BCAM INTERNATIONAL, INC
(a New York corporation)
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NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS TO BE
HELD AT 10:00 A.M. ON MARCH 4, 1999
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To the Shareholders of BCAM INTERNATIONAL, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of BCAM INTERNATIONAL, INC., (the "Company") will be held on March 4,
1999, at 10:00 a.m. at the Engineering and Applied Sciences Building, Room 231,
State University of New York at Stony Brook, Stony Brook, NY 11794 for the
following purpose and the following purpose only:
To consider and to act upon a proposal to sell the Company's remaining
33.3% common stock ownership interest in Drew Shoe Corporation to the
holder of the Company's 10%/13% Convertible Notes ("Notes") in exchange
for redemption of $2,220,000 principal amount of, and $1,050,000 of
accrued interest (as of December 31, 1998) on, the Notes pursuant to the
terms and conditions of a certain purchase and sale agreement dated
October 23, 1998.
As a legal matter, this notice must state that if the foregoing matter is
approved, shareholders fulfilling requirements of Business Corporation Law,
Section 623 (a copy of which is annexed hereto as Exhibit "B") have a right, as
dissenting shareholders, to receive payment at fair market value for their
shares ("Appraisal Rights"). As a practical matter, the Company does not have
the funds to pay the Appraisal Rights of any dissenting shareholder.
Failure to approve the proposed transaction will almost certainly result
in the Company's inability to continue operating as a going concern. The Board
of Directors has fixed December 31, 1998, at the close of business, as the
record date for the determination of shareholders entitled to notice of and to
vote at the Meeting, and only holders of record of shares of the Company's
Common Stock at the close of business on that day will be entitled to vote. The
stock transfer books of the Company will not be closed.
All shareholders are cordially invited to attend the Meeting in person.
However, whether or not you expect to be present at the Meeting, you are urged
to mark, sign, date and return the enclosed Proxy, which is solicited by the
Board of Directors, as promptly as possible in the postage-prepaid envelope
provided to ensure your representation and the presence of a quorum at the
Meeting. The shares represented by the Proxy will be voted according to your
specified response. The Proxy is revocable and will not affect your right to
vote in person in the event you attend the Meeting.
By Order of the Board of Directors
Michael Strauss, Chairman
Melville, New York
January 29, 1999
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BCAM INTERNATIONAL, INC.
1800 Walt Whitman Road
Melville, New York 11747
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PROXY STATEMENT
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NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS TO BE
HELD AT 10:00 A.M. ON MARCH 4, 1999
The enclosed proxy is solicited by the Board of Directors of BCAM
INTERNATIONAL, INC. (the "Company") in connection with a Special Meeting of
Shareholders (the "Meeting") to be held on March 4, 1999 at 10:00 a.m. at the
Engineering and Applied Sciences Building, Room 231, State University of New
York at Stony Brook, Stony Brook, NY 11794 and any adjournment or postponement
thereof. The Board of Directors has fixed December 31, 1998, at the close of
business, as the record date for the determination of shareholders entitled to
notice of and to vote at the Meeting. A shareholder of record executing and
returning a proxy has the power to revoke it at any time before it is exercised
by filing a later proxy with, or other communication to, the Secretary of the
Company or by attending the Meeting and voting in person. The proxy will be
voted in accordance with your directions as to:
1. PROPOSAL TO SELL THE COMPANY'S REMAINING 33.3% COMMON STOCK
OWNERSHIP INTEREST IN DREW SHOE CORPORATION TO THE HOLDER OF THE
COMPANY'S 10%/13% CONVERTIBLE NOTES ("NOTES") IN EXCHANGE FOR
REDEMPTION OF $2,220,000 PRINCIPAL AMOUNT OF, AND APPROXIMATELY
$1,050,000 OF ACCRUED INTEREST (AS OF DECEMBER 31,1998) ON, THE
NOTES AS OUTLINED IN A CERTAIN AGREEMENT DATED AS OF OCTOBER 23,
1998 (THE "PURCHASE AGREEMENT")
In the absence of direction, the proxy will be voted in favor of these
proposals.
The Proxy Statement, the attached Notice of Meeting and the enclosed form
of Proxy are being mailed to shareholders on or about January 29, 1999. The
mailing address of the Company's principal executive offices is 1800 Walt
Whitman Road, Melville, New York 11747.
VOTING
Only shareholders of record of the Company's __________ shares of Common
Stock (the "Common Stock") outstanding at the close of business on January 27,
1999 (excluding 763,182 shares held in treasury) will be entitled to vote. Each
share of Common Stock is entitled to one vote. A majority in interest of the
voting power of the outstanding Shares represented at the meeting in person or
by proxy shall constitute a quorum. The affirmative vote of two-thirds of the
votes of all outstanding shares entitled to vote thereon is necessary to
approve. The shareholders vote at the meeting by casting ballots (in person or
by proxy) which are tabulated by a person appointed by the Board of Directors
before the meeting to serve as the inspector of election at the meeting and who
has executed and verified an oath of office. Abstentions and broker non-votes
are included in the determination of the number of Shares present at the meeting
for quorum purposes but not counted in the tabulation of the votes cast on
proposals presented to shareholders. Thus, an abstention from voting has the
same legal effect as a vote "against" the matter, even though the shareholder
may interpret such action differently. Failure to approve the proposed
transaction will almost certainly result in the Company's inability to continue
operating as a going concern.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies will be borne by the Company. The
Company has retained Corporate Investor Communications, Inc. to aid in the
solicitation of proxies at a cost which is not expected to exceed approximately
$15,000 plus reimbursement for reasonable out-of-pocket expenses. Solicitation
of proxies from shareholders of the Company may be made by personal interview,
mail, telephone or telegram without compensation, by the directors, officers and
regular employees of the Company. In addition, the cost of solicitation will
include the cost of supplying necessary additional copies of the solicitation
materials to beneficial owners of shares held of record by brokers, dealers,
banks, trustees, and their nominees, including the reasonable expenses of such
recordholders for completing the mailing of such materials to such beneficial
owners.
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1. PROPOSAL TO SELL THE COMPANY'S REMAINING THIRTY-THREE AND ONE-THIRD
PERCENT (33.3%) COMMON STOCK INTEREST IN DREW SHOE CORPORATION TO
THE HOLDER OF THE COMPANY'S 10%/13% CONVERTIBLE NOTES IN EXCHANGE
FOR REDEMPTION OF THE REMAINING $2,220,000 PRINCIPAL AMOUNT OF, AND
APPROXIMATELY $1,050,000 OF ACCRUED INTEREST (AS OF DECEMBER 31,
1998) ON, THE NOTES, AS WELL AS CERTAIN NON-REDEEMABLE CLASS DD
WARRANTS
General
Introduction
The Company had historically been primarily a research and development
technology and consulting company, specializing in providing ergonomic solutions
(human factors engineering) to corporate and governmental customers. Through a
series of actions over approximately the past year, including the acquisition of
all of the issued and outstanding shares of the common stock of the Drew Shoe
Corporation ("Drew"), a manufacturer and distribution of medical footwear, and
subsequent disposition of approximately 66.7% of Drew and certain other
restructuring activities, the Company is seeking to further develop and
commercialize certain technology using "Intelligent Surface Technology" and its
proprietary "Microvalve" Technology. (See below "Risk Factors Related to
Proposed Transaction").
The Company has engaged in certain acquisition and restructuring activity
which has included the following: On September 22, 1997, the Company acquired
all of the issued and outstanding common stock of Drew for a purchase price of
Four Million Seven Hundred Thousand ($4,700,000) Dollars plus the assumption of
liabilities. In December 1997 the Board of Directors of the Company decided to
sell the operations of the Company's Ergonomic Consulting Services Division
("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 the Company's HumanCAD Systems Operations ("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. (See Long Term Debt and Convertible Notes
below.) In 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.
Since its acquisition by the Company, Drew's operations have consistently
failed to meet profitability expectations.
Long Term Debt and Convertible Notes
In order to fund the acquisition of Drew and provide additional working
capital to the Company, on September 19, 1997, the Company issued 10%/13%
convertible notes (the "Notes"), and Non-Redeemable Class DD Warrants
("Warrants"), in the aggregate amount of $6,000,000 to Impleo, LLC ("IMPLEO")
and certain other investors. The Notes bear an interest rate of 10%, payable
semi-annually, but the Company, at its discretion, may pay interest in the form
of additional 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 Notes to
$6,805,350.
The 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
8,724,808 shares of Common Stock of the Company (subject to antidilution
provisions).
On April 14, 1998, the holders of the Notes 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
"April Restructuring"). The key elements of the April Restructuring are as
follows:
(1) waiver 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;
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(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 Warrants to purchase 400,000 shares of common stock
of the Company; and
(6) issuance to the holders a total of 10% of the common shares of the
Company's subsidiaries, Drew and BCAM Technologies, Inc., previously
wholly-owned subsidiaries of the Company.
(7) As a result of the April Restructuring, the Company is required to
satisfy 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 September 19, 1998) in
April 1999 or face default and foreclosure on the Company's assets
which are pledged as security.
The Company's intention had 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 shareholders' 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 Note 4 to Condensed Consolidated Financial Statements for the nine
months ended September 30, 1998, (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 shareholders'
equity representing the unamortized portion of the amounts assigned to the value
of the 400,000 Warrants given up by the holders of the Notes. Such charges are
reflected as part of discontinued operations in the accompanying condensed
consolidated financial statements.
October 1998 Plan to Sell Majority Interest in Drew
Due to the Company's belief that it could not meet its obligations
represented by the Notes upon their maturity, on October 2, 1998, the Board of
Directors approved a plan to dispose of the Company's majority interest in Drew
(the "Plan") in order to facilitate the redemption and cancellation of a portion
of the obligations represented by the Notes. Pursuant to the Plan, on October
23, 1998, the Company, entered into a Stock Purchase and Restructure Agreement
between the Company and IMPLEO, and sold 56.7% of the outstanding shares of Drew
to IMPLEO in exchange for the redemption and cancellation of approximately
$3,780,000 of the outstanding principal amount of the Notes. Concurrently with
this transaction, 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 Notes. After this
transaction, the remaining principal balance on the Notes is approximately
$2,220,000 plus an additional approximately $1,050,000 of accrued interest as of
December 31, 1998. The Notes are secured by all of the assets of the Company and
have a maturity date in April 1999. IMPLEO now owns approximately 66.7% of the
common stock of Drew. As a further 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. 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. (See below "Interest of Certain
Persons in Matters to be Acted Upon") under which his compensation from the
Company will be reduced.
In connection with the transactions set forth in the Plan, the Company has
been released from its guarantee of approximately $3.8 million of secured
obligations of Drew to its commercial bank lender.
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 retention, by Drew, of certain contingent liabilities in connection with
the Ulin & Holland litigation.
The Company's redemption of approximately $3,780,000 of the principal
value of the Notes and cancellation of certain related warrants eliminated
approximately 6.1 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 4.8 million shares) and
exercise of warrants to purchase approximately 1.3 million shares of BCAM common
stock.
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Concurrently with the execution of 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 on the Company's Board of Directors which
constituted at least twenty-five (25%) percent of the Board, among other
matters. The Company, Drew and IMPLEO have also entered into a shareholders
agreement relative to certain matters including disposition of shares and
additional investments in Drew.
The sale of the Company's 56.7% ownership interest in Drew in October 1998
will be recorded as a sale in the fourth quarter of 1998 and is not expected to
result in a material gain or loss. The planned sale of the Company's 33.3%
ownership interest in Drew contemplated by this Proxy statement will be
accounted for as a sale and is expected to result in a gain of approximately
$900,000.
The Purchase Agreement
Separately, on October 23, 1998, the Company entered into the Purchase
Agreement (a copy of which is annexed hereto as Exhibit "A") with IMPLEO
pursuant to which it agreed to sell the remaining 33.3% of Drew Shoe to IMPLEO
in exchange for the cancellation of the then remaining principal amount of Notes
($2,220,000) together with accrued interest thereon and Warrants to purchase
740,000 shares of the common stock of the Company. Because the sale of the
Company's remaining interest in Drew constitutes a disposition of one of the
Company's most significant assets, the proposed transaction requires and is
conditioned on receipt of approval by the Company's shareholders (the "Proposed
Transaction"). If the Company's 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. Pursuant to the
terms of the Purchase Agreement, shareholder approval was to be obtained within
sixty (60) days following execution. Although the Company will not be able to
meet this deadline, it does not believe it will materially affect the closing of
the Proposed Transaction assuming shareholder approval. Moreover, the failure of
the Company's shareholders to approve the Proposed Transaction will not affect
the transactions previously consummated under the Plan set forth above.
IMPLEO is an affiliate of Wexford Management, LLP.
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.
Drew's assets consist principally of the following as of September 30,
1998 (unaudited):
a. Accounts receivable: $1,875,000
b. Inventory: $6,681,000
c. Property and equipment, net: $3,057,000
Drew's liabilities include approximately $4.4 million of bank and other
debt in addition to trade liabilities.
The October 1998 Transactions
On October 23, 1998, the Company and the holders of the Notes agreed to
redeem $3,780,000 principal amount of the 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 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 THE PROPOSED TRANSACTION, IMPLEO WOULD BE IN
A POSITION TO FORECLOSE ON ALL OF THE ASSETS OF THE COMPANY. The Company has had
no success in identifying potential sources of refinancing for the Notes, and as
a consequence, the Company has ceased its efforts to refinance the Notes other
than as proposed herein.
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 aggregating approximately $3,786,000 at September 30, 1998.
Additionally, the Company has been
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released from liability for the $200,000 balloon payment to the sellers of Drew
due on September 19, 1999.
Reasons for the Proposed Transaction
In reaching its decision to recommend and approve the Proposed
Transaction, the Company's Board considered material factors described below.
Based upon its review of such factors, the Board of the Company approved the
Proposed Transaction.
The Company's Board considered the following factors in reaching the
conclusion to approve the Proposed Transaction:
o Drew Shoe's business presents very significant near-term issues for
the Company, particularly the prospect of having to satisfy the
Company's obligation to repay approximately $7.1 million (including
interest through December 31, 1998) to the holders of the 10%/13%
Secured Convertible Notes in April 1999.
o Drew was purchased to be a "platform" from which other acquisitions
could be made. The Company has not been successful in completing any
further acquisitions or, more importantly, arranging any acquisition
financing.
o A deterioration in the general investment climate which has
eliminated viable refinancing prospects for the Company.
o Results from Drew's 1998 operations have failed to meet projections.
o The debt service for the financing used to purchase Drew
significantly exceeds Drew's cash flow from operations.
o Drew's capital needs for information and management systems, among
other things, were intended to be met through the acquisition of,
and consolidation with other companies. As a stand alone Company,
these needs cannot currently be satisfied.
o Inability of the Company to refinance the 10%/13% Secured
Convertible Notes and of Drew to generate the requisite cash flows
to satisfy these obligations.
o Possibility of a foreclosure on the Company's assets by the holders
of the 10%/13% Secured Convertible Notes has made it virtually
impossible to attract investment to support the continued
commercialization and development of the Company's technologies.
In July 1998, the Company engaged Mesa Partners (which has not provided
the Company with a fairness opinion in connection with the proposed transaction)
to evaluate its strategic alternatives. After reviewing many factors including
those mentioned above, Mesa's recommendation to the Company was to divest the
Company's interest in Drew and pursue new business opportunities and/or
investors for the further development of BCAM's IST and Microvalue technologies.
Mesa concluded that the sale of Drew, as contemplated, would:
o eliminate approximately $7.1 million of secured acquisition debt
(including interest through December 31, 1998) which comes due in
April 1999 with no realistic chance of repayment.
o eliminate approximately $3.8 million of secured bank debt at the
Drew level;
o eliminate approximately $200,000 of Notes payable to the sellers of
Drew;
o eliminate approximately $1.2 million of annual interest cost which
the Company has no ability to fund, particularly in light of Drew's
lack of positive cash flow; and
o free the Company from the necessary investments in Drew's business
that are called for by the "stand alone" (versus strategic
acquisition) position of Drew.
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o eliminate approximately 10.7 million shares of potential dilution
from the conversion feature of the Notes and from warrants.
o recognize a gain, estimated to be approximately $900,000 on the sale
of Drew.
Interest of Certain Persons in Matter to be Acted Upon.
No officer or director of the Company (or person who served as such as of
the beginning of the last fiscal year) will receive any portion of the
consideration to be received by the Company through any bonus or other similar
arrangement and with the exception of Michael Strauss ("Strauss"), the Company's
Chairman, President, Chief Executive Officer and Chief Operating Officer, and
Joseph Jacobs, who was a director of the Company from April 1998 through August
18, 1998, or has any other interest in the Proposed Transaction other than as
holders of Common Stock or Options. See below, "Information Regarding the
Company - Security Ownership of Certain Beneficial Owners".
As a condition to the consummation of the transactions contemplated under
the Plan, Strauss entered into an employment agreement dated as of October 23,
1998 with Drew (the "Drew Shoe Employment Agreement"). The Drew Shoe Employment
Agreement provided that Drew would employ Strauss as Drew's President, Chairman
and Chief Executive Officer for a four (4) year term at a base annual salary of
Two Hundred Thousand ($200,000) Dollars, together with annual six (6%) percent
increases. In addition, Strauss shall be entitled to an annual cash bonus in an
amount to be determined by the Board of Directors of Drew.
The Drew Shoe Employment Agreement requires Strauss to devote at least
thirty seven and one-half (37 1/2) hours per week to his duties at Drew and
grants him an option to purchase up to 205.17946 shares of the common stock of
Drew (approximately 12% of the issued and outstanding common stock) at an
exercise price of Four Thousand Twelve ($4,012) Dollars per share. In the event
of the termination of Strauss' employment with the Company, Strauss' employment
by Drew will increase to a full-time basis, with a corresponding increase in his
base salary to Two Hundred Fifty-Five Thousand ($255,000) Dollars.
Strauss and the Company entered into a new employment agreement dated as
of October 26, 1998 (the "BCAM Employment Agreement"), which amended their prior
employment agreement dated as of January 1, 1997 (the "Prior Employment
Agreement"). The BCAM Employment Agreement provides for a term of four (4) years
and requires Strauss to devote an average of thirty (30) hours per week (during
any four (4) week period) of his professional time, attention and efforts as the
Company's President, Chief Executive Officer and Chairman of the Board of
Directors in exchange for an annual salary of One Hundred Thousand ($100,000)
Dollars ("Salary") plus an annual bonus payment as may be determined by the
Board of Directors. The Amended BCAM Employment Agreement also provides for
annual increases in Salary equal to the greater of (i) six (6%) percent, or (ii)
the increase in the Consumer Price Index (New York area) from the prior year.
