SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ________________ to ________________
Commission file number 0-18109
-----------------
BCAM INTERNATIONAL, INC.
------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-3228375
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1800 Walt Whitman Road, Melville, New York 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(516) 752-3550
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 |_|
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes |_| No |_|
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: October 30, 1998: 20,991,289
----------------------------
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
<PAGE>
BCAM INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet--September 30, 1998 (Unaudited)........3
Condensed Consolidated Statements of Operations - Three Months
and Nine Months ended September 30, 1998 and 1997 (Unaudited).............4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 (Unaudited)...................................5
Condensed Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1998 (Unaudited)..........................6
Notes to Condensed Consolidated Financial Statements - September
30, 1998 (Unaudited)......................................................7
Item 2. Management's Discussion and Analysis or Plan of Operation.............16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................20
Item 2. Changes in Securities and Use of Proceeds.............................20
Item 6. Exhibits and Reports on Form 8-K......................................21
SIGNATURES....................................................................23
INDEX OF EXHIBITS.............................................................24
2
<PAGE>
BCAM International, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 982,000
Prepaid expenses and other current assets 52,000
Assets of discontinued operations - Drew 12,654,000
------------
Total current assets 13,688,000
Other assets 235,000
------------
Total assets $ 13,923,000
============
Liabilities and shareholders' equity
Current liabilities:
Current portion of long term debt $ 300,000
Accounts payable 244,000
Accrued expenses and other current liabilities 242,000
Liabilities of discontinued operations - Drew:
Convertible Notes and accrued interest, net of discount 6,678,000
Bank and other subsidiary debt 4,414,000
Accounts payable, accruals and all other current 2,106,000
Minority interest 587,000
Liabilities of discontinued operations - HCAD and ECSD 131,000
------------
Total current liabilities 14,702,000
------------
Other non-current liabilities
Commitments and contingencies
Shareholders' equity
Acquisition preferred stock, par value $.01 per share:
750,000 shares authorized, none issued --
Preferred stock, 2,000,000 shares authorized, none issued --
Common stock, par value $.01 per share; authorized 65,000,000
shares, 21,754,471 shares issued and 20,991,289 shares outstanding 218,000
Paid-in surplus 30,015,000
Deficit (30,113,000)
------------
120,000
Less 763,182 treasury shares (899,000)
------------
(779,000)
------------
Total liabilities and shareholders' equity $ 13,923,000
============
</TABLE>
See accompanying notes
3
<PAGE>
BCAM International, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
License Revenue $ 0 $ 0 $ 2,000 $ 19,000
------------ ------------ ------------ ------------
Costs and expenses:
Selling, general and administrative 522,000 419,000 1,438,000 1,476,000
Charge for compensatory element of
1997 options approved in 1998 0 0 858,000 0
Research & development 128,000 23,000 393,000 51,000
------------ ------------ ------------ ------------
Loss from operations (650,000) (442,000) (2,687,000) (1,508,000)
------------ ------------ ------------ ------------
Other income (expense)
Interest and financing costs 0 (1,000) 0 (3,000)
Interest income 18,000 4,000 49,000 18,000
------------ ------------ ------------ ------------
Other income (expense) 18,000 3,000 49,000 15,000
------------ ------------ ------------ ------------
Minority interests charge for beneficial
subsidiaries preferred stock conversion 0 (788,000) 0 (788,000)
------------ ------------ ------------ ------------
Loss from continuing operations $ (632,000) $ (1,227,000) $ (2,638,000) $ (2,281,000)
------------ ------------ ------------ ------------
Discontinued operations - Drew (1,916,000) (385,000) (6,883,000) (385,000)
Discontinued operations - HCAD
and ECSD, including estimated
loss on disposal of HCAD of
approximately $250,000 in 1998 0 (321,000) (803,000) (176,000)
------------ ------------ ------------ ------------
Loss before extraordinary item $ (2,548,000) $ (1,933,000) $(10,324,000) $ (2,842,000)
------------ ------------ ------------ ------------
Extraordinary item - charge for
April 1998 restructure of debt 0 0 (552,000) 0
------------ ------------ ------------ ------------
Net Loss $ (2,548,000) $ (1,933,000) $(10,876,000) $ (2,842,000)
------------ ------------ ------------ ------------
Net loss per share:
Continuing operations $ 0.03 $ 0.08 $ 0.13 $ 0.15
Discontinued operations $ 0.09 $ 0.04 $ 0.39 $ 0.03
------------ ------------ ------------ ------------
Loss per share before extraordinary $ 0.12 $ 0.12 $ 0.52 $ 0.18
Extraordinary item $ 0 $ 0 $ 0.03 $ --
------------ ------------ ------------ ------------
Net loss $ 0.12 $ 0.12 $ 0.55 $ 0.18
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding 20,790,000 16,052,000 19,650,000 15,807,000
============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE>
BCAM International, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating activities
Net loss $(10,876,000) $ (2,842,000)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 281,000 82,000
Amortization of unamortized charge for beneficial debt conversion 4,509,000 175,000
Amortization of deferred finance cost and debt discount 413,000 17,000
Write-off of deferred finance cost and debt discount 1,651,000 0
Compensation charge for stock options including $286,000
related to discontinued operations 1,144,000 0
Interest paid in kind 795,000
Non-cash minority interest charge (benefit) (35,000) 788,000
Extraordinary item 552,000
Changes in operating assets and liabilities:
Accounts receivable (291,000) 33,000
Inventory (403,000) (43,000)
All other current assets 202,000 (10,000)
Accounts payable, accrued expenses, current liabilities, other (12,000) 553,000
All other, net 100,000 0
------------ ------------
Net cash (used in) operating activities (1,970,000) (1,247,000)
------------ ------------
Investing activities
Cash paid for purchase of shares of Drew 0 (3,882,000)
Cash paid for costs to acquire Drew 0 (475,000)
Purchase of equipment and software technology (250,000) (207,000)
------------ ------------
Net cash (used in) provided by investing activities (250,000) (4,564,000)
------------ ------------
Financing activities
Proceeds from sale of common stock 1,200,000 1,075,000
Proceeds from sale of convertible preferred stock of subsidiary 0 1,200,000
Proceeds from sale of 10%/13% Convertible Notes and Warrants 0 6,000,000
Proceeds, net of new bank financing arrangement at Drew 0 1,135,000
Proceeds from exercise of options and warrants 65,000
Payment of existing debentures due to former Drew shareholders 0 (845,000)
Proceeds from short term debt 0 450,000
Payment of notes payable and long term debt 182,000
Drawdown (payment) of revolving credit agreement 311,000 250,000
Payment of stock registration and issuance costs (150,000) (668,000)
Other 47,000
------------ ------------
Net cash provided by financing activities 1,608,000 8,644,000
------------ ------------
(Decrease) increase in cash and cash equivalents (612,000) 2,833,000
Cash and cash equivalents at beginning of period 1,594,000 464,000
============ ============
Cash and cash equivalents at end of period $ 982,000 $ 3,297,000
