ ( 807)
========== ========= ========= =========
Average common shares outstanding 8,070,237 7,939,249 8,237,407 7,954,664
========== ========= ========= =========
Net loss per share $ (0.25) $ (0.39) $ (0.07) $ (0.10)
========== ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,995) $(3,074)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,434 1,723
Loss in equity of joint venture -- 78
Stock issued for services 21 27
Minority interest -- 31
Deferred interest expense 48 231
Foreign currency transaction loss -- 79
Increase (decrease) in cash resulting from changes in:
Accounts receivable (714) (174)
Inventories 925 (1,592)
Prepaid expenses and other current assets (73) 84
Accounts payable and accrued expenses (358) 739
--------- -------
Net cash used in operating activities (712) (1,848)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (21) (599)
(Additions to) decreases in intangible and other assets 29 (52)
Contributions to joint venture -- (88)
--------- -------
Net cash provided by (used in) investing activities 8 (739)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Preferred Stock 4,885 6,185
Proceeds from short-term borrowings 90 777
Repayment of short-term borrowings (728) (365)
Proceeds from long-term borrowings 1,445 --
Repayment of long-term debt (4,160) (4,141)
Preferred dividends paid (791) (131)
--------- -------
Net cash provided by financing activities 741 2,325
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) 37
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 322 (225)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 184 348
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 216 $ 123
========= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
Supplemental information on cash flows and non-cash transactions is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
1996 1995
---------- ---------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 618 $ 716
=========== =======
SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Issuance of Series C Preferred Stock in exchange for:
Accrued Interest $ 838,000 --
Convertible Investor Loans 3,256,000 --
Accumulated dividends 479,000 --
Series A Preferred Stock 3,344,000 --
Series B Preferred Stock 6,185,000 --
-----------
$14,102,000 --
===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
BIODYNAMICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) ORGANIZATION
Biodynamics International, Inc. with its consolidated subsidiaries ("the
Company") processes, manufactures and distributes worldwide specialty
surgical products and tissue processing services for neuro, orthopedic,
cardiovascular, reconstructive and general surgical applications. The
Company's core business is processing human donor tissue ("allografts")
utilizing its patented Tutoplast(R) process for distribution to hospitals
and surgeons. The Company also manufactures and distributes surgical
sutures internationally.
(2) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited consolidated
financial statements of Biodynamics International, Inc. and the unaudited
results of operations and cash flows for the nine months ended June 30,
1996 and 1995, have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis, and include all
adjustments necessary in order to make the financial statements not
misleading. The interim financial statements should be read in conjunction
with the audited consolidated financial statements of the Company for the
year ended September 30, 1995. Significant accounting policies of the
Company are presented below.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
German subsidiary is Deutsche Mark. This subsidiary also represents the
Company's largest operating segment and, accordingly, the translation of
financial statements is affected by significant changes in the exchange
rate. There was no significant fluctuation in the average exchange rates
for the nine months ended June 30, 1996 and 1995.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries, and its 51%
ownership of Corin Orthopedic Products ("Corin"). Corin was sold on August
15, 1995. All intercompany transactions and balances are eliminated in
consolidation.
RECLASSIFICATIONS. Certain prior period financial statement balances
have been reclassified to conform with the current period presentation.
(3)
LONG-TERM DEBT
On November 23, 1995, the Company received a commitment letter from the
holders of its Mezzanine debt, convertible investor loans and Series A and
B Preferred Stock ("institutional investors"), which provided for
additional financing to the Company and a restructuring of certain debt and
equity. As a result of that commitment letter, the Company executed a
Senior B loan on February 8, 1996.
Under the terms of the Senior B loan, the institutional investors have made
available up to approximately $1,500,000 in funds, including approximately
$500,000 for payment of scheduled interest in 1996. The Senior B loan
ranks above the Mezzanine debt but below the existing senior debt. The
funds advanced will accrue interest at 10% per annum, can be prepaid at any
time with the unpaid balance repayable on December 31, 1999, and is
convertible into common shares at $.85 per common share. Any amounts not
repaid within one year would accrue an additional 10% interest.
On April 12, 1996, the Company executed an exchange agreement whereby the
Convertible Investor Loans, including accrued interest thereon, for a total
of $4,094,000, were exchanged for Series C Preferred Stock (See Note 4).