Strauss will be permitted to participate in the Company's benefit programs and
shall be entitled to receive an automobile allowance of Five Hundred ($500)
Dollars per month plus reimbursement for various related expenses. In event of
the termination of Strauss' employment with Drew, Strauss will be employed by
the Company on a full-time basis, with a corresponding increase in his base
Salary to Two Hundred Fifty Five Thousand ($255,000) Dollars per year. In
addition, the BCAM Employment Agreement confirms certain stock option grants to
Strauss which were granted to Strauss pursuant to the Prior Employment
Agreement.
The BCAM Employment Agreement provides for a payment by the Company to
Strauss of an amount equal to two hundred ninety-nine (299%) percent of Strauss'
"base amount of salary" (as such term is defined in IRC ss. 280G) in the event
of a "change in control" (as such term is defined therein) of the Company and
also contains usual and customary non-competition and confidentiality
provisions.
Joseph Jacobs ("Jacobs") was a director of the Company from April 1998
through August 18, 1998. Jacobs is indirectly affiliated with Impleo through the
ownership of certain minority interests in entities serving as general partners
of investment funds which have investments in Impleo.
Risk Factors Related to Proposed Transaction
The failure to approve the Proposed Transaction will almost certainly
result in foreclosure against all of the Company's assets and the Company's
inability to continue operating as a going concern. The Company is relying on
the sale of its remaining 33.3% interest in Drew Shoe in consideration of the
redemption of the Two Million Two Hundred Thousand
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($2,200,000) Dollars principal amount of the Notes (and accrued interest) and
certain related warrants to eliminate the threat of foreclosure by the
Noteholders on the Company's technology assets. The Company intends to shift its
primary focus towards developing its technology business. However, the Company's
revenues from its technology business are extremely limited at present, and the
Company believes it must generate approximately between Three to Five Million
($3,000,000 - $5,000,000) in new investment to continue to enhance/develop its
technologies. The Company does not presently have the financial resources to
complete the first quarter of 1999 operations in the absence of additional
financing or a strategic business arrangement. However, if the Company is unable
to meet these investment goals, such inability will in all likelihood have a
material adverse effect on the Company's business and operations of the Company
and the Company may be unable to continue as a going concern. If the Proposed
Transaction does not close, the Company believes that it will not be able to
meet its obligations under the Notes thereby causing the Noteholders to be
placed in a position to foreclose upon all of the assets of the Company. The
Company does not believe that a sale of all of its assets in foreclosure would
be sufficient to satisfy the outstanding obligations of the Notes. Approval of
the Proposed Transaction does not guaranty the Company's ability to continue
operating as a going concern, since the Company will still face liquidity and
working capital shortfalls without outside investment or a strategic business
arrangement.
Accounting Treatment for Proposed Transaction
The Proposed Transaction will be accounted for as a sale of the Company's
assets.
Dissenter's Rights
The Company's shareholders are entitled to dissenters' rights or appraisal
rights under New York Business Corporation Law ss.623(a). A shareholder who
objects to the action taken must file with the Company his/her written objection
to the action prior to or at the meeting at which time the action is to be
submitted for a vote, but before the actual vote is taken. A shareholder's
written notice of objections shall include a notice of his/her election to
dissent, name and residence address, the number and class of shares as to which
he/she dissents and a demand for payment of the fair value of his/her shares if
such action is taken.
Within twenty (20) days after such proposal is authorized by the
shareholders, the Company shall give written notice to any shareholder who filed
his/her notice objecting to the Proposed Transaction. Any shareholder who voted
for or who otherwise consented to the Proposed Transaction is thereby deemed to
have elected not to enforce his/her rights to receive payment for his/her
shares. Any shareholder wishing to perfect his/her rights to receive payment for
his shares shall follow the procedure set forth in BCL ss.623 ("Procedure to
Enforce Shareholder's Right to Receive Payment for Shares") a copy of which is
annexed hereto as Exhibit "B". However, as a practical matter the Company does
not anticipate having funds available to satisfy any shareholder claims asserted
under BCL ss. 623.
Regulatory Filings and Approvals
The parties are not required to make any filings with or satisfy any
requirements of federal or state regulatory agencies in connection with the
Proposed Transaction.
No Fairness Opinion
The Company has not obtained a report, opinion or appraisal materially
relating to the Proposed Transaction from its financial advisors or any outside
party.
Company's Accountants
On December 16, 1998, the Company appointed JH Cohn LLP as its independent
public accountants to replace Ernst & Young who were dismissed. See Form 8-K/A
filed by the Company on January 7, 1999. Representatives of the principal
accountants for the Company for the current year and for the most recently
completed fiscal year will not be present at the Meeting.
Vote required
Approval of this proposal requires the affirmative vote of not less than a
two-thirds (2/3) majority of the votes entitled to be cast by all holders of
shares of Common Stock of the Company issued and outstanding on the Record Date.
If the proposed transaction is approved by the shareholders, it will become
effective upon closing of the proposed transaction.
THE BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF
THE PROPOSED TRANSACTION
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SELECTED FINANCIAL DATA
The summary historical financial data set forth below is derived from the
audited consolidated financial statements of BCAM International, Inc. and
subsidiaries ("the Company") as of December 31, 1997 and for the years ended
December 31, 1997 and 1996 and from the audited financial statements of Drew
Shoe Corporation ("Drew") for the periods September 23, 1997 to December 31,
1997 (the period in 1997 subsequent to its acquisition by the Company) and from
January 1, 1997 to September 22, 1997 (the period in 1997 prior to its
acquisition by the Company), and for the year ended December 31, 1996 as well as
from the unaudited condensed consolidated financial statements of the Company as
of September 30, 1998 and for the three and nine months ended September 30, 1998
and 1997, all presented elsewhere herein. Results of operations for Drew for the
three and nine months ended September 30, 1998 are derived from internal
financial information, not separately presented herein, and are unaudited.
The Company has accounted for its investment in Drew as a discontinued operation
with a measurement date of October 2, 1998, the date on which a plan of disposal
was approved by the Board of Directors of the Company. Financial statements of
the Company have been retroactively restated to reflect Drew as a discontinued
operation. The Company had reflected the acquisition of Drew under the purchase
method of accounting. As such, the Company's financial position at December 31,
1997 and September 30, 1998 (unaudited) includes the financial position of Drew
based upon an allocation of the purchase price of Drew. The Company's results of
discontinued operations for the year ended December 31, 1997 include the
operations of Drew for approximately three and one half months since its
acquisition by the Company. The Company's results of discontinued operations for
the three and nine months ended September 30, 1998 (unaudited) include the
operations of Drew for the entire period and the results of operations for the
three and nine months ended September 30, 1997 include the operations of Drew
for the approximately eight days since its acquisition on September 22, 1997.
The summary pro-forma balance sheet data presented below reflects the sale of
56.7% of Drew in October 1998 and the anticipated sale of the remaining 33.3%
contemplated by this Proxy statement and the related redemption of the Notes
together with accrued interest and the elimination of approximately $200,000 of
seller notes. The summary pro-forma balance sheet should be read in conjunction
with the financial statements of the Company and Drew referred to above as well
as to the unaudited pro-forma information of the Company and Drew, also included
elsewhere in this prospectus. The pro-forma balance sheet at September 30, 1998
does not reflect losses and cash outflows subsequent to September 30, 1998. Such
losses and cash outflows continue to be significant and may indicate that the
Company may be unable to continue its planned activities subsequent to
completion of the transaction contemplated by this Proxy statement.
Summary Financial Information
(Dollar and Share Amounts In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
The Company
-----------------------------------------------------------------------
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
-------------------- -------------------- -----------------------
Statement of Operations Data: 1998 1997 1998 1997 1997(a) 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue ........................ $ 0 $ 0 $ 2 $ 19 $ 27 $ 29
-------- -------- -------- -------- -------- --------
(Loss) from operations ............. (650) (442) (2,687) (1,508) (1,797) (1,323)
-------- -------- -------- -------- -------- --------
Interest income, net ............... 18 3 49 15 46 54
-------- -------- -------- -------- -------- --------
Minority interests charge (b) ...... 0 (788) -- (788) (788) --
--------- --------
(Loss) from continuing operations .. (632) (1,227) (2,638) (2,281) (2,539) (1,269)
-------- -------- -------- -------- -------- --------
Discontinued operations - (1,916) (385) (6,883) (385) (2,121) 0
Drew(c)(e)
Discontinued operations - Other .... 0 (321) (803) (176) (1,376) (245)
-------- -------- -------- -------- -------- --------
subtotal - Discontinued ........ (1,916) (706) (7,686) (561) (3,497) (245)
-------- -------- -------- -------- -------- --------
(Loss) before extraordinary item ... (2,548) (1,933) (10,324) (2,842) (6,036) (1,514)
-------- -------- -------- -------- -------- --------
Extraordinary item (d) ............. 0 0 (552) 0 0 0
-------- -------- --------
Net loss ........................... (2,548) (1,933) (10,876) (2,842) (6,036) (1,514)
======== ======== ======== ======== ======== ========
</TABLE>
8
<PAGE>
Summary Financial Information
(Dollar and Share Amounts In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
The Company
-----------------------------------------------------------------------
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
-------------------- -------------------- -----------------------
Statement of Operations Data: 1998 1997 1998 1997 1997(a) 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average common shares (g) . 20,790 16,052 19,650 15,807 16,071 14,868
======== ======== ======== ======== ======== ========
Per share data:
Loss from continuing operations . $ (0.03) $ (0.08) $ (0.13) $ (0.15) $ (0.16) $ (0.08)
Loss from discontinued Drew ..... $ (0.09) $ (0.02) $ (0.35) $ (0.02) $ (0.13) $ (0.00)
Loss from other discontinued .... $ (0.00) ($ 0.02) $ (0.04) $ (0.01) $ (0.09) $ (0.02)
-------- -------- -------- -------- -------- --------
Loss before extraordinary item .. $ (0.12) $ (0.12) $ (0.52) $ (0.18) $ (0.38) $ (0.10)
Extraordinary item .............. $ 0.00 $ 0.00 ($ 0.03) $ 0.00 $ 0.00 $ 0.00
-------- -------- -------- -------- -------- --------
Net loss per share .............. ($ 0.12) ($ 0.12) ($ 0.55) $ (0.18) $ (0.38) ($ 0.10)
======== ======== ======== ======== ======== ========
</TABLE>
Balance Sheet Data at The Company
September 30, 1998 (unaudited): --------------------------------------
Actual Pro-Forma As Adjusted
(unaudited) (unaudited) (unaudited)
----------- ----------- -----------
(f)(h) (f)(i)
------ ------
Cash and cash equivalents (f) ........ $ 982 $ 782 $ 732
-------- -------- --------
Assets of discontinued operations .... $ 12,654 $ -0- $ -0-
-------- -------- --------
Current assets ....................... $ 13,688 $ 834 $ 784
-------- -------- --------
Equity in Drew ....................... $ -0- $ 2,052 $ -0-
-------- -------- --------
Total assets ......................... $ 13,923 $ 3,121 $ 1,019
-------- -------- --------
Current portion of long-term debt .... $ 300 $ 100 $ 100
-------- -------- --------
Liabilities of discontinued operations
(including minority interest) ........ $ 13,916 $ 2,978 $ -0-
-------- -------- --------
Other current liabilities ............ $ 486 $ 617 $ 608
-------- -------- --------
Stockholders' equity (deficit)(f) .... $ (779) $ (574) $ 311
-------- -------- --------
<TABLE>
<CAPTION>
Drew Shoe Corporation
-------------------------------------------------------------------------------
Post Acquisition Pre-Acquisition
---------------- ---------------
Nine
Three Months Months September September January 1,
ended ended 23, 1997 to 23, 1997 to To Year ended
September September September December September December 31,
Statement of Operations Data 30, 1998 30, 1998 30, 1997 31, 1997 22, 1997 1996
-------- -------- -------- -------- -------- --------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net revenue .................... $ 3,578 $ 11,643 $ 353 $ 3,800 $ 11,124 14,609
-------- -------- -------- -------- -------- --------
Income (loss) from operations(e) (10) 708 (13) 115 419 285
-------- -------- -------- -------- -------- --------
Interest expense, net .......... (110) (321) (16) (104) (228) (259)
-------- -------- -------- -------- -------- --------
Net income (loss) .............. (120) 387 (29) 9 191 26
-------- -------- -------- -------- -------- --------
Pro-forma adjustment:
Allocate BCAM acquisition
interest and financing costs
and minority interest (c) ... (1,796) (7,270) (356) (2,128) na na
-------- -------- -------- -------- -------- --------
Pro-forma net loss ............. (1,916) (6,883) (385) (2,121) na na
======== ======== ======== ======== -------- --------
</TABLE>
- - ---------
See Notes on next page
9
<PAGE>
Notes:
(a) The results of operations of the Company include the operations of Drew as a
discontinued operation since its acquisition by the Company on September 22,
1997.
(b) Reflects the application of Emerging Issues Task Force pronouncement D-60
("EITF D-60") for the beneficial value of the conversion feature of a
convertible preferred stock placement by a subsidiary in 1997. See "Consolidated
Financial Statements" and "Notes to Consolidated Financial Statements".
(c) Includes charges related to financing used to acquire Drew. Such charges
include interest, amortization of deferred finance costs, charges associated
with the application of EITF D-60 to the beneficial conversion feature of the
Notes and certain charges associated with the April 1998 restructure of the
Notes. See "Consolidated Financial Statements" and related notes thereto for a
more complete discussion.
(d) Reflects the charge associated with granting the Noteholders a 10% interest
in the Company's Drew and BCAM Technologies, Inc. subsidiaries. See
"Consolidated Financial Statements" and related notes thereto.
(e) The nine months ended September 30, 1998 includes, as income, a
non-recurring, one time refund of certain insurance costs of approximately
$308,000.
(f) Does not include losses and negative cash flow from operations subsequent to
September 30, 1998. Such amounts are expected to be material.
(g) Does not reflect significant additional shares which are issuable pursuant
to "reset" provisions of a placement of common stock of the Company in April
1998. See "Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements".
(h) Reflects the sale, in October 1998, of 56.7% of the common stock of Drew to
the Noteholder in exchange for redemption of approximately $3,780,000 principal
amount of Notes.
(i) Reflects (h) above and the anticipated sale of the Company's remaining 33.3%
common stock interest in Drew and redemption of the remaining $2,220,000
principal amount of Notes and related accrued interest, as contemplated by this
Proxy Statement.
10
<PAGE>
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 Shoe Corporation ("Drew") and subsequent
disposition of approximately 66.7% 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 as described in Notes to
Consolidated Financial Statements and Notes to Condensed Consolidated Financial
Statements. In December 1997 the Board of Directors of the Company decided to
sell the operations of it Ergonomic Consulting Services business ("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 the HumanCAD Systems business ("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 ("Notes"). In October 1998, the Company sold 56.7% of
Drew in exchange for redemption of $3,780,000 principal amount of Notes and
agreed to sell its remaining 33.3% interest in the common stock of Drew (subject
to shareholders approval) in exchange for redemption of $2,220,000 principal
amount of Notes and accrued interest which approximates $850,000 at October 23,
1998. (See Notes 3 and 4 of Condensed Consolidated Financial Statements at
September 30, 1998.)
The sale of Drew (including the anticipated sale of the remaining 33.3%
contemplated by the affirmative vote on the matter covered by this Proxy)
eliminates substantial financial obligations of the Company, however, such sale
does not assure that the Company has the financial resources to pursue its
plans. In fact, the Company will require additional resources in the first
quarter of 1999 in order to continue its plans to commercialize its IST
technology and develop its "Microvalve" technology. In the absence of such
additional financial resources, the Company does not have the resources to
continue as a going concern in 1999. Further, if the shareholders do not approve
the sale of the remaining 33.3% common stock interest of Drew, the Company would
still be obligated to pay $2,220,000 face amount plus accrued interest when such
debt comes due in April 1999 or face foreclosure on all of the assets of the
Company. The Company does not believe that it would be able satisfy such
obligation on any other basis. 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 - Three and Nine Months ended September 30, 1998 vs. 1997
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 sale of the ECSD and the discontinuance of the
HCAD 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, ECSD and 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 activities. Additionally, the nine months ended September 30, 1998
includes a charge to discontinued operations for approximately $286,000 for the
compensatory
11
<PAGE>
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 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.
Results of Operations - Year ended December 31, 1997 vs. 1996
Results of operations for 1997 are significantly impacted by restructuring
developments including: (1) the acquisition of Drew Shoe (2) the discontinuation
of the Ergonomic Consulting Services and HumanCAD software divisions and (3)
charges and costs related to the financing to acquire Drew Shoe and other
financing during the year.
Drew Shoe acquisition - Effective September 22, 1997, the Company acquired
all of the outstanding Common Stock of Drew Shoe for approximately $4.7 million
plus the assumption of liabilities. Drew Shoe is a designer, manufacturer,
marketer and distributor (both wholesale and retail) of medical footwear. The
Company has accounted for its acquisition of Drew Shoe under the purchase method
of accounting. As such, the results of operations of Drew Shoe are consolidated
with the Company's 1997 operations for approximately three months and eight days
beginning on September 22, 1997. Drew Shoe had revenues of over $14.6 million in
calendar 1996.
Discontinued operations - As discussed in greater detail in Note 8 to the
Consolidated Financial Statements, the Company has recorded the operations of
ECSD and HCAD as discontinued operations. The two divisions represented combined
revenues and operating losses of approximately $602,000 and $1,356,000,
respectively, in 1997. These divisions were sold/discontinued because ECSD did
not generate operating profits for the Company and HCAD required capital which
the Company could not obtain on favorable terms. Because the measurement date
for the HumanCAD discontinuance is in late February 1998, there will be
additional losses recorded from this activity until its discontinuance in the
first quarter of 1998.
As a result of the October 2, 1998 decision to sell Drew, its operations
have been retroactively reflected in the 1997 financial statements as
discontinued operations. Charges and costs related to financing the Drew
acquisition are similarly included in results of discontinued operations and
include: (i) non-cash amortization of Unamortized charge for beneficial debt
conversion of approximately $1,635,000 as a result of the application of EITF
Statement D-60, (ii) costs of financings which the Company chose not to complete
of approximately $130,000, (iii) amortization of debt discount of approximately
$95,000, (iv) amortization of Deferred finance costs of approximately $75,000
and (v) accrual for interest and all other of approximately $313,000. See Note 6
to financial statements regarding the significant non-cash charge which results
from the accounting under EITF Statement D-60.
Minority interest charge - In addition to the interest and financing costs
discussed above, the Company recorded a non-cash charge of approximately
$788,000 to minority interests during 1997. This charge reflects the accounting
for the beneficial conversion feature of subsidiary preferred stock issued
during 1997. Such accounting, in accordance with EITF Statement D-60 is
described in Note 3 and 7 to the consolidated financial statements.
Ongoing selling, general and administrative costs - Ongoing selling,
general and administrative costs before considering such costs at the acquired
company (Drew Shoe) totaled approximately $1,501,000 in 1997 compared to
approximately $1,408,000 in 1996. The increase consists principally of
approximately $150,000 related to increases in executive compensation and
bonuses over the prior year, offset by various decreases.