============ ============
</TABLE>
See accompanying notes
5
<PAGE>
BCAM International Inc. and subsidiaries
Condensed Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Unamortized
Common Stock $.01 par Charge for
value Paid-in Beneficial Debt
Shares Amount Surplus Conversion Deficit Subtotal
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 18,171,641 $182,000 $26,338,000 $(4,290,000) $(19,237,000) $ 2,993,000
-----------------------------------------------------------------------------------
Conversion of subsidiary preferred stock
into common stock of the Company 1,066,585 11,000 607,000 -- -- 618,000
Additional beneficial debt conversion from
March 1998 payment-in-kind -- -- 219,000 (219,000) -- --
Amortization of beneficial debt conversion -- -- -- 4,509,000 -- 4,509,000
Record compensation for stock options
issued in 1997 and approved in 1998 -- -- 1,144,000 -- -- 1,144,000
Exercise of Class AA Warrants 100,000 1,000 64,000 -- -- 65,000
April 1998 offering of common stock
(subject to "repricing"-See (a) below
and Note 5 and Item 5) and warrants (a) 1,980,198 20,000 1,980,000 -- -- 2,000,000
Stock offering and registration costs -- -- (252,000) -- -- (252,000)
Warrants forfeited in debt restructure -- -- (281,000) -- -- (281,000)
Issuance of warrants to consultant -- -- 200,000 -- -- 200,000
Shares issued in first "repricing"
increment of April 1998 offering in
August 1998 436,047 4,000 (4,000) -- -- --
Net loss -- -- -- -- (10,876,000) (10,876,000)
-----------------------------------------------------------------------------------
Balance at September 30, 1998 21,754,471(a) $218,000 $30,015,000 $ -- (30,113,000) 120,000
===================================================================================
</TABLE>
Treasury
Stock Total
------------------------
Balance at January 1, 1998 $(899,000) $ 2,094,000
------------------------
Conversion of subsidiary preferred stock
into common stock of the Company -- 618,000
Additional beneficial debt conversion from
March 1998 payment-in-kind -- --
Amortization of beneficial debt conversion -- 4,509,000
Record compensation for stock options
issued in 1997 and approved in 1998 -- 1,144,000
Exercise of Class AA Warrants -- 65,000
April 1998 offering of common stock
(subject to "repricing"-See (a) below
and Note 5 and Item 5) and warrants (a) -- 2,000,000
Stock offering and registration costs -- (252,000)
Warrants forfeited in debt restructure -- (281,000)
Issuance of warrants to consultant -- 200,000
Shares issued in first "repricing"
increment of April 1998 offering in
August 1998 -- --
Net loss -- (10,876,000)
------------------------
Balance at September 30, 1998 $(899,000) (779,000)
========================
(a) Excludes addiditional shares issuable, without additional consideration,
pursuant to "repricing" provisions of the April 1998 offering of common stock
and warrants.
6
<PAGE>
BCAM International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation have been
included.
Financial position at September 30, 1998 and results of operations for the
three and nine month periods ended September 30, 1998 include the financial
position and results of operations of Drew Shoe Corporation ("Drew") as a
discontinued operation with a "measurement date" of October 2, 1998. Drew has
been owned by the Company since September 22, 1997 (see Note 3) and the results
of operations for the three and nine months ended September 30, 1997 partially
reflect the results of Drew (because the period before September 22, 1997
precedes the acquisition of Drew). Results of operations for the three and nine
month period ended September 30, 1997 have been restated to reflect, as
discontinued operations, Drew as well as the Company's Ergonomic Consulting
Services Division ("ECSD") and HumanCAD Systems Operations ("HCAD").
Results of operations for the three and nine month period ended September
30, 1998 are not necessarily indicative of results of operations to be expected
for the year ending December 31, 1998.
For further information, refer to the audited consolidated financial
statements and related notes thereto of the Company (at December 31, 1997 and
for the two year periods then ended) and the audited statements of operations
and cash flows of Drew (for the period from January 1, 1997 to September 22,
1997 and for the year ended December 31, 1996) included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1997 and the Form 8-K
filed by the Company on November 6, 1998.
2. Description of Business and Principles of Consolidation
BCAM International, Inc. and subsidiaries (the "Company") has been
primarily a software, technology and consulting company, specializing in
providing ergonomic solutions (human factors engineering) to individuals,
corporations and government. Through a series of actions over the past year,
including the acquisition of Drew and subsequent disposition of approximately
67% of Drew and certain other restructuring activities, the Company is now a
technology company focused on commercializing its Intelligent Surface Technology
and completing the development of its proprietary "microvalve" technology.
The acquisition and restructuring activity has included the following. On
September 22, 1997, the Company acquired Drew Shoe Corporation ("Drew") as
described in Note 3. In December 1997 the Board of Directors of the Company
decided to discontinue the operations of ECSD due to the inability of that
business to generate operating profits for the Company. In February 1998, the
Board of Directors of the Company decided to discontinue the operations of HCAD
as a result of the lack of available financing, on acceptable terms to the
Company, to further the necessary business development activities of that
division. In April 1998 the Company granted a 10% interest in the common stock
of Drew (in addition to 10% of BCAM Technologies, Inc.) to the holders of the
Company's 10%13% Convertible Notes. In
7
<PAGE>
October 1998, the Company sold an additional 56.7% of Drew and agreed to sell
its remaining 33.3% interest in the common stock of Drew subject to shareholders
approval.
The consolidated financial statements include the accounts of BCAM
International, Inc. and its subsidiaries, BCAM Technologies, Inc. (principally
IST and related technologies).
3. October 1998 Plan to Sell Drew -
On October 2, 1998, the Board of Directors approved a plan to dispose of
the Company's interest in Drew (the "Plan"). Pursuant to the Plan, on October
26, 1998, the Company, entered into a Stock Purchase and Restructure Agreement
between the Company and Impleo, LLC. ("Impleo") and sold 56.7% of the
outstanding shares of its Drew subsidiary to Impleo in exchange for
approximately $3,780,000 principal amount of the Company's 10%/13% Secured
Convertible Notes ("Notes"). Impleo, which initially owned $5,000,000 principal
amount of Notes, purchased the remaining $1,000,000 principal amount (plus
accrued interest) of Notes, thereby making it the sole holder of the Notes.
After this transaction, the remaining principal balance on the Convertible Notes
will be approximately $2,220,000 plus an additional approximately $850,000 of
accrued interest as of October 26, 1998. The Notes are secured by all of the
assets of the Company and are due in April 1999. Impleo now owns approximately
66.7% of the common stock of Drew. As a condition of the sale of the Drew shares
to, and the redemption of the Notes from, Impleo, Michael Strauss, the Chairman,
President and Chief Executive Officer of the Company, has become the Chief
Executive Officer of Drew Shoe Corporation. Mr. Strauss is obliged to spend no
less than 75% of his time on the business of Drew. Mr. Strauss will continue to
serve the Company as its Chairman, President and Chief Executive Officer and has
agreed to enter into a new employment agreement with the Company.