6
<PAGE> 7
(4) SHAREHOLDERS' EQUITY
Shareholders' equity at June 30, 1996 and September 30, 1995 consisted of
the following:
<TABLE>
<CAPTION>
(unaudited) (audited)
June 30 September 30
1996 1995
---------------- -----------------
<S> <C> <C>
Capital Stock
Preferred Stock, par value $.01 per share,
Series A, 304,000 shares issued and outstanding
$ -- $ 3,000
Series B, 562,221 shares issued and outstanding -- 6,000
Series C, 110,603 shares issued and outstanding 1,000 --
Common Stock, par value $.01 per share, with 8,319,721 and
7,987,109 issued and outstanding at June 30, 1996 and
September 30, 1995, respectively 83,000 80,000
Additional contributed capital 22,037,000 17,091,000
Foreign currency translation adjustment (27,000) 282,000
Accumulated deficit (18,778,000) (15,992,000)
------------ ------------
$ 3,316,000 $ 1,470,000
============ ============
</TABLE>
On April 12, 1996, the Company executed an exchange agreement amongst the
holders of its Convertible Investor Loans and Series A and B Preferred
Stock, in which all the outstanding loans and Series A and B Preferred
Stock, including accrued interest and dividends thereon, were exchanged
for Series C Preferred Stock. As a result of the exchange, the
institutional investors relinquished their rights to acquire an ownership
interest in the Company's German subsidiary.
Each share of the Series C Preferred Stock entitles its holder to
receive, effective December 1, 1995, 8% cumulative dividends, payable in
cash or Series C Preferred Stock; to receive $127.50 per share of
liquidation preference, to convert into 150 common shares, as adjusted in
the event of future dilution; and, subject to certain conditions related
to earnings, share price and notice to shareholders, may be redeemed
after April, 1999 at the option of the Company at a price of $127.50 per
preferred share. The Series C Convertible Preferred Stockholders are not
entitled to any voting rights except on any matters related to amending
the terms of the Series C Preferred Stock or the authorization of any
stock ranking senior thereto. The Series C Stockholders can also elect
up to two additional directors to the Board. A total of $14,102,000 of
Series C Preferred Stock was issued.
The following represents the value of the debt and equity exchanged for
the Series C Preferred Stock:
<TABLE>
<S> <C>
Accrued Interest $ 838,000
Convertible Investor Loans 3,256,000
Accumulated dividends 479,000
Series A Preferred Stock 3,344,000
Series B Preferred Stock 6,185,000
------------
$14,102,000
============
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Effective August 15, 1995, the Company sold its 51% joint venture interest in
Corin Orthopedic Products ("Corin"), whose results are included in the
consolidated results of operations through the sale date. The Company received
net cash proceeds of approximately $289,000 from the sale, and realized a gain
of $174,000 all in the last quarter of fiscal year 1995.
RESULTS OF OPERATIONS
Comparisons between the 1996 and 1995 nine-month periods should recognize that
the 1995 periods included $665,000 of revenue and $602,000 of expenses
generated by Corin prior to the sale date.
REVENUE AND COST OF REVENUE
Revenue for the nine months ended June 30, 1996 increased less than 1% to
$8,722,000 from $8,710,000 for the comparable period. The $665,000 reduction
in Corin revenues were offset by increased processing and distribution fees in
the U.S. operations. Revenue for the three months ended June 30, 1996 increased
6% to $3,184,000 from $3,004,000 for the comparable period. This increase
resulted primarily from an increase in processing and distribution fees in both
the U.S. and International operations which offset the $259,000 reduction in
Corin revenues for the comparable period.
Gross margins declined to 37% from 46% for the comparable nine month periods,
and to 42% from 44% for the comparable three month periods. The lower margins
are primarily a result of the unfavorable mix of revenue between bioimplants
and sutures.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 14% to $1,772,000 and increased
13% to $746,000 for the nine and three month periods ending June 30, 1996,
respectively. The nine-month reduction is due primarily to personnel savings
resulting from the departure of the Company's former CEO, reduction in
legal/consulting costs, and various other reductions in response to the lower
revenue levels. The three-month increase is due primarily to arbitration costs
related to legal proceedings.
SALES AND MARKETING
Sales and marketing expenses decreased 28% to $1,578,000 and 23% to $528,000
for the nine and three month periods ending June 30, 1996, respectively. The
reduction is a result of some consolidation of sales personnel between the U.S.
and International operations. Additionally, certain personnel and promotional
cost increases were postponed until the second half of the year.
