<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1996
Registration No.333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
THE EASTWIND GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3089 23-2732753
-------- ---- ----------
(State or other jurisdiction of incorporation (Primary Standard Classification Code (I.R.S. Employer Identification
or organization) Number) Number)
</TABLE>
100 Four Falls Corporate Center
Suite 305
West Conshohocken, Pennsylvania 19428
(610) 828-6860
--------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office and principal
place of business)
Paul A. DeJuliis, Chairman and
Chief Executive Officer
The Eastwind Group, Inc.
100 Four Falls Corporate Center
Suite 305
West Conshohocken, Pennsylvania 19428
(610) 828-6860
---------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Joseph P. Galda, Esquire Peter O. Clauss, Esquire
Buchanan Ingersoll Professional Corporation Clark, Ladner,
1200 Two Logan Square, 12th Floor Fortenbaugh & Young
Philadelphia, PA 19103 One Commerce Square
(215) 665-3879 2005 Market Street
Philadelphia, PA 19103
(215) 241-1876
____________________
Approximate date of proposed sale to the public: As soon as practicable
following the date on which this Registration Statement becomes effective.
____________________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [X]
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Registration Statement also amends the Company's Registration Statement on Form
SB-2, Commission File Number 33-94252.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of Amount/(1)/ Proposed Proposed
Shares to be to be Maximum Maximum Amount of
Registered Registered Offering Aggregate Registration Fee
Price per Offering
Share/(2)/ Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 935,000 $10.625 $9,934,375 $3,425.65
$.10 per share
- --------------------------------------------------------------------------------
Common Stock, par value 250,000 $10.625 $2,656,250 $915.95
$.10 per share, issuable
upon exercise of certain
Warrants issued to
Clifton Capital, Ltd.
- --------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $4,341.60
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ This Registration Statement also amends the Company's Registration
Statement on Form SB-2, Commission File Number 33-94252 and pursuant to
Rule 429 of the Securities Act of 1933, as amended, carries forward
564,500 shares of Common Stock. The filing fee of $995.83
associated with these shares was paid in connection with the filing of
the previous Registration Statement, Commission File Number 33-94252.
/(2)/ Estimated solely for the purpose of calculating the registration fee.
Fee calculated upon the basis of the closing price of the Company's
Common Stock on July 9, 1996 of $10.625, which date is within five (5)
business days prior to the date of filing of this Registration
Statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CROSS REFERENCE SHEET
---------------------
<TABLE>
<CAPTION>
Registration Statement
Item Number and Caption Location in Prospectus or Page
- ------------------------- ------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Forepart of the Registration
Statement; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk Factors.. Prospectus Summary; Summary
Financial Information; Risk Factors
4. Use of Proceeds....................... Use of Proceeds
5. Determination of Offering Price....... Cover Page of Prospectus;
Prospectus Summary; Plan of
Distribution
6. Dilution.............................. N/A
7. Selling Securityholders............... Selling Securityholders
8. Plan of Distribution.................. Cover Page of Prospectus;
Prospectus Summary; Plan of
Distribution
9. Legal Proceedings..................... Business of the Company -Litigation
10. Directors, Executive Officers,
Promoters and Control Persons......... Management; Certain Transactions;
Principal Stockholders
11. Security Ownership of Certain
Beneficial Owners and Management...... Principal Stockholders
12. Description of Securities............. Description of Securities
13. Interest of Named Experts and Counsel. N/A
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Statement on Indemnification;
Part II Item 24 - Indemnification
of Directors and Officers
15. Organization within Last Five Years... Business of the Company
16. Description of Business............... Business of the Company
17. Management's Discussion and Analysis
of Plan of Operation.................. Management's Discussion and
Analysis of Financial Condition
and Results of Operation
18. Description of Property............... Business of the Company
19. Certain Relationships and Related
Transactions.......................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters................... Market Price of the Common Stock
21. Executive Compensation................ Management - Executive Compensation
22. Financial Statements.................. Capitalization; Financial
Statements
23. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities of any such State.
Subject to completion, dated July 16, 1996
PRELIMINARY PROSPECTUS
- ----------------------
THE EASTWIND GROUP, INC.
_________________________
1,749,500 SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING SECURITYHOLDERS,
INCLUDING SHARES OF COMMON STOCK WHICH MAY BE ACQUIRED
UPON EXERCISE OF CERTAIN OUTSTANDING WARRANTS
_________________________
This Prospectus relates to the resale by certain selling securityholders
named herein (the "Selling Securityholders") of 1,749,500 shares of Common
Stock, par value $0.10 per share (the "Common Stock"), of The Eastwind Group,
Inc., a Delaware corporation (the "Company"), including 805,000 shares of Common
Stock which may be acquired upon exercise of certain outstanding Class C, D, and
A-1 Common Stock Purchase Warrants and certain other outstanding common stock
purchase warrants issued to Clifton Capital Ltd. (the "Clifton Warrants")
(collectively, the "Warrants"), as described below. The Warrants, which were
issued in certain private placement transactions, consist of the following:
165,000 Class C Common Stock Purchase Warrants (the "Class C Warrants"), 5,000
Class D Common Stock Purchase Warrants (the "Class D Warrants"), 385,000 Class
A-1 Common Stock Purchase Warrants (the "Class A-1 Warrants") and 250,000
Clifton Warrants. Each Class C, D and A-1 Warrant entitles the holder thereof
to purchase prior to expiration on March 10, 2005 (March 31, 1998 in the case of
the Class D Warrants) or prior earlier redemption (as to the Class C Warrants
only), subject to adjustment, one share of Common Stock upon payment of the
exercise price of $6.00, $3.50 and $4.00, respectively. Each Clifton Warrant
entitles the holder to purchase prior to redemption and subject to adjustment,
one share of Common Stock upon payment of the exercise price of $6.00. The
Clifton Warrants are exercisable commencing December 14, 1996 and expire on
December 13, 1999. See "DESCRIPTION OF SECURITIES."
Of the shares of Common Stock offered for resale by the Selling
Securityholders, 1,427,000 shares will be offered by officers, directors and
principal stockholders of the Company, which includes 365,000 shares issuable
upon the exercise of Class A-1 Warrants owned by such officers and directors and
250,000 shares of Common Stock issuable upon exercise of the Clifton Warrants.
See "SELLING SECURITYHOLDERS."
_________________________
The Company's Common Stock is traded on the NASDAQ Small Cap Market./SM
/On July 9, 1996, the last sale price of the Common Stock was $10.625.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Underwriting Proceeds to the
Discounts and Selling Security
Class of Security Price to Public Commissions Holders
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of _______ /(1)/ $18,588,437.50/(2)/
Common Stock
1,749,500
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ Does not give effect to ordinary brokerage commissions or other costs of
sale that will be borne solely by the Selling Securityholders. Does not
include the expenses of preparing the registration statement of which
this Prospectus is a part, estimated at $40,000, which will be borne by
the Company.
/(2)/ Represents the anticipated sale by the Selling Securityholders at $10.625
per share, the last reported sales price reported on The NASDAQ Small Cap
Market/SM/ on July 9, 1996. There can be no assurances, however, that the
Selling Securityholders will be able to sell their shares at this price,
or that a liquid market will exist for the Company's Common Stock. The
Company will receive no proceeds upon the sale of shares of Common Stock
by the Selling Securityholders.
_________________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_________________________
THE DATE OF THIS PROSPECTUS IS , 1996.
-------
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "1934 Act"), and in accordance therewith files reports
and other information with the Securities and Exchange Commission (the
"Commission"). Reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at: Seven
World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may be obtained upon written request addressed to the Commission
at the Public Reference Section, at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Common Stock is listed on NASDAQ
and reports and other information concerning the Company may also be inspected
at the offices of The National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
PRIVATE SECURITIES LITIGATION
REFORM ACT SAFE HARBOR STATEMENT
When used in this Prospectus, the words "estimate," "project," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements regarding events and financial trends which may affect the Company's
future operating results and financial position. Such statements are subject to
risks and uncertainties that could cause the Company's actual results and
financial position to differ materially. Such factors are described in detail
below under "RISK FACTORS." Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
The Eastwind Group, Inc., a Delaware corporation (the "Company"), is a
holding company formed in August 1993 to acquire and consolidate middle-market
manufacturing businesses on an industry by industry basis. The Company focuses
on the acquisition of entities that management believes are not performing to
potential. To date, the Company has completed two acquisitions, which currently
comprise the Company's sole operating subsidiaries: Polychem Corporation
("Polychem") and Princeton Academic Press, Inc. ("Princeton").
Polychem is a Pennsylvania corporation formed in March 1995 which acquired
all of the operating assets which formerly constituted The Polychem Division of
The Budd Company. As a division of The Budd Company, Polychem produced a wide
array of engineered components for the automotive and other industries for over
50 years. In recent years, Polychem has shifted its focus to manufacturing
products designed for the wastewater treatment market. Currently, revenues from
the wastewater treatment market exceed 82% of Polychem's annual revenue.
Polychem develops and manufactures custom engineered plastic molded products at
its 220,000 square foot headquarters in Phoenixville, Pennsylvania. Its
manufacturing capabilities include injection, compression and transfer molding
of engineered plastics, reaction injection molded ("RIM") processing of cast
nylon-6 material, profile extrusion of thermoset resins, and a complete
fabricating shop with computerized numerical control ("CNC") equipment. Through
these processes, Polychem engineers and produces an extensive line of molded
plastic products. Typical products include complete non-metallic rectangular
clarifier component systems for wastewater treatment applications, cast nylon
sprockets and wear shoes, cast nylon elevator buckets, phenolic sprockets and
pulleys, bearings, and molded conveyor chains. Polychem markets its plastic
chain, engineered plastic components, and plastic buckets primarily through
distributors. The balance of its products are sold by its own sales force.
The assets of the Polychem Division of The Budd Company were purchased by
the Company in March 1995 for a purchase price of approximately $6.4 million, of
which approximately $2.4 million was financed by the seller, $3.4 million was
borrowed from Congress Financial Corporation, and the balance was paid from cash
on hand. For the six months ended March 31, 1994 and the period October 1, 1994
through March 10, 1995, Polychem's net losses were $539,000 and $333,000,
respectively. Since its acquisition, Polychem has been profitable with net
income before allocation of corporate overhead and federal taxes of $763,000
from March 10, 1995 (date of acquisition) to December 31, 1995 and $520,000 for
the first quarter of 1996.
4
<PAGE>
Princeton is a Delaware corporation which was formed by Messrs. DeJuliis
and Thach, Chief Executive Officer and Chief Operating Officer of the Company,
respectively, and two other individuals (collectively, the "Founding
Stockholders"), in June 1993 to complete the acquisition of the book
manufacturing operations of Princeton University Press ("PUP"), a book publisher
associated with Princeton University. PUP originally established Princeton's
operation in 1905 to service its book manufacturing needs, and over time
Princeton evolved into a high quality manufacturer of black and white print work
for university presses. Currently, Princeton performs pre-press, printing and
binding services for a national clientele. Princeton's leased facility in
Lawrenceville, New Jersey is fully equipped to manufacture paperback or
condensed books from camera ready copy or digital files.
The assets of Princeton were purchased for a purchase price of
approximately $596,000, of which approximately $117,000 was in the form of a
note to the seller, approximately $100,000 was contributed by the Founding
Stockholders, with the remainder of the purchase price borrowed from Fremont
Financial Corporation. During the period from inception (June 30, 1993) to
December 31, 1993, and the years ended December 31, 1994 and 1995, Princeton had
net losses before allocation of corporate overhead and federal taxes of $49,000,
$168,000 and $125,000 respectively. During the first quarter of 1996 Princeton
had a net loss before allocation of corporate overhead and federal taxes of
$64,000.
The Company acquired all of the issued and outstanding stock of Princeton
on March 10, 1995 from DTF Media, Inc. ("DTF"), a company formed by the
Founding Stockholders to own Princeton. The Company issued 220,000 shares of
its Common Stock to DTF in exchange for the Princeton shares and other assets of
DTF, including cash and receivables. In addition, the Company assumed certain
specific liabilities of DTF, including liabilities for certain professional
fees, a note payable to Cooke Publishing, and an intercompany obligation payable
to Princeton in a principal amount outstanding on that date of $283,005. DTF
distributed the Company's Common Stock acquired in the exchange to the Founding
Stockholders, including 66,000 shares of Company's Common Stock each to Messrs.
DeJuliis and Thach, shortly after the exchange.
Although the Company intends to devote significant efforts to improve the
profitability of its current subsidiaries, ultimately the Company's growth
depends upon the achievement of its goal of acquiring and consolidating
underperforming middle-market manufacturing businesses. The success of this
strategy will depend upon the Company's ability to raise additional capital in
amounts sufficient to fund future acquisitions. No assurances can be made that
the Company will be successful in identifying future candidates for acquisition,
that it will have the available resources to fund such acquisitions, or, if such
acquisitions are consummated, that they will result in operating profits for the
Company. Although as of the date of this Prospectus the Company has not entered
into any letters of intent or agreements in principle, management is actively
engaged in evaluating acquisition candidates on an ongoing basis. The Warrants
will, to the extent exercised, provide one source of funds for potential
acquisitions; however, the Company has achieved no commitment with respect to
the exercise of any of the Warrants.
5
<PAGE>
The Company's principal executive office is located at 100 Four Falls
Corporate Center, Suite 305, West Conshohocken, Pennsylvania and its telephone
number is (610) 828-6860.
6
<PAGE>
THE OFFERING
Securities Being Offered: This Prospectus relates to the resale by certain
- ------------------------- selling security holders named herein (the "Selling
Securityholders") of 1,749,500 shares of Common
Stock. This includes 150,000 shares of Common Stock
issuable to Clifton Capital, Ltd., upon payment
therefor, on the effective date of the registration
statement of which this Prospectus is a part,
pursuant to a securities purchase agreement between
the Company and Clifton Capital, Ltd. (the "Clifton
Agreement") and 805,000 shares of Common Stock which
may be acquired upon exercise of certain Warrants
(the "Warrants"), as described below. The Warrants,
which were issued in certain private placement
transactions, consist of the following: 165,000 Class
C Common Stock Purchase Warrants (the "Class C
Warrants"), 5,000 Class D Common Stock Purchase
Warrants (the "Class D Warrants"), 385,000 Class A-1
Common Stock Purchase Warrants (the "Class A-1
Warrants"), and 250,000 Common Stock Purchase
Warrants (of which 62,500 are outstanding on the date
of this Preliminary Prospectus and the balance of
which will be issued on or prior to the effective
date of the registration statement of which this
Prospecuts is a part upon receipt of the purchase
price therefor) issued to Clifton Capital Ltd., in
each case subject to adjustment. Each Class C, D and
(the "Clifton Warrants") A-1 Warrant entitles the
holder thereof to purchase prior to expiration on
March 10, 2005 (March 31, 1998 in the case of the
Class D Warrants) or prior to earlier redemption (as
to the Class C Warrants only), one share of Common
Stock upon payment of the exercise price of $6.00,
$3.50 and $4.00, respectively, in each case subject
to adjustment as provided in the instrument
evidencing the Warrant.
Each Clifton Warrant entitles the holder to purchase
prior to redemption, subject to adjustment, one share
of Common Stock upon payment of the exercise price of
$6.00. The Clifton Warrants are exercisable
commencing December 14, 1996 and expire on December
13, 1999. See "DESCRIPTION OF SECURITIES."
Each of the Class C and Clifton Warrants are
redeemable by the Company upon 30 days' prior written
notice, in whole or in part, at a call price of $.001
per Warrant, but such call for redemption may only be
made following any calendar year in which the
Company's consolidated financial statements evidence
net income of at least $400,000 and net income per
share of at least $.40 per share or at any time after
the Company proposes to consummate the acquisition of
all of the stock or assets of another company whose
annual gross revenues from operations is at least $10
million (and protective provisions ensure that if
such proposed acquisition is not consummated then
such Warrants shall be returned to the holder
7
<PAGE>
and the Warrants shall continue in full force and
effect as if such redemption call had not been made).
Although this Prospectus registers the resale of
shares of Common Stock which may be issued upon
exercise of the Warrants, no Warrant holder is under
any obligation to exercise any Warrant.
Of the shares of Common Stock offered for resale by
the Selling Securityholders, 1,427,000 shares will be
offered by officers, directors and principal
stockholders of the Company including 365,000 shares
of Common Stock which may be acquired upon exercise
of Class A-1 Warrants owned by such officers and
directors and 250,000 shares of Common Stock which
may be acquired upon exercise of the Clifton
Warrants. See "SELLING SECURITYHOLDERS."
The shares of Common Stock offered by the Selling
Securityholders may be initially offered for sale
from time to time by the holders in regular brokerage
transactions, either directly or through brokers or
to dealers, in private sales or negotiated
transactions, or otherwise, at prices related to then
prevailing market prices. The Company will not
receive any proceeds from the sale of shares of
Common Stock by the Selling Securityholders. All
expenses of the registration of such securities are,
however, being borne by the Company. The Selling
Securityholders, and not the Company, will pay or
assume such brokerage commissions as may be incurred
in the sale of their securities. See "SELLING
SECURITYHOLDERS."
<TABLE>
<CAPTION>
Trading Market: NASDAQ Small-Cap Market: EWND
- --------------
<S> <C>
Total number of shares of
Common Stock outstanding................................... 1,988,250
Total number of shares of Common
Stock which may be issued upon the
exercise of outstanding options and warrants
and pursuant to the Clifton Agreement...................... 1,675,000
Total number of shares
that may be sold by the
Selling Securityholders.................................... 1,749,500
</TABLE>
8
<PAGE>
Use of Proceeds: The net proceeds realized by the Company upon the
- --------------- exercise of the Warrants will be used for working
capital and to fund future acquisitions by the Company,
although currently no such acquisitions have been
identified. See "USE OF PROCEEDS." Inasmuch as the
Company has received no firm commitments for the
exercise of the Warrants, there can be no assurances as
to the amount of the net proceeds to be realized by the
Company. Except for any proceeds that may be realized
upon exercise of the Warrants, the Company will not
receive any of the proceeds of the sale of any of the
shares of Common Stock by the Selling Securityholders.
Risk Factors: The Common Stock offered hereby involves a high degree
- ------------- of risk and prospective investors should consider
carefully the factors specified under "Risk Factors"
before electing to invest. See "RISK FACTORS" beginning
on page 9 of the Prospectus.