12
<PAGE>
Research and development costs - In 1997, research and development costs
consist principally of costs associated with the Company's development of a
"Microvalve" in collaboration with a third party, MCNC.
License revenues - License revenues consist principally of revenues
received from IST products and have not been significant to date. One Company's
licensee, Textron, has launched a new product, in September 1997, utilizing IST
in an automobile seat. It is expected that such product will not generate
material license revenues for the Company in 1998.
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 $ 11,392,000 $ 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 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 23, 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 23, 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 a defined amount 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 entered into a new employment agreement with the Company which
requires him to spend a defined amount of time on the business of the Company.
The Company's redemption of approximately $3,780,000 of Notes and
cancellation of certain related warrants will eliminate approximately 6.1
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 4.8 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
13
<PAGE>
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.
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).
The sale by the Company of 56.7% ownership interest in Drew in October
1998 will be recorded as a sale in the fourth quarter of 1998 and is not
expected to result in a material gain or loss to the Company. The planned sale
of the Company's remaining 33.3% ownership interest in Drew contemplated by this
Proxy statement will be accounted for as a sale and is expected to result in a
gain of approximately $900,000.
See Notes 3 and 4 to Condensed Consolidated Financial Statements.
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.
In addition to the liquidity and capital needs described above, the
Company is in need of additional capital in order to continue its development
activities 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 amounts which are currently due.
Factors That May Affect Future Results
The Company's future operating results are dependent on the Company's
ability to: (i) obtain sufficient capital, which is required immediately, to
fund its development and commercialization plans, (ii) pay its debts when they
come due including significant payments coming due in April 1999, (iii) further
successful development of IST and increase the number of licensees, and the
commercialization of IST by its licensees, (iv) successfully develop the
"Microvalve", (v) successfully sell Drew to the holders of the Notes in order to
preclude foreclosure on all of the assets of the Company (vi) general economic
conditions and conditions in the financial and technology markets.
14
<PAGE>
Index to Financial Statements
BCAM International, Inc. and subsidiaries (the "Company"):
Audited Annual Financial Statements:
Report of Independent Auditors.......................................
Consolidated Balance Sheet--December 31, 1997........................
Consolidated Statements of Operations--years
ended December 31, 1997 and 1996..................................
Consolidated Statements of Shareholders'
Equity--years ended December 31, 1997 and 1996....................
Consolidated Statements of Cash Flows--
years ended December 31, 1997 and 1996............................
Notes to consolidated financial statements...........................
Condensed Unaudited Interim Financial Information:
Condensed Consolidated Balance Sheet--September 30, 1998 (Unaudited)
Condensed Consolidated Statements of Operations - Three Months
and Nine Months ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements - (unaudited)
Drew Shoe Corporation:
Audited Financial Statements:
Report of Independent Auditors -
Balance Sheet - December 31, 1997 ...................................
Statement of Operations - For the period from September 23, 1997
to December 31, 1997.............................................
Statement of Cash Flows - For the period from September 23, 1997
to December 31, 1997.............................................
Notes to financial statements........................................
Report of Independent Auditors --
for the period from January 1, 1997 to September 22, 1997.........
Report of Independent Public Accountants --
for the year ended December 31, 1996..............................
Statements of Operations --For the period from January 1, 1997 to
September 22, 1997 and for the year ended December 31, 1996.......
Statements of Cash Flows --For the period from January 1, 1997 to
September 22, 1997 and for the year ended December 31, 1996.......
Notes to Financial Statements........................................
Pro-Forma Information for the Company:
Introduction to Unaudited Pro-forma Financial Information............
Pro-forma Consolidated Balance Sheet (unaudited).....................
15
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors
BCAM International, Inc.
We have audited the accompanying consolidated balance sheet of BCAM
International, Inc., as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report dated April 20, 1998,
the Company has incurred operating losses and has a working capital deficiency.
In addition, as discussed in Notes 12 and 13, the Company has been unable to
refinance its convertible notes and has disposed of its majority interest in
Drew Shoe Corporation ("Drew") and Drew has been notified by its bank of pending
defaults under its loan agreements. These circumstances adversely affect the
Company's current consolidated results of operations and liquidity, and could
potentially result in the Company being unable to pay its debt obligations.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BCAM
International, Inc. at December 31, 1997, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
April 20, 1998, except for Note
12, as to which the date is
October 23, 1998 and Note
13, as to which the date is
December 10, 1998.
16
<PAGE>
BCAM International, Inc. and subsidiaries
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,459,000
Prepaid expenses and other current assets 38,000
Assets of discontinued operations - Drew 12,083,000
Assets of discontinued operations - HCAD & ECSD 417,000
------------
Total current assets 13,997,000
Other assets 180,000
------------
Total assets $ 14,177,000
============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 100,000
Accounts payable 235,000
Accrued expenses and other current liabilities 299,000
Liabilities of discontinued operations - Drew:
Convertible Notes and accrued interest, net of debt discount 4,233,000
Bank and other subsidiary debt 3,827,000
Accounts payable, accruals and all other current 2,360,000
Current liabilities of discontinued operations - HCAD & ECSD 136,000
------------
Total current liabilities 11,190,000
Long-term debt, net of current maturities 275,000
Minority Interests 618,000
Commitments and contingencies
Shareholders' equity:
Acquisition preferred stock, 750,000 authorized shares, none issued --
Preferred Stock, 2,000,000 authorized, none issued --
Common stock, par value $.01 per share -- 65,000,000 shares authorized,
18,171,641 shares issued and 17,408,459 shares outstanding 182,000
Paid-in surplus 26,338,000
Unamortized charge for beneficial debt conversion (4,290,000)
Deficit (19,237,000)
Less 763,182 treasury shares (899,000)
------------
Total shareholders' equity 2,094,000
------------
Total liabilities and shareholders' equity $ 14,177,000
============
</TABLE>
See accompanying notes.
17
<PAGE>
BCAM International, Inc. and subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
License revenue $ 27,000 $ 29,000
------------ ------------
Costs and expenses:
Selling, general and administrative 1,544,000 1,408,000
Research and development 280,000 --
------------ ------------
Loss from operations
(1,797,000) (1,323,000)
Other Income (Expense)
Interest and financing costs 0 --
Interest income 46,000 54,000
------------ ------------
Total (1,751,000) 54,000
Minority interests charge for beneficial subsidiaries
preferred stock conversion (788,000) --
------------ ------------
Loss from continuing operations (2,539,000) (1,269,000)
Discontinued operations - Drew (2,121,000) 0
Discontinued operations - HCAD and ECSD
including estimated loss on disposal of
approximately $50,000 in 1997 (1,376,000) (245,000)
------------ ------------
Net loss $ (6,036,000) $ (1,514,000)
============ ============
Net Loss per share:
Continuing operations $ (0.16) $ (0.08)
Discontinued operations $ (0.22) $ (0.02)
------------ ------------
Net loss per share $ (0.38) $ (0.10)
============ ============
Weighted average shares outstanding 16,071,000 14,868,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
BCAM International, Inc. and subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock $.01 par value Unamortized Charge
--------------------------- ----------------------------
Beneficial
Paid-in Debt
Shares Amount Surplus Conversion Deficit
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 15,620,415 $ 156,000 $ 15,034,000 -- $(11,687,000)
Exercise of common stock warrants 22,500 -- 21,000 -- --
Registration and issuance costs -- -- (96,000) -- --
Net loss -- -- -- -- (1,514,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 15,642,915 156,000 14,959,000 -- (13,201,000)
Shares issued in January 1997 Placement 1,075,000 11,000 1,064,000 -- --
Issuance costs of January 1997 Placement -- -- (46,000) -- --
Beneficial conversion feature of
subsidiary preferred stock -- -- 788,000 -- --
10%/13% Convertible Notes:
Est. fair value of detachable warrants -- -- 1,872,000 -- --
Est. fair value of beneficial conversion 5,925,000 $ (5,925,000)
Shares issued in acquisition of Drew 375,000 4,000 446,000 -- --
Shares issued and options granted in
connection with Drew acquisition
financing 347,500 3,000 967,000 -- --
Acquisition financing costs -- -- (275,000) -- --
Amortization of beneficial debt conversion -- -- -- 1,635,000 --
Consultant stock options -- -- 175,000 -- --
Conversion of subsidiary preferred 706,226 8,000 435,000 -- --
Exercise of options 25,000 -- 28,000 -- --
Net loss -- -- -- -- (6,036,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 18,171,641 $ 182,000 $ 26,338,000 (4,290,000) $(19,237,000)
============ ============ ============ ============ ============
<CAPTION>
Shares held
Subtotal in Treasury Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 3,503,000 $ (899,000) $ 2,604,000
Exercise of common stock warrants 21,000 -- 21,000
Registration and issuance costs (96,000) -- (96,000)
Net loss (1,514,000) -- (1,514,000)
------------ ------------ ------------
Balance at December 31, 1996 1,914,000 (899,000) 1,015,000
Shares issued in January 1997 Placement 1,075,000 -- 1,075,000
Issuance costs of January 1997 Placement (46,000) -- (46,000)
Beneficial conversion feature of
subsidiary preferred stock 788,000 -- 788,000
10%/13% Convertible Notes:
Est. fair value of detachable warrants 1,872,000 -- 1,872,000
Est. fair value of beneficial conversion
Shares issued in acquisition of Drew 450,000 -- 450,000
Shares issued and options granted in
connection with Drew acquisition
financing 970,000 -- 970,000
Acquisition financing costs (275,000) -- (275,000)
Amortization of beneficial debt conversion 1,635,000 -- 1,635,000
Consultant stock options 175,000 -- 175,000
Conversion of subsidiary preferred 443,000 -- 443,000
Exercise of options 28,000 -- 28,000
Net loss (6,036,000) -- (6,036,000)
------------ ------------ ------------
Balance at December 31, 1997 $ 2,993,000 $ (899,000) $ 2,094,000
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
BCAM International, Inc. and subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net loss $(6,036,000) $(1,514,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 212,000 190,000
Amortization of unamortized charge for beneficial debt conversion 1,635,000 0
Amortization of deferred finance costs and debt discount 151,000 0
Non-cash minority interest charge 788,000 0
Charge for compensatory consultant stock options 175,000 0
Changes in operating assets and liabilities:
Accounts receivable 337,000 186,000
Inventory (99,000) 0
Current assets of discontinued operations (56,000) 0
Accounts payable, accrued expenses and other current liabilities 248,000 (239,000)
All other operating assets and liabilities (120,000) (18,000)
----------- -----------
Net cash used in operating activities (2,765,000) (1,395,000)
----------- -----------
Investing activities
Cash paid for purchase of shares of Drew (3,882,000) 0
Cash paid for costs to acquire Drew (476,000) (33,000)
Purchases of property, plant and equipment (151,000) (6,000)
Investment in software technology 0 (151,000)
Proceeds from sale of held-to-maturity securities 0 1,507,000
----------- -----------
Net cash provided by (used in) investing activities (4,509,000) 1,317,000
----------- -----------
Financing activities
Proceeds from sale of common stock and warrants 1,075,000 0
Proceeds from sale of convertible preferred stock of subsidiary 1,200,000 0
Proceeds from sale of 10%/13% Convertible Notes and Warrants 6,000,000 0
Proceeds, net, from new bank financing arrangement at Drew 1,135,000 0
Payment of existing debentures due to former Drew shareholders (845,000) 0
Proceeds from note payable and drawdown on line of credit 754,000 400,000
Repayment of note payable (450,000) (400,000)
Net proceeds from exercise of stock options 28,000 21,000
Cash paid for deferred finance, stock issuance
and registration costs (555,000) (119,000)
----------- -----------
Net cash provided by (used in) financing activities 8,342,000 (98,000)
----------- -----------
Increase (Decrease) in cash and cash equivalents 1,068,000 (176,000)
Cash and cash equivalents at beginning of year 526,000 702,000
----------- -----------
Cash and cash equivalents at end of year $ 1,594,000 $ 526,000
=========== ===========
Supplemental disclosure:
Cash interest paid $ 110,000 -0-
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. 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. On September 22, 1997, the Company acquired Drew
Shoe Corporation ("Drew"), a designer, marketer, manufacturer and distributor of
medical footwear. Drew had revenues for its year ended December 31, 1996 of
approximately $14.6 million.
The Company's revenues have historically been derived primarily from
ergonomic consulting services. In December 1997 the Board of Directors of the
Company decided to sell the operations of the ergonomic consulting services
business 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 the HumanCAD Systems division as a result of the
lack of available financing to further the necessary business development
activities of that division on a basis that would enhance shareholder value.
Since the acquisition of Drew, the Company's revenues in the near term
have been derived principally from the medical footwear business. As discussed
further in Note 12, in October 1998, the Company adopted a plan to dispose of
its investment in Drew. As such, the Company's strategic focus is on broadening
and strengthening the development and commercialization of the Company's
proprietary technologies, principally Intelligent Surface Technology ("IST") and
its proprietary "Microvalve". The Company requires additional financial
resources in order to pursue this strategic focus.
The consolidated financial statements include the accounts of BCAM
International, Inc. and its subsidiaries, principally BCAM Technologies, Inc.
(principally IST and related technologies), Drew (medical footwear which is
being discontinued pursuant to a plan adopted in October 1998 - See Note 12),
since September 22, 1997, BCA Services, Inc. (principally human ergonomics
consulting which has been sold), and HumanCAD Systems, Inc. (principally
software development and marketing which has been discontinued).
The Company requires additional capital to fund its activities in 1998 and
made a private placement of its equity securities in April 1998 in order to
satisfy this need (see note 7). In April 1998, the Company and the holders of
its 10%/13% Convertible Notes agreed to a restructuring of the obligation which
accelerates repayment to April 1999, among other matters discussed in Note 6. In
October 1998, the Board of Directors of the Company approved a plan to dispose
of Drew and redeem the 10%/13% Convertible Notes as discussed further in Note 12
to Consolidated Financial Statements.
2. Summary of Significant Accounting Policies
Cash Equivalents, Financial Instruments and Concentration of Credit Risk
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
maintains its cash in bank deposit accounts that, at times, may exceed Federally
insured limits. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base, their dispersion across different geographic areas, and generally
short payment terms. In addition, the Company routinely assesses the financial
strength of its customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes. Actual results could differ from those estimates.
Revenue
Revenue from wholesale medical footwear sales is recognized at the time
products are shipped. Revenue from retail medical footwear sales through
Company-owned retail operations is recognized at the point of sale.
18
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
License revenues are recorded when earned under the related license agreement.
Inventory
Inventories included in current assets of discontinued operations - Drew
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
Property, Plant and Equipment
Property and equipment including assets included in current assets of
discontinued operations - Drew are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Other Assets
The costs of acquiring or processing (principally professional and
government fees) patents, trademarks and other intellectual properties are
capitalized at cost. This amount is being amortized using the straight-line
method over the estimated useful lives of the underlying assets of approximately
5 years.
Research and Development
Research and development costs are charged to operations in the period
incurred.
Income Taxes
The Company accounts for income taxes using Financial Accounting Standards
Board ("FASB") Statement No. 109, "Accounting for Income Taxes." At December 31,
1997, the Company has net operating loss carryforwards of approximately
$15,937,000 for income tax purposes, expiring through 2012.
At December 31, 1997 and 1996, deferred tax assets approximating
$5,886,000 and $4,672,000, respectively, arising from the future potential
availability of net operating loss carryforwards have been offset in full by
valuation allowances in accordance with FASB Statement No. 109.
The utilization of these losses to reduce future income taxes will depend
on the generation of sufficient taxable income prior to the expiration of the
net operating loss carryforwards. Additionally, based on ownership changes which
occurred in 1997 and in prior years, it is expected that the annual utilization
of the otherwise available net operating loss carryforwards will be limited by
the provisions of Sections 382 and 383 of the Internal Revenue Code, as amended.
As such the Company may be restricted as to the utilization of its net operating
loss. The Company believes that significant issuances of additional stock could
trigger an additional change and a new limitation.
Net Loss Per Share
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. There was no effect to the Company's financial statements of
adopting SFAS 128.
Stock-Based Compensation
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the standard, the Company elected to continue
to account for its stock-based compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations (APB 25). Under APB 25, because the exercise price of the
Company's stock options granted equals the market price of the underlying stock
on the date of the grant, no compensation expense is required to be recognized
except in the case of options issued which are subject to shareholder approval
(see Note 7).
19
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
Reclassification
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
3. Inventories
Inventories included in current assets of discontinued operations - Drew
consisted of the following at December 31, 1997:
Raw materials $ 760,000
Work in process 976,000
Finished goods 4,542,000
----------
Total $6,278,000
==========
Inventories at September 22, 1997 (date of acquisition of Drew) were
approximately $6,175,000.
4. Property and equipment
Property and equipment including assets included in current assets of
discontinued operations - Drew consists of the following at December 31, 1997
and were depreciated and amortized utilizing the estimated useful lives
indicated below:
Range of
Estimated December
Useful Lives 31, 1997
------------ ------------
Land $ 100,000
Buildings and improvements 10-35 years 726,000
Equipment, furniture and fixtures 5-10 years 2,924,000
Leasehold improvements 2-5 years 51,000
Total 3,801,000
Less accumulated depreciation (832,000)
------------
Total $ 2,969,000
------------
Approximately $2,839,000, net of accumulated depreciation and
amortization, of the total property and equipment was acquired in September 1997
as part of the acquisition of Drew.
5. Acquisition of Drew
Effective September 22, 1997, the Company acquired all of the outstanding Common
Stock of Drew for approximately $4.7 million plus the assumption of liabilities.
The purchase price was paid by delivery to the shareholders of Drew of an
aggregate of $3,882,000 in cash, promissory notes in the aggregate principal
amount of $400,000 (See Note 6) and by delivery of an aggregate of 375,000
unregistered shares of the Company's Common Stock (valued at approximately $1.20
per share to reflect a discount for lack of registration). The promissory notes
bear interest at 8% per annum, are due on September 19, 1999, and are payable in
twenty-four (24) equal monthly installments aggregating $8,333.34 (plus
interest) with final payments due in the twenty-fifth (25th) month aggregating
$200,000.
See Note 6 for a description of the securities issued in order to finance
the acquisition of Drew.
Simultaneously with the acquisition, Drew entered into a credit facility
with a commercial bank (guaranteed by the Company) which is further described in
Note 6.
20
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
Drew is a designer, manufacturer, marketer and distributor of medical
footwear headquartered in Lancaster, Ohio. In addition, Drew operates 15
specialty retail shoe stores. The Company has accounted for its acquisition of
Drew under the purchase method of accounting. Under such method, the purchase
price paid plus costs of the acquisition are allocated to the assets and
liabilities of the acquired company based on the estimated fair value of assets
and liabilities acquired. The remaining amount, if any, is allocated to
goodwill. The results of operations of Drew are consolidated with the Company's
operations beginning on the date of purchase. At December 31, 1997, a
preliminary estimate of the fair value of assets and liabilities has been made
based upon certain appraisals and other data that is preliminary and subject to
change. Based upon such preliminary evaluation at December 31, 1997,
approximately $21,000 of goodwill has been recorded in connection with the
acquisition of Drew.