The Company's redemption of approximately $3,780,000 of Notes and
cancellation of certain related warrants will eliminate approximately 6.8
million shares of potential dilution to the BCAM common shareholders. This
includes the elimination of potential dilution which would result from
conversion of the Notes (approximately 5.5 million shares) and exercise of
warrants to purchase approximately 1.3 million shares of BCAM common stock.
In connection with the Stock Purchase and Restructure Agreement, the
Company and Impleo entered into a Second Amendment to the September 1997 Note
Purchase agreement which eliminates the requirement for Impleo to have
representation of 25% or more on the Company's Board of Directors, among other
matters. The Company, Drew and Impleo have entered into a shareholders agreement
relative to certain matters including disposition of shares and additional
investments in Drew.
The Company has entered into a separate Purchase and Sale Agreement with
Impleo in which it agreed to promptly submit to its shareholders a proposal to
sell the remaining 33.3% of Drew Shoe Corporation to Impleo in exchange for the
cancellation of the then remaining principal amount of Notes together with
accrued interest thereon (the "Second Sale"). If the BCAM shareholders approve
the proposal to sell the remaining 33.3% of Drew common stock, an aggregate of
approximately 10.75 million potentially dilutive securities will be eliminated.
Impleo is an affiliate of Wexford Management, LLP.
In connection with the sale and redemption transaction, the Company has
been released from its guarantee of approximately $3.8 million of secured
obligations of Drew to a bank.
Separately, the Company, under the Plan, has reached agreement with the
sellers of Drew to the Company in 1997 to: (i) cancel an employment contract and
enter into a consulting agreement with the former president of Drew, (ii) cancel
approximately $200,000 of notes payable to the former owners of Drew, (iii)
forgive certain purchase price adjustments due from the former owners of Drew
and the assumption, by Drew, of certain contingent liabilities in connection
with the Ulin & Holland litigation (such litigation is discussed in Item 3 of
Form 10-KSB for the year ended December 31, 1997).
8
<PAGE>
Because the Company's intention is to divest itself of its entire interest
in Drew pursuant to the Plan, the Company has accounted for Drew as a
discontinued operation. Because the Company's 33.3% ownership position is viewed
as temporary, the equity method of accounting is not appropriate for the
Company's investment in Drew.
The Company had originally acquired all of the outstanding Common
Stock of Drew on September 22, 1997 for approximately $4.7 million plus the
assumption of liabilities. Drew is a designer, manufacturer, marketer and
distributor of medical footwear headquartered in Lancaster, Ohio. The Company
had accounted for its acquisition of Drew under the purchase method of
accounting. Under such method, the purchase price paid plus costs of the
acquisition were allocated to the assets and liabilities of Drew based on the
estimated fair value of assets and liabilities acquired. The purchase price
allocation was completed in September 1998 and the remaining amount,
approximately $422,000, was allocated to goodwill. The results of operations of
Drew had been consolidated with the Company's operations beginning on September
22, 1997.
The following summary shows the unaudited selected balance sheet
information at September 30, 1998 and the unaudited results of operations for
the three and nine month period ended September 30, 1998 and for the period from
September 22, 1997 (date of acquisition) to September 30, 1997 for Drew.
Drew's assets consist principally of the following at September 30, 1998
(unaudited):
Cash $ --
Accounts receivable 1,875,000
Inventory 6,681,000
Other current assets 205,000
-----------
total current assets 8,761,000
Property and equipment, net 3,057,000
Deferred finance costs, net 252,000
Goodwill 422,000
Other assets 162,000
-----------
total assets 12,654,000
-----------
Statement of operations data for Drew (unaudited):
<TABLE>
<CAPTION>
Three months Nine Months
ended ended From
September 30, September 30, September
1998 1998 22 -30, 1997
---- -------- ------------
<S> <C> <C> <C>
Revenues $ 3,578,000 $11,643,000 $ 353,000
----------- ----------- ---------
Gross profit 1,398,000 4,931,000 125,000
----------- ----------- ---------
Operating profit (10,000) 708,000 (13,000)
----------- ----------- ---------
Other income (expense):
Interest and financing costs (354,000) (1,279,000) (197,000)
Charge for beneficial conversion (1,579,000) (4,663,000) (179,000)
Write off of discount and costs -- (1,651,000) 0
Interest income 15,000 37,000 3,000
----------- ----------- ---------
Total (1,918,000) (7,556,000) (373,000)
----------- ----------- ---------
Loss before minority interest (1,928,000) (6,848,000) (386,000)
Minority interest 12,000 (35,000) 0
----------- ----------- ---------
Net loss (1,916,000) (6,883,000) (386,000)
----------- ----------- ---------
</TABLE>
9
<PAGE>
4. Long Term Debt and Convertible Notes
Secured 10%/13% Convertible Notes and Warrants - In order to fund the
acquisition of Drew and provide working capital to the Company, on September 19,
1997, the Company issued convertible notes (the "Convertible Notes"), and
Non-Redeemable Class DD Warrants, in the aggregate amount of $6,000,000. The
Convertible Notes bear an interest rate of 10%, payable semi-annually, but the
Company, at its discretion, may pay interest in the form of additional
Convertible Notes ("payment in kind") in which case the annual interest rate
becomes 13% with semi-annual compounding. On March 19, 1998 and on September 19,
1998, the Company elected to make the semiannual interest payment in kind. As
such, the Company increased the related obligation under the Convertible Notes
to $6,805,350.
The Convertible Notes are due, as amended, on April 16, 1999, unless at
any time after September 19, 1998 they are converted, as amended, at $.78 per
share, into 8,192,308 shares of Common Stock of the Company (subject to
antidilution provisions).
On April 14, 1998, the noteholders and the Company entered into the First
Amendment of the Note Purchase Agreement (together with a Stock Pledge Agreement
and Security Agreement) in order to restructure the obligation. The key elements
of the restructuring are as follows: (1) waiving of the Company's violations of
the financial covenants at December 31, 1997 (as well as certain other breaches
of the agreement), (2) eliminating the financial covenants through April 16,
1999, (3) securing the obligation with a pledge of all of the assets of the
Company (excluding the assets of Drew which are already pledged to a bank),
including the stock of the Company's subsidiaries, (4) accelerating the maturity
date for the obligation from September 19, 2002 to April 16, 1999, (5)
cancellation of Class DD warrants to purchase 400,000 shares of common stock of
the Company, (6) issuance to the holders a total of 10% of the common shares of
the Company's subsidiaries Drew Shoe Corporation and BCAM Technologies, Inc. As
a result of the restructuring, the Company has a significant capital requirement
to repay this obligation ($6,805,350 including interest "paid in kind" on March
19, 1998 and September 19, 1998, respectively, and before additional interest
payments in cash or in kind subsequent to that date) in approximately six months
or face default and foreclosure on the security. The Company's intention has
been to refinance or otherwise restructure this obligation prior to its
maturity.