RISK FACTORS
The securities offered hereby are speculative in nature, involve a high
degree of risk and an investment in the securities should not be made by any
investor who cannot afford the loss of his entire investment. Prior to making
an investment decision with respect to the securities offered by this
Prospectus, prospective investors should carefully consider, along with the
other matters discussed in this Prospectus, the following risk factors:
1. No Significant Independent History of Operations; Historical Net
Losses of Operating Subsidiaries. The Company is a holding company which has
only recently acquired its operating subsidiaries and, as such, has a limited
history of independent operations. Each of the Company's operating subsidiaries
was formerly, but is no longer, a division of a significantly larger operating
entity in its industry. Each subsidiary realized a net loss from operations
during its last fiscal year prior to its acquisition and Princeton has realized
net losses in all periods since its acquisition.
2. No Assurance of Proceeds. A major source of potential capital to the
Company is the proceeds from the exercise of the Warrants. The Company, however,
has received no firm commitment for the exercise of the Warrants. Thus, there
can be no assurances that the Company will realize material proceeds, if any,
from the exercise of such Warrants. Furthermore, the Company has established no
minimum number of Warrants which must be exercised. Thus, holders of the
Warrants will have no assurance, at the time they elect to exercise, that the
Company will yield sufficient proceeds from the exercise of the Warrants by
other holders, so as to achieve its proposed plan of operation or ensure its
continued operations as a going concern.
9
<PAGE>
Although the Class C and Clifton Warrants may be redeemed if certain
operating performance criteria are met, the Class C, D, A-1 and Clifton Warrants
are for terms lasting a number of years and Warrant holders may prefer to hold
the Warrants until expiration or earlier redemption, even if the market price of
the Common Stock rises above the exercise price of the Warrants.
3. Control by Certain Stockholders. Management of the Company presently
possess, directly or beneficially, control over 28.62% of the Company's
outstanding voting stock (after giving effect to the issuance of 150,000 shares
of Common Stock pursuant to the Clifton Agreement) and have options and warrants
to acquire additional voting stock and, therefore, is, and for the near term,
will likely be, in a position to elect or influence the election of, at least,
five of the seven directors, and direct the policies of the Company for the
foreseeable future without the concurrence of the Company's public stockholders.
In addition, the Company, Messrs. DeJuliis and Thach, American Maple Leaf
Financial Corporation ("AMLF") and FAC Enterprises, Inc. ("FAC"), holders of
approximately 28.71% of the Company's outstanding voting securities, have
entered into a Voting Agreement concerning the election of such directors, which
will continue in effect until the earlier of (i) March 10, 1998, or (ii) the
completion of underwritten public offering which results in aggregate cash
proceeds of not less than $7.5 million at a per share price of not less than
$5.00 per share (a "Qualified Public Offering"). Pursuant to that Voting
Agreement, AMLF and FAC are guaranteed of the ability to elect at least one of
the Company's seven directors. Moreover, the Company's bylaws were further
amended to provide that any amendment of bylaw provisions relating to the number
of directors or the approval of certain fundamental transactions shall require
the affirmative vote of 75% of the outstanding shares entitled to elect
directors or, following a Qualified Public Offering, such number of affirmative
votes as otherwise is required under the Delaware General Corporation Law. This
supermajority voting requirement will expire automatically on September 10, 1996
with respect to certain of these fundamental transactions. See "PRINCIPAL
STOCKHOLDERS," "DESCRIPTION OF SECURITIES" and "CERTAIN TRANSACTIONS."
4. Rights of First Refusal. The Company is a party to certain agreements
which contain certain rights of first refusal in favor of the various parties to
such agreements under certain circumstances. Pursuant to one such agreement,
Paul A. DeJuliis, John R. Thach, FAC and AMLF have the right of first refusal to
purchase, pro rata, all or any part of new securities which the Company may from
time to time propose to sell and issue. These rights of first refusal expire ten
days following receipt of notice from the Company, after which the Company has
90 days thereafter to sell or enter into an agreement to be closed, if at all,
within 120 days from the date of such agreement regarding any new securities not
subscribed for by the holders of such rights of first refusal. Following
expiration of those dates, the rights of first refusal reapply to any reoffering
by the Company of such securities. These rights of first refusal are not
assignable and expire upon the earlier of September 10, 1996 or the consummation
of a Qualified Public Offering. Paul A. DeJuliis and John R. Thach's rights of
first refusal expire upon the earlier of the same events, and such date as they
no longer hold at least 25,000 shares of Common Stock of the Company (including
stock issuable upon exercise of warrants).
10
<PAGE>
On June 20, 1996 the Company entered into a Securities Purchase Agreement
with Mentor Special Situation Fund, L.P. ("MSSF") under which MSSF has a right
of first refusal to purchase, pro rata, all or any part of new securities which
the Company may from time to time propose to sell and issue. MSSF's right of
first refusal is substantially similar to those rights described above. MSSF's
right expires at the earlier of the maturity of (June 30, 2001) or the Company's
repayment of, a $500,000 subordinated debenture held by MSSF. The Company has
the right to repay the debenture at any time.
These rights of first refusal may adversely affect the Company's ability to
obtain financing.
5. Possible Dilution. The Company is authorized to issue 5,000,000 shares
of Common Stock of which 1,988,250 shares were outstanding as of July 2, 1996.
Assuming full exercise of all of the Warrants, other outstanding options and
warrants and issuance of 150,000 shares of Common Stock pursuant to the Clifton
Agreement, 3,663,250 shares will be outstanding. Furthermore, in connection with
other business matters deemed appropriate by the Company's management, there can
be no assurances that the Company will not, in fact, undertake the issuance of
more shares of Common Stock without notice to then existing stockholders. This
may be done in order to, among other things, facilitate a business combination,
acquire assets or stock of another business, generate debt or equity financing,
reward employees or consultants, or for other valid business reasons in the
discretion of the Company's Board of Directors. See "DESCRIPTION OF SECURITIES."
6. Dependence Upon Principal Customer. Princeton's largest customer,
Princeton University Press ("PUP"), accounted for approximately 44% of
Princeton's total revenue (and 16% of consolidated revenues) in its most recent
fiscal year. The loss of PUP as a customer would have a material adverse effect
on Princeton and the Company. PUP has no contractual obligations with Princeton
or the Company regarding its purchases. See "BUSINESS OF THE COMPANY."
7. Adequacy of Working Capital Financing. There can be no assurances that
the borrowing formulae under Polychem and Princeton's financing arrangements,
which are percentages of eligible inventory and accounts receivable, will permit
significant drawdown of loans under these commitments to provide adequate
working capital for the needs of their businesses if the operating cash flow
from either or both businesses is insufficient. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The loan agreement
with Princeton's lender was in default in May 1995 and a waiver from the lender
was required (and granted on June 15, 1995) based upon the lender's
determination that a material adverse change had occurred in Princeton's
financial condition. The outstanding balance on the loan was $382,000 as of June
30, 1996, and it is secured by a lien on all of Princeton's assets. In exchange
for the waiver, Princeton agreed to reduce the amount outstanding under its line
of credit by $300,000 by November 15, 1995, which condition was met on
November 7, 1995.
11
<PAGE>
Moreover, under the relevant loan agreements, although the cash flow
from the operating subsidiaries can be used to support the holding company
within prescribed limits, such cash flow cannot be invested in, or loaned or
advanced to, any of such subsidiaries directly by the other subsidiary. If the
Company does not maintain adequate working capital, it will have to scale back
operations to a level commensurate with its available financing.
8. Effect of Secured Liens on Future Financing Activities. A significant
portion of the Company's assets have been pledged as collateral to secure
various debt obligations of the Company. See "BUSINESS OF THE COMPANY." In the
event the Company fails to comply with its obligations, its assets could be
foreclosed upon. Moreover, to the extent that the Company's assets continue to
be pledged to secure the obligations, such assets will be unavailable to secure
additional debt financing, which may adversely affect the Company's ability to
borrow in the future.
9. Holding Company Risks. The Company, as a holding company without
significant income from operations, will be dependent upon the income from its
operating subsidiaries to meet its operating expenses. If its operating
subsidiaries are unable to dividend or otherwise pay amounts to the Company
sufficient to cover its operating expenses, the Company may be subject to
liquidity problems, even if, on a consolidated basis, its operating subsidiaries
are profitable.
10. Possible State and Federal Restrictions on Exercise of Warrants.
Holders of Warrants will be able to sell the underlying Common Stock issuable
upon exercise of the Warrants only if a current registration statement relating
to such underlying Common Stock is then in effect and on file with the
Commission and only if such Common Stock is qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. The Warrant agreements relating to the
warrants contain certain provisions requiring the Company to file for, and
endeavor to secure, such current and effective registration of the shares of
Common Stock issuable upon exercise of the Warrants. Although the Company has
undertaken to use its best efforts to maintain the effectiveness of this
Prospectus covering the securities underlying the Warrants for one year, there
can be no assurances that the Company will be able to do so. The Company will
maintain the effectiveness of this Prospectus if the benefits of doing so (i.e.,
encouraging additional exercise of the Warrants) outweigh the cost of
maintaining the Prospectus. Among other things, the Company's willingness to
maintain the effectiveness of the Prospectus will be dependent on the market
price of the Company's Common Stock and whether a liquid public market is
developed. The likelihood of the Warrants being exercised and the Company
obtaining any proceeds therefrom, may be greatly reduced if a current prospectus
covering the securities issuable upon the exercise of Warrants is not kept
effective or if such securities are not qualified or exempt from qualification
in the states in which the holders of the Warrants reside. See "DESCRIPTION OF
SECURITIES."
11. Effect of Outstanding Warrants. As of June 30, 1996, the Company had
outstanding warrants and options to purchase 1,525,000 shares of Common Stock.
To the extent
12
<PAGE>
that the shares underlying the warrants and options enter the market, the price
of the Common Stock in the market may be substantially reduced. Moreover, for
the term of the warrants and options issued by the Company, the holders thereof
are given an opportunity to profit from a rise in the market price of the
Company's Common Stock, with a resulting dilution in the interest of the other
stockholders. Further, the terms on which the Company may obtain additional
financing during that period may be adversely affected by the existence of such
warrants and options. The holders of such warrants and options may exercise them
at a time when the Company might be able to obtain additional capital through a
new offering of securities on terms more favorable than those provided therein.
The Company has undertaken to file this Prospectus with the Commission pursuant
to certain registration rights enjoyed by the holders of certain warrants. The
expense of registration of this Prospectus will be borne by the Company, which
expense may be significant.
12. Dividends Not Likely. The Company does not intend to declare or pay
cash dividends in the foreseeable future. Earnings, if any, are expected to be
retained to finance and develop its business. Moreover, payment of dividends are
limited or prohibited under certain restrictions contained in a subordinated
debenture issued by the Company to MSSF, the terms of the Series A Preferred
Stock of the Company, and the loan agreements of its subsidiaries. The Company
is also dependent, in part, upon the earnings of its subsidiaries for cash which
would be used to pay dividends. See "DESCRIPTION OF SECURITIES."
13. Dependence on Key Personnel. To a material extent, the Company's
future success is dependent upon the continued efforts of Messrs. Paul A.
DeJuliis and John R. Thach. The loss of either of their services would likely
have a material adverse effect on the Company's business. As of the date of this
Prospectus, although the Company has entered into employment agreements with
these individuals, the Company does not have any "key-man" insurance on the
lives of these individuals.
14. Antitakeover Provisions; Certain Provisions of the Company's
Certificate of Incorporation, Bylaws and Delaware Law. Certain provisions of the
Company's bylaws require a greater percentage stockholders' vote than a majority
of the shares cast at a meeting at which a quorum of stockholders is present. In
addition, the approval of certain fundamental transactions requires the
affirmative approval of at least 75% of the affirmative vote of the entire Board
of Directors. These supermajority voting requirements expire automatically on
September 10, 1996 with respect to certain of these fundamental transactions or
upon a Qualified Public Offering as defined in the voting agreement with FAC and
AMLF. See "CERTAIN TRANSACTIONS" and "DESCRIPTION OF SECURITIES".
The Company is governed by the provisions of Section 203 of the
General Corporation Law of the State of Delaware (the "GCL"), an anti-takeover
law. In general, the law prohibits a public Delaware corporation from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. "Business combination" includes mergers, asset sales and
other transactions
13
<PAGE>
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or, within
three years, did own) 15% or more of the corporation's voting stock. The
supermajority voting provisions in the Company's bylaws and the provisions
regarding certain business combinations under the GCL could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices. See "DESCRIPTION OF SECURITIES."
15. Competition. The businesses of the Company's operating subsidiaries
are highly competitive. Some of the companies with which the Company competes
have substantially greater marketing, financial and managerial resources than
those of the Company. See "BUSINESS OF THE COMPANY-Competition."
USE OF PROCEEDS
The Company will not realize any proceeds from the sale of shares of Common
Stock by the Selling Securityholders. See "SELLING SECURITYHOLDERS."
The gross proceeds which may be realized by the Company upon the exercise
of one hundred (100%) percent of the Warrants will be $4,047,500. Inasmuch as
the Company has received no firm commitments for their exercise, there can be no
assurance that any or a substantial portion of the Warrants will be exercised.
Management cannot predict with any certainty the amount of proceeds, if
any, which may be generated from the exercise of Warrants. The net proceeds
which may be realized by the Company, if any, upon the exercise of the Warrants
will not be utilized for any specific purpose other than to contribute to the
Company's working capital and be used to continue the operations of the Company
in accordance with the business strategy identified by management. See
"BUSINESS OF THE COMPANY." Based upon this strategy, assuming that proceeds net
of costs of this offering of $4,007,500 are realized by the Company upon the
exercise of Warrants within a period of twenty-four (24) months, management
would reasonably expect to utilize such proceeds in the following relative
proportions and orders of priority:
Application of Funds % of Funds
-------------------- ----------
Working Capital 20
Capital to fund
future acquisitions 80
The amounts actually expended for the purposes described above could vary
significantly depending on, among other things, the Company's ability to obtain
capital from other sources. In addition, if each class of Warrant is not
exercised at the same time, the proceeds from the
14
<PAGE>
Warrants which are exercised piecemeal will likely be contributed to the
Company's working capital.
Although the Company is constantly evaluating potential acquisition
candidates, the Company has not entered into any letters of intent or reached
any agreements in principle, nor has it identified any such candidate as a bona
fide acquisition target. There can be no assurances that the Company will be
able to identify attractive acquisition targets in the future, or that if so
identified, that they will be acquired on terms reasonably acceptable to the
Company.
MARKET PRICE OF THE COMMON STOCK
The Company's Common Stock has been traded on the NASDAQ Small Cap
Market/SM/, under the symbol EWND, since May 28, 1996. From November 13, 1995
to May 27, 1996 the Common Stock was traded on the NASDAQ Electronic Bulletin
Board. The following table sets forth, for the periods indicated, the range of
high and low bid prices of the Common Stock of the Company as reported by the
National Quotation Bureau. These quotations represent prices between dealers
and do not include retail markups, markdowns, or commissions, and do not
necessarily represent actual transactions. The number of holders of record of
the Company's Common Stock as of July 2, 1996 was approximately 129.
The bid price per share by quarter was:
<TABLE>
<CAPTION>
Three months ended High Low
---------------------------------------------------
<S> <C> <C>
December 31, 1995 $ 10 $ 8
March 31, 1996 $ 10 7/8 $ 8 1/4
June 30, 1996 $ 11 1/2 $ 7
</TABLE>
The Company has not paid any cash dividends to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future.
Moreover, payment of dividends are limited or prohibited under certain
restrictions in a subordinated debenture issued by the Company to MSSF, the
terms of the Series A Preferred Stock of the Company, and the loan
agreements of its subsidiaries. The Company is also dependent, in part, upon the
earnings of its subsidiaries which would be necessary to provide the cash for
any such dividends. It is the present intention of management to utilize all
earnings from operations for working capital of the Company.
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
as of March 31, 1996, and the pro forma capitalization after giving effect to
the recent issuance of Series A Convertible Preferred Stock and a subordinated
debenture in two private placement transactions.
<TABLE>
<CAPTION>
March 31, 1996
--------- ----------
Actual Pro Forma
<S> <C> <C>
Long-term debt $3,209,875 $3,209,875
---------- ----------
Subordinated debenture - 289,600
---------- ----------
Stockholders' equity:
Preferred Stock, $.10 par value;
3,000,000 shares authorized,
none issued and outstanding,
actual; 1,000 shares issued and
outstanding, pro forma --- 100
Common stock, $.10 par value
5,000,000 authorized;
1,608,250 actual 168,325 168,325
Warrants outstanding 139,836 871,636
Additional paid-in capital 2,129,465 2,608,265
Accumulated deficit (218,674) (218,674)
---------- ----------
Total stockholders' equity 2,218,952 3,429,652
---------- ----------
Total capitalization $5,428,827 $6,929,127
---------- ----------
</TABLE>
(1) On May 10, 1996, the Company issued 1,000 shares of its Series A Preferred
Stock for consideration of $1,000,000 and 220,000 common stock purchase
warrants for consideration of $220 to Odyssey Capital Group, L.P.. On June
20, 1996, the Company issued a $500,000 principal amount 12% Subordinated
Debenture for consideration of $500,000 and 80,000 common stock purchase
warrants for consideration of $80 to Mentor Special Situation Fund, L.P..
The pro forma capitalization of the Company gives effect to these
transactions. See "DESCRIPTION OF SECURITIES."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background and Basis of Presentation
Although the Company was formed in August 1993, no significant business
operations were conducted until March 10, 1995 when the Company acquired the
shares of Princeton from DTF and the Company's wholly-owned subsidiary acquired
the assets of the Polychem Division of The Budd Company.
The acquisitions of Princeton and Polychem were accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
assets of the acquired business are generally valued at their fair market value
on the date of acquisition, with the amount by which the purchase price differs
from the aggregate fair market value of the acquired assets treated as goodwill
or negative goodwill. The results of the operations of the acquired businesses
are included with the results of operations of the Company beginning on the date
of acquisition.
Because the acquired businesses were part of larger operations prior to
their acquisition, evaluating results of operations prior to the date of
acquisition may not be indicative in projecting operations which may be expected
in the future.
The consolidated financial statements of the Company have been prepared
assuming that Princeton had been a subsidiary of the Company for the periods
presented since it is considered an entity under common control.
Consolidated Results of Operations
Results of operations are presented for the years ended December 31, 1994
and 1995 and the three month periods ended March 31, 1995 and 1996. Results of
operations for the year ended December 31, 1994 include the Company and its
wholly-owned subsidiary, Princeton. Results of Operations in 1995 and 1996
include the Company and its two wholly-owned subsidiaries, Princeton and
Polychem, the latter from March 10, 1995 (date of acquisition).