The following summary shows the unaudited pro-forma results of operations for
the years ended December 31, 1997 and 1996 assuming that the Company had
purchased Drew as of the beginning of each period shown. This information gives
effect to the increased interest and financing costs (excluding certain material
non-recurring charges that are discussed in Notes 6 and 7) and the amortization
of fair value adjustments (principally for increased depreciation). The Company
has not included a provision for income taxes because it believes that it will
have sufficiently available net operating losses available to offset anticipated
profits from Drew. This summary may not be indicative of what the actual results
of operations would have been had the purchase occurred at the beginning of each
period shown.
1997 1996
------------ ------------
Revenues $ 15,083,000 $ 14,638,000
============ ============
Loss from operations $ (1,321,000) $ (1,123,000)
============ ============
Loss from Continuing Operations (excluding
non-recurring charges in 1997) $ (2,905,000) $ (2,506,000)
============ ============
Net loss (excluding non-recurring charges in 1997) $ (4,280,000) $ (2,751,000)
============ ============
Net loss per share (excluding non recurring
charges in 1997) $ (0.26) $ (0.19)
============ ============
6. Long Term Debt and Convertible Notes
Secured bank debt (See also, Note 12 - Subsequent event - October 1998
plan to sell Drew) - 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 up to $4,500,000
(which is based upon agreed upon percentages of accounts receivable and
inventory) and (ii) a term loan of $1,000,000. As of the date of the Drew
acquisition, the Company believes there was approximately $4,500,000 available
under this credit facility (approximately $3,750,000 of which was drawn down to
pay certain existing liabilities of Drew, including an existing liability to
that bank of approximately $2,655,000, debentures payable to former shareholders
of approximately $845,000, and to transfer $250,000 to the Company). 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% (10% at December 31,1997). The
term loan portion of the credit facility (in the principal amount of $1,000,000)
also bears an interest rate of prime plus 1.5% (10% at December 31, 1997) and is
payable in monthly installments 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 requires Drew to maintain compliance with certain
financial covenants, principally net worth, 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.
21
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
10%/13% Convertible Notes and Warrants (See also, Note 12 - Subsequent
event - October 1998 plan to sell Drew) - In order to fund the acquisition of
Drew and provide working capital to the Company, on September 19, 1997, the
Company issued subordinated convertible notes (the "Convertible Notes"), and
Non-Redeemable Class DD Warrants, in the aggregate amount of $6,000,000. The
Convertible Notes are due, as amended, on April 16, 1999 unless at any time
after September 19, 1998 they are converted, at $.80 per share, into 7,500,000
shares of Common Stock of the Company. Such conversion feature is subject to
antidilution provision in certain circumstances including the issuance of Common
Stock and warrants in 1998 discussed below. 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 in which case the
annual interest rate becomes 13% with semi-annual compounding. The Convertible
Notes require the Company to maintain compliance with certain financial
covenants including maintenance of minimum levels of interest coverage and net
worth (as defined). At December 31, 1997, the Company was in violation of such
covenants. 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 agreement. 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 Corporation and BCAM Technologies, Inc. As a
result of the restructuring, the Company has a significant capital requirement
to repay this obligation ($6,000,000) in approximately one year or face default
and on the security. It is the Company's intention to refinance or otherwise
restructure this obligation (see Note 12). The Company expects to take a
significant charge to operations in 1998 in connection with the finalization of
the restructuring of the debt.
The Non-Redeemable Class DD Warrants entitle the holders to purchase, as
amended, 2,000,000 shares of common stock at $1.75 per share at any time prior
to September 19, 2002. The Company has, under generally accepted accounting
principles, recorded approximately $1,872,000 of the $6,000,000 received from
the sale of the Convertible Notes and Warrants as the estimated value (based
upon a "Black Scholes" calculation) of the detachable warrants issued in
connection with the Convertible Notes resulting in a discount to the value
assigned to the Convertible Notes. Such amount is being amortized over the
five-year term of the Convertible Notes.
The private placement of convertible notes and warrants to one investor
group (aggregating $5,000,000 of the total $6,000,000) was made with the
assistance of an investment banker who charged a cash fee of 6% ($300,000) plus
187,500 unregistered shares of common stock (valued at $1.20 per share to
reflect a discount for lack of registration), and Class EE warrants to purchase
500,000 shares of common stock at an exercise price of $0.80 per share, of the
Company. The cash fee, shares of stock and the estimated fair value of the
warrants aggregate approximately $1,025,000. This amount has been apportioned
between Deferred financing costs, and acquisition costs of Drew. The portion
allocated to Deferred financing costs (approximately $775,000), together with
legal and other costs of the transaction are being amortized over the five year
term of the Convertible Notes. There were no investment banking fees associated
with the remaining $1,000,000 of proceeds.
The market value of the Company's common stock on the NASDAQ SmallCap
market on the date of the transaction was approximately $1.50.
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 new 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 described above and the Convertible Preferred Stock of
BCA Services, Inc., a subsidiary of the Company, described in Note 7). 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 or to retained earnings as a dividend
in the case of a preferred stock, 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
(representing the value of the beneficial debt conversion feature of the
Convertible Notes measured at the date of issuance) to Unamortized Charge for
Beneficial Debt Conversion in the shareholders' equity
22
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
section of its Consolidated Balance Sheet. Such amount is being charged to
Interest and financing costs in the Consolidated Statements of Operations at the
rate of approximately $1,481,000 per quarter until September 19, 1998. See,
however, the discussion of the restructuring of this financing above. This
charge to operations is considered a non-recurring charge in the preparation of
the summary pro-forma data contained in Note 5. This charge is in addition to
amortization of Deferred financing costs and the debt discount related to the
Convertible Notes (approximately $1,872,000), over the five-year term of the
Convertible Notes.
At December 31, 1997, long term debt, principally associated with
discontinued operations - Drew, consists of the following:
10%/13% Convertible Notes, face amount $6,000,000, net
of approximately $1,767,000 of unamortized debt
discount with interest payable on March 19 and
September 19, due April 16, 1999 unless earlier
converted $4,233,000
Revolving credit arrangement with a bank, payable on
September 30, 1999, bearing interest at prime plus 1.5% 2,618,000
Term Loan agreement 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. 976,000
Notes payable to sellers of Drew (including $187,500
payable to the ongoing President 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 375,000
Amount payable to parties related to former owners and
an officer of Drew due December 31, 1998, bearing
interest at prime 214,000
Other, net 19,000
----------
Total long term debt 8,435,000
less: current portion 463,000
----------
$7,972,000
----------
Principal payment requirements on the above obligations, adjusted for the
debt restructure described above is approximately as follows subsequent to
December 31, 1997:
Years ended Amount
----------- ------
1998 $ 463,000
1999 9,049,000
2000 690,000
----------
10,202,000
----------
Less unamortized debt discount (1,767,000)
----------
Total Long-term Debt at December 31, 1997 $8,435,000
==========
23
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
7. Shareholders' Equity
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.
The Preferred Stock is convertible into shares of the Company's common
stock at a price equal to a fixed discount (30%) of the average closing bid
price of the common stock over a period of time ending on the day preceding the
conversion date and subject to a ceiling price.
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).
At December 31, 1997, $500,000 of the Preferred Stock had been converted
into 706,226 common shares of the Company at a weighted average conversion price
of approximately $0.71. Subsequent to December 31, 1997, the remaining $700,000
of the Preferred Stock has been converted into 1,066,585 shares of common stock
at $0.66 per share resulting in the transfer of $618,000 of minority interest at
December 31, 1997 into shareholders equity.
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
has 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. Such amount is considered a non-recurring charge in
preparation of the summary pro forma data in Note 5.
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.
Authorized shares/Shares reserved for future issuance - At the annual
meeting of shareholders on February 19, 1998 (including an adjournment to March
16, 1998), the shareholders of the Corporation approved an increase in the
authorized shares of common stock from 40,000,000 shares to 65,000,000 shares.
Additionally, the shareholders approved the adoption of changes to the bylaws of
the Corporation to, among other matters, permit the Board of Directors to issue
up to 2,000,000 shares of Preferred Stock of the Company on terms to be set by
the Board of Directors.
The Company is also authorized to issue up to 750,000 shares of its
acquisition preferred stock, $.01 par value, none of which are presently issued
and outstanding. The acquisition preferred stock is permitted to be issued
pursuant to (i) a statutory merger or consolidation in which the Company is the
surviving entity, (ii) the acquisition by the Company of substantially all the
assets or business of another entity or (iii) the acquisition by the Company of
50% or more of the voting securities of another entity. The Board of Directors
is authorized to fix, before issuance, the voting powers, designations,
preferences and other rights, qualifications, limitations and restrictions
applicable to each series of acquisition preferred stock.
Common shares reserved for future issuance as of December 31, 1997,
adjusted in the case of the 1998
24
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
stock option plan for the February 1998 increase to the shares available under
such plan, are approximately as follows:
Units sold in public offering in 1990:
Class B warrants, subject to antidilution (see below) ............ 1,292,000
Class E warrants, subject to antidilution (see below) ............ 737,000
Unit Options, expired in 1997 .................................... 0
Conversion feature of 10%/13% Convertible Notes, subject
to antidilution and "pay in kind" provisions ($0.80, 2002
see Note 6) .................................................. 7,500,000
Conversion feature of BCA Preferred stock, stated at amount
actually converted in full prior to March 31, 1998, (see
above) ....................................................... 1,067,000
Third party options (see table below) ............................ 1,050,000
1989 Stock Option Plan (see below) ............................... 432,000
1989 Nonstatutory Plan (see below) ............................... 25,000
1995 Stock Option Plan (as amended in 1998, see below) ........... 8,000,000
Warrants issued in private placements:
Class C warrants, expired during 1997 ....................... 0
Class D warrants, expired during 1997 ....................... 0
Class AA warrants ($0.65, 2002, see above) .................. 1,075,000
Class BB warrants ($0.72, 2002, see above) .................. 100,000
Class CC warrants ($1.03, 2002, see above) .................. 10,000
Class DD warrants ($1.75, 2002, see above) .................. 2,400,000
Class EE warrants ($0.80, 2002 see Note 6) .................. 500,000
----------
24,188,000
----------
Class B and Class E Warrants - The Company's Class B warrants were issued
in connection with a 1990 public offering of securities of the Company. The
Class E Warrants were issued in connection with a "Discounted Warrant Plan"
offered to holders of the Class A Warrants (all of which have been exercised or
expired) and Class B Warrants issued in connection with the public offering in
1990. The Class B and Class E Warrants are presently exercisable, were due to
expire in January 1998, have been extended to October 17, 1998 and are subject
to anti-dilution provisions. As a result of the financings completed in 1997,
the anti-dilution provisions of the warrants were triggered and resulting in the
following revisions to the warrant price and the number of shares subject to
warrant:
<TABLE>
<CAPTION>
Exercise price Number of shares Exercise price Number of shares
per warrant per warrant per share subject to warrant
-------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Class B Warrants:
Previous $ 1.50 1.2 $ 1.25 969,191
Current $ 1.14 1.6 $ .71 1,292,254
Class E Warrants:
Previous $ 1.25 1.1 $ 1.14 540,747
Current $ 0.95 1.5 $ .63 737,382
</TABLE>
The 1998 private placement discussed in the following paragraphs may
trigger the operation of antidilution provisions of the Class B and Class E
warrants and will trigger the operation of the antidilution provisions of the
10%/13% Convertible Notes discussed in Note 6.
1998 Private placement of common shares and warrants - Beginning on
April 14, 1998, the Company commenced a private offering of its common stock and
warrants. The offering contemplates aggregate proceeds of $2,000,000 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 seven accredited investors. Through
April 16, 1998 the Company issued 1,881,188 shares of common stock, together
with warrants to purchase 237,500 common shares at $2.05 per share for three
years, to private investors in exchange for
25
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
$1,900,000, less $475,000 held in escrow pending the Company's filing of a
registration statement covering the shares and shares underlying the warrants
prior to June 13, 1998. The Company has agreed to register such shares and has
agreed to penalties of 3% per month should the registration statement not be
declared effective within 130 days.
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 significantly greater number of
shares being issued. The investors have agreed not to sell any shares before at
least 120 days after the closing. The Company is exposed to significant
penalties for failure to have a registration statement declared effective
covering such shares within 130 days, certain other penalties as described in
the agreements and has agreed not to issue certain financings and has agreed to
pay a placement agent a 6.5% fee in connection with the transaction.
Stock Options
In June 1995, the shareholders of the Company approved the adoption of the
1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan supercedes and closes
all prior option plans and provides for the granting of incentive stock options
("ISOs") and/or nonqualified stock options to employees, directors or
consultants of the Company to purchase an aggregate of 2,000,000 shares of the
Company's common stock. The option price per share for ISOs granted under the
1995 Plan shall not be less than the fair market value of the Company's common
stock on the date of grant. Options vest and are exercisable over various
periods up to ten years from the date of grant. No option may be granted under
the 1995 Plan after June 2005. At December 31, 1996, there were 219,500 shares
available for granting of future options.
In 1997, the Company issued option grants under the 1995 Plan to purchase
an aggregate of 3,984,000 shares of Common Stock of the Company, approximately
3,764,500 of which were subject to approval by shareholders of an amendment to
the Company's 1995 Plan. The amendment, approved at the 1997 Annual Meeting of
Shareholders in February 1998, increases the number of shares under the 1995
Plan from 2,000,000 to 8,000,000 shares.
In 1989, the shareholders of the Company approved the adoption of a 1989
Stock Option Plan (the "1989 Plan"). The 1989 Plan provided for the granting of
incentive stock options and/or nonqualified stock options to key employees and
consultants to purchase shares of the Company's common stock at a price per
share not less than the fair market value on the date of grant. In 1992, the
Plan was amended to: (a) increase the number of shares to 1,565,957, (b) permit
the granting of nonqualified stock options at a price per share less than the
fair market value of the Company's common stock on the date of grant and (c)
permit options to be exercised up to two years after termination of employment
under certain circumstances. Options vest and are exercisable over various
periods up to six years from the date of grant.
In 1989, the Company also adopted a Nonstatutory Stock Option Plan (the
"1989 Nonstatutory Plan") for directors and outside consultants. Under the 1989
Nonstatutory Plan, the Company could grant options for the purchase of an
aggregate of 355,000 shares of common stock at not less than fair market value
at the date of grant. Pursuant to the terms of the 1995 Plan, no options may be
granted under the 1989 Plan or the 1989 Nonstatutory Plan subsequent to June 22,
1995.
Option activity during each of the two years ended December 31, 1997 for
the 1989 Plan and the 1989 Nonstatutory Plan is summarized as follows:
26
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
<TABLE>
<CAPTION>
1989 Nonstatutory Plan 1989 Plan
Shares Under Option Shares Under Option
-------------------------------------------------------------------------------------
Weighted
Number Average Number
Option price of Option price per Exercise of
per share Shares share Price Shares
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 100,000 452,000
Exercised -- $0.92 (2,500)
Cancelled/expired -- $0.92 to $3.13 $2.18 (17,500)
Balance at December 31,1996 100,000 $1.94 432,000
Exercised $1.13 (25,000) --
Cancelled/expired $1.10 to $1.13 (50,000) --
---------- ----------
Balance at December 31,1997 25,000 $1.94 432,000
========== ==========
</TABLE>
Option activity during each of the two years ended December 31, 1997 for the
1995 Plan is summarized as follows:
1995 Plan
Shares Under Option
-------------------------------------------------
Weighted Number
Option price per Average of
share Exercise Price shares
-------------------------------------------------
Balance at January 1, 1996 $1.04 1,932,500
Granted $0.95 to $1.20 $1.09 193,000
Cancelled/expired $0.92 $1.09 (350,000)
Exercised $0.92 $0.92 (20,000)
---------
Balance at December 31, 1996 $1.04 1,755,500
Granted $0.75 to $1.52 $1.09 3,984,000
Cancelled/expired $0.92 to $1.68 $1.17 (55,000)
---------
Balance at December 31, 1997 5,684,500
=========
Of the options issued in 1997, options to purchase approximately 3,684,500
shares were issued subject to approval of the Company's shareholders. Such
approval was received in February 1998. Generally accepted accounting principles
require that a charge to compensation expense be made if the market value of the
stock on the date of shareholder approval exceeds the market value on the date
of grant. The closing bid price of the Company's common stock on the date of the
shareholder vote was approximately $1.41. Options to purchase approximately 1.8
million shares were granted at prices that, although fair market value at the
time of grant, were lower than $1.41. As a result, the Company will record a
charge to compensation expense of approximately $1,200,000 in the first quarter
of 1998.
Primarily as a result of the acquisition activity of the Company, 550,000
fully vested nonstatutory stock options were granted to eight investment bankers
and other vendors who, as third parties, are outside of the 1995 Plan, as
amended. The options are exercisable for from two to ten years, 375,000 shares
at a price of $0.75 per share and 175,000 shares at a price of $1.52 per share.
During 1996, the Company granted 100,000 fully vested nonstatutory stock
options at fair market value to a third party, which are exercisable for a
period of ten years at a price of $1.17 per share. In addition, during 1995, the
Company granted 300,000 fully vested nonstatutory stock options at fair market
value to a third party, which are exercisable for a period of eighteen months at
a price of $1.05 per share, and 5,000 nonstatutory stock options at fair market
value to a third party, which were cancelled in 1996. Further, in 1994 the
Company granted 100,000
27
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
nonstatutory stock options at fair market value to a third party, which vest
ratably over two years and are exercisable for a period of five years at a price
of $1.69 per share. At December 31, 1997, 1,050,000 of these options are
outstanding.
The following table summarizes information about the options to third
parties (1,050,000) and warrants not reflected as granted as part of any option
plan.
Options/warrants
Outstanding
- - --------------------------------------------------------------------------------
Weighted Average
Range of Number Outstanding at Remaining Weighted Average
Exercise Price December 31, 1997 Contractual Life Exercise Price
- - --------------------------------------------------------------------------------
$0.65 to $1.00 2,787,382 3.2 years $0.77
$1.01 to $1.75 4,377,254 3.4 years $1.50
================================================================================
$0.65 to $1.75 7,164,636 3.3 years $1.22
================================================================================
The Company recorded a charge to selling, general and administrative costs
of approximately $175,000 for the year ended December 31, 1997 related to the
estimated fair value of the options granted to consultants.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based compensation"
which requires that the information be determined as if the Company has
accounted for its stock options granted subsequent to December 31, 1994 under
the fair value method of that statement. The fair value for these options was
estimated at the date of the grant using a Black-Scholes option pricing model.