During the second quarter of 1998 the Company reflected an aggregate of
approximately $2.5 million of charges to operations and/or stockholders' equity
in connection with the restructuring of the debt. Such charges included: (i)
approximately $1,651,000 to write-off interest and finance costs as further
described in the second following paragraph, (ii) approximately $552,000 charged
to extraordinary item representing the approximate value of the 10% interest in
subsidiaries given up and (iii) approximately $281,000 charged to stockholders'
equity representing the unamortized portion of the amounts assigned to the value
of the 400,000 Class DD warrants given up by the holders of the Convertible
Notes.
As discussed in Note 3 above, on October 26, 1998, the Company agreed with
the holders of the Convertible Notes to redeem $3,780,000 principal amounts of
Convertible Notes in exchange for 56.7% of the common stock of Drew. Further,
the parties agreed that the remaining approximately $2,220,000 principal amount
of Convertible Notes together with accrued interest would be redeemed in
exchange for the remaining 33.3% of the common stock of Drew owned by the
Company, after receipt of shareholder approval. Should the shareholders not
approve such transaction, it is unlikely that the Company would be able to
refinance the remaining secured Notes and therefore Impleo would be in a
position to foreclose on all of the assets of the Company. See Note 3 and Form
8-K filed on November 6, 1998 for further information.
The Company originally allocated approximately $1,872,000 of the
$6,000,000 received from the sale of the Convertible Notes and Warrants as the
estimated value of the detachable warrants issued in connection with the
Convertible Notes resulting in a discount to the value assigned to the
Convertible Notes. Additionally, the Company originally recorded approximately
$825,000 in deferred financing costs in connection with the issuance of the
Convertible Notes. The $1,872,000 in debt discount and $825,000 of deferred
finance costs were being charged to interest and financing costs over the 60
month
10
<PAGE>
term of the Convertible Notes. As discussed above, in April 1998, the Company
and the holders of the Convertible Notes agreed to shorten the maturity of the
Convertible Notes from September 2002 to April 1999. Under generally accepted
accounting principles the Company recorded a charge to interest and financing
costs in the second quarter of 1998 for the amortization of this discount and
these costs that would have occurred during the 41 months that have been
shortened from the original maturity ($1,651,000).
Remaining debt discount and deferred financing costs in connection with
the transaction are being amortized over the remaining term of the Convertible
Notes.
The market value of the Company's common stock on the Nasdaq SmallCap
market on September 19, 1997 was approximately $1.50, approximately $1.25 at
March 19, 1998 and approximately $0.25 at September 19, 1998 (when additional
Convertible Notes were issued as payment in kind for interest).
In response to positions recently taken by the Securities and Exchange
Commission, Emerging Issues Task Force Statement D-60 has been issued. Statement
D-60 requires certain accounting for securities issued which are convertible
into common stock at a value which is "beneficial" at the date of issuance (such
as the Convertible Notes discussed above). This accounting requires that the
beneficial value be charged to operations (based upon the traded market price,
without discount, compared to the conversion price) in the case of a convertible
note over a period reflecting the shortest period in which the investor has to
exercise and under the most favorable terms to the investor. As such, the
Company has charged approximately $5,925,000 at September 19, 1997, an
additional $219,000 at March 19, 1998 and no additional charge at September 30,
1998, to Unamortized Charge for Beneficial Debt Conversion in the shareholders'
equity section of its Condensed Consolidated Balance Sheet. Such amounts
represent the value of the beneficial debt conversion feature of the Convertible
Notes measured at the date of issuance in September 1997 and for the payment in
kind in March 1998. These amounts are being charged to Interest and financing
costs in the Condensed Consolidated Statements of Operations at the rate, as
adjusted for the March 1998 payment in kind, of approximately $1,600,000 per
quarter until September 19, 1998. This charge to operations is considered a
non-recurring charge in the preparation of the summary pro-forma data contained
in Note 3.
Secured bank debt - Simultaneously with the acquisition of Drew, the
Company through its wholly-owned subsidiary, Drew, entered into a credit
facility with a commercial bank consisting of: (i) a revolving line of credit
("revolver") which is based upon agreed upon percentages of accounts receivable
and inventory and (ii) a term loan of $1,000,000. As of June 30, 1998, Drew had
outstanding borrowings of approximately $2,929,000 under the revolver.
The revolving line of credit matures on September 30, 1999, and calls for
current payments of interest at a rate of prime plus 1.5% (9.5 % at September
30, 1998). The term loan portion of the credit facility also bears an interest
rate of prime plus 1.5% (9.5 % at September 30, 1998) and is payable in monthly
principal installments of $11,905, plus interest, through September 30, 2000
with a payment due at that time of $583,000. Both the revolving line of credit
and term loan may be used for general working capital purposes and are
guaranteed by the Company. The credit facility with this bank, as amended on May
14, 1998, requires Drew to maintain compliance with certain financial covenants,
principally net worth and cash interest coverage, and contains restrictions on
the transfer of cash to the Company.
Costs incurred in connection with the bank term loan and revolving credit
totaling approximately $75,000, are included in Deferred finance cost and are
being amortized to Interest and financing cost using the effective interest
method over a two year period.
11
<PAGE>
At September 30, 1998, including the debt of Drew, long term debt
consists of the following:
10%/13% Convertible Notes, $6,805,000
(including interest paid in kind),
net of approximately $127,000 of
unamortized debt discount, with
interest payable on March 19 and
September 19, due April 16, 1999
unless earlier converted $ 6,678,000
Revolving credit arrangement of Drew
with a bank, payable on September 30,
1999, bearing interest at prime plus
1.5% 2,929,000
Term Loan agreement of Drew with a
bank, bearing interest at prime plus
1.5% payable in monthly principal
installments of $11,905 plus interest
through September 30, 2000 when the
final payment of $583,000 is due. 857,000
Notes payable to sellers of Drew
bearing interest at 8%, with monthly
payments of principal aggregating
$8,333 plus interest and balloon
payments aggregating $200,000 on
September 19, 1999 300,000
All other, principally Drew 628,000
-----------
Total long term debt, considered current 11,392,000
-----------
In connection with the sale of 56.7% of the common stock of Drew and the
redemption of $3,780,000 of 10%/13% Convertible Notes in October 1998, the
Company was released from its guarantee of the term loan and revolving credit
obligations of Drew. Additionally, the Company has been released from liability
for the $200,000 balloon payment to the sellers of Drew due on September 19,
1999. See Note 3 and Item 6 (b)
5. Private Placements during the nine months ended September 30, 1998 and 1997
1998 Private placement of common shares and warrants - On April 22, 1998,
the Company completed a private offering of its common stock and warrants. The
offering raised aggregate proceeds of $2,000,000 for the purchase of 1,980,198
shares of common stock of the Company, subject to increase for "repricing"
discussed below, and warrants to purchase 250,000 shares of common stock at
$2.05 for three years by six accredited investors. The Company has agreed, to
and in August 1998, did register such shares for resale by the investors.