17
<PAGE>
The following table sets forth certain statement of operations items as a
percentage of total net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended March 31,
1994 1995 1995 1996
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 88.1 78.0 87.4 74.3
---- ---- ---- ----
Gross Profit 11.9 22.0 12.6 25.7
Selling, general and
administrative 12.4 19.6 17.8 18.7
---- ---- ---- ----
Operating income (loss) (0.5) 2.4 (5.2) 7.0
Interest expense 2.7 4.2 3.9 3.0
--- --- --- ---
Income (loss) before income
tax benefit and minority
interest in loss of
subsidiary (3.2) (1.8) (9.1) 4.0
Income tax (provision)
benefit 0.8 0.1 1.7 (1.1)
Minority interest in
loss of subsidiary 0.6 0.0 0.0 0.0
--- --- --- ---
Net income (loss) (1.8%) (1.7%) (7.4%) 2.9%
------ ------ ------ ----
</TABLE>
Discussion Of Fiscal Year Ended December 31, 1994 ("Fiscal 1994")
Compared To The Fiscal Year Ended December 31, 1995 ("Fiscal 1995")
-------------------------------------------------------------------
Net sales for Fiscal 1995 were $15,434,000, compared to $5,236,000 for
Fiscal 1994. The principal reason for the significant increase in net sales in
Fiscal 1995 versus Fiscal 1994 was the inclusion of net sales from Polychem for
the period March 10, 1995 (the date of acquisition) through December 31, 1995 of
$9,858,000.
Net sales for Princeton of $5,576,000 in Fiscal 1995 reflected an increase
of 6.5% over Fiscal 1994. The increase in Princeton's revenues is a result of
the cumulative effects of
18
<PAGE>
increased sales and marketing efforts implemented upon the acquisition of assets
from Princeton University Press ("PUP"). A significant number of new customers
were added to Princeton's customer account base during 1995. These
customers, together with increased orders over a broadened customer base, were
the primary reason for the increase in revenues at Princeton. Princeton's
largest customer remains PUP, which accounted for $3,050,000 and $2,453,000 of
net sales in Fiscal 1994 and Fiscal 1995, respectively. Princeton's revenue from
reprints (as opposed to the printing of new titles) represented approximately
48% of Princeton's net sales for Fiscal 1995, down from 62% in Fiscal 1994.
Gross profit percentage for Fiscal 1995 was 22%, up from 11.9% in Fiscal
1994. Gross profits were $621,000 and $3,390,000, for Fiscal 1994 and Fiscal
1995, respectively. The increase in gross profits for Fiscal 1995 related
principally to the inclusion of Polychem's gross profits from the date of
acquisition (March 10, 1995) through December 31, 1995 of $2,723,000, or 28%.
Princeton's gross profits rose slightly in Fiscal 1995 to $667,000 or 12% from
$621,000 or 11.9% in Fiscal 1994.
The products which Polychem provides to its customers have widely varying
gross margins, even within the water treatment product line, dictated by whether
the product is manufactured by the Company (higher margins) or purchased from
outside sources and packaged for customers (lower margins). Polychem's gross
profits are expected to hold at the Fiscal 1995 level, or perhaps increase due
to a more favorable mix of international versus domestic sales. International
sales traditionally generate higher profits. Other factors impacting gross
profits at Polychem, namely materials cost, labor costs, and manufacturing
overhead, are expected to be consistent with the experience in Fiscal 1995, with
an improvement in gross profits due to anticipated increased volume in future
periods.
Princeton's gross margins tend to be volatile, particularly as a result of
changing paper prices. During Fiscal 1995, Princeton was able to absorb paper
cost volatility through its pricing, resulting in slightly increased gross
margins versus the prior year. In addition, Princeton has been able to adjust
the pricing scale with PUP, falling more in line with market prices. Those
latter two factors together with production efficiencies in the pressroom,
bindery, and pre-press should further enhance gross profits in future periods.
Selling, general and administrative expenses totaled $645,000 and
$3,009,000 for Fiscal 1994 and Fiscal 1995, respectively. The increase in
selling, general and administrative expenses in Fiscal 1995 of $2,364,000 was
principally due to the inclusion of Polychem ($1,534,000) from the date of
acquisition (March 10, 1995), corporate overhead relating to the holding company
($756,000), principally relating to salaries, facility costs and professional
fees, and Princeton adding three full time salespersons during the second half
of Fiscal 1995.
Interest expense for Fiscal 1995 was $655,000, or 4.2% of net sales, 1.5
points higher than the 2.7% of net sales for Fiscal 1994. This increase reflects
the cost of borrowings at Polychem (2.6% of revenues) plus interest expense
related to bridge financing for the holding company during Fiscal 1995.
19
<PAGE>
Discussion Of Fiscal Quarter Ended March 31, 1995 (The "Comparable Quarter")
Compared To The Fiscal Quarter Ended March 31, 1996 (The "Current Quarter")
---------------------------------------------------------------------------
The Company generated net income of $145,000 during the Current Quarter,
compared to a loss of $142,000 for the Comparable Quarter. The income for the
Current Quarter is a result of Polychem's profitability more than offsetting the
losses of Princeton during that period. As Polychem was acquired by the Company
effective March 10, 1995, its results of operations during the Comparable
Quarter showed a virtual break-even during that period.
Net sales for the Current Quarter of $4,967,000 represents an increase of
$3,053,000 versus the Comparable Quarter. The increase is attributable entirely
to Polychem, as Princeton's revenues were slightly down during the Current
Quarter versus the Comparable Quarter. Historically, Princeton's revenues during
the first quarter of the calendar year are lower than other quarters due to the
nature of the book publishing marketplace served by Princeton. Princeton
revenues showed substantial increase in April 1996 versus each of the preceding
three months.
Cost of sales for the Current Quarter totaled $3,689,000, or 74% of net
sales, compared to the Comparable Quarter of $1,673,000, or 87% of net sales, an
improvement of 13 percentage points. Polychem's cost of sales for the Current
Quarter was $2,581,000 or 69% of net sales. Polychem's improvement in gross
profit percentage points during the Current Quarter is attributable to
streamlined production methods and a favorable mix in manufactured products
versus products for resale purchased from outside vendors. Princeton's cost of
sales for the Current Quarter was 92%, approximately the same percentage as in
the Comparable Quarter. The relatively high cost of sales percentage at
Princeton is due to fixed costs of manufacturing allocated over slightly lesser
volume in the Current Quarter versus the Comparable Quarter.
Selling, general and administrative expenses for the Current Quarter were
$927,000, or 19% of net sales, compared to the Comparable Quarter of $341,000,
or 18% of net sales. The increase in selling, general and administrative
expenses for the Current Quarter was principally due to Polychem ($401,000),
corporate overhead relating to the holding company ($212,000), off-set by a
reduction in selling, general and administrative expenses at Princeton of
$31,000. Polychem's selling, general and administrative expenses as a
percentage of net sales for the Current Quarter were 13%, a reduction of 3
percentage points from the same period of the prior year and the percentage
which was experienced during 1995. Management believes that the percentage of
selling, general and administrative expenses to net sales will decrease as fixed
costs are spread over higher net sales for both Polychem and Princeton.
Interest expense for the Current Quarter was $150,000, or 3% of net
sales, versus $75,000, or 3.9% of net sales, for the Comparable Quarter.
Interest expense as a percentage of net sales was lower during the Current
Quarter due to the influx of additional capital and continuing efforts by
management to more effectively manage accounts receivable and inventories,
resulting in lower utilization of available lines of credit. Polychem's
interest expense
20
<PAGE>
for the Current Quarter was $117,000, or 3.1% of its net sales, while
Princeton's interest expense during this quarter was $30,000 or 2.5% of its net
sales.
Liquidity and Capital Resources
The Company has financed its working capital requirements and capital
expenditures through cash flows generated from operations, bank debt, sale of
Company securities and equipment leases.
Although the Company realized a net loss of $259,000 during Fiscal 1995,
the net increase in cash during the year was $426,000, which represents the
balance of cash and cash equivalents at December 31, 1995. Cash flows from
operating activities provided $1,126,000, resulting from: depreciation,
amortization and a deferred tax benefit of $177,000; imputed interest on bridge
note; non-cash compensation of $33,000; a decrease in inventories of $772,000,
resulting from improved raw materials and purchasing and management efforts,
together with the shipment of significant orders previously included in work in
process; a decrease in prepaid expenses and other assets of $65,000,
representing charge offs of such expenses during the period; an increase in
accounts payable of $214,000; an increase in accrued expenses of $271,000,
occurring in the normal course of business; and an increase in accrued income
taxes and pension of $47,000 offset by an increase in accounts receivable of
$267,000 due to increased sales volume. The Company utilized increases in
accounts payable in order to take advantage of trade credit available as opposed
to increasing borrowings under its revolving credit facilities. The Company
believes that its continued effort in receivables collections and inventory
management will positively affect future cash flows.
Investing activities during Fiscal 1995 reflected a net use of cash of
$3,914,000, principally relating to the purchase of the net assets of Polychem
in the amount of $3,897,000. In addition, purchases of property and equipment
for the year totaled $30,000 and the Company received net payments from related
parties of $13,000.
For Fiscal 1995, net cash provided by financing activities totaled
$3,214,000, and included borrowing on term notes of $1,952,000, the sale of the
Company's Common Stock and warrants, net of registration costs, of $1,086,000
and net borrowings under lines of credit of $1,450,000. The Company paid
deferred financing costs of $206,000, repaid a $750,000 seller note related to
the Polychem acquisition, and made $317,000 of repayments on term loans and
capital leases.
Net cash provided by operating activities during the Current Quarter was
$1,194,000, as compared to cash provided by operating activities of $1,413,000
for the Comparable Quarter. The principal components of cash flows provided by
operating activities during the Current Quarter were net income of $145,000,
depreciation and amortization of $77,000, accounts receivable ($707,000), and
inventories ($65,000), an increase in accounts payable ($201,000) and accrued
income taxes ($56,000); offset by an increase in prepaid expenses ($31,000) and
accrued income taxes and pension retirement benefits ($60,000).
21
<PAGE>
During the Comparable Quarter the net loss for the period of $142,000 was
offset by depreciation and amortization of $19,000, non-cash compensation
expense ($33,000), decreases in accounts receivable ($610,000), inventory
($189,000), prepaid expenses ($58,000), increases in accounts payable ($398,000)
and accrued expenses ($346,000); all of which was offset by an increase in other
assets ($64,000) and a deferred tax benefit ($33,000).
The cash flow from operating activities during the Comparable Quarter, was
principally attributable to a decrease in inventories and increases in accounts
payable and accrued expenses at Polychem from the date of acquisition. However,
the Company has continued to focus on the management of accounts receivable and
inventories, resulting in lower levels of line of credit utilization and a
resultant lower interest cost. In addition , the Company continues to utilize
increases in accounts payable in order to take advantage of trade credit
available as opposed to increasing borrowings under its revolving credit
facilities.
Net cash used in investing activities for the Current Quarter was $420,000
as compared to cash used in the Comparable Quarter of $3,690,000. During the
Current Quarter, the Company made an investment in the form of a subordinated
debenture to Lavelle Company in the amount of $450,000. During the Comparable
Quarter, cash used in investing activities relating to the purchase of net
assets of Polychem ($3,780,000) and purchase of property and equipment
($1,000), which were offset by net payments from a related party ($91,000).
Net cash used in financing activities for the Current Quarter was $445,000,
compared to cash provided during the same period of the prior year of
$3,025,000. The principal components of cash used in financing activities
during the Current Quarter included repayments under lines of credit
($1,389,000), principal payments on term notes and capital leases ($103,000)
offset by proceeds form the exercise of warrants ($1,046,000). During the
Comparable Quarter, cash flows from financing activities included borrowings on
term notes ($1,952,000), net borrowings under lines of credit ($809,000),
proceeds from sales of Common Stock ($500,000) offset by principal repayments on
term notes and capital leases ($30,000) and deferred financing costs ($206,000).
As of March 31, 1996 and December 31, 1995, working capital was $2,895,000
and $2,978,000, respectively. While actual working capital decreased by
$83,000, the working capital ratio increased from 1.6 to 1.8. The Company's
focus on managing its principal assets of accounts receivable and inventories
has resulted in stronger liquidity at March 31, 1996 versus December 31, 1995.
On May 24, 1996, the Company purchased convertible preferred stock in
Wickersham Printing Company, Inc. for $250,000. The preferred stock has a
minimum dividend rate of 6%, and participates in the earnings of Wickersham, if
any, at the rate of 80% of such earnings. The preferred stock has a liquidation
preference equal, in the aggregate, to $250,000 plus accrued and unpaid
dividends thereon, and is convertible, in the aggregate, into 80% of the
outstanding common stock of Wickersham.
Wickersham is a privately-owned printing and book manufacturer located
in Lancaster, Pennsylvania. Its two production facilities manufacture books via
conventional offset
22
<PAGE>
printing and through the latest technology - "on demand" printing. This dual
capacity allows Wickersham to produce books efficiently in quantities ranging
from one to 20,000.
The Company has no significant capital spending or purchase commitments,
other than normal commitments under facility and capital leases. There are no
commitments to purchase significant property, plant and equipment during the
remainder of 1996.
The $9,000,000 credit facility at Polychem includes a term loan with an
outstanding balance of $1,523,000 at March 31, 1996, leaving an aggregate
availability of $7,477,000 as of that date under the credit facility, dependent
upon eligible collateral assets. As of June 30, 1996, availability under the
line of credit, based upon available eligible collateral assets, was $1,272,000,
and outstanding borrowings were $774,000.
As of June 30, 1996, Princeton's line of credit balance outstanding was
$382,000 against the total available credit facility of $1,000,000.
As of March 31, 1996, the Company had outstanding Class C, D, and A-1
Warrants, which were offered in March 1995 to create a reserve to be used by the
Company in raising funds for additional potential business opportunities and
acquisitions. During the Current Quarter, 75,000 Class A-1 Warrants were
exercised, generating $300,000 of net capital to the Company. Since the end
of the Current Quarter, as of the date of this Prospectus, 85,000 Class C
Warrants, 30,000 Class D Warrants and 140,000 Class A-1 Warrants have been
exercised generating $1,175,000 of net capital to the Company. The outstanding
warrants as of the date of this Prospectus, if fully exercised, would generate
$5,847,500 of capital to the Company. This includes the warrants issued to
Odyssey Capital Group, L.P. ("Odyssey") and MSSF described below.
Subsequent to the end of the Current Quarter, the Company has also closed
financings with three separate investors as follows:
Sale to Odyssey of $1,000,000 of the Company's Series A Preferred
Stock, which initially has a dividend rate of 9% increasing to 15% on
May 10, 1999 and to 18% on May 10, 2002. In addition, Odyssey
purchased 220,000 warrants at a purchase price of $220. The warrants
are exercisable at $6.00 per share for a seven year period.
Sale to MSSF of a five year, $500,000 Subordinated Debenture
which bears interest at 12%. The Debenture is payable in three equal
installments due June 30, 1999, 2000 and 2001. The Company can repay
the Debenture in whole or in part at any time. In addition, MSSF
received a warrant to purchase 80,000 shares of the Company's Common
Stock at $6.00 per share exercisable for a seven year period.
Sale to Clifton Capital, Ltd of $1,200,000 of the Company's
Common Stock Units (the "Units") with each unit consisting of one (1)
share of Common Stock and one and one-quarter (1 1/4) Common Stock
Purchase Warrants. Each warrant is exercisable at $6.00 per share for
a three year period commencing on December 14, 1996. 50,000 Units have
been issued. The remaining 150,000 Units will be
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issued on the effective date of the registration statement, of which
this Prospectus is a part.
The Company believes that its current cash and available resources, cash
generated from operations, and the availability under its lines of credit will
be sufficient to fund the Company's operations and expected capital expenditures
for the twelve months from March 31, 1996.
The Company intends to aggressively pursue potential acquisitions. The
Company will require additional capital to fund its expansion plans, which may
be in the form of private placements or public offerings of debt, equity or
convertible securities.
BUSINESS OF THE COMPANY
Background
- ----------
The Company is a holding company formed in August 1993 to acquire and
consolidate middle-market manufacturing businesses on an industry by industry
basis. The Company focuses on the acquisition of entities that management
believes are not performing to potential. To date, the Company has completed
two acquisitions, which currently comprise the Company's sole operating
subsidiaries: Polychem Corporation ("Polychem," formerly The Polychem Division
of The Budd Company) and Princeton Academic Press, Inc. ("Princeton," formerly
part of Princeton University Press "PUP"). Polychem and Princeton are described
in detail below. As of the date of this Prospectus, no other acquisitions are
likely to occur.
Princeton Academic Press, Inc.
- ------------------------------
Background
----------
Princeton was incorporated under the laws of Delaware in June 1993, to
complete the acquisition of the book manufacturing operations of PUP.
Subsequently, DTF Media, Inc. ("DTF") acquired the shares of Princeton from its
Founding Stockholders in a share exchange. The Company acquired 100% of
Princeton's stock from DTF on March 10, 1995 (see "Acquisition", below).
Princeton helps organizations manage the process of creating high-quality black
and white print work. It provides pre-press, printing, and binding services to
publishers, university presses, and other information providers. Other
Princeton services include assembly and packaging, order fulfillment and
distribution, and overall project management.
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Acquisition
-----------
The Company acquired all of the issued and outstanding stock of Princeton
on March 10, 1995, from DTF. The Company issued 220,000 shares of its Common
Stock to DTF in exchange for the Princeton shares and other assets of DTF,
including cash and receivables. In addition, the Company assumed certain
specific liabilities of DTF, including liabilities for certain professional
fees, a note payable to Cooke Publishing, of which the principal balance
outstanding on the date of acquisition was $25,000, and an intercompany
obligation payable to Princeton in a principal amount outstanding on that date
of $283,005. DTF distributed the Company's Common Stock acquired in the
exchange to its four stockholders shortly after the exchange. See "PRINCIPAL
STOCKHOLDERS."
Products
--------
Princeton's products include manufactured books and manuals for publishers,
university presses, and other information providers, as well as related services
involved in managing the process of creating books and manuals.
Marketing and Customers
-----------------------
Princeton's customer base is primarily comprised of university presses and
traditional book and journal publishers which are primarily concentrated in the
Northeastern United States. The majority of Princeton's products consist of
short to medium run (under 10,000 copies), high-quality black and white hard
cover and paperback books for the university publishing market. PUP accounted
for approximately 44% of Princeton's total revenue in its most recent fiscal
year, which represents a 31% reduction since Princeton began diversifying its
customer base after the acquisition in June 1993. Nonetheless, PUP remains
Princeton's most significant client, and Princeton and the Company would suffer
material, adverse effects if it were to lose PUP's business. Princeton's
management believes that it will continue to enjoy a strong relationship with
PUP due to PUP's dependence upon Princeton's equipment and software systems
which were specially designed to meet PUP's needs, the familiarity of PUP's
personnel with these systems, and the quality of the work produced for PUP.