The Company's pro forma information follows:
December 31, December 31,
1997 1996
------------ ------------
Pro forma net loss:
Continuing operations $ (2,874,000) $ (1,617,000)
Discontinued operations (3,497,000) (245,000)
------------ ------------
Total $ (6,371,000) $ (1,862,000)
============ ============
Pro forma net loss per share:
Basic
Continuing operations $ (.18) $ (.11)
Discontinued operations $ (.22) $ (.02)
------------ ------------
$ (.40) $ (.13)
------------ ------------
Assuming dilution
Continuing operations $ (.18) $ (.11)
Discontinued operations $ (.22) $ (.02)
------------ ------------
$ (.40) $ (.13)
============ ============
The fair value of these options at the date of the grant was estimated with
the following weighted average assumptions for 1997 and 1996: risk free interest
rates ranging from 6.25% to 6.36%, no dividend yield, volatility factor of the
expected market price of the Company's common stock ranging from 49% to 76%, and
a weighted average expected life of the options ranging from six to ten years.
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994 and employee stock options granted vest over a period from one
to four years, its pro forma effect will not be fully reflected in pro forma net
loss.
The following table summarizes information about stock options, including
those to third parties, outstanding at December 31, 1997:
28
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Number Weighted Average Weighted Number Weighted
Outstanding at Remaining Average Outstanding at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Price 1997 Life Price 1997 Price
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75-$1.00 2,950,500 8.1 years $0.78 1,465,083 $0.78
$1.01-$2.00 4,033,000 7.5 years $1.33 1,614,750 $1.21
$2.01-$3.22 208,000 1.3 years $2.65 207,000 $2.65
- - ------------------------------------------------------------------------------------------------------
$0.75-$3.22 7,191,500 7.5 years $1.14 3,286,833 $1.11
======================================================================================================
</TABLE>
The weighted average fair value of all stock options granted in 1997 was
$.63 per share.
8. Discontinued Operations (See also, Note 12 - Subsequent event - October 1998
plan to sell Drew)
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
December 31, 1997, assets of the ECSD were approximately, 155,000, consisting
principally of billed and unbilled receivables, and liabilities were
approximately $76,000 consisting principally of trade payables. The operations
of the ECSD from January 1, 1998 through disposal on February 9, 1998 did not
generate a loss due to the high utilization of personnel on contracts during
that time. Approximately $50,000 has been 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.
There was no material severance paid in connection with the discontinuance of
the ECSD. Revenues, gross margin and net loss for ECSD are approximately the
following for the years ended December 31, 1997 and 1996:
1997 1996
---------- ----------
Revenues $ 467,000 $ 576,000
Gross Margin $ 183,000 $ 247,000
Net Loss $ (356,000) $ (245,000)
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 and (ii) seeking a strategic or management
buyer for the operation.
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 is seeking a strategic or possible management buyer for a majority of
HCAD.
The measurement date for the discontinuance is February 1998, at which
time losses from January 1, 1998 through February 1998 will be recorded and a
provision for discontinued operations (principally severance and non-cancelable
lease costs) will be made. Such amount is expected to exceed $500,000. The
Company has reflected the
29
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1997 operations of HCAD as a discontinued operation in the December 31, 1997
financial statements. At December 31, 1997, assets of the HCAD were
approximately $98,000 consisting principally of customer receivables, certain
computer and communications equipment, furniture, and inventory. Liabilities
were approximately $60,000 consisting principally of trade payables and payroll.
Revenues, gross margin and net loss for HCAD are approximately the following for
the year ended December 31, 1997 (HCAD did not operate in 1996):
1997
-----------
Revenues $ 135,000
Gross Margin $ 125,000
Net Loss $(1,000,000)
9. Commitments and contingencies
Leases - The Company leases its office space for a term extending through
March 31, 2000. In August, 1996, this lease was modified to reflect a reduction
in leased space. Additionally, the Company has entered into various operating
leases for equipment. Future minimum payments under non-cancelable operating
leases for years December 31 are as follows:
1998 $ 541,000
1999 406,000
2000 256,000
2001 77,000
Thereafter 88,000
Rent expense in 1997 and 1996, under all operating leases, was
approximately $550,000 and $179,000, respectively.
Collective bargaining agreement - Approximately 155 of Drew's
approximately 255 employees are covered by a collective bargaining agreement
with a union. The contract covering such employees is due to expire in May 1998.
Litigation - In January 1998, a third party filed suit against the
Company's Drew subsidiary alleging that it is due a fee of not less than
$297,000 in connection with the Company's acquisition of Drew. Drew disputes
this claim and the Company and Drew intends to vigorously defend this action.
There are no other material legal proceedings pending against the Company.
10. Pension
Drew has two noncontributory, defined benefit pension plans covering
substantially all employees. Benefits under the plan covering nonunion employees
are based on average monthly compensation and years of service. Benefits under
the plan covering union employees are based on years of service. Drew's policy
is to make contributions to the plans sufficient to meet minimum funding
requirements. Effective September 3, 1997, Drew's non-union plan was frozen and
no future benefits will accrue to participants in the plan. The net pension
liability at December 31, 1997 reflects the result of these plan changes.
A summary of the components of net periodic pension cost for the period
from September 22, 1997 to December 31, 1997, included in discontinued
operations - Drew is as follows:
Service cost $ 9,000
Interest 33,000
Actual return on plan assets (14,000)
Amortization and deferral (4,000)
-----------
Net pension cost $ 24,000
===========
30
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheet as of December 31, 1997:
Actuarial present value of benefit obligation:
Vested benefit $ 1,525,000
Nonvested benefits 70,000
-----------
Accumulated and projected benefit obligation 1,595,000
Plan assets at fair market value 1,056,000
-----------
Accumulated benefit obligations in excess of
plan assets 539,000
Accrued pension cost $ 539,000
Significant assumptions used in the accounting for the defined benefit plans
were as follows:
Discount rate 7.00%
Expected long-term rate of return on assets 8.25%
The plans assets are invested in an annuity investment fund, certificates
of deposit, insurance contracts and interest bearing cash accounts.
11. Other
Other assets- Other noncurrent assets principally include patent costs of
approximately $147,000 (net of related amortization of approximately $61,000).
Costs of financings not completed- In the third quarter of 1997, the
Company was able to secure more favorable acquisition financing and credit
facility for its acquisition of Drew than it had originally expected. As a
result, the Company elected not to complete a proposed acquisition financing and
a proposed credit facility. Costs associated with such uncompleted financings of
approximately $130,000 were charged to Interest and financing costs of
discontinued operations in the year ended December 31, 1997.
Charges to fourth quarter operations - Significant charges to operations
in the fourth quarter of 1997 include: (i) approximately $175,000 for the
estimated value of options granted to consultants in May and September 1997,
(ii) accrual of contractual management bonuses for three executives of
approximately $75,000 (including $25,000 related to discontinued operations),
(iii) write off of approximately $75,000 of capitalized software costs no longer
considered realizable (included in discontinued operations) and (iv) costs of
approximately $235,000 related to a collaborative research effort (microvalve)
and certain software development costs.
Advertising expense - Advertising expense for Drew were approximately
$125,000 for the period of inclusion of Drew in the Company's financial
statements for 1997. Such costs are expensed as incurred.
Significant customer - One customer accounts for approximately 11% of
Drew's revenues for the year ended December 31, 1997. Significant customer
information is not meaningful for the year ended December 31, 1996 due to the
level of revenue and the discontinued operations.
12. Subsequent event - October 1998 Plan to Sell Drew
On October 2, 1998, the Board of Directors of the Company approved a plan
to dispose of the Company's interest in Drew (the "Plan"). Pursuant to the Plan,
on October 23, 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 on October 23, 1998, 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 23, 1998. The Notes are
secured by all of the assets of the
31
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 Corporation. Mr. Strauss is obliged to spend a defined amount 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 entered into a
new employment agreement with the Company which requires him to spend a defined
amount of his time on the Company's business.
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 will not be used for the Company's
investment in Drew.
The Company's redemption of approximately $3,780,000 of Notes and
cancellation of certain related warrants will eliminate approximately 6.1
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 entered into a separate Purchase and Sale Agreement on October
23, 1998 with IMPLEO in which it agreed to promptly submit to its shareholders a
proposal to sell the remaining 33.3% of Drew to IMPLEO in exchange for the
cancellation of the then remaining principal amount of Notes together with
accrued interest thereon (the "Second Sale").
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 Note 9).
The following summary shows the selected balance sheet information at
December 31, 1997 and the results of operations for the period from September
23, 1997 (date of acquisition) to December 31, 1997 for Drew.
Drew's assets consist principally of the following at December 31, 1997
(unaudited):
Cash $ 103,000
Accounts receivable 1,584,000
Inventory 6,278,000
Other current assets 167,000
-----------
total current assets 8,132,000
Property and equipment, net 2,838,000
Deferred finance costs, net 786,000
Goodwill 21,000
Other assets 306,000
-----------
total assets $12,083,000
-----------
32
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
Statement of operations data for Drew (unaudited):
From September 23 -
December 31, 1997
-----------------
Revenues $ 3,800,000
-----------
Gross profit 1,601,000
-----------
Operating profit 115,000
-----------
Interest (expense), net (104,000)
-----------
Income before corporate financing costs 9,000
Acquisition financing charges:
Interest and financing costs (376,000)
Charge for beneficial conversion (1,754,000)
-----------
Total (2,130,000)
-----------
Net Loss $(2,121,000)
===========
Note 13. Subsequent Event - Bank Debt
On December 10, 1998, Drew was notified by the commercial bank with which
it has the Term loan and Revolving credit relationship described in Note 6 that
such bank believes there is a "pending default" of such Term loan and Revolving
credit. The commercial bank cites its view that there has been a "material
adverse change" at Drew and that they anticipate violation of the debt service
covenant at December 31, 1998 when Drew's financial statements for the year
ended December 31, 1998 are prepared. Drew is discussing this matter with the
commercial bank.
33
<PAGE>
Intentionally Blank
<PAGE>
BCAM International, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1998
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
============
See accompanying notes
34
<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
<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 0
Non-cash minority interest charge (benefit) (35,000) 788,000
Extraordinary item 552,000 0
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 (2,170,000) (1,247,000)
------------ ------------
Investing activities
Cash paid for purchase of shares of Drew 0 (3,882,000)
Cash paid for costs to acquire Drew (86,000) (475,000)
Purchase of equipment and software technology (250,000) (207,000)
------------ ------------
Net cash (used in) provided by investing activities (336,000) (4,564,000)
------------ ------------
Financing activities
Proceeds from sale of common stock 2,000,000 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 0
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) 0
Drawdown (payment) of revolving credit agreement 311,000 250,000
Payment of stock registration and issuance costs (300,000) (668,000)
Other 0 47,000
------------ ------------
Net cash provided by financing activities 1,894,000 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
35
<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
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 18,171,641 $ 182,000 $ 26,338,000 $ (4,290,000)
-----------------------------------------------------------
Conversion of subsidiary preferred stock
into common stock of the Company 1,066,585 11,000 607,000 --
Additional beneficial debt conversion from
March 1998 payment-in-kind -- -- 219,000 (219,000)
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 100,000 1,000 64,000 --
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 --
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 436,047 4,000 (4,000) --
Net loss -- -- -- --
-----------------------------------------------------------
Balance at September 30, 1998 21,754,471(a) $ 218,000 $ 30,015,000 $ --
===========================================================
<CAPTION>
Treasury
Deficit Subtotal Stock Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $(19,237,000) $ 2,993,000 $ (899,000) $ 2,094,000
------------------------------------------------------------
Conversion of subsidiary preferred stock
into common stock of the Company -- 618,000 -- 618,000
Additional beneficial debt conversion from
March 1998 payment-in-kind -- -- -- --
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 -- 65,000 -- 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 -- 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 -- -- -- --
Net loss (10,876,000) (10,876,000) -- (10,876,000)
------------------------------------------------------------
Balance at September 30, 1998 (30,113,000) 120,000 $ (899,000) (779,000)
============================================================
</TABLE>
(a) Excludes additional shares issuable, without additional consideration,
pursuant to "repricing" provisions of the April 1998 offering of common
stock and warrants.
36
<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 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
66.7% of Drew and certain other restructuring activities, the Company is now a
technology company focused on commercializing its Intelligent Surface Technology
("IST") 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 5 to the audited Consolidated Financial Statements of the
Company as of and for the two years ended December 31, 1997. In December 1997
the Board of Directors of the Company decided to sell 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 October 1998, the Company
sold 56.7% of Drew to the holder of the 10%/13% Convertible Notes 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).
37
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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
23, 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 23, 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. Mr. Strauss is obliged to spend a defined amount 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 severance 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).
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,
38
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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>
In December 1998, Drew was notified by the commercial bank with which
it has the Term loan and Revolving credit relationship described in Note 6 that
such bank believes there is a "pending default" of such Term loan and Revolving
credit. The commercial bank cites its view that there has been a "material
adverse change" at
39
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
Drew and that they anticipate violation of the debt service covenant at December
31, 1998. Drew is discussing this matter with the commercial bank.
4. Long Term Debt and Convertible Notes
Secured 10%/13% Convertible Notes and Warrants (see also Note 3. October
1998 Plan to Sell Drew) - 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 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 23, 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
40
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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 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). The Company's
common stock has since been "delisted" from the NASDAQ Small Cap Market.
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 (see also Note 3. October 1998 Plan to Sell Drew) -
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.
41
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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.
In December 1998, Drew was notified by the commercial bank with which it
has the Term loan and Revolving credit relationship described in Note 2 that
such bank believes there is a "pending default" of such Term loan and Revolving
credit. The commercial bank cites its view that there has been a "material
adverse change" at Drew and they anticipate violation of the debt service
covenant at December 31, 1998. Drew is discussing this matter with the
commercial bank.
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
42
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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.
Significant additional shares may be required to be issued in connection with
future repricings. 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. The investors in the private offering have certain registration
rights which were initially satisfied by the effectiveness of a registration
statement covering 4,000,000 share of common stock on August 13, 1998. The
investors have certain ongoing rights relative to the registration of additional
shares that result from "repricings". The Company is not currently in compliance
with such requirement and may be unable to satisfy such requirement. Such
penalties could be very material.
In December 1998, the Company and the investors reached agreement to
restructure the "repricing" provisions and waive penalties described in the
prior paragraph. Under the December 1998 amendment, the investors agree that the
original $2,000,000 placement will be "repriced", at the holders option, in new
increments of up to $250,000 per month commencing in December 1998. Repricings
would be based on a 27% discount from an average bid price of the common stock
of the Company. Repricings would be subject to a maximum of $0.75 per share
resulting in the issuance of approximately 686,469 shares effective December 24,
1998. 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.
43
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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 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
44
<PAGE>
BCAM International, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
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.
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.
45
<PAGE>
Report of Independent Auditors
Shareholder of
Drew Shoe Corporation
We have audited the accompanying balance sheet of Drew Shoe Corporation, a
wholly-owned subsidiary of BCAM International, Inc., as of December 31, 1997,
and its statements of income and cash flows for the period from September 23,
1997 through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report dated March 13, 1998, the Company,
as discussed in Note 7, has been notified by its bank of pending defaults under
its loan agreements. This circumstance could potentially result in the Company
being unable to pay its debt obligations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drew Shoe Corporation at
December 31, 1997 and the results of its operations and its cash flows for the
period from September 23, 1997 through December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
March 13, 1998,
except for Note 6, as to which
the date is October 23, 1998
and Note 7, as to which the
date is December 10, 1998
46
<PAGE>
Drew Shoe Corporation
Balance Sheet
December 31, 1997
Assets
Current assets:
Cash $ 103,000
Accounts receivable, less allowance of $134,000 1,584,000
Inventories 6,278,000
Prepaids and other current assets 167,000
------------
Total current assets 8,132,000
Property, plant and equipment:
Land 138,000
Buildings and improvements 688,000
Machinery and equipment 2,111,000
------------
2,937,000
Accumulated depreciation (99,000)
------------
Property, plant and equipment, net 2,838,000
Due from Parent 250,000
Other assets 327,000
------------
Total assets $ 11,547,000
============
Liabilities and shareholder's equity
Current liabilities:
Accounts payable $ 727,000
Accrued wages and commissions 404,000
Other accrued liabilities 875,000
Current portion of long-term debt 363,000
------------
Total current liabilities 2,369,000
Long-term debt 3,464,000
Other non-current liabilities 184,000
Shareholder's equity:
Common stock, no par value; authorized, 1,711
shares; issued and outstanding 1,710 5,521,000
Retained earnings 9,000
------------
5,530,000
Total liabilities and shareholder's equity $ 11,547,000
============
See accompanying notes
47
<PAGE>
Drew Shoe Corporation
Statement of Income
For the period from September 23, 1997 through December 31, 1997
Net sales $ 3,800,000
Cost of Sales 2,330,000
-----------
1,470,000
Selling expenses 877,000
General and administrative expenses 478,000
-----------
1,355,000
-----------
Income from operations 115,000
Other income (expense):
Interest expense (118,000)
Interest income 14,000
-----------
(104,000)
Income before taxes 11,000
Provision for income taxes 2,000
-----------
Net income $ 9,000
===========
See accompanying notes.
48
<PAGE>
Drew Shoe Corporation
Statement of Cash Flows
For the period from September 23, 1997 through December 31, 1997
Operating activities
Net income $ 9,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 99,000
Changes in operating assets and liabilities:
Accounts Receivable 267,000
Inventories (110,000)
Prepaids and other current assets 7,000
Other assets (30,000)
Accounts payable (402,000)
Accrued wages and commissions 138,000
Other liabilities 39,000
-----------
Net cash provided by operating activities 17,000
Investing activities
Purchases of property, plant and equipment (63,000)
-----------
Net cash used for investing activities (63,000)
Financing activities
Advance to parent (250,000)
Proceeds, net from new bank financing agreement 1,135,000
Payment of debentures due to former shareholders (845,000)
Principal repayments on long term debt (24,000)
-----------
Net cash provided by financing activities 16,000
Net (decrease) in cash (30,000)
Cash at September 23, 1997 133,000
-----------
Cash at December 31, 1997 $ 103,000
===========
Supplemental cash flow information:
Cash paid for interest $ 118,000
===========
Cash paid for income taxes $ 0
===========
See accompanying notes.
49
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Operations
Drew Shoe Corporation ("The Company") manufactures, imports, and distributes
women's and men's shoes for sale to independent retailers and through
Company-owned retail operations throughout the United States.
Basis of Accounting
Effective September 22, 1997, the Company was acquired by BCAM International,
Inc. ("BCAM"). The transaction was accounted for as a purchase. The purchase
price of approximately $5,500,000, which was primarily debt financed by BCAM
(which debt has not been recorded in these financial statements - see Note 6),
has been allocated to the acquired assets and liabilities based on their
estimated fair values. The excess of cost over net assets acquired of
approximately $21,000 is being amortized over 20 years on a straight line basis.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months of less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out
basis, or market. Inventories at December 31, 1997 consist of:
Raw materials $ 760,000
Work-in-process 976,000
Finished goods 4,542,000
==========
Total inventories $6,278,000
==========
Property, Plant and Equipment
Property, plant and equipment are stated at estimated fair value at the date of
acquisition. Property, plant and equipment acquired subsequent to the
acquisition is stated at cost. Depreciation is calculated using the
straight-line method based on the following estimated useful lives of the
assets:
Buildings and improvements 10 - 35 years
Machinery and equipment 5 - 13 years
Revenue Recognition
Revenue from wholesale product sales is recognized at the time products are
shipped. Revenue from retail product sales through Company-owned retail
operations is recognized at the point of sale.