RESEARCH AND DEVELOPMENT
Research and Development expenses decreased 60% to $191,000 and 58% to $84,000
for the nine and three month periods ending June 30, 1996, respectively. The
Company canceled several of its R&D projects during the fourth quarter of 1995.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased 22% to $1,172,000 and less than 1% to
$350,000 for the nine and three month periods ending June 30, 1996,
respectively. The Company recognized $2,183,000 in 1995 for the revaluation of
certain worldwide patents. As a result of the 1995 write down, current and
future years' charges have been reduced. The three-month period in 1995 was
reduced by a change in estimate of depreciation expense for the year.
LOSS IN EQUITY OF JOINT VENTURE AND MINORITY INTEREST
The loss in equity of joint venture and minority interest decreased to zero
from $109,000 and $14,000 for the comparable nine and three month periods,
respectively, due to the sale of the Corin Joint Venture in 1995.
INTEREST EXPENSE
Total interest expense declined 22% to $638,000 and 29% to $202,000 for the
nine and three month periods ending June 30, 1996, respectively, primarily from
the completion of the exchange of the remaining investor loans for the new
Series C Preferred Stock, a reduction in working capital borrowings and a
slight reduction in interest rates.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
While the Company has generated net losses over the periods presented, a
significant amount of these losses are non-cash. These non-cash expenditures
relate primarily to depreciation and amortization on patents and trademarks and
deferred interest. These non-cash expenditures totaled $1,482,000 and
$1,954,000 for the nine months ended June 30, 1996 and 1995, respectively.
In addition to its operating lines of credit, the Company has relied on its
institutional debt and equity holders to fund cash flow. On February 8, 1996,
the Company executed a Senior B loan which provided for an additional
$1,500,000 in available funding. The Company intends to use the balance of the
funds as needed for certain defined R & D and marketing projects, which are
expected to increase revenues sufficiently to repay all or a portion of the
funds advanced within a year. Working capital has increased $724,000 to
$2,434,000 as of June 30, 1996 and the Company has approximately $750,000
available in operating lines of credit. Advances under the Senior B loan
enabled the Company to fund $712,000 of its operating cash deficit for the nine
months ended June 30, 1996. The issuance of the Series C Preferred Stock in
exchange for the remaining investor debt and accrued interest enabled the
Company to increase equity and reduce liabilities by over $4 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January, 1996, the Company filed a claim with an arbitrator in Germany
seeking recovery for breach of contract from the previous owner of its German
facility. Simultaneously, the owner has demanded an immediate acceleration of
the amounts due under the original Asset Purchase Agreement. These amounts of
approximately $1,500,000 are recorded as a current liability.
ITEM 2. CHANGES IN SECURITIES
On May 29, 1996, the Company filed with the State of Florida Articles of
Amendment to its Articles of Incorporation to establish a Series C Preferred
Stock, with 125,000 shares available for issuance. The Articles of Amendment
are included herein as an exhibit.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on June 13, 1996
for the following purposes:
1. To elect five directors to hold office until the next annual
meeting of shareholders and until their successors have been duly
elected and qualified.
2. To consider and vote on a proposal to approve an amendment to the
Company's Articles of Incorporation to revise the number of
authorized shares of Capital Stock from 21,000,000 shares of
Capital Stock, consisting of 20,000,000 shares of Common Stock,
$.01 par value and 1,000,000 shares of Preferred Stock, $.01 par
value to 31,000,000 shares of Capital Stock, consisting of
30,000,000 shares of Common Stock, $.01 par value and 1,000,000
shares of Preferred Stock at $.01 par value.
3. To consider and vote upon a proposal to approve the Company's
1996 Incentive and Non-Statutory Stock Option Plan.
4. To consider and vote upon a proposal to approve the Company's
1996 Management Incentive Compensation Plan.
9
<PAGE> 10
5. To consider and vote on a proposal to approve the Company's
Special Stock Options of 750,000 shares for the President and
Chief Executive Officer.
6. To approve the appointment of Price Waterhouse LLP as the
Company's independent certified public accountants for the fiscal
year ending September 30, 1996.