The number of shares issuable to these investors will be "repriced"
pursuant to a schedule initially in four $300,000 increments and then in four
$200,000 increments on eight occasions commencing with the effectiveness of a
registration statement covering the shares and again 60 days later and then in
30 day intervals. On such dates, the investor would receive the additional
number of shares, if any, that result from the difference between the number of
shares actually issued and the number of shares which would have been issued
using a 23% discount to the market price, as defined, at that time. The
operation of this provision could result in a significantly greater number of
shares being issued. For example, the first repricing increment of $300,000 in
August 1998 results in the issuance of approximately 436,000 shares in addition
to the 297,030 shares originally issued for this portion of the $2,000,000
placement. The scheduled "repricing" on the second occasion, October 1998, would
result in the issuance of an additional approximately 1,480,879 shares in
addition to the 297,030 originally issued for this portion of the $2,000,000
placement. The investors have agreed not to sell any shares before at
12
<PAGE>
least 120 days after the closing. The Company has agreed not to issue certain
financings and has agreed to pay a placement agent a 6.5% fee in connection with
the transaction.
In October 1998, the Company and the representative of the investors
agreed, subject to Board approval and completion of documentation, to
restructure the "repricing". Under the agreement, the investors will return all
"repricing" shares they have received or are due to receive and the original
$2,000,000 placement will be "repriced", at the holders option, in new
increments of $250,000 per month. Amounts not "repriced" at a scheduled
repricing date will be carried over to the next month.
1997 Sale of common stock and warrants of the Company - In January 1997,
the Company commenced an offering and ultimately sold 1,075,000 equity units
(each consisting of one share of the Company's common stock and one
non-redeemable Class AA warrant) for $1,075,000. The Class AA warrants, as
amended, entitle the holder to purchase one share of the Company's Common Stock
at $0.65 per share until March 31, 2002. In April 1998, warrants to purchase
100,000 shares of common stock were exercised by the holders.
1997 Sale of Convertible Preferred Stock of Subsidiary - On July 22, 1997,
September 8 and September 18, 1997, BCA Services, Inc. ("BCA"), previously
wholly-owned by the Company, sold 120 shares of BCA's Convertible Preferred
Stock (the "Preferred Stock") for an aggregate consideration of $1,200,000 in
two private offerings to accredited investors.
Between November 1997 and March 1998, the Preferred Stock was converted
into 1,772,811 shares of the Company's common stock at a price, pursuant to a
formula, that averaged approximately $0.68.
In addition, for 100 of the shares of Preferred Stock sold, the Company
issued Non-Redeemable Class BB Warrants to purchase 50,000 shares of common
stock at $0.72 per share. For 20 shares of Preferred Stock sold, the Company
issued Non-Redeemable Class CC Warrants to purchase 10,000 shares of common
stock at $1.03 per share. The Class BB and CC Warrants have a term of five years
and the underlying common stock has been registered by the Company.
The two private placements of BCA Preferred Stock were made with the
assistance of a placement agent. The placement agent charged a commission of 8%
in fees and 2% in expenses, plus warrants to purchase 50,000 shares of common
stock of the Company at approximately $0.72 per share for five years, for the
first offering ($1,000,000). The placement agent charged 6% in fees and no
warrants for the second offering ($200,000).
See Note 6 for a discussion of certain accounting treatment called for by
Emerging Issues Task Force Statement D-60. Because the Preferred Stock issued is
that of a subsidiary, but is convertible into shares of the Company, the Company
had recorded the Preferred Stock of the subsidiary as "Minority interest" in the
consolidated financial statements until its conversion into common stock of the
Company. The "beneficial" conversion feature, therefore, has been charged to
Minority interests (approximately $788,000) in the accompanying Consolidated
Statement of Operations.
6. Other Discontinued Operations
Ergonomic Consulting Services Division - In December 1997, the Board of
Directors of the Company approved a plan to sell the operations of its Ergonomic
Consulting Services Division ("ECSD"). ECSD has not generated operating profits
and is no longer considered a core asset in light of the Company's current
strategy. The plan of disposition involved finding a strategic buyer who would
take over the Company's contractual commitments (some of which are long-term) to
consulting division customers and liquidating the remaining assets through
collection (with respect to receivables) or sale or disposal (with respect to
furniture and equipment). On February 9, 1998, the Company closed on the sale of
the revenue contract rights and transfer of the obligations for certain related
personnel of the ECSD to a third party. Terms of the sale call for the payment
of a portion of future revenues of the contracts sold as well as a portion of
certain follow-on work, or referrals for work provided by the Company. At
September 30, 1998, assets and liabilities of the ECSD were not material. The
operations of the ECSD from January
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1, 1998 through disposal on February 9, 1998 did not generate a loss.
Approximately $50,000 was accrued in the December 31, 1997 financial statements
as a loss on disposal representing management's estimate of the write-off of
furniture and equipment and accrual of certain lease costs. Management believes
that the $50,000 accrual recorded in December 1997 continues to be adequate at
September 30, 1998. There was no material severance paid in connection with the
discontinuance of the ECSD.
HumanCAD Systems Operations - During late February 1998, as a result of
specific events at the time, the Board of Directors of the Company approved a
plan to seek alternative value for the HumanCAD Systems operations ("HCAD") by
(i) initially reducing the activity, (ii) seeking a strategic or management
buyer for the operation and, if necessary, (iii) closing the operation. In March
HCAD was closed and it is currently being liquidated under the bankruptcy laws
of Ontario, Canada, where it is based.
In December 1997, the Company had reached agreement with a funding source
to provide approximately $2.5 million for development and marketing of the
Company's existing and planned HCAD ergonomic modeling software products. In
January 1998, the Company commenced executing the business plan contemplated by
the financing, but in late February 1998 the funding source advised the Company
that they were no longer willing to go forward with the planned financing. The
Company continues to seek a strategic or possible management buyer for HCAD.
The measurement date for the discontinuance is February 1998, at which
time losses from January 1, 1998 through February 1998 have been recorded and a
provision for discontinued operations (principally severance and non-cancelable
lease costs) has been made. At September 30, 1998, assets of the HCAD were
minimal and liabilities (excluding intercompany) were approximately $100,000
consisting principally of trade payables and accruals.
Revenues and net loss for ECSD and HCAD discontinued operations are
approximately the following for the nine months ended September 30, 1998 and
1997:
1998 1997
--------- ---------
Revenues $ 169,000 $ 399,000
Net Loss $(803,000) $(176,000)
7. Other
Material subsequent events - See Note 3 regarding Drew.
Extraordinary item and Minority Interest - In April 1998, the Company
granted a 10% minority interest in its subsidiaries, Drew and BCAM Technologies,
Inc. The granting of that minority interest is reflected as an extraordinary
item in the accompanying Condensed Consolidated Statements of Operations.
Minority interest in Drew is reflected in other liabilities of discontinued
operations and in results from discontinued operations in the accompanying
financial statements. The minority shareholders interest in the net income of
Drew is reflected in the Condensed Consolidated Statements of Operations as part
of loss from discontinued operations - Drew.