Advertising Expense
The Company expenses advertising costs as they are incurred. Advertising expense
was $125,000 for the approximately three month period ended December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts reported in the financial statements
50
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
December 31, 1997
and footnotes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains its cash in bank deposit accounts that at times may exceed federally
insured limits. Concentrations of credit risk with respect to accounts
receivable are generally limited due to the large number of customers comprising
the Company's customer base, their dispersion across different geographic areas
and generally short payment terms. The Company routinely assesses the financial
strength of its customers. A single customer accounted for approximately 11% of
sales for the approximately three month period ended December 31, 1997 (this
concentration also existed during the year ended December 31, 1997) and
approximately 14% of accounts receivable at December 31, 1997.
2. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<S> <C>
Term loan with a bank, prime plus 1.5%, principal and interest payable in monthly
installments of $11,905 through September 30, 2000 when a final payment of $585,000
is due and guaranteed by BCAM $ 976,000
Revolving credit agreement with a bank, a maximum of $4.5 million available,
prime plus 1.5%, interest payable monthly, principal due September 1999 and
guaranteed by BCAM. 2,618,000
Note payable to a Trust related to the former owners, at prime, interest payable and
renewable every January 1 for an additional 12 months upon mutual agreement between
the Trust and Company, unsecured 214,000
Other 19,000
----------
3,827,000
Less current portion 363,000
----------
Long-term debt, less current portion $3,464,000
==========
</TABLE>
Maturities of long-term debt are as follows:
Year ending December 31:
1998 $ 363,000
1999 2,766,000
2000 694,000
2001 2,000
2002 2,000
The term loan and the revolving credit agreement are secured by substantially
all the assets of the Company. The maximum borrowing under the revolving credit
agreement is based on agreed upon percentages of accounts receivable and
inventory. The terms of the agreement with the bank require the Company to
maintain compliance with certain financial covenants, principally net worth and
restricts the Company's transfer of cash to the Parent Company.
See Note 6 regarding a December 1998 communication received from the bank in
connection with its view of a "pending default" of the Term loan and Revolving
credit agreements.
3. Benefit Plans
The Company has two non contributory, defined benefit pension plans covering
substantially all employees. Benefits under the plan covering union employees
are based on years of service. Benefits under the nonunion plan are based on
average monthly compensation and years of service. Effective September 3, 1997,
the Company's nonunion plan was frozen and no future benefits will accrue to
participants in the plan. These employees now
51
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
December 31, 1997
participate in a defined contribution plan. The net pension liability at
December 31, 1997 reflects the result of these changes. The Company's policy is
to make contributions to the plans sufficient to meet minimum funding
requirements.
A summary of the components of net periodic defined benefit pension cost for the
approximately three month period ended December 31, 1997 follows:
Service cost $ 9,000
Interest 33,000
Actual return on plan assets (14,000)
Amortization and deferral (4,000)
========
Net pension cost $ 24,000
========
The following table sets forth the funded status and amounts recognized in the
balance sheet at December 31, 1997 relating to the defined benefit pension
plans:
Actuarial present value of benefit obligations:
Vested benefit obligation $ 1,525,000
===========
Accumulated and projected benefit obligation $ 1,595,000
===========
Plan assets at fair market value $ 1,056,000
Actuarial present value of accumulated benefit obligation 1,595,000
-----------
Accumulated benefit in excess of plan assets $ (539,000)
===========
Accrued pension cost $ (539,000)
===========
Significant assumptions used in the accounting for the defined benefit plans
were as follows:
Discount rate 7%
Rate of increase in compensation levels n/a
Expected long-term rate of return on assets 8.25%
The plans' assets at December 31, 1997 are invested in an annuity investment
fund, certificates of deposit, insurance contracts, and interest bearing cash
accounts.
Effective October 6, 1997, the Company established a defined contribution 401(k)
plan covering all nonunion employees meeting certain age and eligibility
requirements. The plan provides for Company matching contributions up to a
maximum of 50% of the first 6% of employee compensation. The plan also provides
for annual discretionary Company contributions. Employees become fully vested in
the Company's contributions and the earnings thereon after five years. For the
approximately three period ended December 31, 1997, the Company made
contributions to the plan of approximately $11,000.
4. Commitments and Contingencies
Lease Commitments
The Company leases retail space and certain machinery and equipment under
operating leases that expire through 2002. Rent expense relating to operating
leases was $92,000 for the approximately three month period ended December 31,
1997.
52
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
December 31, 1997
The following is a summary of future minimum rental payments required under
non-cancelable operating leases:
Year ending December 31:
1998 $390,000
1999 251,000
2000 100,000
2001 38,000
2002 28,000
Collective Bargaining Agreement
Approximately 155 of Drew Shoe's approximately 255 employees are covered by a
collective bargaining agreement with a union. The contract covering such
employees is due to expire in May 1998.
Litigation
In January 1998, a third party filed suit against the Company alleging that it
is due a fee of not less than $297,000 in connection with the Parent's
acquisition of Drew Shoe. The Company disputes this claim and intends to
vigorously defend this action. There are no other material legal proceedings
pending against the Company.
5. Income Taxes
BCAM files a consolidated federal income tax return which will include the
Company. Current and deferred tax expense is allocated to the Company based on
the Company's taxable income for the current year and its temporary differences.
The Company accounts for income taxes using the liability method to recognize
deferred income tax assets and liabilities. Deferred income taxes are determined
based on the temporary differences between the financial statement carrying
values and the tax basis of the assets and liabilities. The Company's temporary
differences relate primarily to differences between the book and tax values
assigned to inventory, accounts receivable, fixed assets and pensions.
Income taxes for the period ended December 31, 1997 consisted of:
Current income tax expense $ 7,700
Deferred income tax benefit (5,700)
=======
$ 2,000
=======
6. Subsequent Event
On April 20, 1998, certain BCAM debt related to the acquisition of the Company
was restructured. In April 1998, BCAM transferred 10% of its ownership of the
Company to holders of BCAM's 10%/13% Convertible Notes ("Noteholders").
Effective October 23, 1998, BCAM sold 56.7% of its ownership in the Company to
the remaining Noteholder and agreed, subject to certain conditions including
approval by the shareholders of BCAM, to sell its remaining 33.3% interest in
the Company to the remaining Noteholder. In connection therewith, the
Noteholders and BCAM entered into a shareholders' agreement governing certain
matters as disclosed in Form 8-K of BCAM filed on November 6, 1998.
Note 7. Subsequent Event -- Bank Debt
On December 10, 1998, the Company was notified by the commercial bank with which
it has the Term loan and Revolving credit relationship described in Note 2 that
such bank believes there is a "pending default" of such Term loan and Revolving
credit. The commercial bank cites its view that there has been a "material
adverse change" at the Company and they anticipate violation of the debt service
covenant at December 31, 1998 when Drew's financial statements for the year
ended December 31, 1998 are prepared. The Company is discussing this matter with
the commercial bank.
53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholder
Drew Shoe Corporation
We have audited the accompanying statements of operations and cash flows
of DREW SHOE CORPORATION for the period from January 1, 1997 to September 22,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Since the completion of our audit of the accompanying financial statements and
initial issuance of our report dated March 15, 1998, the Company, as discussed
in Note 10, has been notified by its bank of pending defaults under its loan
agreements. This circumstance could potentially result in the Company being
unable to pay its debt obligations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Drew Shoe
Corporation for the period from January 1, 1997 to September 22, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Melville, New York
March 15, 1998,
except for Note 9, as to which
the date is October 23, 1998 and
Note 10, as to which the date
is December 10, 1998.
54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder
Drew Shoe Corporation
We have audited the accompanying statements of operations and cash flows
of DREW SHOE CORPORATION for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Drew Shoe
Corporation for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ J.H. COHN LLP
Roseland, New Jersey
September 26, 1997
55
<PAGE>
DREW SHOE CORPORATION
STATEMENTS OF OPERATIONS FOR THE PERIOD FROM
JANUARY 1, 1997 THROUGH SEPTEMBER 22, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
January 1, 1997 through Year Ended
September 22, 1997 December 31, 1996
----------------------- -----------------
Net sales $ 11,124,000 $ 14,609,000
Cost of goods sold 6,657,000 9,147,000
--------------- ---------------
Gross profit 4,467,000 5,462,000
--------------- ---------------
Operating expenses:
Selling 2,690,000 3,477,000
General and administrative 1,358,000 1,700,000
--------------- ---------------
Totals 4,048,000 5,177,000
--------------- ---------------
Operating income 419,000 285,000
Interest expense (261,000) (338,000)
Interest and other income 33,000 79,000
--------------- ---------------
Net income $ 191,000 $ 26,000
=============== ===============
See Notes to Financial Statements.
56
<PAGE>
DREW SHOE CORPORATION
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM
JANUARY 1, 1997 THROUGH SEPTEMBER 22, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
January 1, 1997 through Year Ended
September 22, 1997 December 31, 1996
----------------------- -----------------
<S> <C> <C>
Operating activities:
Net income $ 191,000 $ 26,000
Adjustments:
Depreciation and amortization 188,000 248,000
Changes in operating assets and liabilities:
Accounts receivable (512,000) 433,000
Inventories 316,000 (712,000)
Prepaid expenses and other (236,000) 25,000
Accounts payable 235,000 26,000
Accrued expenses (104,000) 120,000
--------- ---------
Net cash provided by operating activities 78,000 166,000
--------- ---------
Investing activities:
Purchases of property and equipment (118,000) (266,000)
(Increase) decrease in cash value of life
insurance and other (19,000) 59,000
--------- ---------
Net cash used by investing activities (137,000) (207,000)
--------- ---------
Financing activities:
Net proceeds under revolving note agreement 852,000 218,000
Proceeds from long-term debt -- 24,000
Principal payments on long-term debt (628,000) (146,000)
Distributions to shareholders (60,000) (56,000)
--------- ---------
Net cash provided by financing activities 164,000 40,000
--------- ---------
Net increase (decrease) in cash 105,000 (1,000)
Cash, beginning of period 27,000 28,000
--------- ---------
Cash, end of period $ 132,000 $ 27,000
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 259,000 $ 329,000
========= =========
Supplemental disclosure of noncash investing
and financing information:
Change in additional pension liability:
Increase (decrease) in intangible pension asset $ 106,000 $(237,000)
Increase in stockholders' equity (51,000) (180,000)
--------- ---------
Totals $ 55,000 $(417,000)
========= =========
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
Note 1 - Business and summary of accounting policies:
Business:
Drew Shoe Corporation (the "Company") designs, manufactures, imports,
markets and distributes women's and men's shoes for sale to independent
retailers and through Company-owned retail operations throughout the
United States.
Basis of accounting/Use of estimates:
The accompanying financial statements are prepared on the historical basis
of accounting of the Company prior to its acquisition, on September 22,
1997, by BCAM International, Inc. ("BCAM"). Results of operations and cash
flows on the historical basis of accounting may not be indicative of
future results of operations. This is because, among other factors, the
additional depreciation, amortization or other charges which may result
from the revaluation of the assets and liabilities of the Company in
connection with the acquisition. Further, the recording of other
acquisition adjustments, as well as future events and conditions, may
affect comparisons. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Financial instruments and off-balance-sheet risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable. The Company maintains its cash in bank deposit
accounts that, at times, may exceed Federally insured limits.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base, their dispersion across different geographic areas, and
generally short payment terms. In addition, the Company routinely assesses
the financial strength of its customers.
Inventories:
Inventories utilized in the computation of cost of goods sold are stated
at the lower of cost, determined on a first-in, first-out basis, or
market.
Property and equipment:
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets.
Goodwill:
Goodwill is amortized on a straight-line basis over periods ranging from
five to twenty years.
Revenue recognition:
Revenue from wholesale product sales is recognized at the time products
are shipped. Revenue from retail product sales through Company-owned
retail operations is recognized at the point of sale.
Income taxes:
The Company has elected to be treated as an "S" Corporation under the
applicable sections of the Internal Revenue Code. Under these sections,
corporate income or loss, in general, is allocated to the stockholders for
inclusion in their personal income tax returns. Accordingly, there is no
provision for Federal income
58
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
taxes in the accompanying financial statements.
The Company has also elected to be treated as an "S" Corporation in the
states in which it files corporate income tax returns. Accordingly, no
provision for state income taxes has been provided in the accompanying
financial statements.
Advertising:
The Company expenses the cost of advertising as incurred. Advertising
costs charged to operations were approximately $321,000 and $364,000 for
the period from January 1, 1997 through September 22, 1997 and for the
year ended December 31, 1996, respectively.
Note 2 - Inventories:
Inventories used in the computation of cost of goods sold were
approximately $6,378,000 and $6,694,000 at September 22, 1997 and December
31, 1996, respectively.
Note 3 - Property and equipment:
Property and equipment consists of the following at September 22, 1997 and
December 31, 1996, respectively, and were amortized utilizing the
estimated useful lives indicated below:
Range of
Estimated September December
Useful Lives 22, 1997 31, 1996
------------ ---------- ----------
Land $ 100,000 $ 100,000
Building and improvements 10-35 years 857,000 865,325
Machinery and equipment 5-13 years 2,742,000 2,614,715
---------- ----------
Total 3,699,000 3,580,040
Less accumulated depreciation 2,397,000 2,229,895
---------- ----------
Total $1,302,000 $1,350,145
========== ==========
Note 4 - Notes payable and long term debt:
Charges for interest included in the accompanying Statements of Operations
and Cash Flows are based principally upon the following historical
borrowings of the Company:
Approximate
Weighted Average
Borrowings
----------
To September
22, 1997
----------
Revolving credit (prime) and Bankers Acceptance
($500,000 at 7.25%) facility with a Bank $2,164,000
Mortgage Note payable with interest at prime plus .25 375,000
Notes payable to related party with interest at prime 214,000
Debentures payable to related parties with interest at 10% 845,000
All other 25,000
----------
Total $3,623,000
----------
59
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
The Revolving Credit and Banker Acceptance facility, Mortgage Notes and
Debentures were repaid on September 22, 1997 in connection with the
acquisition by BCAM.
Interest charged to the Statement of Operations for related parties
approximated $108,000 and $119,000 in the period ended September 22, 1997
and the year ended December 31, 1996.
Principal payment requirements on the above obligations, as adjusted for
the refinancing discussed in Note 9, in each of the five years subsequent
to December 31, 1997 are as follows:
Year Ending
December 31, Amount
------------ ----------
1998 $ 148,000
1999 2,980,000
2000 694,000
2001 2,000
2002 2,000
See Note 9 regarding a December 1998 communication received from the bank
in connection with its view of a "pending default" of the Term loan and
Revolving credit agreements.
Note 5 - Pension plans:
The Company has two noncontributory, defined benefit pension plans
covering substantially all employees. Benefits under the plan covering
nonunion employees are based on average monthly compensation and years of
service. Benefits under the plan covering union employees are based on
years of service. The Company's policy is to make contributions to the
plans sufficient to meet minimum funding requirements. Effective September
3, 1997, the Company's non-union plan was frozen and no future benefits
will accrue to participants in the plan. The net pension liability at
December 31, 1997 reflects the result of these plan changes with no
material curtailment gain or loss.
A summary of the components of net periodic pension cost for the period
from January 1, 1997 to September 22, 1997 and for the year ended December
31, 1996 is as follows:
1997 1996
--------- ---------
Service cost $ 28,000 $ 136,000
Interest 100,000 144,000
Actual return on plan assets (40,000) (46,000)
Amortization and deferral (13,000) (13,000)
--------- ---------
Net pension cost $ 75,000 $ 221,000
========= =========
Significant assumptions used in the accounting for the defined benefit
plans were as follows:
Discount rate 7.00%
Expected long-term rate of return on assets 8.25%
Effective September 3, 1997, the accrual of future benefits under the
nonunion defined benefit pension plan was suspended. The effect of the
curtailment of the nonunion plan on the Company's financial statements at
December 31, 1996 cannot currently be determined.
60
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
Note 6 - Commitments and other matters:
Lease commitments:
The Company leases retail space and certain machinery and equipment
under operating leases that expire through 2003. Related rent
expense amounted to approximately $269,000 and $369,000 for the
period from January 1, 1997 through September 22, 1997 and for the
year ended December 31, 1996, respectively. Future minimum rental
payments required under the non-cancelable operating leases in years
subsequent to December 31, 1997 are as follows:
Year Ending
December 31, Amount
------------ --------
1998 $390,000
1999 251,000
2000 100,000
2001 38,000
2002 28,000
Collective bargaining agreement:
At September 22, 1997, approximately 60% of the Company's workforce
is represented under a collective bargaining agreement which expires
May 31, 1998.
Concentrations:
The Company relies to a large extent on medical footwear for sales.
Approximately 60% in 1997 and 80% in 1996 of the Company's sales are
women's shoes. One customer accounts for more than approximately 11%
in 1997 and 10% in 1996 of the Company's sales.
Note 7 - Provision for income taxes:
A reconciliation of income taxes based on pre-tax income and the Federal
statutory rate to the Company's effective rate for the period from January
1, 1997 through September 22, 1997 and the year ended December 31, 1996
follows:
Period ended Year ended
September December
22, 1997 31, 1996
------------ ----------
Federal statutory income tax rate 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of Federal
tax benefit 7.8 7.0
"S" Corporation income not subject
to Federal or state tax (48.6) (42.7)
Other 6.8 1.7
------------ ----------
Effective rate --% -- %
============ ==========
Note 8 - Unaudited proforma income tax information:
Unaudited proforma income tax information as if the Company had been a "C"
Corporation subject to Federal and state income taxes follows:
61
<PAGE>
Drew Shoe Corporation
Notes to Financial Statements
Period ended Year ended
September December
22, 1997 31, 1996
--------- --------
Income before income taxes $ 191,000 $ 26,000
Pro forma provision for income taxes (73,000) (10,000)
--------- --------
Pro forma net income $ 118,000 $ 16,000
========= ========
Note 9 - Subsequent events:
Effective September 22, 1997, the Company's stockholders sold all of the
outstanding common stock of the Company to BCAM International, Inc.
("BCAM"), a publicly-held software technology and consulting company, for
cash and other consideration.
On September 22, 1997, the Company entered into a new $4,500,000 revolving
credit facility and a $1,000,000 term loan with the Bank. Under the terms
of the revolving credit facility, the Company may borrow a maximum of 80%
of eligible accounts receivable, as defined, and 35% of eligible
inventory, as defined. Such borrowings bear interest at the prime rate
plus 1.5%, payable monthly. Principal payments are not required under the
revolving credit facility until expiration on September 30, 1999.