The results of the shareholder votes were as follows:
<TABLE>
<CAPTION>
FOR AGAINST/WITHHELD ABSTAIN
--- ---------------- -------
<S> <C> <C> <C> <C>
1. Directors:
James M. Barry 6,979,637 78,600
Charles C. Dragone 6,714,137 344,100
Karl H. Meister 6,710,637 347,600
Elroy "Gene" Roelke 6,980,137 78,100
Laurie Rostron 6,980,637 77,600
2. Increase Authorized Shares 6,764,916 202,600 473,048
3. 1996 Stock Option Plan 6,108,212 830,454 119,571
4. 1996 Compensation Plan 6,101,072 821,590 135,575
5. Special Stock Options 5,972,277 923,244 162,716
6. Ratification of Accountants 6,994,867 22,040 41,330
</TABLE>
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
3.2** Articles of Incorporation of Registrant
3.3* Articles of Amendment to Articles of Incorporation establishing
Series A Preferred Stock
3.4* Articles of Amendment to Articles of Incorporation establishing
Series B Preferred Stock
3.5 Articles of Amendment to Articles of Incorporation establishing
Series C Preferred Stock
10.18* Joint Venture Agreement between Biodynamics, Inc. And Texas Medical
Products dated November 1, 1990.
10
<PAGE> 11
10.19* Partnership Agreement between Biodynamics International, Inc. And
Corin Medical Products dated September 2, 1992
10.20*** Purchase Agreement between Biodynamics International (Deutschland)
GmbH and Pfrimmer-Viggo GmbH & Co., KG.
10.21*** Convertible Debenture Loan Agreement between Biodynamics
International, Inc. as Borrower and Renaissance Capital
Partners, II, Ltd. And Froley, Revy Investment Co., Inc.
10.22*** Convertible Debenture, Renaissance Capital Partners II, Ltd.
10.23*** Convertible Debenture, Froley, Revy Investment Co., Inc.
10.24* Senior B Loan Agreement
22* Subsidiaries of Registrant
27 Financial Data Schedule (for SEC use only)
* Document incorporated by reference from previous 10-KSB or 10-QSB filing.
** Document incorporated by reference from Exhibit 2 of American
Biodynamics, Inc. Registration Statement on Form 20-F effective October
2, 1987.
*** Document incorporated by reference from Form 8-K dated May 28, 1993.
REPORTS ON FORM 8-K
NONE.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 1996 BIODYNAMICS INTERNATIONAL, INC.
/s/ Karl H. Meister
------------------------------------------------
President and Chief Executive Officer
/s/ David P. Nichols
------------------------------------------------
Chief Financial Officer
11
<PAGE> 1
EXHIBIT 3.5
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
BIODYNAMICS INTERNATIONAL, INC.
Pursuant to the provisions of Section 607.1001 of the Florida General
Corporation Act, the undersigned corporation does hereby adopt these Articles
of Amendment to the Articles of Incorporation, and the undersigned director
does hereby certify on behalf of the undersigned corporation as follows:
A. The name of the corporation is Biodynamics International, Inc.
(the "Corporation"). The Articles of Incorporation of this Corporation
were filed with the Department of State of the State of Florida and
became effective on December 6, 1991. The document number of this
Corporation is S98512.
B. Article III of the Articles of Incorporation provides that the
Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and, by filing the appropriate
Articles of Amendment with the Secretary of State of the State of
Florida, is authorized to establish the number of shares to be
included in each series and the preferences, limitations, and relative
rights of each series.
C. Article III of the Articles of Incorporation is hereby amended to
adopt the following series of Preferred Stock.
1. Designation of Series. The series established hereby shall be
designated Series C 8% Cumulative Convertible Preferred Stock (the
"Series C Preferred Stock").
2. Number of Shares; Par Value. The total number of shares of Series
C Preferred Stock available for issuance shall be 125,000 shares with
a par value of $.01 per share. The consideration for the issuance of
shares of Series C Preferred Stock may be paid in cash or, unless
otherwise provided by law, in whole or in part, in other property
(tangible or intangible) or in labor or services actually performed
for the Corporation, in all cases at a per share sales price and
valuation of consideration to be fixed by the Board of Directors.
3. Rank. The Series C Preferred Stock shall, with respect to
dividend rights and rights upon liquidation, winding up and
dissolution, rank senior to (a) any other class of preferred stock
established by the Board of Directors after the date hereof, the terms
of which specifically shall provide that such shares rank junior to
the Series C Preferred Stock; (b) all other classes of preferred stock
established by the Board of Directors after the date hereof unless the
holders of the Series C Preferred Stock shall
<PAGE> 2
agree pursuant to Section 10(b) hereof that such shares shall rank
pari passu with or senior to the shares of Series C Preferred Stock;
and (c) all other equity securities of the Corporation, including the
Common Stock, par value $.01 per share (the "Common Stock"), of the
Corporation (all of the securities of the Corporation which rank
junior to Series C Preferred are at times collectively referred to
herein as the "Junior Securities").