However, there can be no assurances that Princeton's relationship with PUP will
continue over the long term, or, if it does, that it will continue at the same
level.
Competition and Strategy
------------------------
All phases of Princeton's business are highly competitive. The printing
and publishing industries are highly fragmented. While most establishments are
relatively small, several of Princeton's competitors are considerably larger or
are affiliated with companies which are considerably larger and have greater
financial and other resources than both Princeton and the Company. In recent
years, consolidation of customers and competitors within Princeton's markets has
increased competitive pricing pressures. Currently, approximately 55% of
Princeton's projects are competitively bid in the marketplace. The major
competitive factors in
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Princeton's business in addition to price are product quality, customer service,
availability of appropriate printing capacity, rapid turnaround, scheduling
flexibility, and technology support. Princeton obtains its customers through
word-of-mouth referrals as well as through its own sales force, who sells
through advertising directories, trade shows, and direct contact. In the most
recent completed fiscal year, Princeton derived approximately 48% of its
business from reprints of prior book runs (down from 62% in the prior fiscal
year).
In its most recent fiscal year, Princeton ranked approximately tenth in
annual sales volume among its major competitors in the particular book
manufacturing niche in which it markets its products (short to medium-run high-
quality black and white printing primarily for the university marketplace).
Several of these competitors have far greater resources than Princeton and
significantly larger market share. Princeton's goal is to increase revenues and
improve its competitive position in the book manufacturing industry through
capital expenditures for acquisitions of new equipment and expansion of its
sales force. Acquisitions could take place either through direct purchases of
new equipment, purchases of printing and binding equipment from existing small
manufacturers, or through strategic acquisitions of other book manufacturing
operations approximately equal in size to Princeton. As of the date of this
Prospectus, no additional acquisitions are probable (i.e., more likely than not
to occur).
Operations, Materials and Supplies
----------------------------------
Although some of Princeton's competitors employ a web printing process
capable of handling larger runs of books, Princeton uses sheet fed printing
presses, which provide a higher overall print quality and are better suited for
shorter (under 10,000 copies) runs. Currently, a few of Princeton's customers
purchase their own paper and furnish it to Princeton for book production
purposes, but usually Princeton purchases its paper, film, plate materials,
cover stock and ink directly from outside suppliers. As is prevalent in many
other manufacturing facilities, notably the automobile manufacturing sectors,
Princeton attempts to maintain a J-I-T (Just In Time) inventory policy for its
standard paper and cover stock which number seven types, and a consignment
inventory policy for its film and plate materials requirements, whereby such raw
materials are delivered on an "as needed" basis. Additional materials may be
special ordered as the need arises. Princeton buys its raw materials from
approximately fourteen different sources, and is not dependent upon any one
supplier for any of its requirements. Management believes that its long-term
relationships with these suppliers will enable Princeton to continue to maintain
an adequate availability of raw materials for its book manufacturing operations.
The majority of Princeton's typesetting and case binding work is currently
contracted to various specialty providers. While most of Princeton's
competitors outsource typesetting work, some competitors have in-house case
binding capability. Assuming that the demand of its customer base for such
service increases at its current rate, Princeton anticipates obtaining its own
case binding operation at some point in the future when management feels that
the volume of case binding work would support the expense.
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Princeton typically requires pre-payment or payment on delivery for book
manufacturing jobs for new customers; existing customers pay on average 45 days
after completion of the job. The average job's duration is between three and
six weeks, which necessitates that the Company maintain a working capital
facility of $1 million, of which the average balance is approximately $600,000,
leaving Princeton with available working capital under the facility of $400,000.
Management believes that Princeton's ability to finance its working capital
requirements is adequate, but expansion of its customer and revenue base will
entail additional, and perhaps significant, working capital requirements.
Princeton's overall business is not significantly seasonal in nature,
although the first quarter tends to have lower sales than the remaining three
quarters. Princeton holds no patents, licenses, franchises or concessions which
are important to its operations.
Environmental Regulations
-------------------------
Management believes that Princeton's operations comply in all material
respects with applicable federal, state and local environmental laws and
regulations. Because all of Princeton's film development and ink processes are
closed systems in which potentially hazardous substances are recycled or stored
for proper disposal in accordance with existing law, it does not anticipate
incurring any significant expenditures in order to comply with such laws and
regulations that would have a material impact on capital expenditures, earnings
or competitive position. In addition, Princeton utilizes soy-based inks
exclusively, to lessen any potential adverse environmental conditions The
Company is unaware of investigations, audits or threatened actions related to
environmental matters within the last five years, nor is it aware of any ongoing
investigations, audits or threatened actions related to environmental matters
which occurred prior to that period.
Employees
---------
Princeton employs 48 persons full-time, who work one to two shifts per day,
depending upon the level of demand. All of Princeton's employees are non-union
workers. Princeton occasionally hires additional part-time help at times of
peak demand. Princeton has never suffered a work stoppage and believes its
employee relations are good.
Property and Equipment
----------------------
Princeton's operations are housed in a facility in Lawrenceville, New
Jersey, which is comprised of approximately 42,700 square feet. The facility is
leased from PUP at a gross rate (excluding electric) of $6.45 per square foot.
The term of the lease extends until June 30, 1997. Princeton considers its
plant to be well maintained and suitable for the purpose intended.
Princeton's products are manufactured on equipment which in most cases is
owned by Princeton, although it leases computers and electronic printing systems
which are subject to more rapid obsolescence. Capital expenditures amounted to
approximately $70,000 in 1993, $146,000 in 1994, and $14,000 in 1995. In 1996
capital expenditures are estimated to be $140,000.
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Princeton considers its equipment to be in good operating condition and adequate
for its present needs.
Management believes that all of Princeton's real and personal property is
adequately covered by insurance.
Polychem Corporation
- --------------------
Background
----------
Polychem is a wholly-owned subsidiary of the Company, which was formed in
February 1995 for the purpose of acquiring substantially all of the assets and
business of The Polychem Division of The Budd Company (see "Acquisition",
below). Polychem develops and manufactures custom engineered plastic molded
products which are marketed primarily to wastewater treatment plants, as well as
to other industrial users.
Acquisition
-----------
The Company acquired substantially all of the assets and business of the
Polychem Division of The Budd Company through its wholly-owned subsidiary,
Polychem, on March 10, 1995, for a purchase price of approximately $6.4 million,
including transaction costs, of which approximately $2.4 million has been
financed by the seller through the issuance of two promissory notes, including a
$750,000 retainage note payable and a $1.63 million term note payable. The
retainage note did not bear interest and was repaid in September 1995. The term
note bears interest at 8% per year and is payable in 20 equal consecutive
quarterly installments. The quarterly installments commence on March 31, 1998,
but if the amount of any such quarterly payment exceeds an amount equal to the
net cash flow of Polychem, as defined in such note, for its last fiscal quarter
ending prior to the date on which such payment is due, then a portion of the
installment may be deferred, subject to certain limitations. See -- Debt and
Encumbrances, below.
Pursuant to the terms of the Asset Purchase Agreement, Polychem assumed
certain specific liabilities and obligations of The Budd Company with respect to
the purchased business and assets, including those under leases of real and
personal property, sales contracts and purchase orders, permits issued to the
division, certain distributor and sales representative agreements, warranty and
product claims, and the limited obligation to pay severance benefits, if any, to
salaried employees of The Budd Company who were offered and accepted employment
by Polychem. It is not expected that any severance benefits will be payable to
any of such employees.
The Company is a party to a surety agreement in favor of The Budd Company
relating to the purchase by the Company of the business and assets of Polychem,
under which the Company has guaranteed all of Polychem's obligations under or
contemplated by the Asset Purchase Agreement, except that the guaranty does not
extend to the two promissory notes of Polychem for the seller financed portion
of the purchase price. The guaranty also applies to any
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indemnification obligations of Polychem under the Asset Purchase Agreement in
favor of The Budd Company, which could involve claims for certain environmental
matters arising after March 10, 1995, product warranty claims related to
products installed or sold by Polychem after that date (even if such product was
partially manufactured, installed or sold by The Budd Company prior to that
date), and for services performed after that date (even if such services were
partially performed by The Budd Company prior to that date).
Products
--------
Polychem engineers and produces an extensive line of plastic molded
products that are used in a broad array of industrial markets. Polychem's
typical products include, among others, complete non-metallic rectangular
clarifier component systems for water and wastewater treatment operations, which
are comprised of non-metallic chain, sprockets, stub shafts, wear shoes and
other products fabricated to customer specifications; cast nylon elevator
buckets for the handling of foundry sand, aggregate, and glass cullet; phenolic
sprockets and pulleys for agricultural and mining equipment; bearings for steel
mills; extruded thermoset profiles for aircraft applications; and molded
conveyor chains and accessories for food packaging, water and wastewater
treatment and other material handling applications. Most of the nylon buckets,
steel mill bearings and table-top conveyor chains are sold as off-the-shelf
items to steel mills and distributors. The majority of the balance of Polychem's
products are produced for use in a complete system of wastewater treatment
clarifier equipment which Polychem sells to its customers. The latter category
is sold primarily as a complete system built to customer specifications, which
is usually sold under an order selected from competitive bids. The reaction
injection molded ("RIM") nylon products and the injected molded products account
for between 80% and 90% of Polychem's sales; compression molded products
comprise the balance of the business.
Manufacturing Processes
-----------------------
Polychem's plant is equipped and organized to handle three distinct
manufacturing processes by which its diverse line of products is fabricated:
RIM, which produces cast nylon, is used for buckets, stub shafts, and sprockets;
compression molding, which produces phenolic moldings, is used for steel mill
bearings, timing gears, timing pulleys, and other molded products; and injection
molding, which produces engineered resin parts used for wastewater drive and
collector chain, and table-top conveyor chain.
Polychem's various products are more easily categorized by these three
processes rather than by product type because each of Polychem's many products
is created through only one of the processes. In RIM molding, a compound
containing a catalyst and a compound containing a promoter are mixed in the mold
where a reaction takes place; the combination and percentage of base chemicals
and additives determine the properties of the final product. In the compression
molding process, phenolic macerate or phenolic laminate is placed in heated
molds (approximately 325 degrees) and cured for a specific period of time at
pressures up to 3000 PSI. In injection molding, engineered plastic materials
are melted and injected into the mold at a
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controlled temperature and rate. Once in the mold, the plastic is cooled to a
shape reflecting the cavity.
Polychem's plant is laid out so that each of its manufacturing processes
occupies a separate location. In the Molding Department, products are molded in
batches and then sent to the Fabricating Department as complete orders for
machining and assembly. Raw materials for all of the manufacturing processes
are stored in tanks inside and outside the facility. Polychem's plant operates
on a three-shift basis. Most of the employees are interchangeable and have been
trained to operate all of the various equipment in their departments, which
gives Polychem additional flexibility in scheduling personnel to meet production
needs as they arise.
Marketing and Customers
-----------------------
The Budd Company originally purchased The Polychem Division in 1955. At
that time, Polychem produced a complete line of industrial laminates, automotive
timing gears, vulcanized fibre and teflon and silicon tape. In recent years,
however, Polychem has shifted its focus to manufacturing products designed for
the wastewater treatment market, and presently the revenues from wastewater
products comprise 82% of Polychem's annual sales volume. The wastewater
treatment market is global in nature, and the potential exists for Polychem to
expand into growing markets for such products in Mexico, Central and South
America, Asia, and Eastern Europe.
In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components, RIM-
processed nylon buckets, phenolic bearings and corrugated fibre products) to the
food processing, electronics, steel, automotive, chemical, printing, aerospace,
and consumer products industries, among others. Polychem markets its plastic
chain, cast nylon buckets, steel mill bearings and compression molded phenolics
primarily through distributors. The balance of its products, including its
water and wastewater treatment component systems, are sold through Polychem's
sales force and agents. In its most recent fiscal year, Polychem's sales force
generated 61% of its annual sales revenue, international distributors accounted
for 31% and domestic distributors accounted for 8%. Domestic revenues were
approximately 56% and international revenues were approximately 44% in that
fiscal year.
Competition and Strategy
------------------------
Competition to Polychem and its products tends to be fragmented. Many
other companies domestically and internationally produce one or more of
Polychem's products, but Polychem does not believe any of its competitors offer
a similar variety of light-weight plastic products for a variety of industries.
Experienced competition exists in each of Polychem's major markets, and many of
Polychem's competitors enjoy excellent working relationships with their
customers, produce a variety of quality products, and have access to significant
resources. These factors, along with product characteristics, reliability,
servicing, and pricing form the major competitive factors in Polychem's markets.
Many of Polychem's customers and potential
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customers have long associated it with The Budd Company, a large multinational
corporation. Such customers may feel less comfortable using a smaller supplier,
especially with regard to reliance on product warranties. Maintaining its image
as a stand-alone company forms a key component of Polychem's marketing strategy.
Polychem believes that it has four significant competitors in the area of
non-metallic rectangular wastewater clarifier systems, of which it considers
Envirex to be the most significant. Together, Polychem and Envirex are believed
to possess approximately 70% of this market, in which they share approximately
equally. However, while Polychem provides product only to clarifier systems in
wastewater plants, Envirex has a much broader line of wastewater treatment
products that encompasses all of the major processes in a treatment plant. FMC
and NRG are Polychem's other less substantial (in terms of market share)
competitors, and a fifth company is attempting to enter the market. Both
Envirex and FMC are significantly larger than Polychem. Polychem believes that
it has three competitors in the market for nylon buckets and five competitors in
the market for table-top chains.
Polychem's long-term goals include solidifying its reputation as a leading
provider of quality wastewater treatment equipment products; increasing sales of
its traditional products by improving existing product lines; and seeking new
products to supplement its current line, both from internal research and
development and by acquisition.
Materials and Supplies
----------------------
Polychem's business of manufacturing a broad line of engineered plastics
products necessitates the ability to obtain various sources of raw materials,
even in periods of short supply. Polychem has accumulated a strong supply
network over the past thirty years and does not believe the potential for
shortages in raw materials exists. At present, Polychem does not maintain more
than one month's supply of raw materials beyond the amount required for its
scheduled production work.
Environmental Regulations
-------------------------
Polychem does not anticipate any significant expenses for environmental
remediation projects. In the ordinary course of its business, it incurs some
cost for oil reclamation, hauling of waste products and normal energy costs
associated with recycling and waste disposal. Polychem maintains two
environmental permits; one for a dust collection system and the other for its
after burner heater. The collected dust is transported to an approved landfill
and samples of the dust are periodically analyzed. The heater is used to
impregnate phenolic resin into rolls of fabric which are then processed into
specific products. Methanol from the heater is processed through an after
burner and emits little in the way of contaminants. Polychem maintains seven
above ground storage tanks. Two are used to store phenolic resins inside the
plant; two store fuel oil; and three outside tanks are used to store other
chemicals. There are spill containment systems in place throughout the
facility.
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Occasionally, there are minor and isolated spills of heat transfer oil,
caprolactam and phenolic resins. The latter two quickly solidify in room
temperature and the hardened material is removed to an approved landfill; spills
of heat transfer oil are cleaned and properly disposed of with other waste
products. Polychem has submitted a revised spill prevention and response plan
to the Pennsylvania Department of Environmental Resources in May 1994 to which
no comments have been received as of the date of this Prospectus.
The Company believes that the Polychem property in Phoenixville,
Pennsylvania was first used as a silk mill in the early part of this century and
then as a manufacturing site for felt carpet padding. For this reason, the
Company commissioned several environmental audits prior to its acquisition of
the Polychem Division assets, and no contaminations were found.
Employees
---------
Polychem employs approximately 85 employees, of whom approximately 48 are
employed on an hourly basis. Hourly employees are members of United Textile
Workers of America, AFL-CIO, Phoenixville Plastic Makers' Union, Local No. 130
(the "Union"). Most are semi-skilled workers. In October 1993, Polychem
incurred a nine day work stoppage by the Union prior to the negotiation of the
current Union contract, which expires at the end of September 1996. Management
believes that employee relations are satisfactory.
Polychem has assumed all of The Budd Company's continuing obligations under
its collective bargaining agreement with the Union, which includes assumption of
obligations under a defined benefit retirement plan for hourly rated employees
at its Phoenixville, Pennsylvania plant. The Budd Company made a lump sum
payment of $1,980,740 to the trusteed pension fund for Polychem's employees on
April 3, 1995 in order to fund the plan in accordance with certain actuarial
assumptions agreed to by the parties and to meet ERISA funding requirements;
however, there can be no assurances that market performance of plan investments
will be sufficient to meet all plan liabilities as they arise.
Real Properties
---------------
Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with Congress Financial Corp.
See -- "Debt and Encumbrances", below. Polychem uses approximately 120,000
square feet for manufacturing and warehousing, and 20,000 square feet for
offices. Polychem leases approximately 33,000 square feet of its facility as
warehouse space to Windsor Designs, a wholesale distributor of imported outdoor
furniture. The Windsor Designs lease continues until December 1999 at a rental
rate of $92,000 per year ($2.79 per square foot), net of utilities. Polychem
leases an additional 7,200 square feet of the facility as equipment storage
space to Industrial Construction Environmental Co., an environmental clean-up
firm. That lease continues until December 1997 at a rental rate of $21,000 per
year ($2.92 per square foot). Polychem also leases a tower located on the
facility to Comcast Metrophone, which Comcast uses for cellular telephone
transmissions,
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at the rate of $1,000 per month. The Comcast Metrophone lease continues through
September 1998. An additional 40,000 square feet of warehouse space is available
for lease at the facility.
Equipment
---------
Polychem owns all of the equipment required to conduct its business. The
equipment is comprised of compression molding presses, transfer molding presses,
injection molding presses, reactors, dispensers and RIM press lines for nylon-6
operations, a complete fabrication shop with state of the art computerized
numerical control ("CNC") equipment and a computer aided design ("CAD") center.
Polychem considers its equipment to be in good operating condition and
adequate for its present needs, as well as near term expanded business volume.
Management believes that all of Polychem's real and personal property is
adequately covered by insurance.
Research and Development
------------------------
Polychem is the owner of a number of United States and foreign patents and
patent applications relating to water treatment plastic products, chain conveyor
links, conveyor chain bearings, sprockets with locking mechanisms and a bucket
grit elevator system. The ownership of such patents helps Polychem from a
marketing standpoint by securing its continued reputation as an innovative
competitor in its industry.