Per share data - In March 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Standards ("SFAS") No. 128, Earnings per
Share. Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Net loss
per share has been computed on the basis of the weighted average number of
common shares outstanding. Common stock equivalents have been excluded because
their effect is antidilutive.
14
<PAGE>
Income taxes - The Company accounts for income taxes in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for
Income Taxes". The Company has not reflected a benefit for income taxes in the
accompanying Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1998 and 1997, since the future
availability of net operating loss carryforwards have been offset in full by
valuation allowances in accordance with FASB Statement No. 109.
Antidilution adjustments to 10%/13% Convertible Notes and Class B Warrants
and Class E Warrants - Principally as a result of the 1998 Private Placement of
common stock and warrants in April 1998, the Company believes that the
antidilution provisions of the Convertible Notes and the Class B and Class E
Warrants were triggered. The calculation of the revised amounts has been
reflected in the amounts in Note 4. The effect on the Class B and E warrants was
not significant enough to warrant adjustment. Any repricings of the April 1998
private placement which result in the issuance of additional common stock
without further consideration discussed in Note 5 above would result in
additional antidilution calculations.
Expiration of Class B and Class E Warrants - On October 17, 1998, the
Company's Class B Warrants and Class E Warrants expired according to their
terms.
Other - See Note 11 to Consolidated financial statements at December 31,
1997 regarding charges to fourth quarter operations in 1997.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward looking statements that involve risk and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below in Factors That May Affect Future Results
Overview
BCAM International, Inc. and subsidiaries (the "Company") has been
primarily a software, technology and consulting company, specializing in
providing ergonomic solutions (human factors engineering) to individuals,
corporations and government. Through a series of actions over the past year,
including the acquisition of Drew and subsequent disposition of approximately
67% of Drew and certain other restructuring activities, the Company is now a
technology company focused on commercializing its Intelligent Surface Technology
and completing the development of its proprietary "microvalve" technology. The
Company has collaborative research and development relationships with the State
University of New York at Stony Brook and with MCNC which provide resources in
broadening, strengthening and commercializing the Company's technologies.
The acquisition and restructuring activity has included the following. On
September 22, 1997, the Company acquired Drew Shoe Corporation ("Drew") as
described in Note 3. In December 1997 the Board of Directors of the Company
decided to discontinue the operations of ECSD due to the inability of that
business to generate operating profits for the Company. In February 1998, the
Board of Directors of the Company decided to discontinue the operations of HCAD
as a result of the lack of available financing, on acceptable terms to the
Company, to further the necessary business development activities of that
division. In April 1998 the Company granted a 10% interest in the common stock
of Drew (in addition to 10% of the common stock of BCAM Technologies, Inc.) to
the holders of the Company's 10%13% Convertible Notes. In October 1998, the
Company sold 56.7% of Drew and agreed to sell its remaining 33.3% interest in
the common stock of Drew subject to shareholders approval.
See Liquidity and Capital Resources and Notes to Condensed Consolidated
Financial Statements regarding certain secured long-term debt coming due in
April 1999.
Results of Operations
Results of operations for the three and nine months ended September 30,
1998 continue to be significantly impacted by restructuring developments
including: (1) the Plan to sell the Company's interest in Drew to the holders of
the 10%/13% Convertible Notes ("Notes") in exchange for redemption of the Notes
and related interest, (2) the discontinuation of the Ergonomic Consulting
Services and HumanCAD Systems divisions, (3) a charge to compensation expense
for certain options granted during 1997 which were at exercise prices below the
market value when approved by the shareholders in February 1998, (4) charges and
extraordinary item related to the April 1998 restructuring of the Company's
Notes and (5) charges and costs related to the financing to acquire Drew and
other financing during the year.
Discontinued operations - As discussed in greater detail in Notes 3 and 6
to the Condensed Consolidated Financial Statements, the Company has recorded the
operations of Drew, the Ergonomic Consulting Services Division ("ECSD") and
HumanCAD Systems Division ("HCAD") as discontinued operations. Operations of
these discontinued businesses in the three and nine months ended September 30,
1998 (including provisions for losses on discontinuance of approximately
$250,000 in the nine months) resulted in losses of approximately $1,916,000 and
$7,686,000 including very substantial non-cash charges related to certain
financing acivities. Additionally, the nine months ended September 30, 1998
includes a charge to discontinued operations for approximately $286,000 for the
compensatory element of stock options granted in 1997 and approved by the
shareholders in February 1998. The reader is referred for further information
regarding the losses generated from these discontinued operations to
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<PAGE>
Notes 3 and 6 to the Condensed Consolidated Financial Statements. Losses from
discontinued operations were approximately $706,000 and $561,000, respectively,
in the three and nine months ended September 30, 1997. The reduced losses from
discontinued operations in 1997 reflect the fact that Drew was only included in
the 1997 results for approximately eight days. These divisions were discontinued
because: (1) the Company could not service and/or refinance the debt related to
the acquisition of Drew, (2) ECSD did not generate operating profits for the
Company and (3) HCAD required capital which the Company could not obtain on
favorable terms.
Ongoing selling, general and administrative costs - Selling, general and
administrative costs decreased by approximately $38,000 in the nine months ended
September 30, 1998 when compared to the prior year. Such costs increased in the
three months ended September 30, 1998 principally as a result as increased
corporate costs.
Research and development costs - In the three and nine months ended
September 30, 1998, research and development costs consist principally of costs
associated with the Company's development of a "microvalve" in collaboration
with a third party, MCNC, for potential use in its "ISTX" technology. Such costs
and related development expenditures increased by approximately $105,000 and
$342,000, for the three and nine months ended September 30, 1998, respectively,
due to the stage of developments activities at the time.
License revenues - License revenues consist principally of revenues
received from IST products and have not been significant to date. One Company
licensee, Textron, has launched a new product, in September 1997, utilizing IST
in an automobile seat.
Liquidity and Capital Resources
From December 31, 1997 to September 30, 1998, Company's financial position
changed as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Cash $ 982,000 $ 1,594,000
Working capital $(1,014,000) $ 6,716,000
Long-term debt, including
current portion $11,092,000 $ 8,435,000
Total Assets $13,923,000 $14,177,000
Shareholders' equity (deficit) $ (779,000) $ 2,094,000
On April 14, 1998, the Company and the holders of the 10%/13% Convertible
Notes agreed to restructure the 10%/13% Convertible Notes ("Notes") as discussed
in Note 4. As part of the restructuring, the Company agreed to accelerate
repayment of the obligation from September 19, 2002 to April 16, 1999, to secure
the obligation with all of the assets of the Company and to grant the holders a
10% interest in the Company's Drew and BCAM Technology subsidiaries, among other
items. As a result, the Company had a significant capital requirement to repay
this obligation ($6,805,000, at September 30, 1998 including interest paid in
kind on March 19, 1998 and September 19, 1998 plus interest for the remaining
period) in less than one year or face default and possible foreclosure on the
security. The Company presently does not have the resources to repay this
obligation and has been unsuccessful in its efforts to refinance this
obligation.