Borrowings under the revolving credit facility and the term loan are
secured by substantially all of the Company's assets.
The agreement contains various restrictive covenants including net worth
requirements, limitations on dividends and distributions, limitations on
transactions with affiliates, as defined, and the maintenance of a debt
service coverage ratio.
In April 1998, BCAM transferred 10% of its ownership of the Company to
holders of BCAM's 10%/13% Convertible Notes ("Noteholders"). Effective
October 23, 1998, BCAM sold 56.7% of its ownership in the Company to the
remaining Noteholder and agreed, subject to certain conditions, including
approval by the shareholders of BCAM, to sell its remaining 33.3% interest
in the Company to the remaining Noteholder. In connection therewith, the
Noteholders and BCAM entered into a shareholders' agreement governing
certain matters.
Note 10 - Subsequent Event -- Bank Debt
On December 10, 1998, the Company was notified by the commercial bank with
which it has the Term loan and Revolving credit relationship described
above, that such bank believes there is a "pending default" of such Term
loan and Revolving credit. The commercial bank cites its view that there
has been a "material adverse change" at the Company and they anticipate
violation of the debt service covenant at December 31, 1998 when Drew's
Financial Statements for the year ended December 31, 1998 are prepared.
The Company is discussing this matter with the commercial bank.
62
<PAGE>
BCAM International, Inc. and subsidiaries
Consolidated Condensed Pro-Forma Financial Information
Reflecting the October 1998 sale of 56.7% of Drew
and the
Planned Sale of the Remaining 33.3% of Drew
Introduction
The following pro-forma condensed consolidated balance sheet of BCAM
International Inc. and subsidiaries (the "Company") reflects the Company's
financial position at September 30, 1998 and "Pro-forma" at that date to reflect
the October 1998 sale of 56.7% of the Company's Drew Shoe Corporation ("Drew")
subsidiary in exchange for the redemption of $3,780,000 of Notes and "As
adjusted" to reflect sale of the Company's remaining 33.3% ownership of Drew
(the "Second Sale") as contemplated by the shareholder vote described by this
Proxy Statement.
The pro-forma information is derived from the unaudited condensed consolidated
financial statements of the Company at September 30, 1998. This information
reflects the October 1998 sale of 56.7%, and the contemplated Second Sale of
33.3%, of Drew as though they had occurred as of September 30, 1998 and
therefore does not reflect the effect of operating losses and negative cash flow
since September 30, 1998. Operating losses and negative cash flow since
September 30, 1998 have continued to be significant. The Company's plans include
raising additional financing or entering into a strategic business arrangement
prior to the end of the first quarter of 1999 in order to support the
Intelligent Surface Technology and Microvalve technologies. In the absence of
additional financing or a strategic business arrangement, the Company will not
be able to continue its planned operations through the first quarter of 1999.
While the planned sale of the Company's remaining 33.3% of Drew would relieve
the Company from obligations which it cannot satisfy, in no event, however,
should a shareholder infer that the Company would be able to continue as a going
concern or raise additional financing or enter into a strategic business
arrangement as a result of the sale of the Company's remaining 33.3% interest in
Drew.
63
<PAGE>
BCAM International, Inc.
Pro-Forma Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1998
<TABLE>
<CAPTION>
Pro-Forma Adjustments Adjustments Reflecting
To reflect 56.7% sale 33.3% Second Sale
Assets --------------------- -----------------
Historical Dr. Cr. Pro-forma Dr. Cr. As adjusted
---------- --- --- --------- --- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 982,000 200,000d 782,000 50,000f 732,000
Prepaid expenses and other 52,000 52,000 52,000
Assets of discontinued Drew 12,654,000 12,654,000a 0 0
---------------------------------------------------------------------------------------
Total current assets 13,688,000 834,000 784,000
Equity in Drew 12,654,000a 7,107,000a 2,052,000 2,052,000e 0
3,495,000b
Other assets 235,000 235,000 235,000
---------------------------------------------------------------------------------------
Total assets $13,923,000 3,121,000 1,019,000
=======================================================================================
Liabilities and shareholders' equity
Current liabilities:
Current portion of long term debt $ 300,000 200,000c 100,000 100,000
Accounts payable 244,000 244,000 244,000
Accrued expenses and other 242,000 242,000 9,000e 233,000
Liabilities of discontinued Drew:
Convertible Notes and interest, net 6,678,000 3,700,000b 2,978,000 2,978,000e 0
Bank and other subsidiary debt 4,414,000 4,414,000a 0 0
Accounts payable, accruals, other 2,106,000 2,106,000a 0 0
Minority interest 587,000 587,000a 0 0
Liabilities of discontinued other 131,000 131,000 131,000
---------------------------------------------------------------------------------------
Total current liabilities 14,702,000 3,695,000 708,000
Shareholders' equity
Common stock 218,000 218,000 218,000
Paid-in surplus 30,015,000 30,015,000 30,015,000
Deficit (30,113,000) 200,000d 205,000b (29,908,000) 50,000f 935,000e (29,023,000)
200,000c
---------------------------------------------------------------------------------------
120,000 325,000 1,210,000
Less 763,182 treasury shares (899,000) (899,000) (899,000)
---------------------------------------------------------------------------------------
(779,000) (574,000) 311,000
---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $13,923,000 3,121,000 1,019,000
=======================================================================================
</TABLE>
64
<PAGE>
Notes to Pro-Forma adjustments:
To record sale of 56.7% of the common stock of Drew (representing 63% of the
Company's investment in Drew):
a. To deconsolidate the Drew assets and liabilities.
b. To record the disposition of 56.7% of Drew in exchange for $3,780,000 face
amount of Notes ($3,700,000 net of discount). (Note: 63% of net debt and
63% of net assets of Drew. 63% equals 56.7% sold divided by 90% previously
owned)
c. To reflect the disposition of $200,000 of Seller Notes.
d. To record the payment of estimated transaction costs.
To record sale of 33.3% of the common stock of Drew:
e. To record the disposition of 33.3% of Drew in exchange for $2,220,000 face
amount of Notes ($2,173,000 net of discount) plus interest (approximately
$814,000 at September 30, 1998).
f. To record the payment of estimated transaction costs.
65
<PAGE>
Limitation of Liability of Directors; Indemnification of Directors and Officers;
Directors and Officers Insurance
Sections 721 through 725 of the New York Business Corporation Law provide
that New York corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in such
actions, suits or proceedings. Article Seventh of the Company's Restated
Certificate of Incorporation provides for indemnification of directors and
officers of the Company generally in accordance with New York law.
Section 721 of the New York Business Corporation Law permits a corporation
to enter into agreements with its directors and officers providing for
indemnification for actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that they
were or are such directors or officers, against expenses incurred in such
actions, suits or proceedings, provided, however, that no such indemnification
may be provided if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not legally entitled. Pursuant to such
authority, the Company has entered into an agreement with each of its current
directors indemnifying them to the maximum extent permitted by Section 721. The
agreement provides for the indemnification of these individuals against any and
all civil or criminal actions or proceedings brought as a result of such
individual being a director or officer of the Company and any judgments and
amounts paid in settlement costs and expenses, including reasonable attorneys
fees. No indemnification may be made, however, if a judgment or final
adjudication establishes that the individual committed acts in bad faith or with
deliberate dishonesty and were material to the cause of action so adjudicated,
or that he personally gained financial profit or other advantage to which he was
not legally entitled. Such indemnification shall be made only by the Board
acting with a quorum consisting of directors who are not parties to the action
in question, or by independent legal counsel, or by the stockholders and in all
cases only after a finding that the applicable standard of conduct has been met.
Under Section 722(a), the corporation may indemnify any director or
officer in any action (other than an action by or in the right of the
corporation) brought against him by reason of the fact that he, his testator or
intestate was a director or officer of the corporation, or served another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity at the request of the corporation. Indemnification
may be given for judgments, fines, amounts paid in settlement and reasonable
expenses, including attorney's fees, if such director or officer is shown to
have acted in good faith, in furtherance of a purpose believed to be in the best
interests of the corporation, and, in the case of a criminal action or
proceeding, to have had no reason to believe such conduct was unlawful.
Section 722(c) of the New York Business Corporation Law provides for
permissive indemnification by the corporation of directors and officers, sued by
or in the right of the corporation, against reasonable expenses including
attorney's fees unless the director or officer is found to have breached his
duty to the corporation under Section 717 or Section 715(h) of the Business
Corporation Law, respectively. Amounts paid under this section may not include
amounts paid in settlement of a threatened or pending action and expenses
incurred in defense of a threatened action or settlement of a pending action
without court approval.
Indemnification may be by court order under Section 724 or by approval of
the corporation in the manner set forth in the statute. Under Section 723(a),
success on the merits or otherwise entitles the director or officer to
indemnification under Section 722. If not wholly successful, indemnification
shall be made by the corporation only if a quorum of the board, not including
parties to the action, finds that the standards of Section 722 have been met. If
a quorum cannot be obtained, approval may be by the board upon (i) the opinion
of independent legal counsel or (ii) a determination by the stockholders that
the standards of conduct have been met by the director or officer. Expenses may
be paid in advance if authorized by one of the methods discussed above. Under
Section 724, if the corporation fails to provide indemnification, the director
or officer may apply to the court and may receive indemnification to the extent
authorized under Section 722. Expenses may also be advanced if the court finds
the defendant director or officer to have raised genuine issues of fact or law.
Expenses advanced must be repaid to the corporation if (i) the director or
officer has not met the applicable standard which entitles him to
indemnification or (ii) if he has been paid in excess of the amount to which he
is entitled. Indemnification may not be made if it is inconsistent with the
corporation's certificate, by-laws, board resolutions or agreements or a
condition imposed by the court in approving a settlement.
66
<PAGE>
The New York Business Corporation Law permits a corporation through its
certificate of incorporation to prospectively eliminate or limit the personal
liability of its directors to the corporation or its stockholders for damages
for breach of fiduciary duty as a director, with certain exceptions. The
exceptions include acts or omissions in bad faith or which involve intentional
misconduct or knowing violations of law, improper declaration of dividends, and
transactions from which the director personally gained in fact a financial
profit or other advantage to which he was not legally entitled. The Company's
Restated Certificate of Incorporation exonerates its directors from personal
liability to the extent permitted by this statutory provision.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the 1933 Act and is therefore unenforceable.
The Company carries insurance providing indemnification to all of the
Company's directors and officers for claims against them by reason of, among
other things, any act or failure to act in their capacities as directors or
officers. To date, no sums have been paid to any past or present director or
officer of the Company under this or any prior indemnification insurance policy.
The BCL permits a corporation, through its certificate of incorporation,
to prospectively eliminate or limit the personal liability of its directors to
the corporation or its shareholders for damages for breach of fiduciary duty as
a director, with certain exceptions. The exceptions include acts or omissions in
bad faith or which involve intentional misconduct or knowing violations of law,
improper declarations of dividends, and transactions from which the director
personally gained in fact a financial profit or other advantage to anything he
was not legally entitled. The Company's Restated Certificate of Incorporation
exonerates its directors from personal liability to the extent permitted by this
statutory provision.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 10, 1999 based on
information obtained from the records of the Company with respect to the
beneficial ownership of shares of Common Stock of the Company by (i) each person
known by the Company to be owners of more than five (5%) percent of the
outstanding shares of Common Stock, (ii) each director and nominee and certain
executive officers, and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
Common Stock
------------
Amount and Nature Percentage of
Name and Address of Beneficial Owner of Beneficial Ownership(1) Common Stock Owned
------------------------------------ -------------------------- ------------------
<S> <C> <C>
Michael Strauss (2) 2,208,333 (6) 9.5%
Robert P. Wong (2) 1,016,458 (7) 4.8%
Joel L. Gold (2) 107,500 (8) *
Glenn F. Santmire (2) 25,000 (9) *
Mark Plaumann (2) -0- *
Balmour Funds, S.A. (3) 3,121,787 (10) 13.9%
Austost Anstalt Schaan (4) 2,754,518 (10) 12.4%
Kirr Marbach & Co., LLC (5) 1,488,500 (11) 7.0%
All officers and directors as a group (9 persons) 3,507,291 14.3%
</TABLE>
1) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them.
2) Address is c/o BCAM International, Inc., 1800 Walt Whitman Road, Melville,
New York 11747.
3) Address is Trident Chambers, P.O. Box 146, Road Town, Tortola, British
Virgin Islands.
67
<PAGE>
4) Address is 7440 Fuerstentum, Landstrasse 163 Lichtenstein.
5) Address is 621 Washington Street, Columbus, IN 47201.
6) Includes options to purchase 2,208,333 shares of Common Stock currently
exercisable or exercisable within 60 days of the date hereof.
7) Includes options to purchase 1,016,458 shares of Common Stock currently
exercisable or which will be exercisable within 60 days of the date
hereof.
8) Includes options to purchase 107,500 shares of Common Stock currently
exercisable or exercisable within 60 days of the date hereof.
9) Includes options to purchase 25,000 shares of Common Stock exercisable
within 60 days of the date hereof. Does not include options to purchase
50,000 shares of Common Stock not exercisable within 60 days of the date
hereof.
10) On December 24, 1998, the Company and certain investors in an April 1998
private placement of equity securities agreed to amend the subscription
agreement with respect to the operation of the "repricing" provisions.
Under the April 1998 agreement, the number of shares issuable to these
investors are "repriced" pursuant to a schedule initially in four $300,000
increments and then in four $200,000 increments on eight occasions
commencing on August 13, 1998 (the effective date of a registration
statement covering the shares) and again sixty (60) days later and then in
thirty (30) day intervals. On such dates, the investors were to receive
the additional number of shares, if any, that result from the difference
between the number of shares actually issued and the number of shares
which would have been issued using a twenty-three (23%) percent discount
to the market price, as defined, at the time of the "repricing". The
operation of this provision could result in significantly greater number
of shares being issued to these investors. In August 1998, 436,047 shares
were issued in connection with the repricing provision and very
significant additional shares would be required to be issued in the
October, November and December 1998 reset dates.
The December 24, 1998 amendment to the subscription agreement with these
investors has four (4) principal effects (i) the August, October, November
and December 1998 repricings are eliminated in favor of new repricings
which will begin on January 1, 1999; (ii) the discount from market used to
measure the repricings is increased from twenty-three (23%) percent to
twenty-seven (27%) percent; (iii) a ceiling price was established of
seventy-five ($.75) cents; and (iv) certain penalties under the agreement
are waived. Under the amended agreement, the investors, at their option,
may reprice up twelve and one-half (12 1/2%) percent of the amount
invested (an aggregate of $250,000 based upon the original $2,000,000
invested in April 1998) on the first of each month beginning with January
1, 1999. Any amounts not "repriced" in any month may be carried over to
any future month without limitation.
The January 1, 1999 "reset" of twelve and one-half (12 1/2%) percent of
the $2,000,000 offering, if elected by the investors, could result in the
issuance of 1,004,518 shares to Austost and 1,138,459 shares to Balmour.
In connection with the amendment, the Company, will issue additional
shares to the investors to bring the total shares from 1,980,198
originally invested up to 2,666,667 shares based upon the ceiling price in
the amendment.
11) Included 700,000 shares that may be acquired upon the exercise of
warrants. * Less than 1.0%.
2. OTHER MATTERS
The special meeting is being call in order to address the matters in
proposal 1. No other business may be transacted at the special meeting that is
unrelated to the purpose of the special meeting.
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By Order of the Board of Directors
Michael Strauss. Chairman
Dated: January 8, 1999
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EXHIBIT A
PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT (this "Agreement"), entered into as of this
23rd day of October, 1998, by and between IMPLEO, LLC, a Delaware limited
liability company (the "Buyer"), and BCAM INTERNATIONAL, INC., a New York
Corporation, ("BCAM");
W I T N E S S E T H:
WHEREAS, BCAM is the record and beneficial owner of 569.37302 shares of
common stock, without par value, of Drew Shoe Corporation ("Drew"), an Ohio
corporation (the "Subject Stock");
WHEREAS, pursuant to a Stock Purchase and Restructuring Agreement of even
date herewith, to which this Agreement is attached as an exhibit, the parties
have agreed to enter into this Agreement;
WHEREAS, the Buyer is the holder of a BCAM 10%/13% convertible
subordinated promissory note in the aggregate principal amount of $3,073,663.90
(the "Note") and, 740,000 warrants to purchase an aggregate of 569.37302 shares
of common stock of BCAM, $.01 par value per share (the "Warrants");
WHEREAS, conditioned upon shareholder approval of the transactions
contemplated by this Agreement, BCAM wishes to transfer to the Buyer the Subject
Stock in exchange for the cancellation of indebtedness evidenced by the Note,
and certain other good and valuable consideration as more particularly provided
for herein; and
WHEREAS, the Buyer desires to purchase from BCAM and BCAM desires to sell
to the Buyer, all upon the terms and subject to the conditions set forth in this
Agreement, the Subject Stock.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereby agree as follows:
ACQUISITION OF THE STOCK.
Stock Purchase. Subject to the terms and conditions of this
Agreement, on the Closing Date (as such term is hereinafter defined), the Buyer
shall purchase and acquire from BCAM, and BCAM shall sell and transfer to the
Buyer, the Subject Stock for the consideration provided for in Section 2 below.
In furtherance thereof, BCAM shall, on the Closing Date, against delivery of
such consideration in accordance with Section 2 below, deliver to the Buyer the
certificates representing the Subject Stock, duly endorsed for transfer or
accompanied by stock powers executed in blank for transfer.
CONSIDERATION/DELIVERIES AT CLOSING.
At the Closing:
Purchase Price. The Buyer shall effectuate its cancellation of
the indebtedness evidenced by the Note by delivering the Note to BCAM for
cancellation.
2.2 Shareholder Agreement. That certain Shareholders' Agreement
dated of even date herewith and entered into by and between the Buyer, BCAM and
Drew, as referred to in the Restructuring Agreement, shall terminate pursuant to
its terms.
2.3 Note Purchase Agreement. The Buyer shall deliver such documents
to BCAM as BCAM may reasonably request, so as to evidence the termination of the
Note Purchase Agreement.
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2.4 Security Agreement. The Buyer shall deliver such documents to
BCAM as BCAM may reasonably request, so as to evidence the termination of that
certain Security Agreement dated April 14, 1998, entered into by and among BCAM,
the Buyer and the Buyer's agent, in favor of the Buyer, along with any UCC-3
termination statements necessary to further effectuate the provisions of this
Section 2.4.
2.5 Warrants. Buyer shall effectuate its cancellation of the
Warrants by delivering to BCAM for cancellation the warrant certificates
representing the Warrants.
REPRESENTATIONS AND WARRANTIES OF BCAM.