4. Dividends.
(a) The holders of the Series C Preferred Stock (the "Holders")
shall be entitled to receive, when and as declared by the Board of
Directors out of the funds of the Corporation legally available
therefor and in preference to the holders of the Common Stock of the
Corporation and any other capital stock of the Corporation ranking
junior to the Series C Preferred Stock as to dividends, cumulative
preferential dividends per share of Series C Preferred Stock either in
cash or in shares of Series C Preferred Stock of the Company, at the
sole option of the Company, at the rate of $10.20 per annum and no
more. Dividends on the Series C Preferred Stock will be cumulative,
will accrue from date of issuance, and will be paid quarterly, in
arrears, commencing on December 31, 1995, until the date of conversion
or redemption of the Series C Preferred Stock. Each dividend on the
Series C Preferred Stock shall be paid to the holders of record of
shares of the Series C Preferred Stock as they appear on the stock
register of the Corporation on such record date, not exceeding 30 days
preceding the payment date thereof, as shall be fixed by the Board of
Directors of the Corporation. Fractional shares will not be issued. In
lieu thereof, the cash value of the fractional share, as determined
below, will be paid to the holders.
If the Company utilizes Series C Preferred Stock to pay any dividend,
the value of the Series C Preferred Stock utilized to pay such
dividend shall be equal to the average closing bid and asked prices as
quoted by Nasdaq (or the closing price if the Series C Preferred Stock
is then listed on a national exchange) for the ten (10) trading day
period ending one day prior to the date on which the dividend is
declared. If the Series C Preferred Stock is not quoted by Nasdaq, the
bid and ask prices will be obtained from any member of the National
Association of Securities Dealers, Inc. If none of these alternatives
are available, the value of the Series C Preferred Stock will be
deemed to be $127.50.
(b) Notwithstanding anything contained herein to the contrary, no
cash dividends on shares of the Series C Preferred Stock shall be
declared by the Board of Directors or paid or set apart for payment by
the Corporation at such time as the terms and provisions of any
agreement of the Corporation, including any agreement relating to its
indebtedness, prohibits such declaration, payment or setting apart for
payment or provides that such declaration, payment or setting apart
for payment would constitute a breach thereof or a default thereunder,
unless the Corporation has obtained the consent of the requisite
holders of such indebtedness to the payment or setting apart for
payment of such dividends, provided, however, that nothing herein
contained shall in any way or under any circumstances be construed or
deemed to require the Board of Directors to declare or the Corporation
to pay or set apart for payment any dividends on shares of the Series
C Preferred Stock at any time, whether permitted by any of such
agreements or not.
<PAGE> 3
(c) If at any time the Corporation shall have failed to pay all
dividends which have accrued on any outstanding shares of any series or
class of preferred stock having cumulative dividend rights ranking pari
passu with or senior to the shares of the Series C Preferred Stock at
the times such dividends are payable, no cash dividend shall be
declared by the Board of Directors or paid or set apart for payment
until (i) all accrued and unpaid dividends on all outstanding shares of
any other series or class of preferred stock having cumulative dividend
rights ranking senior to the Series C Preferred Stock shall have been
or be declared, paid or set apart for payment without interest, and
(ii) all accrued and unpaid dividends on all outstanding shares of any
other series of preferred stock having cumulative dividend rights
ranking pari passu with the Series C Preferred Stock shall have been or
be declared, paid or set apart for payment, without interest, pro rata
with all accrued and unpaid dividends on all outstanding shares of the
Series C Preferred Stock, so that the amounts of any cash dividends
declared, paid or set apart for payment on shares of the Series C
Preferred Stock and shares of such other series of preferred stock have
cumulative dividend rights ranking pari passu with the Series C
Preferred Stock shall in all cases bear to each other the same ratio
that, at the time of such declaration, payment or setting apart for
payment, all accrued but unpaid cash dividends on shares of the Series
C Preferred Stock and shares of such other series of the preferred
stock having cumulative dividend rights ranking pari passu with the
Series C Preferred Stock bear to each other.
(d) (i) Holders of shares of the Series C Preferred Stock shall
be entitled to receive the dividends provided for in paragraph 4(a)
hereof in preference to and in priority over any dividends upon any of
the Junior Securities.