On October 2, 1998, the Board of Directors approved a plan (the "Plan") to
resolve the pending maturity of the Notes prior to their due date and probable
foreclosure by the Noteholder. Such Plan
17
<PAGE>
involves disposition of the Company's interest in Drew in exchange for
redemption of the Notes together with related interest. Pursuant to the Plan, on
October 26, 1998, the Company, entered into a Stock Purchase and Restructure
Agreement between the Company and Impleo, LLC. ("Impleo") and sold 56.7% of the
outstanding shares of its Drew subsidiary to Impleo in exchange for
approximately $3,780,000 principal amount of the Company's 10%/13% Secured
Convertible Notes ("Notes'). After this transaction, the remaining principal
balance on the Convertible Notes will be approximately $2,220,000 plus an
additional approximately $850,000 of accrued interest as of October 26, 1998.
The Notes are secured by all of the assets of the Company and are due in April
1999. As a condition of the sale of the Drew shares to, and the redemption of
the Notes from, Impleo, Michael Strauss, the Chairman, President and Chief
Executive Officer of the Company, has become the Chief Executive Officer of Drew
Shoe Corporation. Mr. Strauss is obliged to spend no less than 75% of his time
on the business of Drew. Mr. Strauss will continue to serve the Company as its
Chairman, President and Chief Executive Officer and has agreed to enter into a
new employment agreement with the Company.
The Company's redemption of approximately $3,780,000 of Notes and
cancellation of certain related warrants will eliminate approximately 6.8
million shares of potential dilution to the BCAM common shareholders. This
includes the elimination of potential dilution which would result from
conversion of the Notes (approximately 5.5 million shares) and exercise of
warrants to purchase approximately 1.3 million shares of BCAM common stock.
The Company does not presently have the liquidity and capital resources to
repay the remaining balance of the Notes when they are due in April 1999.
The Company has entered into a separate Purchase and Sale Agreement with
Impleo in which it agreed to promptly submit to its shareholders a proposal to
sell the remaining 33.3% of Drew Shoe Corporation to Impleo in exchange for the
cancellation of the then remaining principal amount ($2,220,000) of Notes
together with accrued interest thereon (the "Second Sale"). If the BCAM
shareholders approve the proposal to sell the remaining 33.3% of Drew common
stock, an aggregate of approximately 10.75 million potentially dilutive
securities will be eliminated.
The Company anticipates that the sale of Drew will result in the
recognition of a gain on the transaction.
It is the Company's intention to complete the second sale. If the BCAM
shareholders should not approve the proposal to sell the remaining 33.3% of Drew
common stock, in exchange for the remaining principal amount of, and accrued
interest on, the Notes, the Company does not have the resources to repay such
Notes and therefore the holder of the Notes would most likely be in a position
to foreclose on all of the assets of the Company when the Notes mature in April
1999.
Separately, the Company, under the Plan, has reached agreement with the
sellers of Drew to the Company in 1997 to: (i) cancel an employment contract and
enter into a consulting agreement with the former president of Drew, (ii) cancel
approximately $200,000 of notes payable to the former owners of Drew, (iii)
forgive certain purchase price adjustments due from the former owners of Drew
and the assumption, by Drew, of certain contingent liabilities in connection
with the Ulin & Holland litigation (such litigation is discussed in Item 3 of
Form 10-KSB for the year ended December 31, 1997).
See Notes 3 and 4 to Condensed Consolidated Financial Statements and Items
1 and 6. Other Information.
During April 1998, the Company commenced a private placement and raised an
aggregate $2,000,000 though the issuance of common stock and warrants (See Item
2 Changes in Securities and Use of Proceeds). Such private placement involves
periodic "resets" which result in the issuance of additional shares as described
in Note 5 to Condensed Consolidated Financial Statements and in Item 6 (b).
In addition to the liquidity and capital needs described above, the
Company is in need of additional capital in order to continue its development
activites to further commercialize the Intelligent Surface Technology and to
develop the "microvalve" technology. The Company believes that its current cash
resources can permit it to continue its business plan until approximately the
first quarter of 1999, assuming that the Company receives the cooperation of its
vendors in deferring certain amonts which are currently due.
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Factors That May Affect Future Results
The Company's future operating results are dependent on the Company's ability
to: (i) obtain sufficient capital to fund its development, growth and
acquisition plans, (ii) generate profitable growth at Drew, (iii) generate
sufficient profits from operations to fund its debt service including
significant payments coming due in April 1999, (iv) identify and successfully
close potential acquisitions on terms that are favorable to the Company (v)
further successful development of IST and increase the number of licensees, and
the commercialization of IST by its licensees, (vi) introduction of IST in
medical footwear and orthotic products, (vii) successfully develop the
"microvalve", (viii) general economic conditions and conditions in the financial
and medical footwear markets.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings
In January 1998, Ulin & Holland Incorporated ("U & H") filed suit against
the Company's Drew subsidiary in United States District Court for the District
of Massachusetts. The suit alleges that U & H was retained in 1992 by Drew
pursuant to which U & H alleges that it is due a fee of not less than $297,000
in connection with the Company's acquisition of Drew. It is possible that the
Company may also be named as a defendant in this lawsuit. Drew disputes this
claim and the Company intends to vigorously defend this action.
The Company's HumanCAD Systems operations were discontinued in February
1998. In October 1998, the Company's HumanCAD subsidiary filed an assignment in
bankruptcy under the laws of Ontario, Canada and Fuller Landau Ltd. (the
"Trustee") were appointed as trustee of the estate. The Trustee is in the
process of liquidating that business. Various vendors and one customer have
threatened litigation for amounts claimed to be due them. One vendor has filed
litigation against the Company in connection with a claim of approximately
$19,000. There can be no assurance that any threatened litigation will not
result in the filing of further actions against the Company or that such
action(s) will not result in additional costs beyond those already included in
the Company's financial statements.
There are no other material legal proceedings pending against the Company.
Item 2. Changes in Securities and Use of Proceeds
See Item 6. Exhibits and Reports on Form 8-K for a discussion of the
redemption of $3,780,000 of 10%/13% Convertible Notes and the resultant
elimination of conversion feature and warrants which were derivative into over
6.8 million common shares of the Company.
Sale of Common Stock and Warrants in April 1998 - On April 22, 1998 the
Company completed an offering of $2,000,000 of its common stock and warrants in
a private placement to accredited investors.
The offering raised aggregate proceeds of $2,000,000, before expenses, for
the purchase of 1,980,198 shares of common stock of the Company, subject to
"repricing" as described below, and warrants to purchase 250,000 shares of
common stock at $2.05 for three years by six accredited investors as follows:
Common
Common Shares shares
issued before under
Name of purchaser Amount paid(b) "repricing"(a) warrants
----------------- -------------- -------------- --------
Balmore Funds S.A. $ 850,000 841,584 106,250
Austost Anstalt Schaan $ 750,000 742,574 93,750
Beeston Investments Ltd. $ 200,000 198,020 25,000
Manor Investments $ 100,000 99,010 12,500
Ellis Enterprises $ 50,000 49,505 6,250
East Lane Corporation, Ltd. $ 50,000 49,505 6,250
---------- --------- -------
Totals $2,000,000 1,980,198 250,000
========== ========= =======
Prior to "repricing", discussed below, which has resulted in August 1998
in the commitment to issue an additional approximately 425,000 additional
shares, before further repricings, as discussed below.