Polychem employs eight application engineers who use CAD equipment to
design custom wastewater treatment non-metallic rectangular clarifier systems or
to alter existing clarifiers to meet changing specification requirements. All
new products are evaluated for patent protection. Recently, Polychem was
granted a patent for a grit bucket system which is now undergoing marketing
development. To date, twelve successful applications for the system have been
found, the most significant of which is to function as part of a grit collection
system in wastewater treatment where it will be used to remove sand and gravel
from effluent before it reaches the clarifier. The amounts spent on research
and development by Polychem were $100,000 for the year ended December 31, 1995
and $128,000 for the year ended September 30, 1994 (its last full fiscal year as
a division of The Budd Company).
Debt and Encumbrances
---------------------
To partially finance the acquisition of assets from The Budd Company,
Polychem borrowed approximately $2,748,000 from Congress Financial Corporation
(the "Loan") pursuant to a Loan and Security Agreement dated March 10, 1995 (the
"Loan Agreement"), which provides a maximum credit of $9 million. All of
Polychem's assets have been pledged to secure the loans advanced and to be
advanced under the Loan Agreement. Of the total amount of the Loan, the term
loan portion is $1.777 million, repayment of which is secured by real estate and
equipment. The balance of the Loan is a revolving credit accommodation subject
to a lending
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formula limiting availability of funds to the total of 75% of eligible accounts
receivable plus the lesser of 55% of eligible inventory or $1,000,000 minus 55%
of the undrawn amounts of outstanding letter of credit accommodations for the
purpose of purchasing eligible inventory. Interest rates on the Loan are at a
rate of 2.25% in excess of the prime rate established by CoreStates Bank,
Philadelphia, on the term loan portion, and 1.75% in excess of that prime rate
on the revolving credit portion of the Loan. The Loan is subject to other
customary terms and conditions.
The Company has given a limited guarantee to Congress Financial Corporation
of the obligations of Polychem under the Loan Agreement, limited to a principal
amount of $2.5 million of such indebtedness outstanding.
Polychem has acknowledged the terms of an Intercreditor Agreement between
Congress Financial Corporation and The Budd Company pursuant to which The Budd
Company has substantially subordinated its rights with respect to promissory
notes payable to it by Polychem in favor of Congress Financial Corporation and
has agreed to defer its rights of collection for 180 days in the event of a
default under the promissory notes.
Litigation
----------
Currently Polychem is not a party to any litigation nor have any claims
been made or threatened against it. Its predecessor, the Polychem Division of
The Budd Company, was a party to several serious worker's compensation claims
which were out of the ordinary course and The Budd Company was self insured for
such claims. The Company and Polychem are indemnified by The Budd Company for
any liabilities arising from these cases. Indemnification for worker's
compensation claims by The Budd Company is limited to claims made and payable
prior to March 10, 1995 arising from an injury occurring prior to that date or,
in the case of cumulative exposure, occupational disease or psychiatric
disability, when the injury date or last date of exposure or trauma is found to
have occurred prior to that date, although The Budd Company retains an
indemnification obligation for 50% of such liability for a worker's compensation
claim made after March 10, 1995 provided it related to an industrial accident
occurring prior to that date. It is probable that additional worker's
compensation claims will arise in the future, but Polychem carries insurance for
such claims which it believes is in customary amounts. The Polychem Division
was also subject to other litigation, some of which may have involved multi-
defendant litigation involving superfund sites. However, each of these
litigation matters in progress were identified and excluded from the liabilities
assumed by Polychem. As a consequence, full responsibility regarding these
existing litigation matters resides with The Budd Company. Should any new
environmental claims arise which were not disclosed at the time of the
acquisition of the Polychem Division assets, to the extent relating to the
ownership or use of the assets of that division prior to the acquisition date,
The Budd Company has indemnified Polychem. This indemnification obligation
expires three years after March 10, 1995, unless a claim has been made prior to
that date. The details of such indemnification are set forth below.
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With respect to unknown claims, if any, the indemnification obligation of
The Budd Company expires eighteen months following the closing date on March 10,
1995, except with respect to certain claims, including those relating to
environmental matters, which expire three years from that date. Indemnification
for environmental claims is limited to a violation of an environmental law by
The Budd Company during such period of time it owned the Phoenixville,
Pennsylvania premises. The Budd Company's indemnification obligation only
arises after reimbursable claims exceed, in the aggregate, $150,000, and, in any
event, are limited to a maximum amount of $1.5 million, except in the case of
environmental claims pursuant to which The Budd Company has agreed to share 50%
of environmental liabilities in excess of that amount up to an additional $1.5
million, meaning that in no event will The Budd Company's indemnification for
environmental liabilities exceed $2.25 million.
MANAGEMENT
----------
Directors and Executive Officers
- --------------------------------
The present members of the Board of Directors, all of whom have been
elected for a one year term and until their successors are duly elected and
qualified, and their ages and positions with the Company are set forth below:
<TABLE>
<CAPTION>
Positions with
Name Age the Company
- ---- --- --------------
<S> <C> <C>
Paul A. DeJuliis 40 Chairman and Chief
Executive Officer
John R. Thach 45 President, Chief Operating
Officer and a Director
William B. Miller 55 Chief Financial Officer
and a Director
Bruce P. Murray 50 Director
Anthony J. Mendicino 48 Director
Andrew Panzo 32 Director
Porter Bibb 58 Director
</TABLE>
FAC and AMLF are jointly entitled to name a director of the Company, who is
Porter Bibb. In addition, pursuant to the Securities Purchase Agreement with
MSSF, the Company has agreed to submit a proposal at its next annual meeting of
stockholders which would have the effect of electing Edward F. Sager, Jr. to the
Board of Directors, a nominee of MSSF.
35
<PAGE>
The following is a summary of the business experience of the Company's
directors and executive officers during at least the past five years and their
directorships, if any, of companies with a class of securities registered with
the Securities and Exchange Commission:
Paul A. DeJuliis - Chairman of the Board of Directors, Chief Executive
----------------------------------------------------------------------
Officer and a founder of Company, has experience in strategic planning, mergers
- -------
and acquisitions and corporate finance. Mr. DeJuliis is also Chairman and CEO
of DTM Aerospace, Inc., a Delaware corporation. Prior to assuming his current
roles, he was a partner in Phoenix Management Services, Inc., a turnaround
consulting firm (1989-91). Previously he was Vice-President, Corporate Finance
for Colemen & Co., a national investment banking firm (1987-89), and Manager,
Corporate Turnaround Consulting Group for Coopers & Lybrand (1986-87). Mr.
DeJuliis was a Director and Officer of Lavalle Aircraft Company, an aerospace
manufacturing comapny which filed for bankruptcy in 1994. Mr. DeJuliis has a
B.S. in finance and accounting from the University of Delaware. He is also a
certified public accountant.
John R. Thach - President, Chief Operating Officer, a Director and a
--------------------------------------------------------------
founder of Company has significant experience in corporate finance, financial
planning, marketing and sales. Mr. Thach is also President and Chief Operating
Officer of DTM Aerospace, Inc. and its predecessor (1991 to present). Prior to
assuming his current roles, Mr. Thach was an Associate, Vice President and
Senior Vice President for Butcher & Co. (1985 to 1987), Philadelphia First Group
(1987 to 1989), and Philadelphia Investment Banking (1989 to 1991),
respectively, three regional investment banking firms where he was involved
extensively in advisory roles to a number of industrial companies. Other
experience includes Mr. Thach's active participation (as an investor and in
management) in a number of successful start-ups ranging from the creation of an
industrial chemical sales division of a major U.S. corporation to the creation
of a small but profitable municipal waste ash treatment company. Mr. Thach was
a Director and Officer of Lavalle Aircraft Company, an aerospace manufacturing
company which filed for bankruptcy in 1994. Mr. Thach holds an undergraduate
degree from the University of Virginia, and an MBA from the Darden School at the
University of Virginia.
William B. Miller - Senior Vice President, Chief Financial Officer and a
------------------------------------------------------------------------
Director, is a certified public accountant and founder, in 1976, of the public
- --------
accounting firm of Kreischer, Miller & Co. in Horsham, PA, which he left in 1987
and which has performed accounting services for Princeton. Prior to the
formation of that firm, he was with Price Waterhouse in Philadelphia (1966-71).
Mr. Miller also served as Vice President and Treasurer of WPHL-TV, Inc. in
Philadelphia (1971-75); President of Marian Financial Services Corp. in
Philadelphia, the real estate finance affiliate of a private bank (1987-92);
Chief Financial Officer of Worlco, Inc. in King of Prussia, PA (1990-91), a
holding company for an insurance, equipment leasing and commercial mortgage
brokerage companies which filed for bankruptcy in 1993; and President of
Schulmerich Carillons, Inc. in Sellersville, Pennsylvania (1992-94). Mr. Miller
holds an accounting and economics degree from Muhlenberg College.
Bruce Murray - a Director, is founder and President of The Bannock Burn
-------------------------
Group, Ltd., a management consulting firm specializing in assisting businesses
in transition and having a
36
<PAGE>
national practice. Prior to the founding of his firm in 1987, he was part of a
senior operating turnaround team recruited by The Sun Company to manage Sun Ship
in Chester, PA and thereafter part of the senior management group at Sun
Carriers, a trucking subsidiary of The Sun Company. Prior to that, Mr. Murray
was employed by the U.S. Maritime Administration as the on-site representative
at the Bath Ironworks in Maine, where he was responsible for managing the
Maritime Administration's interests in major ship construction contracts. He is
a graduate of the United States Merchant Marine Academy and has a masters degree
from Rensselaer Polytechnic Institute. He was formerly Chairman of the Board of
Electronic Associates, Inc., the stock of which is traded on the New York Stock
Exchange, and he remains a member of such Board and of its Executive Committee.
Anthony Mendicino - a Director, currently serves as a consultant to UTI
------------------------------
Energy Corp., a diversified oilfield service company listed on the American
Stock Exchange. Between 1987 and 1996 he served as the Senior Vice President,
Chief Financial Officer and a director of UTI Energy Corp. He holds a degree in
engineering from Lehigh University and an MBA from the Wharton School of the
University of Pennsylvania.
Andrew Panzo - a Director, is the managing director of American Maple Leaf
-------------------------
Financial Corporation (1993 to present) in Bala Cynwyd, PA, an investment
banking advisor to the Company, and is President and a director of Sector
Associates, Ltd. Mr. Panzo was formerly Executive Vice President of HMA
Investments (1992 to 1993), an investment banking firm at which he managed the
diversified securities fund. Prior to that he was an associate with Venture
Partners, Ltd. of Middletown, CT (1987 to 1992), a venture capital firm. Mr.
Panzo is also a director of VDC Corporation Ltd., a real estate development,
management and investment company. He specializes in emerging growth companies.
He is a graduate of the University of Connecticut and has a masters degree in
international business and finance from both Temple University and the
University of Pennsylvania.
Porter Bibb - a Director, has been with Ladenburg Thalmann & Co., Inc., New
------------------------
York NY, since 1984, currently serving in the capacity of Principal and Co-
Director of Corporate Finance. He was formerly a Managing Director of Bankers'
Trust Company (1980-1984) and Director of Corporate Development of New York
Times Company (1977-1980) and President and Co-Founder of Financial Management,
Inc. He is also a director of one other publicly held company, PMC
International, an asset management company. Mr. Bibb is a graduate of Yale
University and has studied in graduate programs at New York University, London
School of Economics and Harvard Business School.
Directors' Fees
To date, the directors of the Company have received no fees in connection
with their service as directors. Non-employee directors participate in the Non-
Employee Directors Stock Option Plan discussed below. See "Non-Employee Stock
Option Plan".
37
<PAGE>
The Board of Directors has established three committees of the Board: an
Executive Committee, an Audit Committee and a Compensation Committee. The
Executive Committee has the ability to exercise the powers of the Board during
intervals between Board meetings and which acts as an advisory body to the Board
by reviewing various matters prior to their submission to the Board. The
Executive Committee consists of Messrs. DeJuliis, Thach and Murray. The Audit
Committee oversees actions taken by the Company's independent auditors,
recommends the engagement of auditors and reviews the Company's internal audits.
The Audit Committee consists of Messrs. DeJuliis, Mendicino and Bibb The
Compensation Committee, which consists of Messrs. Murray and Mendicino, makes
recommendations to the Board with respect to standards for setting compensation
levels, and administers the Company's incentive and retirement plans.
Management of Operating Subsidiaries
- ------------------------------------
The following is a summary of the business experience of the management of
the Company's operating subsidiaries:
Princeton Academic Press, Inc.
- ------------------------------
Marvin Hoffman - President, has been with Princeton since July 1995. Mr.
---------------------------
Hoffman was previously Chief Operating Officer (1992) and later Chief Executive
Officer (1993 to July 1995) of Packquisition Corporation t/a Packard Press (a
financial printing concern), a self-employed consultant (1991) and Chief
Operating Officer of Omega Publishing Services, Ltd. (1983-1991).
Graeme B. Frazier, IV - Director of Sales, has been with Princeton since
-----------------------------------------
its acquisition by DTF Media, Inc., and previously served as its President.
Mr. Frazier has extensive experience in graphic arts management and sales,
having been Managing Director of Murphy Parker, Inc., a bookbinding company.
Mr. Frazier has an economics degree from Trinity College in Hartford, CT.
Philip V. Leclerc - Plant Manager, joined Princeton when it moved to its
---------------------------------
present location in 1965, having worked for Princeton University Press and
subsequently for Princeton. He has broad experience in all aspects of the pre-
press, printing and binding processes (most notably in the area of digital pre-
press), as well as expertise in scheduling and technical issues. Mr. Leclerc
has an AS degree in electronics from Northeastern University in Boston, MA.
Polychem Corp.
- --------------
Theodore F. Rutkowski - President, prior to assuming that position, Mr.
---------------------------------
Rutkowski was the General Manager of The Polychem Division of The Budd Company
since 1975. He previously served as President of The Budd Company Trailer
Division, which was sold in 1985, and was responsible for the restructuring of
Greening Donald in Hamilton, Ontario, a Budd Company subsidiary. He has an
accounting degree from Rutgers University.
38
<PAGE>
William J. Crighton - Vice President and Treasurer, previously served as
--------------------------------------------------
the divisional controller of the Polychem Division of The Budd Company since
1975. Prior to joining that division he was employed with the automotive
division and technical center of The Budd Company. He holds an accounting
degree from La Salle University in Philadelphia and an MBA from Widener
University in Chester, PA.
J. R. Hannum - Manager of International Sales, Product Development and
----------------------------------------------------------------------
Engineering, had previously served as General Manager of The Polychem Division
- -----------
of The Budd Company and as manager of domestic sales, research and development
and manufacturing engineering of that division, prior to which he was the plant
manager. He has an engineering degree from Villanova University and a masters
degree in engineering from Penn State University.
Donald L. Hutton - National Sales Manager, has been with The Budd Company
-----------------------------------------
for 36 years, during which time he has served as advertising manager, manager of
distributor sales and manager of customer service. He is a graduate of the
University of Delaware.
Executive Compensation
- ----------------------
The following table discloses for the fiscal years ended December 31, 1993,
1994, and 1995, individual compensation information relating to the chief
executive officer of the Company and the executive officers of the Company who
earned in excess of $100,000 during 1995 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Restricted
Principal Other Annual Stock Options LTIP All Other
Position Salary Bonus Compensation Awards /SARS Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Paul A. DeJuliis ($)/(1),(2)/ ($) ($) ($) (#) ($)
Chief Executive
Officer
1995 157,917 0 3,661 0 125,000 0 0
1994 64,500 0 0 0 0 0 0
1993 21,400 0 0 0 0 0 0
John R. Thach
President
1995 161,167 0 1,916 0 70,000 0 0
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Restricted
Principal Other Annual Stock Options LTIP All Other
Position Salary Bonus Compensation Awards /SARS Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
1994 77,500 0 0 0 0 0 0
1993 25,650 0 0 0 0 0 0
Theodore F.
Rutkowski/(3)/
President,
Polychem
Corporation
1995 109,653 0 0 0 17,500 0 0
1994 --- 0 0 0 0 0 0
1993 --- 0 0 0 0 0 0
</TABLE>
/1)/ Mr. DeJuliis and Mr. Thach received no compensation or other benefits
from the Company during fiscal years 1993 and 1994. The amounts
reported above were paid to them by Princeton, which is presently a
wholly owned subsidiary of the Company, but during 1993 and 1994 was
owned by a corporation not related to the Company. However, because the
financial results of the Company have been consolidated with those of
Princeton Academic Press retroactively to July 1993 by reason of common
ownership, compensation and other benefits paid to Mr. DeJuliis and Mr.
Thach by Princeton Academic Press have been included in the above
table.
/(2)/ Compensation for Mr. Rutkowski represents payments from Polychem
Corporation, a wholly owned subsidiary of the Company, from March 10,
1995 (date of acquisition) through the end of the fiscal year.
/(3)/ Mr. Rutkowski earned compensation from the Polychem Division of The
Budd Company prior to its acquisition by the Company.
Aggregated Option/Sar Exercises In Last Fiscal Year And F/Y End
---------------------------------------------------------------
Option/Sar Values
-----------------
The following table sets forth information with respect to option exercises
and fiscal year-end option values for the Named Executive Officers.
40
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options/SARS in-the-money Options/SARs at
Shares Valued at FY-End FY-End
Name On Acquired Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- Exercise (#) ($) ------------------------- -------------------------
------------ ---
<S> <C> <C> <C> <C>
Paul A. DeJuliis 0 --- 0/125,000 0/$390,625
John R. Thach 0 --- 0/70,000 0/$218,750
Theodore R.
Rutkowski 0 --- 0/17,500 0/$58,687
</TABLE>
/(1)/Based upon the bid price of the Company's Common Stock on December 31, 1995
of $9.125.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
The following table sets forth information with respect to option grants
during 1995 to the Named Executive Officers.
<TABLE>
<CAPTION>
Percent of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise Price
Name Granted (#) Fiscal Year ($) Expiration Date
---- ----------- ----------- --- ---------------
<S> <C> <C> <C> <C>
Paul A. DeJuliis 125,000 42% $6.00 2005
John R. Thach 70,000 23% $6.00 2005
Theodore F. 17,500 6.5% $6.00 2005
Rutkowski
</TABLE>
Employment Arrangements
Effective as of January 1, 1995, the Company entered into employment
agreements with Paul A. DeJuliis and John R. Thach. Each of these agreements
provides for a base salary of up to $170,000 annually with certain automatic
adjustments in the event certain targets relating to the financial performance
of the Company are satisfied (incremental increases of $25,000 for each $1.0
million increase in annual pre-tax net income over a base of $1.5 million) and
in the event the Company makes a significant acquisition, the adjusted base
compensation will increase to $250,000 annually, together with discretionary
bonuses, if any, to be declared by the Board of Directors, but with a provision
that at such time as each of their equity stock ownership in the
41
<PAGE>
Company is reduced to 10% or less of the total issued and outstanding shares of
all classes of equity stock, then such employee shall be entitled to annual
minimum incentive compensation equal to 3% of the Company's annual pre-tax net
income. These agreements also provide for certain benefits, including vacation,
health and medical insurance, reimbursement of certain expenses and stock option
plan participation, but only to the extent such benefits are offered to
comparable employees by the Board of Directors. Such agreements contain
covenants regarding confidentiality of proprietary information of the Company
and a restrictive covenant in favor of the Company under certain circumstances.