(ii) So long as any shares of the Series C Preferred Stock are
outstanding, the Corporation shall not declare, pay or set apart for
payment any dividend on any of the Junior Securities or make any
distribution in respect thereof, either directly or indirectly, and
whether in cash, obligations or shares of the Corporation or other
property (other than distributions or dividends in stock to the
holders of such stock), unless prior to or concurrently with such
declaration, payment or setting apart for payment, as the case may be,
all accrued and unpaid cash dividends on shares of the Series
Preferred Stock not paid on the dates provided for in paragraph 4(a)
hereof (including if not paid pursuant to paragraph 4(b) or 4(c)
hereof) shall have been or concurrently therewith, shall be paid.
5. Conversion.
(a) Conversion Date. The Series C Preferred Stock shall be convertible
into shares of Common Stock of the Corporation at any time subsequent
to the date of issuance.
(b) Conversion Rate. For the purposes of conversion, the Common Stock
shall be valued at $.85 per share as adjusted pursuant to Section 5(c)
and 5(d) hereof (the "Conversion Price") and the Series C Preferred
Stock shall be valued at $127.50 per share resulting in an initial
conversion rate of 150 shares of the Common Stock of the Corporation
for each share of Series C Preferred Stock (the "Conversion Rate").
Upon such conversion, the Holder of Series C Preferred Stock shall
surrender the certificate evidencing such shares and receive, in lieu,
and in conversion thereof, a certificate evidencing shares of the
Common Stock of the Corporation. At the time of any such conversion,
the Corporation shall pay all cumulated but unpaid dividends on such
shares of Series C Preferred Stock.
<PAGE> 4
(c) Recapitalizations, Dividends, Etc. If the Corporation shall, prior
to conversion, effect a reorganization or recapitalization of such
character that the shares of Common Stock receivable shall be changed
into or become exchangeable for a larger or smaller number of shares of
Common Stock, upon the effectuation of such reorganization or
recapitalization, and/or, in connection therewith, securities (other
than shares of Common Stock) or other property then receivable by the
holders of shares of Common Stock, then (i) the number of shares of
Common Stock which the Holders shall be entitled to receive upon a
conversion shall be increased or decreased, as the case may be, in
direct proportion to the increase or decrease in the number of shares
of Common Stock resulting from such reorganization or recapitalization,
(ii) the Conversion Rate applicable upon a conversion by the Holders
for such reorganized or recapitalized shares of Common Stock shall be
proportionately increased in the case of an increase in the number of
such shares, and shall be proportionately decreased in the case of a
decrease in the number of such shares, and (iii) the Holders shall be
entitled to receive, upon consummation of a conversion, the other
securities and property which they would have received by reason of
such reorganization or recapitalization, had the Holders been the
record holders, on the record date for determining stockholders
entitled to such other securities and property, of the shares then
issuable upon such conversion and had the Holders thereafter retained
such shares (unless they would have been given up in connection with
the reorganization or recapitalization) and such securities and
property. A "reorganization or recapitalization" shall mean a stock or
other non-cash dividend or distribution on the shares or a stock split
or reverse stock split, or a reclassification of, or other change in,
the shares, other than in connection with a transaction referred to in
4 (d) below.
(d) Certain Issuances. In the event that the Corporation shall issue
any shares of Common Stock in excess of 100,000 during any twelve
consecutive month period for a price less than the Conversion Price per
share of Common Stock then in effect, or a Common Stock Equivalent (as
hereinafter defined) which is convertible into Common Stock at a price
less than the Conversion Price per share then in effect (each, an
"Issuance"), then in each such event the Conversion Price shall be
reduced to such lower issuance price.
In the event the Corporation issues or sells: (i) warrants to subscribe
for Common Stock ("Warrants"), or (ii) securities convertible into
Common Stock ("Convertible Securities"), or (iii) options to purchase
Common Stock ("Options") other than Qualified Options (as hereinafter
defined), then, for the purposes of the foregoing adjustment, the
Corporation shall be deemed to have issued, on the date of issuance of
said Warrants, Options and Convertible Securities, the Common Stock
issuable pursuant to such Warrants, Options, and Convertible Securities
for the consideration received or receivable by the Corporation for the
issuance of shares of Common Stock pursuant to such Warrants, Options
or Convertible Securities. The term "Qualified Options" shall mean
options granted by the Corporation which is an "incentive stock option"
as defined in Section 422A(b) of the Internal Revenue Code of 1986, as
amended. The term "Common Stock Equivalent" shall mean Options,
Warrants and Convertible Securities, but shall not include Qualified
Options.