- ---------------------
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The Company has agreed to, and did in August 1998, register such shares
for resale by these investors.
The number of shares issuable to these investors will be "repriced" in
increments of invested proceeds pursuant to a schedule. The increments are
initially four $300,000 increments and then four $200,000 increments on eight
occasions. The repricing increments commence with the effectiveness of a
registration statement covering the shares (completed in August 1998), then one
increment 60 days later and the remaining six increments in 30 day intervals
thereafter. On such dates, the investor would receive the additional number of
shares, if any, that result from the difference between the number of shares
actually issued and the number of shares which would have been issued at 77% of
the average closing bid price, as defined, for the five trading days immediately
preceeding but not including, the "repricing" date. Each "repricing' calculation
is made independent of the other "repricing" calculations.
The operation of the "repricing" provision has resulted in the commitment
to issue an additional approximately 425,000 shares in August 1998 and could
result in significantly greater number of shares being issued in addition to the
amounts listed in the above table.
The investors have agreed not to sell any shares before at least 120 days
after the closing. The Company has agreed not to issue certain financings for
270 days after issuance of all shares under the "repricing" provisions without
the consent of the investors and has agreed to a right of first refusal as
defined in the agreements.
The Company has paid a placement agent a 6.5% fee in connection with the
transaction.
The $2,000,000 issuance of common stock and warrants has triggered the
anti-dilution provisions of the 10%/13% Convertible Notes and the Company's
currently outstanding Class B and Class E warrants. Anti-dilution computations
have been completed and are reflected in the accompanying Notes to Condensed
Consolidated Financial Statements.
The Registrant claims exemption from registration of this placement by
virtue of Section 4(2) of the Securities Act of 1933. The proceeds of the
offering are to be utilized for general working capital purposes.
In October 1998, the Company and the representative of the investors
agreed, subject to Board approval and completion of documentation, to
restructure the "repricing". Under the agreement, the investors will return all
"repricing" shares they have received or are due to receive and the original
$2,000,000 placement will be "repriced", at the holders option, in new
increments of $250,000 per month. Amounts not "repriced" at a scheduled
repricing date will be carried over to the next month.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On November 6, 1998, the Company filed a Form 8-K in order to
report that effective October 26, 1998, the Company, pursuant to a Stock
Purchase and Restructure Agreement between the Company and Impleo, LLC.
("Impleo"), sold 56.7% of the outstanding shares of its investment in its Drew
Shoe Corporation subsidiary ("Drew") to Impleo in exchange for approximately
$3,780,000 principal amount of the Company's 10%/13% Secured Convertible Notes
(Notes"). Impleo, which initially owned $5,000,000 principal amount of Notes,
purchased the remaining $1,000,000 principal amount (plus accrued interest) of
Notes, thereby making it the sole holder of the Notes. After
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this transaction, the remaining principal balance on the Convertible Notes will
be approximately $2,220,000 plus an additional approximately $850,000 of accrued
interest as of October 26, 1998. The Notes are secured by all of the assets of
the Company and are due in April 1999. Impleo now owns approximately 67% of the
common stock of Drew. As a condition of the sale of the Drew shares to, and the
redemption of the Notes from, Impleo, Michael Strauss, Chairman, President and
Chief Executive Officer of BCAM International, Inc. has become the Chief
Executive Officer of Drew Shoe Corporation. Mr. Strauss is obliged to spend no
less than 75% of his time on the business of Drew. Mr. Strauss will continue to
serve BCAM International, Inc. as its Chairman, President and Chief Executive
Officer and has agreed to enter into a new employment agreement with the
Company.
BCAM's redemption of approximately $3,780,000 of Notes and cancellation of
certain related warrants will eliminate approximately 6.8 million shares of
potential dilution to the BCAM common shareholders. This includes the
elimination of potential dilution which would result from conversion of the
Notes (approximately 5.5 million shares) and exercise of warrants to purchase
approximately 1.3 million shares of BCAM common stock.
In connection with the Stock Purchase and Restructure Agreement, the
Company and Impleo entered into a Second Amendment to the September 1997 Note
Purchase agreement which eliminates the requirement for Impleo to have
representation of 25% or more on the Company's Board of Directors, among other
matters. In addition, the Company has been released from its guarantee of the
secured obligations of Drew to a bank.
The Company, Drew and Impleo have entered into a shareholders agreement
relative to the certain matters including disposition of shares and additional
investments in Drew.
The Company has entered into a separate Purchase and Sale Agreement with
Impleo in which it agreed to promptly submit to its shareholders a proposal to
sell the remaining 33.3% of Drew Shoe Corporation to Impleo in exchange for the
cancellation of the then remaining principal amount of Notes together with
accrued interest thereon (the "Second Sale"). If the BCAM shareholders approve
the proposal to sell the remaining 33.3% of Drew common stock, an aggregate of
approximately 10.75 million potentially dilutive securities will be eliminated.
Impleo is an affiliate of Wexford Management, LLP.
Separately, the Company has reached agreement with Charles G. Schuyler and
Frank Shyjka (the sellers of Drew to the Company in 1997) to: (i) cancel Mr.
Schulyer's employment contract and enter into a consulting agreement, (ii)
cancel approximately $200,000 of notes payable to Messrs. Schuyler and Shyjka,
(iii) forgive certain purchase price adjustments due from Messrs. Schuyler and
Shyjka and the assumption, by Drew, of certain contingent liabilities in
connection with the Ulin & Holland litigation (such litigation is discussed in
Item 3 of Form 10-KSB for the year ended December 31, 1997).
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
BCAM INTERNATIONAL, INC.
Dated: November 16, 1998 By: /s/ Michael Strauss
--------------------------------------------
Michael Strauss
Chairman of the Board of Directors,
President and Chief Executive Officer
(principal executive officer)
Dated: November 16, 1998 By: /s/ Kenneth C. Riscica
--------------------------------------------
Kenneth C. Riscica
Vice President - Finance, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
23
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedule
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 982,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,688,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,923,000
<CURRENT-LIABILITIES> 14,702,000
<BONDS> 0
0
0
<COMMON> 218,000
<OTHER-SE> (997,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,923,000
<SALES> 0
<TOTAL-REVENUES> 2,000
<CGS> 0
<TOTAL-COSTS> 2,689,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (49,000)
<INCOME-PRETAX> (10,876,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,638,000)
<DISCONTINUED> 7,686,000
<EXTRAORDINARY> 552,000
<CHANGES> 0
<NET-INCOME> (10,876,000)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