Each agreement has an initial term of five years, and thereafter is annually
renewable for successive two-year periods. Such agreements will earlier
terminate as a result of the employee's death, permanent disability or dismissal
for "just cause." If the termination results from death or permanent disability,
the agreements provide for continuation of base compensation and fringe benefits
for a period of six months, but if the termination results from any reason other
than death, permanent disability, termination for "just cause," or where the
employee terminates his employment for "good reason," then his base compensation
and all existing fringe benefits shall be continued for the balance of the
unexpired term of his employment agreement, but in no event for less than one
year, after which the employee shall be entitled to all earned and accrued
incentive compensation. Moreover, if his termination follows a "change of
control" and the employee owns no more than 20% of the total issued and
outstanding securities of the Company, he shall be entitled to a lump sum
severance benefit equal to 500% of his annual base compensation.
In May 1995, the Company entered into an employment agreement with William
B. Miller. Such agreement provides for a base salary in the first year of
$84,000 per year, together with discretionary bonuses, if any, to be declared by
the Board of Directors. The base salary will automatically increase to $102,000
per year upon the completion of a significant acquisition by the Company. The
agreement also provides for certain benefits, including vacation, health and
medical insurance, reimbursement of certain expenses and stock option plan
participation, if such are implemented for comparable employees by the Board of
Directors. The agreement contains covenants regarding confidentiality of
proprietary information of the Company and a restrictive covenant in favor of
the Company. The agreement is for a term of one year, and thereafter is
annually renewable for successive one year periods, although either party may
terminate the agreement upon six months written notice to the other and the
Company may discharge the employee at any time with or without cause. If the
employee is terminated without cause, the Company shall pay to the employee a
severance allowance equal to six months base compensation.
Employee Stock Option Plan
The Board has authorized, and the stockholders of the Company have
approved, a stock option plan for management and other key employees of the
Company and its subsidiaries, including a limited number of outside consultants
and advisors, effective as of the effective date of this prospectus (the "Stock
Option Plan"). A total of 750,000 shares of Common Stock have been reserved for
issuance under the Stock Option Plan. The purpose of the Stock Option Plan is
to attract and retain qualified personnel and to provide additional incentives
to employees,
42
<PAGE>
officers and non-employee advisors and consultants who are not serving as
directors ("employees"). Options or other stock appreciation rights ("SARs")
with respect to 300,000 shares of Common Stock are currently outstanding under
the Stock Option Plan. The aggregate number of shares reserved for issuance
under the Stock Option Plan effectively limits the number of awards which may be
made to any one person under that plan.
The Stock Option Plan provides for the granting to eligible employees of
incentive stock options ("ISOs"), nonqualified stock options ("NQOs") and stock
appreciation rights ("SARs"), which SARs may either be awarded in tandem with
stock options ("Tandem SARs") or independently ("Non-Tandem SARs"). The Stock
Option Plan will be administered by the Committee. The Committee will determine
the terms of all options or SARs granted under the Stock Option Plan, including
the types of options or SARs which are granted, their exercise price, the number
of shares subject to the options or SARs and when they may be exercised. No
option can be granted at an exercise price which is less than the fair market
value of the Common Stock on the date of grant. ISOs may only be granted to
employees who are then employees of the Company or one of its subsidiaries for a
term not to exceed ten years from the date of grant, and the aggregate fair
market value (determined with respect to each ISO at the time it is granted) of
the shares of Common Stock with respect to which the ISO is exercisable for the
first time by an employee during any calendar year shall not exceed $100,000.
Additional restrictions apply in the case of the grant of an ISO to any employee
who owns Common Stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (including requirements that the
option price be at least equal to 110% of the fair market value of the Common
Stock at the date of grant and that no such ISO may be exercised after five
years from the date of grant). No option or SAR may be transferred by the
employee other than by will or the laws of descent or distribution. During the
lifetime of the employee, the option or SAR may be exercised only by him or his
legally appointed guardian or representative. Payment of the exercise price of
an option may be made in cash, by delivery of Common Stock or with such other
consideration as is approved by the Committee. The Committee may determine at
the time of grant the terms under which options and SARs shall vest and become
exercisable. Tandem SARs are exercisable only to the extent that the related
option is exercisable and only for the period determined by the Committee.
Options and SARs may be exercised within three months following the termination
of an employee's employment with, or providing active consulting services to,
the Company (other than by death or total disability) but in no case later than
the term specified in the grant. Upon the death or total disability of an
employee while employed by the Company or during the term of a consultant's
active role with the Company (or upon the death of the employee or consultant
within three months after such termination), options and SARs shall remain
exercisable for one year following such employee's death, for nine months
following the date the employee first receives benefits under the Company's Long
Term Disability Plan (and with respect to a consultant, nine months following
the determination of the total disability of such consultant).
Shares of Common Stock attributable to unexercised options which expire or
are terminated, surrendered or canceled (other than in connection with the
exercise of a SAR) may become available for subsequent award under the Stock
Option Plan at the Committee's
43
<PAGE>
discretion. The number of shares available under the Stock Option Plan may be
adjusted by the Committee to prevent dilution or enlargement of rights in the
event of various changes in the capitalization of the Company. The Board may
suspend, amend, modify or terminate the Stock Option Plan; provided, however,
that the Company's stockholders must approve any amendment that would materially
increase the aggregate number of shares issuable under such Plan, materially
increase the benefits accruing to employees under such Plan, or materially
modify the requirements for eligibility to participate in such Plan. Awards
granted prior to termination of the Stock Option Plan shall continue in
accordance with their terms following such termination. No amendment, suspension
or termination of the Stock Option Plan shall adversely affect the rights of any
employee in awards previously granted without such employee's consent.
Non-Employee Directors Stock Option Plan
The Board has authorized, and the stockholders of the Company have
approved, a stock option plan for directors of the Company who are not also
employees of the Company or any of its subsidiaries (the "Directors Stock Option
Plan"), which will provide for the automatic grant of NQOs to eligible
directors. A total of 250,000 shares of Common Stock have been reserved for
issuance under the Directors Stock Option Plan, of which 120,000 are issued and
outstanding. The purpose of the Directors Stock Option Plan is to attract,
retain and motivate highly qualified individuals to serve as directors of the
Company. As of the date of this Prospectus, the number of NQOs granted annually
(the exercise price of which will be the fair market value of the Common Stock
on the date of grant) to each eligible director shall be determined by dividing
$10,000 by the fair market value of a share of Common Stock on the first Friday
following the Company's annual meeting of stockholders (the "Valuation Date").
In addition, upon joining the Board, each director shall be awarded 40,000
options with an exercise price equal to the fair market value of the Common
Stock. For these purposes, if the Company's Common Stock is traded in the over-
the-counter market and not on a National Securities Exchange nor in the NASDAQ
Reporting System, the fair market value of the Common Stock shall be the average
of the mean between the last bid and asked prices per share, as reported by the
National Quotation Bureau, Inc., or an equivalent generally accepted reporting
service, for the date of grant, or if not so reported, the average closing bid
and asked prices for a share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc. selected by the Company for
that purpose. On the other hand, if the Company's Common Stock is traded on a
national securities exchange or in the NASDAQ reporting system, then the fair
market value of the Common Stock shall be determined by the higher of (i) the
simple average of the high and low prices at which the Common Stock traded on
the date of grant, as quoted on the NASDAQ reporting system or other principal
exchange on which such Common Stock is traded or (ii) the price of the last sale
of Common Stock on that date as quoted by the NASDAQ reporting system or such
other principal exchange, which price shall then be rounded up to the next
higher multiple of $.125 (unless that figure is already a multiple of $.125).
NQOs granted under the Directors Stock Option Plan shall generally become
exercisable at the rate of one-third for each full year of the director's
continued service following the date of grant and shall expire ten years after
the date of grant. In no event may shares of Common Stock issued upon exercise
of such NQOs be sold or otherwise disposed of within six months following the
date of grant. Upon a
44
<PAGE>
director's cessation of service as a director (except as a result of reaching a
mandatory retirement age, death or disability) only those NQOs immediately
exercisable at such date may be exercised, and they must be exercised within six
months following cessation of service or they shall be forfeited. If the
director is terminated as a director by reason of a permanent disability, all
unexercised NQOs, whether or not then vested, shall be exercisable, but must be
exercised within six months following such retirement date, date of death or
termination as a director by reason of disability, or they shall be forfeited.
The Directors Stock Option Plan shall be administered by the Board or by a
committee of the Board comprised of those directors not eligible to receive
options under the Directors Stock Option Plan. No NQOs granted under the
Directors Stock Option Plan may be transferred other than by will or the laws of
descent and distribution, and, during the director's lifetime, a NQO may only be
exercised by him or his legally appointed guardian or representative.
Federal Income Tax Consequences Relevant to Stock Option Plans
The following is intended only as a brief summary of the federal income tax
rules relevant to stock options issued and supplemental cash payments made under
the Stock Option Plan and the Directors Stock Option Plan. These rules are
highly technical and subject to change in the future. In particular, the
discussion of ISOs is based, in part, on temporary or proposed regulations which
may be amended substantially before they are adopted in final form.
A publicly held corporation may not, subject to limited exceptions, deduct
for federal income tax purposes certain compensation paid to an executive who is
the chief executive or one of the four other highest paid executives in excess
of $1 million in any taxable year (the "$1 million cap"). Compensation
attributable to the exercise of options could be counted in determining whether
the $1 million cap has been exceeded in any taxable year. Whether the $1
million cap with respect to such an executive will be exceeded, and whether the
Company's deductions for compensation paid in excess of the $1 million cap will
be denied, will depend on the resolution of various factual and legal issues
that cannot be determined at this time.
Nonqualified Stock Options
--------------------------
In general, an optionee will not recognize any taxable income, and the
Company will not be entitled to a deduction, upon the grant of an NQO. Upon the
exercise of an NQO where the exercise price is paid in cash, the optionee will
recognize ordinary income (subject to wage and employment tax withholding) equal
to the excess of the fair market value of the shares acquired over the option
exercise price. The amount of such excess is generally determined by reference
to the fair market value of the Common Stock on the date of exercise. However,
in the case of an optionee subject to six month short-swing profit liability
under Section 16(b) of the Securities Exchange Act of 1934 (a "16(b) Person" --
typically officers, directors and major stockholder of the Company after the
Company has elected to register under the Securities Exchange Act of 1934, as
amended, which the Company may not immediately elect to do after this prospectus
becomes effective, unless otherwise required to do so), such excess is
determined by using the
45
<PAGE>
fair market value on the later of the date of exercise or the date six months
after the date of grant, unless such optionee elects to be taxed based on the
fair market value of the Common Stock on the date of exercise by filing an
appropriate election with the Internal Revenue Service within 30 days after the
exercise date. Such liability is unlikely to attach since under recently enacted
rules, it only applies if a 16(b) Person exercises an option and sells the
option stock within six months of the date of the option grant. An optionee's
basis in the stock received will equal such stock's fair market value on the
date of exercise (or on the date six months after the date of grant, if later,
in the case of an optionee who is a 16(b) Person and who makes no such
election). The Company will be entitled to a deduction (subject to the $1
million cap) equal to the compensation taxable to the optionee.
Upon the sale of shares acquired pursuant to the exercise of an NQO, such
optionee will recognize capital gain or loss equal to the difference between the
selling price of the shares and the optionee's basis in the shares. Such
capital gain or loss will be long-term gain or loss if the optionee has held the
shares for more than one year. In the case of an optionee who is a 16(b) Person
and who does not make the election described above, any such capital gain will
be long-term only if the stock has been held for more than one year after the
later of the exercise date or the date six months after the date of grant. The
Company will not be entitled to any deduction with respect to any capital gain
recognized by the optionee.
Incentive Stock Options
-----------------------
An optionee will not recognize taxable income on the grant or exercise of
an ISO. However, the excess of the stock's fair market value on the exercise
date (the fair market value on the exercise date or six months after the date of
grant, whichever is later, is likely to govern in the case of a 16(b) Person)
over the option exercise price will be included in the optionee's alternative
minimum taxable income and thereby may subject the optionee to an alternative
minimum tax. Such alternative minimum tax may be payable even though the
optionee receives no cash upon the exercise of his or her ISO with which to pay
such tax. Upon the disposition of shares of Common Stock acquired pursuant to
the exercise of an ISO (i) more than one year after the date of exercise, and
(ii) more than two years after the date of grant (the "Required Holding
Periods"), the optionee will recognize long-term capital gain or loss, as the
case may be, measured by the difference between the stock's selling price and
the exercise price. The Company will not be entitled to any tax deduction by
reason of the grant or exercise of an ISO, or a disposition of stock received
upon the exercise of an ISO after the Required Holding Periods have been
satisfied.
If an optionee disposes of the shares of stock acquired pursuant to the
exercise of an ISO before the expiration of the Required Holding Periods (a
"Disqualifying Disposition"), the difference between the exercise price of such
shares and the lesser of (i) the fair market value of the shares upon the date
of exercise (the fair market value on the exercise date or six months after the
date of grant, whichever is later, is likely to govern in the case of a 16(b)
Person), or (ii) the selling price, will constitute compensation taxable to the
optionee as ordinary income. The Company will be entitled to a corresponding
tax deduction (subject to the $1 million cap) equal
46
<PAGE>
to the amount of compensation taxable to the optionee. If the selling price of
the stock exceeds the fair market value on the exercise date (or six months
after the date of grant, if later, in the case of a 16(b) Person), the excess
will be taxable to the optionee as a capital gain (long-term or short-term,
depending upon whether the optionee held the stock for more than one year). The
Company will not be entitled to a deduction with respect to any such capital
gain recognized by the optionee.
SARs
----
The grant of SARs will normally not result in taxable income to the
optionee. At the time of exercise, an optionee should recognize ordinary
compensation income in an amount equal to the cash and the fair market value of
the Common Stock the optionee receives to satisfy the optionee's SAR. The tax
basis of any such shares of Common Stock received by the optionee pursuant to a
SAR should be equal to the amount includable in the optionee's gross income as
compensation in respect of such shares, and the optionee's holding period
thereafter should normally commence on the day on which the optionee receives
such shares. The Company will be entitled to a deduction with respect to any
compensation income recognized by the optionee.
Use of Common Stock to Pay Option Price
---------------------------------------
If an optionee delivers previously-acquired Common Stock, however,
acquired, in payment of all or part of the option exercise price of an NQO, the
optionee will not, as a result of such delivery, recognize gain or loss for
federal income tax purposes on the shares surrendered. The optionee's tax basis
in, and holding period for, the previously-acquired stock surrendered will carry
over to an equal number of the option shares received on a share-for-share
basis. The fair market value of the shares received in excess of the shares
surrendered will constitute compensation taxable to the optionee as ordinary
income. Such fair market value will be determined on the date of exercise,
except in the case of 16(b) Persons as discussed above. The tax basis for such
shares will equal their fair market value as so determined, and such shares'
holding period begin on the date on which the fair market value of such shares
is determined. The Company will be entitled to a tax deduction (subject to the
$1 million cap) equal to the compensation income recognized by the optionee.
The Company will not be entitled to a deduction with respect to any such capital
gain recognized by the optionee.
If an optionee delivers previously-acquired Common Stock (other than stock
acquired upon exercise of an ISO and not held for the Required Holding Periods)
in payment of all or part of the option price of an ISO, the optionee will not
recognize gain or loss for federal income tax purposes on the shares
surrendered. The optionee's tax basis in, and holding period (for capital gain
purposes, but not for the purpose of the Disqualifying Disposition Rules) for
the previously-acquired stock surrendered will carry over to an equal number of
the option shares received on a share-for-share basis. Shares received in
excess of the shares surrendered will have a tax basis equal to the amount paid
(if any) in excess of the previously-acquired shares used to pay the exercise
price, and such shares' holding period will begin on the date of exercise (with
the possible exception of a 16(b) Person). Proposed regulations provide that
where an ISO is
47
<PAGE>
exercised using previously-acquired stock, a later Disqualifying Disposition
of the shares received will be deemed to have been a disposition of the shares
having the lowest basis first. The Company will not be entitled to a deduction
with respect to any such capital gain recognized by the optionee.
If an optionee pays the exercise price of an ISO in whole or in part with
previously-acquired Common Stock that was acquired upon the exercise of an ISO
and that has not been held for the Required Holding Periods, the optionee will
recognize ordinary income (but not capital gain) under the rules applicable to
Disqualifying Dispositions. The Company will be entitled to a corresponding
deduction (subject to the $1 million cap). The optionee's basis in the shares
received in exchange for the shares surrendered will be increased by the amount
of ordinary income the optionee recognizes.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 2, 1996, information with
respect to the securities holdings of all persons which may be deemed the
beneficial owners of 5% or more of the Company's outstanding Common Stock. Also
set forth in the table is the beneficial ownership of all shares of the
Company's outstanding stock, as of such date, of all officers and directors,
individually and as a group.
<TABLE>
<CAPTION>
Amount & Nature
of Beneficial % of
Ownership Ownership/(1)/
--------------- ---------
<S> <C> <C>
Paul A. DeJuliis 476,000/(2)/ 20.6%
John R. Thach 476,000/(2)/ 20.6%
William B. Miller 25,000/(3)/ 1.2%
Andrew P. Panzo ___
Bruce R. Murray ___ ___
Anthony R. Mendicino ___ ___
Porter Bibb ___ ___
FAC Enterprises Inc. 152,000/(4)/ 6.7%
Clifton Capital Ltd. 200,000/(5)/ 9.4%
All Officers and Directors
as a group (7 persons) 977,000 39%
</TABLE>
48
<PAGE>
/(1)/ Calculated in accordance with rules of the Securities and Exchange
Commission and after giving effect to the issuance of an additional
150,000 shares of Common Stock to Clifton Capital, Ltd. on the effective
date of the registration statement of which this Prospectus is a part.
/(2)/ Includes 175,000 shares of Common Stock issuable upon the exercise of
Class A-1 Warrants.
/(3)/ Includes 15,000 shares of Common Stock issuable upon the exercise of
Class A-1 Warrants.