(e) Mergers, Consolidations, Etc. In the event of any consolidation of
the Corporation with, or merger of the Corporation with or into, any
other entity, or in the event of any sale or conveyance of all or
substantially all of the assets of the Corporation in connection with a
plan of complete liquidation of the Corporation, as a condition
precedent thereto, the
<PAGE> 5
Corporation shall arrange for provision to be made (which shall be
reasonably satisfactory to the Holders) whereby the Holders shall
thereafter have the right to receive, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon the exercise of the
conversion rights hereunder, such shares of stock or securities or
other property which the Holders would have received in connection with
such consolidation, merger or sale or conveyance with respect to or in
exchange for the number of shares of Common Stock immediately
theretofore receivable upon the exercise of the conversion rights
hereunder, as if such conversion had already taken place at the time of
such consolidation, merger, sale or conveyance.
6. Liquidation Preferences and Relative Preferences of Classes of
Securities of the Corporation.
(a) Preference. Upon the liquidation, dissolution, or winding up of
the affairs of the Corporation, whether voluntary or involuntary,
Holders shall be entitled to receive, before any distribution, payment,
or declaration and setting apart for payment to the holders of Common
Stock or any other security of the Corporation subordinate to the
Series C Preferred Stock as to liquidation, a liquidation preference,
in cash or property, of $127.50 per share; provided, however, prior to
such liquidation, dissolution or winding up of affairs the Corporation
shall provide each Holder of shares of Series C Preferred Stock advance
notice of such action on the earliest date that any holder of any
security of the Corporation is provided such notice. After all shares
of Series C Preferred Stock then outstanding receive the above
described liquidation preference, such shares shall have no right or
claim whatsoever to any of the remaining assets of the Corporation.
(b) Payment. If the assets of the Corporation are insufficient to pay
in full the liquidation preference required by paragraph 6(a), the
available assets shall be distributed pro rata among the shares of
Series C Preferred Stock and the shares of any other class of security
of the Corporation ranking on a parity with the Series C Preferred
Stock as to liquidation preference.
(c) Merger, Etc. A consolidation, merger, or other similar
reorganization of the Corporation, or sale, lease or conveyance of all
or substantially all of the Corporation's property or business with or
to any other entity or entities, shall not be deemed to be a
liquidation, dissolution or winding up of affairs of the Corporation
for purpose of this paragraph 6.
7. Redemptions. The Series C Preferred Stock shall not be redeemable
for three years from the date of issue, and thereafter may be called in
whole or in part for a cash redemption at $127.50 per share provided
that (i) the Corporation shall have achieved annualized earnings for
the preceding two quarters of no less than $.05 per share on a fully
diluted basis, (ii) the average market value for the common stock shall
have exceeded the conversion price of the Series C Preferred Shares by
2 times for the 30 business days immediately prior to the call or
redemption date and (iii) the Corporation give the Holders written
notice no less than 90 days prior to the call date for such redemption,
during which time the Holders will have the opportunity to convert
their Series C Preferred Stock into shares of Common Stock.
If less than all of the outstanding shares of Series C Preferred Stock
are to be redeemed, the
<PAGE> 6
Company will select those to be redeemed pro rata or by lot or in such
other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the
Series C Preferred Stock. In the event that the Company has failed to
pay accrued and unpaid dividends on the Series C Preferred Stock, it
may not redeem any of the then outstanding shares of the Series C
Preferred Stock, unless all the then outstanding shares are redeemed,
until all such accrued and unpaid dividends and (except with respect to
shares to be redeemed) the then-current annual dividend have been paid
in full.
8. No Sinking Fund. No sinking fund or other similar provision for the
purchase or redemption of Series C Preferred Stock shall be
established.
9. No Preemptive Rights. The Holders of the Series C Preferred Stock shall
not be entitled to preemptive rights with respect to their shares or
any other shares of the capital stock or securities of the Corporation.
10. Voting Rights. The holders of Series C Preferred Stock shall not be
entitled to any voting rights with respect to the shares of Series C
Preferred Stock except as set forth below.