In connection with the sale of the Subject Stock to the Buyer, BCAM
hereby represents and warrants to the Buyer as follows:
Title to the Stock. BCAM is the valid and lawful record and
beneficial owner of all of the Subject Stock, all of which has been duly
authorized and validly issued and is fully paid and non-assessable, and is free
and clear of all pledges, liens, claims, charges, options, calls, encumbrances,
restrictions and assessments whatsoever other than (a) the outstanding pledge
thereof to the Buyer, and (b) restrictions which may be created by operation of
state or federal securities laws. On the Closing Date, the Buyer shall receive
from BCAM good, valid and marketable title to all of the Subject Stock, free and
clear of all pledges, liens, claims, charges, options, calls, encumbrances,
restrictions and assessments whatsoever, other than the above-referenced pledge
and securities law restrictions.
Valid and Binding Agreement; No Breach. (a a) BCAM has full
legal right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. BCAM has taken all necessary
corporate action to authorize its execution and delivery of this Agreement. This
Agreement constitutes the legal, valid and binding obligations of BCAM,
enforceable against BCAM in accordance with their respective terms, except to
the extent that such enforceability may be limited by bankruptcy, insolvency,
reorganization and other laws affecting creditors' rights generally, and except
that the remedy of specific performance or similar equitable relief is available
only at the discretion of the court before which enforcement is sought.
(b) Neither the execution and delivery of this Agreement nor
compliance with the terms and provisions of this Agreement on the part of BCAM
will: (i) violate any statute or regulation of any governmental authority,
domestic or foreign, applicable to BCAM; (ii) require the issuance of any
authorization, license, consent or approval of any federal or state governmental
agency, or any other person; or (iii) except for the pledge of the Subject Stock
in favor of the Buyer, conflict with or result in a breach of any of the terms,
conditions or provisions of any judgment, order, injunction, decree, note,
indenture, loan agreement or other agreement or instrument to which BCAM is a
party, or by which BCAM is bound, or constitute a default thereunder.
Organization, Good Standing and Qualification. BCAM is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York, with full corporate power and authority to own its
assets and conduct its business as owned and conducted on the date hereof.
Equity Ownership. The Subject Stock to be transferred to the
Buyer hereunder constitutes not less than 33.33% of the total issued and
outstanding capital stock of Drew Shoe, on a fully diluted basis (after giving
effect to the exercise or conversion of any and all outstanding options,
warrants, convertible securities, subscription rights or other rights to acquire
any capital stock of Drew Shoe). For purposes of this representation, the
options contained in the Drew Shoe Employment Agreement with Michael Strauss,
which Agreement is referred to in the Stock Purchase and Restructuring
Agreement, shall be disregarded.
Litigation. There is no suit, action, arbitration, or legal,
administrative or other proceeding, or governmental investigation pending or, to
the best knowledge of BCAM, threatened against BCAM which would in any manner
prohibit, restrain, impair or otherwise adversely affect the ability of BCAM to
convey free and clear title to the Subject Stock in accordance with this
Agreement.
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REPRESENTATIONS AND WARRANTIES OF THE BUYER.
In connection with the Buyer's purchase of the Subject Stock from
BCAM, the Buyer hereby represents and warrants to BCAM as follows:
Valid and Binding Agreement. This Agreement constitutes the
legal, valid and binding obligations of the Buyer, enforceable against the Buyer
in accordance with their respective terms, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization and
other laws affecting creditors' rights generally, and except that the remedy of
specific performance or similar equitable relief is available only at the
discretion of the court before which enforcement is sought. The Buyer has taken
all necessary company action to authorize its execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
Organization, Good Standing and Qualification. The Buyer is a
limited liability company duly organized, validly existing and in good standing
under the laws of the State of Delaware, with full power and authority to own
its assets and conduct its business as owned and conducted on the date hereof.
No Breach of Statute or Contract. Neither the execution and
delivery of this Agreement by the Buyer, nor compliance with the terms and
provisions of this Agreement on the part of the Buyer, will: (a) violate any
statute or regulation of any governmental authority, domestic or foreign,
affecting the Buyer; (b) require the issuance of any authorization, license,
consent or approval of any federal or state governmental agency; or (c) conflict
with or result in a breach of any of the terms, conditions or provisions of any
judgment, order, injunction, decree, note, indenture, loan agreement or other
agreement or instrument to which the Buyer is a party, or by which the Buyer is
bound, or constitute a default thereunder.
Investment. The Buyer is purchasing the Subject Stock for its
own account for investment, and not with a view to the resale or distribution
thereof in violation of any applicable securities laws.
4.5 Disclaimer. The Buyer acknowledges that BCAM has not made any
representations or warranties relating to the value of the Drew Common Stock
transferred herein or the Business prospects of Drew Shoe.
CONDITIONS PRECEDENT TO THE BUYER'S PERFORMANCE.
The obligations of the Buyer to consummate the transactions
contemplated by this Agreement are further subject to the satisfaction, at or
before the Closing Date, of all of the following conditions, any one or more of
which may be waived in writing by the Buyer:
Accuracy of Representations and Warranties. All
representations and warranties made by BCAM in this Agreement and/or in any
written statement delivered to the Buyer under this Agreement shall be true and
correct in all respects on and as of the Closing Date as though such
representations and warranties were made on and as of that date.
Performance. BCAM shall have performed, satisfied and complied
with all covenants, agreements, and conditions required by this Agreement to be
performed, satisfied or complied with by BCAM on or before the Closing Date.
Certification. The Buyer shall have received a certificate,
dated the Closing Date, signed by the President of BCAM, certifying, in such
detail as the Buyer and its counsel may reasonably request, that the conditions
specified in Sections 5.1 and 5.2 above have been fulfilled.
Absence of Litigation. No action, suit or proceeding by or
before any court or any governmental body or authority, against BCAM or
pertaining to the transactions contemplated by this Agreement or
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their consummation, shall be pending or threatened on the Closing Date, which
action, suit or proceeding would, if determined adversely, prohibit, restrain or
impair the consummation of the transactions contemplated by this Agreement, or
have a material adverse effect on Drew Shoe, its business or any material
portion of its assets.
5.5 Consents and Releases. All necessary disclosures to and
agreements and consents of (a) any parties to any material contracts and/or any
licensing authorities which are material to Drew Shoe's business and (b) any
governmental authorities or agencies to the extent required in connection with
the transactions contemplated by this Agreement, shall have been obtained and
true and complete copies thereof delivered to the Buyer. Without limitation of
the foregoing, the Buyer shall have received the written consent of Bank One,
National Association, a creditor and secured party of Drew Shoe, with respect to
the transactions contemplated by this Agreement, and the transfer of the Subject
Stock to the Buyer hereunder.
5.6 Proceedings and Instruments Satisfactory. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incidental thereto, shall be reasonably
satisfactory in form and substance to the Buyer and its counsel.
CONDITIONS PRECEDENT TO BCAM'S PERFORMANCE.
The obligations of BCAM to consummate the transactions contemplated
by this Agreement are further subject to the satisfaction, at or before the
Closing Date, of all of the following conditions, any one or more of which may
be waived in writing by BCAM:
Accuracy of Representations and Warranties. All
representations and warranties made by the Buyer in this Agreement and/or in any
written statement delivered by the Buyer under this Agreement shall be true and
correct in all respects on and as of the Closing Date as though such
representations and warranties were made on and as of that date.
Performance. The Buyer shall have performed, satisfied and
complied with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Buyer on or before
the Closing Date.
Certification. BCAM shall have received a certificate, dated
as of the Closing Date, signed by the Buyer, certifying, in such detail as BCAM
and its counsel may reasonably request, that the conditions specified in
Sections 6.1 and 6.2 above have been fulfilled.
6.4 Shareholder Consent. Provided BCAM shall be required under the
New York Business Corporations Law, BCAM shall have submitted a copy of this
agreement to its shareholders and its shareholders shall have consented to the
terms of this Agreement and the transactions contemplated hereby.
6.5 Proceedings and Instruments Satisfactory. All proceedings to be
taken in connection with the transactions contemplated by this Agreement, and
all documents incidental thereto, shall be reasonably satisfactory in form and
substance to BCAM and its counsel.
CLOSING.
Place and Date of Closing. Unless this Agreement shall be
terminated pursuant to Section 8 below, the consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of counsel for the Buyer, Greenberg Traurig, 200 Park Avenue, New York, New York
10166 or such other location as is agreed to between the Buyer and BCAM, at
10:00 A.M. local time on or before January 15, 1999 (the date of the Closing
being referred to in this Agreement as the "Closing Date").
Actions at Closing. At the Closing or prior thereto, the Buyer
and BCAM shall make all deliveries stated in this Agreement, which deliveries
are required to be made at the Closing and/or on or prior to the
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Closing Date.
TERMINATION OF AGREEMENT.
General. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Closing: (a) by
the mutual written consent of BCAM and the Buyer; (b) by the Buyer, or by BCAM,
if: (i) a material breach shall exist with respect to the written
representations and warranties made by the other party, (ii) the other party
shall take any action prohibited by this Agreement, if such action shall or may
have a material adverse effect on Drew Shoe and/or the transactions contemplated
hereby, (iii) the other party shall not have furnished, upon reasonable notice
therefor, such certificates and documents required in connection with the
transactions contemplated hereby and matters incidental thereto as it shall have
agreed to furnish, and it is reasonably unlikely that the other party will be
able to furnish such item(s) prior to or on the Closing Date specified below, or
(iv) any consent of any third party to the transactions contemplated hereby
(whether or not the necessity of which is disclosed herein) is reasonably
necessary to prevent a default under any outstanding material obligation of
either party, or Drew Shoe, and such consent is not obtainable without material
cost or penalty (unless the party or parties not seeking to terminate this
Agreement agree to pay such cost or penalty); or (c) by either party, at any
time on or after January 16, 1999, if the transactions contemplated hereby shall
not have been consummated prior thereto, and such party shall not then be in
breach or default of any obligations imposed upon it by this Agreement.
INDEMNIFICATION.
General.
BCAM shall defend, indemnify and hold harmless the Buyer
from, against and in respect of any and all claims, losses, costs, expenses,
obligations, liabilities, damages, recoveries and deficiencies, including
interest, penalties and reasonable attorneys' fees, that the Buyer may incur,
sustain or suffer as a result of (i) any misrepresentation or breach of warranty
by BCAM under this Agreement, and/or (ii) any failure by BCAM to perform any of
the covenants or agreements of BCAM contained in this Agreement.
The Buyer shall defend, indemnify and hold harmless BCAM
from, against and in respect of any and all claims, losses, costs, expenses,
obligations, liabilities, damages, recoveries and deficiencies, including
interest, penalties and reasonable attorneys' fees, that BCAM may incur, sustain
or suffer as a result of (i) any misrepresentation or any breach of warranty by
the Buyer under this agreement, and/or (ii) any failure by the Buyer to perform,
any of the representations, warranties, covenants or agreements of the Buyer
contained in this Agreement.
POST-CLOSING EVENTS.
Further Assurances. From time to time from and after the
Closing Date, the parties will execute and deliver to each other any and all
further agreements, instruments, certificates and other documents as may
reasonably be requested by the other party in order more fully to consummate the
transactions contemplated hereby.
COSTS.
Finder's or Broker's Fees. Each of the Buyer and BCAM
represents and warrants that neither they nor any of their respective affiliates
have dealt with any broker or finder in connection with any of the transactions
contemplated by this Agreement, and no broker or other person is entitled to any
commission or finder's fee in connection with any of these transactions.
Expenses. At the time of Closing or any termination of
this Agreement (as the case may be), or upon demand by the Buyer, BCAM shall pay
all costs and expenses incurred or to be incurred by BCAM
5
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and/or the Buyer in negotiating and preparing this Agreement, all related
agreements and documentation, and in closing and carrying out the transactions
contemplated by this Agreement, regardless of whether such transactions
ultimately close or are consummated, which costs and expenses shall include, but
not be limited to, all reasonable legal fees and disbursements the parties may
incur in connection herewith.
FORM OF AGREEMENT.
Effect of Headings. The Section headings used in this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of the provisions hereof.
Entire Agreement; Waivers. This Agreement and the other
agreements and instruments referred to herein, constitute the entire agreement
between the parties pertaining to the subject matter hereof, and supersede all
prior agreements or understandings as to such subject matter. No party hereto
has made any representation or warranty or given any covenant to the other
except as set forth in this Agreement. No waiver of any of the provisions of
this Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
PARTIES.
Parties in Interest. Nothing in this Agreement, whether
expressed or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and their
respective successors and permitted assigns, nor is anything in this Agreement
intended to relieve or discharge the obligations or liability of any third
persons to any party to this Agreement, nor shall any provision give any third
persons any right of subrogation or action over or against any party to this
Agreement.
Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if served personally or by
telecopier on the party to whom notice is to be given, on the day after the
delivery thereof to a recognized overnight courier service for next-day delivery
with all charges prepaid or billed to the account of the sender, or on the third
day after mailing if mailed to the party to whom notice is to be given, by first
class mail, registered or certified, postage prepaid, and properly addressed as
follows:
If to BCAM:
BCAM International, Inc.
1800 Walt Whitman Road
Melville, New York, 17747
Attention: Michael Strauss, Chairman
and Chief Executive Officer
Fax: (516) 752-3558
with copy to:
Ruskin, Moscou, Evans et al.
170 Old Country Road
Mineola, NY 11501
Attention: Norman M. Friedland, Esq.
6
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If to the Buyer:
IMPLEO, LLC
c/o Wexford Management, LLC
411 West Putnam Avenue
Greenwich, Connecticut 06803
Attention: Joseph Jacobs, President
Fax: (203) 862-7320
with a copy to:
Greenberg, Traurig
200 Park Avenue
New York, New York 10166
Attention: Shahe Sinanian, Esquire
Fax: (212) 801-6400
or to such other address as either party shall have specified by notice in
writing given to the other party.
MISCELLANEOUS.
Amendments and Modifications. No amendment or modification of
this Agreement shall be valid unless made in writing and signed by or on behalf
of the party to be charged therewith.
Non-Assignability; Binding Effect. Neither this Agreement, nor
any of the rights or obligations of the parties hereunder, shall be assignable
by any party hereto without the prior written consent of all other parties
hereto. Otherwise, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
Governing Law; Jurisdiction. This Agreement shall be construed and
interpreted and the rights granted herein governed in accordance with the laws
of the State of New York applicable to contracts made and to be performed wholly
within such State.
Choice of Forum; Waiver of Trial by Jury. Any suit, action or
proceeding brought by either party against the other party for claims arising
out of this Agreement shall be brought and enforced exclusively in the United
States District Court for the Southern District of New York, or in the event
that court lacks jurisdiction to hear the claim, in the New York State Supreme
Court in New York County. In any such suit, action or proceeding, each party
waives, to the fullest extent it may effectively do so, its right to a trial by
jury.
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IN WITNESS WHEREOF, the parties have executed this Agreement on and as of
the date first set forth above.
IMPLEO, LLC
By:
---------------------------------
Joseph Jacobs,
BCAM INTERNATIONAL, INC.
By:
---------------------------------
Michael Strauss, Chairman &
Chief Executive Officer
8
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EXHIBIT B
BCL ss.623 Procedure to Enforce Shareholder's Right to Receive
Payment for Shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten (10) days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty (20) days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty (20) days after the giving to him of a copy of
the plan of merger or exchange or an outline of the material features thereof
under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty (60) days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty (60) days from the date an offer is made. Upon
expiration of such time, withdrawal of a notice of election shall require the
written consent of the corporation. In order to be effective, withdrawal of a
notice of election must be accompanied by the return to the corporation of any
advance payment made to the shareholder as provided in paragraph (g). If a
notice of election is withdrawn, or the corporate action is rescinded, or a
court shall determine that the shareholder is not entitled to receive payment
for his shares, or the shareholder shall otherwise lose his dissenter's rights,
he shall not have the right to receive payment for his shares and he shall be
reinstated to all his rights as a shareholder as of the consummation of the
corporate action, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such rights
have expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall
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return the certificates to the shareholder or other person who submitted them on
his behalf. Any shareholder of shares represented by certificates who fails to
submit his certificates for such notation as herein specified shall, at the
option of the corporation exercised by written notice to him within forty-five
(45) days from the date of filing of such notice of election to dissent, lose
his dissenter's rights unless a court, for good cause show, shall otherwise
direct. Upon transfer of a certificate bearing such notation, each new
certificate issued therefor shall bear a similar notation together with the name
of the original dissenting holder of the shares and a transferee shall acquire
no rights in the corporation except those which the original dissenting
shareholder had at the time of transfer.
(g) Within fifteen (15) days after the expiration of the period within
which shareholders may file their notices of election to dissent, or within
fifteen (15) days after the proposed corporate action is consummated, whichever
is later (but in no case later than ninety (90) days from the shareholders'
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to pay
for his shares at a specified price which the corporation considers to be their
fair value. Such offer shall be accompanied by a statement setting forth the
aggregate number of shares with respect to which notices of election to dissent
have been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the certificates
representing his shares to the corporation, as provided in paragraph (f), of an
amount equal to eighty (80%) percent of the amount of such offer, or (2) as to
each shareholder who has not yet submitted his certificates a statement that
advance payment to him of an amount equal to eighty (80%) percent of the amount
of such offer will be made by the corporation promptly upon submission of his
certificates. If the corporate action has not been consummated at the time of
the making of the offer, such advance payment or statement as to advance payment
shall be sent to each shareholder entitled thereto forthwith upon consummation
of the corporate action. Every advance payment or statement as to advance
payment shall include advice to the shareholder to the effect that acceptance of
such payment does not constitute a waiver of any dissenters' rights. If the
corporate action has not been consummated upon the expiration of the ninety (90)
day period after the shareholders' authorization date, the offer may be
conditioned upon the consummation of such action. Such offer shall be made at
the same price per share to all dissenting shareholders of the same class, or if
divided into series, of the same series and shall be accompanied by a balance
sheet of the corporation whose shares the dissenting shareholder holds as of the
latest available date, which shall not be earlier than twelve (12) months before
the making of such offer, and a profit and loss statement or statements for not
less than a twelve (12) period ended on the date of such balance sheet or, if
the corporation was not in existence throughout such twelve (12) month period,
for the portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholder were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty (30) days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty (60) days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen (15) days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty (30) days thereafter upon the price to be paid for their
shares:
(1) The corporation shall, within twenty (20) days after the
expiration of whichever is applicable of the two periods last mentioned,
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.
(2) If the corporation fails to institute such proceeding within
such period of twenty (20) days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty (30) days after
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the expiration of such twenty (20) day period. If such proceeding is not
instituted within such thirty (30) day period, all dissenter's rights shall be
lost unless the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty (60) days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder the amount
found to be due him, upon surrender of the certificates for any such shares
represented by certificates.
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(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation;
(2) Retain his status as a claimant against the corporation and, if
it is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply; or
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty (30) days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this paragraph. If
the dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty (20) days after the expiration of such period of thirty (30) days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e) (2) of section 907 (Merger or consolidation of
domestic and foreign corporations).