/(4)/ Includes 140,000 shares of Common Stock issuable upon the exercise of
Class C Warrants.
/(5)/ Includes 150,000 shares of Common Stock issuable upon the effective date
of the registration statement of which this Prospectus is a part.
Approximately 28.71% of the voting shares of Company Common Stock
outstanding on the date of this Prospectus (after giving effect to the issuance
of 150,000 shares of Common Stock pursuant to the Clifton Agreement), are
subject to a Voting Agreement between the Company, Messrs. DeJuliis and Thach,
AMLF and FAC. The Agreement provides that all parties will vote their shares of
Company Common Stock so that one director shall be nominated by FAC and AMLF
and five shall be nominated by Messrs. DeJuliis and Thach. Messrs. DeJuliis and
Thach have nominated, in addition to themselves, Messrs. Miller, Murray and
Mendicino. FAC and AMLF have nominated Porter Bibb.
The addresses of Messrs. DeJuliis, Thach and Miller is 100 Four Falls Corporate
Center, Suite 305, West Conshohocken, PA 19428. The address of Mr. Panzo is 401
City Avenue, Suite 725, Bala Cynwyd, PA 19004. The address of Mr. Murray is
c/o Bannock Burn Group, 712 Pleasant Run, Suite Two, Kennett Square, PA 19348.
The address of Mr. Mendicino is 212 South Spring Mill Road, Villanova, PA
19085. The address of Porter Bibb is c/o Ladenburg, Thalmann & Co., 540 Madison
Avenue, New York, NY 10022. The address of Mr. Frazier is 3175 Princeton Pike,
Lawrenceville, NJ 08648.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue five million shares of Common Stock,
$.10 par value per share. As of July 2, 1996, 1,988,250 shares were issued and
outstanding. An additional 150,000 shares of Common Stock are issuable on the
effective date of the registration statement of which this Prospectus is a part
pursuant to the Clifton Agreement. An additional 1,525,000 shares of Common
Stock are reserved for issuance upon the exercise of the Warrants and other
outstanding common stock purchase warrants and options. All outstanding shares
of Common Stock are fully paid and non-assessable.
49
<PAGE>
Holders of Common Stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefore.
However, the Company has no current plans to pay dividends with respect to its
shares of Common Stock and in addition certain restrictions limiting or
prohibiting payment of such dividends are contained in a subordinated debenture
issued to MSSF, the terms of the Series A Preferred Stock of the Company, and
loan agreements to which the Company or its operating subsidiaries are currently
obligated. Holders of Common Stock have one vote for each share held of record
and do not have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to
share ratably in the net assets available for distribution. Shares of Common
Stock are not redeemable and have no preemptive or similar rights under the
Company's Certificate of Incorporation. However, FAC, AMLF, MSSF and Messrs.
DeJuliis and Thach have contractual rights of first refusal to purchase, pro
rata, all or any part of new securities which the Company may from time to time
propose to sell and issue. For this purpose, new securities do not include
shares issued upon exercise of outstanding Warrants. These rights of first
refusal are not assignable and expire, as to FAC, and AMLF, upon the earliest of
September 10, 1996 or the consummation of a Qualified Public Offering. The
rights of Messrs. DeJuliis and Thach expire upon the earlier of the same events
and such time as they no longer hold 25,000 shares of the Company's Common Stock
(including shares issuable upon exercise of Warrants). MSSF's right expires at
the earlier of June 30, 2001 or the Company's repayment of a $500,000
subordinated debenture issued to MSSF.
Preferred Stock
The Company is also authorized to issue three million shares of Preferred
Stock, $.10 par value per share, of which 1,000 shares are outstanding. The
Board of Directors is authorized to issue Preferred Stock in classes or series
and to fix from time to time before issuance thereof the number of shares in
each series or class and all terms of such series or class, including, but not
limited to, all designations, preferences, qualifications, limitations and
restrictions with respect to the rate and nature of dividends, the price and
terms and conditions on which shares may be redeemed, the amount payable in the
event of voluntary or involuntary liquidation, the terms and conditions for
conversion or exchange into any other class or series of stock, voting rights
and other terms. The issuance of Preferred Stock may have the effect of
delaying or preventing a change in control of the Company. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock.
On May 10, 1996, the Company issued 1,000 shares of its newly designated
Series A Preferred Stock (the "Series A Preferred Stock") to Odyssey Capital
Group, L.P. for gross proceeds of $1,000,000. The Series A Preferred Stock has
a stated value of $1,000 per share and pays quarterly dividends at the rate of
9% per annum until May 9, 1999, 15% per annum
50
<PAGE>
thereafter until May 9, 2002, and 18% per annum thereafter. The Company may
redeem the Series A Preferred Stock at any time on thirty days' prior written
notice at the stated value per share plus accrued and unpaid dividends thereon
to the date of redemption. The holders of the Series A Preferred Stock are
entitled to payment of the stated value plus accrued and unpaid dividends
thereon, prior to payment in respect of any class of capital stock of the
Company, in the event of a liquidation or dissolution of the Company. The Series
A Preferred Stock is not entitled to any voting rights.
In connection with the issuance of the Series A Preferred Stock, the
Company issued 220,000 Common Stock Purchase Warrants which are each exercisable
to purchase one share of the Company's Common Stock at $6.00 per share until
they expire on May 10, 2003.
Outstanding Warrants
Class C Warrants
----------------
The Class C Warrants were offered in March 1995 to create a reserve to be
used by the Company in raising funds for additional potential business
opportunities and acquisitions. Each Class C Warrant, of which there are 165,000
outstanding, entitles the holder to purchase one share of Common Stock at an
exercise price of $6.00 until March 10, 2005. Each of the Class C Warrants are
redeemable by the Company, upon 30 days, written notice, in whole or in part, at
a call price of $.001 per Warrant, but such call for redemption may only be made
following any calendar year in which the Company's consolidated financial
statements evidence net income of at least $400,000 and net income per share of
at least $.40 per share or at any time after the Company proposes to consummate
the acquisition of all of the stock or assets of another company whose annual
gross revenues from operations is at least $10 million (and protective
provisions ensure that if such proposed acquisition is not consummated then such
Warrants shall be returned to the holder and the Warrants shall continue in full
force and effect as if such redemption call had not been made).
Class D Warrants
----------------
The Class D Warrants, of which there are 5,000 outstanding, were offered in
March 1995 to four investors who loaned money to the Company, evidenced by a
promissory note, and who received the Class D Warrants and shares of the
Company's Common Stock as an inducement for such loan. Each Class D Warrant
entitles the holder to purchase one share of Common Stock at an exercise price
of $3.50 until March 31, 1998. The Class D Warrants are not redeemable by the
Company.
Class A-1 Warrants
------------------
The Class A-1 Warrants have been issued to certain founding stockholders
and other officers of the Company or its operating subsidiaries. See CERTAIN
TRANSACTIONS - DESCRIPTION OF INVESTMENT BANKING ADVISOR AGREEMENTS. Each Class
A-1 Warrant, of which there are 385,000 outstanding, entitles the holder to
purchase one share of Common stock at an exercise price of $4.00 until March 10,
51
<PAGE>
2005. The Class A-1 Warrants are not redeemable by the Company.
Clifton Warrants
----------------
The Clifton Warrants have been issued to Clifton Capital Ltd. in connection
with Clifton's $1,200,000 financing commitment to the Company. Each Clifton
Warrant, of which 62,500 are outstanding and an additional 187,500 are
issuable, upon payment therefor, on the effective date of the registraton
statement of which this Prospectus is a part, entitles the holder to purchase
one share of Common Stock at an exercise price of $6.00 beginning December 14,
1996 and ending December 13, 1999. The Clifton Warrants are redeemable by the
Company upon thirty (30) days notice at $.001 per Warrant (i) following any
calendar year in which the Company's consolidated financial statements evidence
net income of least $400,000 and net income per share of at least $.40 per share
or (ii) at any time after the Company proposes to consummate the acquisition of
all of the stock or assets of another company whose annual gross revenues from
operations is at least $10,000,000.
General.
--------
The Warrants provide for adjustment of the exercise price and for a change
in the number of shares issuable upon exercise to protect holders against
dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock. The Warrants may be exercised upon
surrender of the Warrant Certificate on or prior to the expiration date (or in
the case of those Warrants which are redeemable, at an earlier redemption date)
of such Warrant at the offices of the Company or its Transfer Agent, with the
form of "Election to Purchase" completed and executed as indicated, accompanied
by payment of the full exercise price (by certified or bank check, payable to
the order of the Company) for the number of shares with respect to which the
Warrant is being exercised. In the event where less than the full amount of
shares subject to the Warrant is being exercised, the Company will return to the
holder a replacement Warrant evidencing the number of shares subject to the
Warrant which have not been exercised. Shares issued upon exercise of Warrants
and paid for in accordance with the terms of the Warrants will be fully paid and
non-assessable.
The Class C, D, A-1 and Clifton Warrant holders have been granted
registration rights by the Company and the registration statement of which this
Prospectus is a part has been filed with the Commission as a result thereof.
The costs of filing the Registration Statement will be borne entirely by the
Company.
The Warrants do not confer upon the holder thereof any voting or other
rights of a stockholder.
Limited Grant of Registration Rights
- ------------------------------------
The Company has granted registration rights to certain of the stockholders
who acquired shares pursuant to its private placement transactions. The Company
has similarly granted registration rights to the holders of the Warrants who
52
<PAGE>
acquired them pursuant to these private placement transactions. Accordingly,
the Company has agreed to include such Shares in the Registration Statement of
which this Prospectus is a part.
In connection with any such registration, the Company shall have no
obligation (i) to assist or cooperate in the offering or disposition of such
Shares; (ii) to indemnify or hold harmless the holders of any such Shares beyond
those specific indemnification obligations contained in that certain agreements
with the Selling Securityholder; (iii) to obtain a commitment from an
underwriter relative to the sale of any such Shares or (iv) to include such
Shares or within an underwritten offering of the Company. Accordingly, the
Company's only obligation is to include certain of such Shares in a Registration
Statement to be filed by the Company. The Company will assume no obligation or
responsibility whatsoever to determine a method of disposition for such Shares
or to otherwise include such Shares or within the confines of the registered
offering.
Transfer Agent
- --------------
Stock Trans, Inc. of Ardmore, Pennsylvania, serves as Transfer Agent for
the Common Stock and the Warrants.
Certain Provisions of the Certificate of Incorporation, the Bylaws and Delaware
- -------------------------------------------------------------------------------
Law.
- ----
Certain provisions of the Company's Bylaws require a greater percentage
stockholders' vote than a majority of the shares cast at a meeting at which a
quorum of stockholders is present. For example, any amendment in the number of
required directors of the Company requires the affirmative approval of at least
75% of the votes which all stockholders would be entitled to cast at any
election of directors. In addition, the approval of certain fundamental
transactions (to include, for example, a sale of substantially all of the
Company's assets or a change in the nature of its business, the filing of a
voluntary petition for bankruptcy or reorganization or approval of a liquidation
or dissolution, or issuance of additional shares in excess of 10% of the total
issued and outstanding shares or an acquisition resulting in an investment by
the Company of 10% or more of its consolidated assets, or certain other
transactions with its stockholders) requires the affirmative approval of at
least 75% of the affirmative vote of the entire Board of Directors. These
supermajority voting requirements expire automatically on September 10, 1996
with respect to certain of these fundamental transactions or upon a qualified
public offering as defined in the Securities Purchase Agreement with Sector
Associates. See "CERTAIN TRANSACTIONS."
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in
53
<PAGE>
a financial benefit to the stockholder. An "interested stockholder" is a person
who, together with its affiliates and associates, owns (or, within three years,
did own) 15% or more of the corporation's voting stock.
The supermajority voting provisions in the Company's bylaws and the
provisions regarding certain business combinations under the GCL could have the
effect of delaying, deferring or preventing a change in control of the Company
or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
The Company has adopted the provisions of Section 102(b)(7) of the GCL,
which eliminate or limit the personal liability of a director to the Company or
its stockholders for monetary damages for breach of fiduciary duty under certain
circumstances. Furthermore, under Section 144 of the GCL, the Company may
indemnify each of its directors and officers against his expenses (including
reasonable costs, disbursements and counsel fees) in connection with any
proceeding involving such person by reason of his having been an officer or
director to the extent he acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interest of the Company, and,
with respect to any criminal action or proceeding, if he had no reasonable cause
to believe his conduct was unlawful. The determination of whether
indemnification is proper under the circumstances, unless made by a court, shall
be determined by the Board of Directors.
The Company's Bylaws require that if the Company shall have more than fifty
(50) stockholders of record, no action required or permitted to be taken at any
annual special meeting of stockholders of the Company may be taken without a
meeting, and stockholders of the Company may not take action by written consent.
Additionally, the Company's Bylaws require that special meetings of the
stockholders of the Company be called only by a majority of the Board of
Directors and certain officers.
The Company's Bylaws provide that stockholders seeking to bring business
before or to nominate directors at any meeting of stockholders must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received, at the principal executive offices of the
Company not less than 50 days nor more than 75 days prior to such meeting or, if
less than 60 days' notice or prior public disclosure of the date of the meeting
was given or made to stockholders, within 10 days following the date on which
such notice was given. The Company's Bylaws also specify certain requirements
for stockholder's notice to be in proper written form. These provisions may
preclude some stockholders from bringing matters before the stockholders or from
making nominations for directors.
Under the Company's Certificate of Incorporation, assuming full exercise of
all of the Warrants and other outstanding warrants and options and issuance of
150,000 shares of Common Stock under the Clifton Agreement, 1,366,750 shares of
Common Stock will remain authorized but unissued after this offering and
2,999,000 shares of Preferred Stock will be available for future issuance
without additional stockholder approval. These additional shares
54
<PAGE>
may be utilized for a variety of corporate purposes including future public
offerings to raise additional capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved Common Stock
and Preferred Stock may be to enable the Board of Directors to issue shares to
persons friendly to current management which could render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy context or otherwise, and thereby protect the continuity of
the Company's management. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of the Company.
The Board of Directors is authorized without any future action by the
stockholders to determine the rights, preferences, privileges and restrictions
of the unissued Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuance. The Board of Directors
may issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock, and which
could, among other things, have the effect of delaying, deferring or preventing
a change in control of the Company.
The Company does not currently have any plans to issue additional shares of
Common Stock or Preferred Stock other than shares of Common Stock which may be
issued upon the exercise of options which have been granted or which may be
granted in the future to the Company's employees.
CERTAIN TRANSACTIONS
Equity Infusion from Sector Associates, Ltd.
- --------------------------------------------
Effective on March 10, 1995, pursuant to a Securities Purchase Agreement
dated January 25, 1995, Sector Associates, Ltd. ("Sector"), a Delaware
corporation, purchased securities from the Company consisting of 200,000 shares
of its Common Stock, 250,000 Class A Common Stock Purchase Warrants, 187,500
Class B Common Stock Purchase Warrants and 250,000 Class C Common Stock Purchase
Warrants for an aggregate purchase price in cash of $500,000. Upon the
effectiveness of the Company's Registration statement relating to the resale of
the shares of Comon Stock issued to Sector, Sector distributed such shares to
its shareholders on a pro rata basis.
The Securities Purchase Agreement contains customary representations,
warranties and covenants of the Company for the benefit of Sector and its
shareholder distributees of the Company's securities, including customary
indemnification provisions. In addition, provision has been made for amendment
of the Company's Bylaws to ensure that there shall be a minimum of seven
directors and the parties to that Agreement have entered into a separate voting
agreement concerning the election of such directors. Pursuant to that voting
agreement, Sector and its shareholder distributees are guaranteed the ability to
elect at least two of the seven directors. Moreover, the Company's Bylaws were
further amended pursuant to the Securities Purchase Agreement to provide that
any amendment of bylaw provisions relating to the number of directors
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<PAGE>
or the approval of certain fundamental transactions, as described
in such Agreement, shall require the affirmative vote of 75% of the outstanding
shares entitled to elect directors, or, following a Qualified Public Offering as
defined in such Agreement, such number of affirmative votes as otherwise is
required under the Delaware Corporation Law. This supermajority voting
requirement will expire automatically on September 10, 1996 with respect to
certain of these fundamental transactions.
Bridge Loan Transaction and Issuance of Equity Securities.
- ----------------------------------------------------------
On March 31, 1995, the Company borrowed $175,000 from FAC Enterprises,
Inc., Centaur Financial Corp., Rozel International Holdings, Ltd., and HST
Partners (the "Lenders"), evidenced by its subordinated notes at an interest
rate of 8% per annum. These subordinated notes were exchanged for 35,000 shares
of Common Stock. As an inducement for the loan, the Company issued 26,250
shares of its Common Stock to the Lenders and issued Class D Common Stock
Purchase Warrants for an additional 35,000 shares of stock at an exercise price
of $5.00 per share, which Warrants may be exercised until March 31, 1998. These
Class D Warrants are not redeemable by the Company. On December 29, 1995 the
Company issued 35,000 shares of Common Stock to the Lenders in consideration of
the cancellation of all outstanding indebtedness due the Lenders under the
subordinated notes and a reduction of the exercise price of the Class D Warrants
to $3.50. The Common Stock and the Class D Warrants issued to the Lenders are
being registered under the Registration Statement of which this Prospectus is a
part and has been filed with the Securities and Exchange Commission. The cost of
filing the Registration Statement will be borne entirely by the Company.
Description of Investment Banking Advisor Agreements.
- -----------------------------------------------------
The Company entered into an Investment Banking Advisor Agreement on January
25, 1995 with FAC Enterprises, Inc. ("FAC") and American Maple Leaf Financial
Corporation ("AMLF") (collectively, the "Investment Advisors"). Pursuant to the
Agreement, the Investment Advisors are required to provide certain consulting
services of an investment banking and financial relations nature to the Company,
in exchange for which the Company issued 40,000 shares of its Common Stock to
FAC and 10,000 shares to Andrew Panzo on March 10, 1995.
Pursuant to the Agreement, the Company was also obligated to issue an
aggregate of 100,000 additional shares of its Common Stock and an aggregate of
100,000 Class A-1 Warrants to the Investment Advisors, but only upon the
satisfaction of certain conditions tied to their performance. The agreement was
amended on December 15, 1995 to accelerate delivery of all of these conditional
shares and warrants provided that all of the Class A Warrants were exercised
before December 31, 1995. As of December 31, 1995, all Class A Warrants had
been exercised. Accordingly, the conditional Class A-1 warrants and Common
Stock were issued as of that date.
The Investment Advisors are granted similar registration rights with
respect to the stock issued and the conditional shares and warrants issuable to
them under the Investment Banking Advisor Agreement as has been granted to
Sector. The Investment Advisors are also given similar rights of first refusal,
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<PAGE>
similar indemnification and similar tag-along rights as those given to Sector.