(a) Election of Director. At any meeting of the shareholders of the
Corporation at which directors are elected to the Corporation's Board
of Directors, the holders of shares of Series C Preferred Stock shall
have the right, voting separately as a class, to elect two directors to
the Board of Directors. Such election by the holders of the Series C
Preferred Stock shall be effected by the vote of the holders of
two-thirds (2/3) of the then outstanding shares of Series C Preferred
Stock.
(b) Amendments and Additional Capital Stock. The holders of Series C
Preferred Stock shall have the right to vote as a separate class on the
following matters: (i) the amendment of any of the terms of the Series
C Preferred Stock or (ii) the authorization, creation, issuance or sale
of any class or series of capital stock ranking senior to or on parity
with the Series C Preferred Stock as to dividends or liquidation
preference. The affirmative vote of the holders of not less than
two-thirds (2/3) of the outstanding shares of Series C Preferred Stock
shall be necessary to authorize any transaction referenced in
subsection (b)(i) and (ii) above.
(c) Voting Rights on Default. If the Corporation fails to pay in whole
or in part for four (4) or more cumulative quarterly dividends on the
Series C Preferred Stock, the Series C Preferred Stock shall have the
right to elect the smallest number of directors constituting a majority
of the authorized number of directors of the Corporation, and the
holders of the Common Stock shall have the right to elect the remaining
directors. Such right in the Series C Preferred Stock shall continue
until all cumulative dividends for all past dividend periods shall have
been declared and paid or set apart and after all defaults have been
cured in the Purchase Agreement, after which the right to elect
directors shall revert to the manner provided in paragraph 10(a),
subject to renewal of the voting right of the Series C Preferred Stock
from time to time in the event of nonpayment of dividends or Default as
described above. At any time after the right to elect a majority of the
directors is vested in the Series C Preferred Stock, the holders of 5%
or more of the outstanding shares of Series C Preferred Stock or Common
Stock, as the case may be, have a right to call a special meeting of
stockholders for the purpose of electing all of the members of the
Board of Directors, such
<PAGE> 7
right to be exercisable by delivering a request in writing for the
calling of the special meeting to the president or secretary, or to the
chairman of the board or a vice-president if there be such. The officer
receiving the request shall forthwith cause notice to be given to the
stockholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than
35 or more than 90 days after the receipt of the request. Upon the
election of directors by the Series C Preferred Stock at a special
meeting, the terms of all persons who were directors immediately prior
thereto shall terminate and the directors elected by the Series C
Preferred Stock, together with those elected at the special meeting by
the Common Stock shall constitute the directors of the Corporation
until the next annual meeting.
(d) Failure to Convert or Redeem. If any of the Series C Preferred
Stock remain outstanding on or after October 31, 2000, then at any time
thereafter during the period that any shares of the Series C Preferred
Stock remain outstanding, the remaining holders of the Series C
Preferred Stock shall have the right to elect the smallest number of
directors constituting a majority of the authorized number of directors
of the Corporation, and the holders of the Common Stock shall have the
right to elect the remaining directors. At any time after the right to
elect directors pursuant to this Paragraph 10(d) is vested in the
Series C Preferred Stock, the holders of 5% or more of the outstanding
shares of Series C Preferred Stock shall have a right to call a special
meeting of stockholders for the purpose of electing all of the members
of the board of directors, such right to be exercisable by delivering a
request in writing for the calling of the special meeting to the
president or secretary, or to the chairman of the board or a
vice-president if there be such. The officer receiving the request
shall forthwith cause notice to be given to the stockholders entitled
to vote that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than 35 or more than 90 days
after the receipt of the request. Upon the election of directors at any
such special meeting, the terms of all persons who were directors
immediately prior thereto shall terminate and the directors elected by
the Series C Preferred Stock, together with those elected at the
special meting by the Common Stock, shall constitute the directors of
the Corporation until the next annual meeting. The term of office of
any director elected by the holders of the Series C Preferred Stock
pursuant to this Paragraph 10(d) shall terminate immediately upon the
redemption or conversion of the last remaining outstanding share of
Series C Preferred Stock, and the Corporation's Board of Directors or
shareholders shall be entitled to fill the vacancy on the Board created
thereby in a manner permitted by the Corporation's By-laws.
The foregoing Amendment to the Articles of Incorporation was duly adopted
by the Board of Directors on December 29, 1995. Shareholder approval was not
required.
IN WITNESS WHEREOF, the undersigned Director of this Corporation has
executed these Articles of Amendment on December 29, 1995.
/s/ Charles C. Dragone
-------------------------------
Charles C. Dragone, Director
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