In addition, the Investment Banking Advisor Agreement further provides that
the Company will pay the Investment Advisors a monthly fee (the allocation of
such aggregate fee between the two investment advisors to be determined by them)
in an amount currently being paid of $6,000 per month.
The Investment Banking Advisor Agreement with the Investment Advisors was
the product of arm's length negotiation, and the Company believes that the terms
of the Investment Banking Advisor Agreement are no less favorable than could
otherwise have been obtained as of the date of the Agreement.
Transactions with DTF Media, Inc.
- ---------------------------------
The Company acquired the shares of Princeton in a share exchange from DTF
Media, Inc., a company formed by Messrs. DeJuliis and Thach, officers and
principal stockholders of the Company, and the other Founding Stockholders,
Graeme Frazier IV and Robert Spahr, to own the shares of Princeton. Messrs.
DeJuliis, Thach and Frazier each received 66,000 shares of Common Stock and Mr.
Spahr received 22,000 shares of Common Stock in exchange for all of the
outstanding shares of Princeton. In addition, the Company assumed certain
specific liabilities of DTF, including certain liabilities for professional fees
($26,000), a note payable to Cooke Publishing ($25,000), and an intercompany
obligation payable to Princeton in a principal amount of $283,005. The
aggregate cost of the shares of Princeton in June 1993 was approximately
$596,000. Inasmuch as the share exchange reflected the initial organization of
the Company, there was no issue of valuation of the Princeton shares and for
accounting purposes the Princeton shares were accounted for on the basis of the
initial acquisition of the Princeton assets from PUP.
Investment in Lavelle Company
- -----------------------------
In March 1996, The Company invested $450,000 in Lavelle Company ("Lavelle")
in the form of a subordinated debenture. The debenture matures in March 2001
and pays quarterly interest at a rate of 20% per year. In connection with its
investment, the Company has guaranteed the indebtedness of Lavelle under a
$900,000 equipment facility. The Company's debenture is subordinate to the
equipment facility indebtedness. In addition, the Company has pledged a
$100,000 security interest in favor of the equipment facility lender.
Lavelle was incorporated to purchase the net assets of Lavelle Aircraft
which was liquidated under Chapter 11 of the U.S. Bankruptcy Law. Lavelle
Aircraft is owned by DTM Aerospace, Inc. of which Mssrs. DeJuliis and Thach are
directors, officers and principal shareholders. The stock of Lavelle is owned
by non-affiliates of the Company. Of the $78,000 receivable due from Lavelle
Aircraft at December 31, 1995, $55,000 was repaid by Lavelle Aircraft and the
remainder was assumed by Lavelle.
57
<PAGE>
The $450,000 debenture will be recorded as a non-current asset on the
balance sheet of the Company. Because of the Company's guarantee and pledge
relating to Lavelle's equipment facility, any loss of Lavelle will be recognized
by the Company in its statement of operations and recorded as a reduction in the
carrying amount of its investment. To the extent Lavelle's losses exceed the
amount of the investment, a liability will be recorded on the Company's balance
sheet.
SELLING SECURITYHOLDERS
The shares of Common Stock of the Company offered by this Prospectus are
being sold for the account of the persons named herein (the "Selling
Securityholders").
The shares of Common Stock offered by the Selling Securityholders may be
offered for sale from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting discounts
or commissions except for usual and customary selling commissions paid to
brokers or dealers.
The following table describes the shares held by the Selling
Securityholders before and after the offering, actual and as a percentage of the
total./1/
<TABLE>
<CAPTION>
=================================================================================================================================
Percentage of
Number of Shares Percentage of Shares of
of Common Stock Number of Shares Shares of Common Common Stock
held before of Common Stock Stock held before held after
Name of Selling Security Holder Offering held after Offering Offering/1/ Offering/1/
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mitchell K. Posner/(2)/ 9,500 -0- (3) -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Rozel International Holdings, Ltd./(4)/ 8,000 -0- (3) -0-
- ---------------------------------------------------------------------------------------------------------------------------------
HST Partners/(5)/ 10,000 -0- (3) -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Centaur Financial Corp/(6)/ 10,000 -0- (3) -0-
- ---------------------------------------------------------------------------------------------------------------------------------
FAC Enterprises,Inc./(7)/ 152,000 -0- 6.7 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Cranbourne Investments/(8)/ 25,000 -0- 1.2 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Paul A. DeJuliis/(9)(10)/ 476,000 -0- 20.6 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
John R. Thach/(10)(11)/ 476,000 -0- 20.6 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
William B. Miller/(12)/ 25,000 -0- 1.2 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Graeme B. Frazier, IV/(13)/ 88,000 -0- 4.1 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Clifton Capital, Ltd./(1)(14)/ 450,000 -0- 18.9 -0-
- ---------------------------------------------------------------------------------------------------------------------------------
Robert N. Spahr 22,000 -0- 1.0 -0-
=================================================================================================================================
</TABLE>
58
<PAGE>
(1) Calculated in accordance with the rules of the Securities Exchange
Commission and after giving effect to the issuances to Clifton Capital,
Ltd. of an additional 150,000 shares of Common Stock on the effective date
of the registration statement of which this Prospectus is a part.
(2) Mr. Posner has served as a financial adviser to the Company.
(3) Less than 1%.
(4) All the shares in issue of this company are owned by a Gilbraltan
Discretionary Settlement (Trust) the Trustee of which is Hasley Fidelity
Company Limited. The class of beneficiaries defined in the settlement deed
consists of a number of Israeli and international charities. Until such
time as the Trustee elects, none of the beneficiaries have any legal
entitlement. In the event of a failure by the Trustee to appoint
beneficiaries, all the class would share the trust assets equally.
(5) Owned by Lisa Davis and Debbie Stutz. Includes Class D Warrants to
purchase 5,000 shares of Common Stock.
(6) Owned by Steven B. Rosner.
(7) Wholly-owned by Howard M. Appel. Includes Class C Warrants to purchase
140,000 shares of Common Stock.
(8) All the shares in issue of this company are owned by a Gibraltan
Discretionary Settlement (Trust) the Trustee of which is Audley Fidelity
Company Limited. The class of beneficiaries defined in the settlement deed
consists of a number of British and international charities. Until such
time as the Trustee elects, none of the beneficiaries have any legal
entitlement. In the event of a failure by the Trustee to appoint
beneficiaries, all the class would share the trust assets equally.
Consists of 25,000 shares of Common Stock which may be acquired upon
exercise of Class C Warrants.
(9) Mr. DeJuliis is Chairman and Chief Executive Officer and a director of the
Company.
(10) Includes 175,000 shares of Common Stock which may be acquired upon exercise
of Class A-1 Warrants.
(11) Mr. Thach is President and Chief Operating Officer and a director of the
Company.
(12) Mr. Miller is Senior Vice President, Chief Financial Officer and a
director of the Company. Includes 15,000 Shares of Common Stock which may
be acquired upon exercise of Class A-1 Warrants.
59
<PAGE>
(13) Mr. Frazier is Director of Sales for Princeton. He was previously President
of Princton. Includes Class A-1 Warrants to purchase 20,000 shares of
Common Stock.
(14) Includes 250,000 shares issuable upon the exercise of the Clifton Warrants.
According to its Schedule 13D filed with the SEC under the Exchange Act,
Clifton Capital, Ltd. is a holding company for a common law discretionary
settlement, Davera Fidelity CO. Ltd. of Gibraltar, trustee.
PLAN OF DISTRIBUTION
Selling Securityholders
- -----------------------
The Selling Securityholders are offering shares of Common Stock for their
own account, and not for the account of the Company. The Company will not
receive any proceeds from the sale of the shares of Common Stock by the Selling
Securityholders.
Each Selling Security Holder will, prior to any sales, agree (a) not to
effect any offers or sales of the Common Stock in any manner other than as
specified in this Prospectus, (b) to inform the Company of any sale of Common
Stock at least one business day prior to such sale and (c) not to purchase or
induce others to purchase Common Stock in violation of Rule 10b-6 under the
Exchange Act.
The shares of Common Stock may be sold from time to time to purchasers
directly by any of the Selling Securityholders acting as principals for their
own accounts in one or more transactions in the over-the-counter market or in
negotiated transactions at market prices prevailing at the time of sale or at
prices otherwise negotiated. Alternatively, the shares of Common Stock may be
offered from time to time through agents, brokers, dealers or underwriters
designated from time to time, and such agents, brokers, dealers or underwriters
may receive compensation in the form of commissions or concessions from the
Selling Securityholders or the purchasers of the Common Stock.
Under the Exchange Act, and the regulations thereunder, any person engaged
in a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the Common Stock of the Company during the applicable "cooling off"
periods prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Security Holder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation, Rule 15c2-6, and Rules 10b-6 and 10b-
7, which provisions may limit the timing of purchases and sales of Common Stock
by the Selling Security Holder. There are possible limitations upon trading
activities and restrictions upon broker-dealers effecting
60
<PAGE>
transactions in certain securities which may also materially affect the value
of, and an investors ability to dispose of, the Company's securities. See "RISK
FACTORS."
The Company will use its best efforts to file, during any period in which
offers or sales are being made, one or more post-effective amendments to this
Registration Statement of which this Prospectus is a part to describe any
material information with respect to the plan of distribution not previously
disclosed in this Prospectus or any material change to such information in this
Prospectus.
Exercise of Warrants
- --------------------
The Company is registering for resale shares of Common Stock which may be
acquired upon exercise of Warrants that were previously issued to the holders
thereof in private placement transactions.
The Warrants are exercisable by tendering to the Company the appropriate
exercise price along with the Warrant Certificate (with the "Election to
Purchase" section properly filled out). Upon exercise, the Company will issue
such fully paid and non-assessable shares of Common Stock as are specified on
the Certificate so tendered and deliver to the holder thereof such additional
securities as are required by the terms thereof. Payment of the exercise price
shall be made in cash or by certified check or bank draft made payable to the
order of the Company. The Class C Warrants and Clifton Warrants may be subject
to redemption by the Company. See "DESCRIPTION OF SECURITIES."
The exercise price of the Warrants was determined through arm's length
negotiations with the holders thereof.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In 1995, the Company reassessed its requirements for auditing services.
The Company advised Kreischer Miller & Co., its independent public accountant at
that time, that it would interview other accounting firms. Following these
interviews, on April 7, 1995, the Company dismissed Kreischer Miller & Co. and
retained Arthur Andersen LLP as its independent public accounting firm with the
approval of its Board of Directors.
Kreischer Miller & Co. audited the consolidated financial statements of the
Company for the period July 1, 1993 (date of inception) to December 31, 1993 and
for the year ended December 31, 1994. During such periods, the independent
auditor's report on such financial statements contained no adverse opinions or
disclaimers of opinion and there were no qualifications or modifications of the
opinion due to uncertainty, audit scope or accounting principles. During such
period, there were no disagreements with the Company's independent public
accountants on any matter of accounting principles or practices, financial
disclosures or auditing scope or procedures, nor were there any such
disagreements with Kreischer Miller & Co. through the date of dismissal.
61
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Buchanan Ingersoll Professional Corporation, Two Logan Square, 12th
Floor, 18th and Arch Streets, Philadelphia, Pennsylvania, 19103.
STATEMENT OF INDEMNIFICATION
The Company has adopted the provisions of Section 102(b)(7) of the Delaware
General Corporation Law, which eliminate or limit the personal liability of a
director to the Company or its stockholders for monetary damages for breach of
fiduciary duty under certain circumstances. Furthermore, under Section 145(d) of
the GCL, the Company may indemnify each of its directors and officers against
his expenses (including reasonable costs, disbursements and counsel fees) in
connection with any proceeding involving such person by reason of his having
been an officer or director to the extent he acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interest of the
Company, and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe his conduct was unlawful. The determination of
whether indemnification is proper under the circumstances, unless made by a
court, shall be determined by the Board of Directors.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers and controlling persons of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in a successful defense of any
action, suit or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issuer.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for the
year then ended included in this Prospectus and in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports. The
financial statements of the Company as of December 31, 1994 and 1993 and for the
year ended December 31, 1994 and the six months ended December 31, 1993 have
been included herein and in the Registration Statement in reliance upon the
report of Kreischer, Miller & Co., independent
62
<PAGE>
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in giving said reports.
In 1995, the Company reassessed its requirements for auditing services. On
April 7, the Company informed Kreischer, Miller & Co. that it had retained
Arthur Andersen LLP as its independent public accounting firm with the approval
of its Board of Directors. Kreischer, Miller & Co. audited the financial
statements of the Company for the period July 1, 1993 (date operations
commenced) to December 31, 1993 and the year ended December 31, 1994. During
such periods, the independent auditor's report on such financial statements
contained no adverse opinions or disclaimers of opinion and there was no
qualification or modification of the opinion due to uncertainty, audit scope or
accounting principles. During such period and through April 7, 1995, there were
no disagreements with the Company's independent certified public accountants on
any matter of accounting principles or practices, financial disclosures or
auditing scope or procedure.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 with respect to the Common Stock being
registered hereby. This Prospectus does not contain all the information
contained in such Registration Statement, as permitted by the Rules and
Regulations of the Securities and Exchange Commission. The Registration
Statement, including exhibits thereto, may be inspected without charge, and
copies of all or any part thereof may be obtained from the Commission's
principal office in Washington, D.C. at Room 1024, 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 7 World
Trade Center, New York, New York 10007 and at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained upon written request addressed to the Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
prescribed rates. For further information with respect to the Company, the
Common Stock being registered hereby, and the contents of any contract or
document referred to herein, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
63
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Report of Independent Public Accountants-
Arthur Andersen LLP F-2
Independent Auditor's Report-
Kreischer, Miller & Co. F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1996 (unaudited) F-24
Consolidated Statements of Operations For the
Three Months ended March 31, 1996 and 1995 (unaudited) F-25
Consolidated Statements of Cash Flows For the
Three Months ended March 31, 1996 and 1995 (unaudited) F-26
Notes to Consolidated Financial Statement (unaudited) F-27
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Eastwind Group, Inc.:
We have audited the accompanying consolidated balance sheet of The Eastwind
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Eastwind Group, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 19, 1996
F-2
<PAGE>
Independent Auditor's Report
----------------------------
To the Stockholders
The Eastwind Group, Inc.
Conshohocken, Pennsylvania
We have audited the accompanying consolidated balance sheets of The
Eastwind Group, Inc. and subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of operations and accumulated deficit and cash
flows for the year ended December 31, 1994 and for the period from June 30, 1993
(Date of Inception) to December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Eastwind
Group, Inc. and subsidiary as of December 31, 1994 and 1993 and the results of
their operations and their cash flows for the year ended December 31, 1994 and
for the period from June 30, 1993 to December 31, 1993 in conformity with
generally accepted accounting principles.
/s/ Kreischer, Miller & Co.
Kreischer Miller & Co.
A Partnership of
Professional Corporations
North Point
Horsham, Pennsylvania Office Center
May 26, 1995 200 Gibraltar Road
Horsham, PA
19044-21378
215.441.4600
FAX: 215.672.8224
Member
The McGladrey Network
F-3
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED BALANCE SHEETS (Note 1)
------------------------------------
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
December 31, Pro Forma
1994 Actual (Note 2)
-------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 426,377 $ 726,377
Accounts receivable, net 787,672 4,486,821 4,486,821
Stock subscription receivable -- 746,000 746,000
Due from related party 374,005 78,000 78,000
Inventories 853,036 1,911,969 1,911,969
Prepaid expenses 98,108 63,912 63,912
---------- ----------- -----------
Total current assets 2,112,821 7,713,079 8,013,079
PROPERTY, PLANT AND EQUIPMENT, net 282,380 1,612,817 1,612,817
DEFERRED INCOME TAXES 108,050 128,312 128,312
GOODWILL, net -- 169,400 169,400
OTHER ASSETS, net 21,500 492,878 492,878
---------- ----------- -----------
$ 2,524,751 $ 10,116,486 $ 10,416,486
========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY(DEFICIT)
-----------------------------
CURRENT LIABILITIES:
Lines of credit $ 684,830 $ 2,135,096 $ 2,135,096
Current portion of long-term debt 114,502 458,294 458,294
Accounts payable 994,100 1,571,010 1,571,010
Accrued expenses 55,673 397,188 397,188
Accrued income taxes -- 27,223 27,223
Deferred income taxes 168,418 146,494 146,494
---------- ----------- -----------
Total current liabilities 2,017,523 4,735,305 4,735,305
---------- ----------- -----------
LONG-TERM DEBT 342,533 3,221,585 3,221,585
---------- ----------- -----------
ACCRUED PENSION AND
POSTRETIREMENT BENEFITS -- 200,510 200,510
---------- ----------- -----------
DEFERRED CREDIT, net 209,524 184,874 184,874
---------- ----------- -----------
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.10 par value, 3,000,000 shares
authorized, none issued and outstanding -- -- --
Common stock, $.10 par value, 5,000,000 shares
authorized, 470,000 and 1,608,250 shares issued
and outstanding (actual), 1,683,250 issued and
outstanding (pro forma) 47,000 160,825 168,325
Warrants outstanding -- 158,586 139,836
Additional paid-in capital 13,000 1,818,215 2,129,465
Accumulated deficit (104,829) (363,414) (363,414)
---------- ----------- -----------
Total stockholders' equity (deficit) (44,829) 1,774,212 2,074,212
---------- ----------- -----------
$ 2,524,751 $ 10,116,486 $ 10,416,486
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 1)
----------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(June 30, 1993) to Year Ended December 31,
December 31, --------------------------------------
1993 1994 1995
------------------- ----------------- -------------
<S> <C> <C> <C>
NET SALES $ 2,182,321 $ 5,235,774 $ 15,433,897
COST OF GOODS SOLD 1,939,681 4,614,419 12,044,099
---------- ---------- -----------
Gross profit 242,640 621,355 3,389,798
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 244,153 645,020 3,008,833
---------- ---------- -----------
Operating income (loss) (1,513) (23,665) 380,965
INTEREST EXPENSE 47,269 144,024 654,513
---------- ---------- -----------
Loss before income tax benefit
and minority interest in loss
of subsidiary
(48,782) (167,689) (273,548)
INCOME TAX BENEFIT 27,196 44,446 14,963
MINORITY INTEREST IN LOSS OF
SUBSIDIARY 9,535 30,465 --
---------- ---------- -----------
NET LOSS $ (12,051) $ (92,778) $ (258,585)
========== ========== ===========
PRO FORMA LOSS PER SHARE
(unaudited) $ (.02) $ (.13) $ (.28)
========== ========== ===========
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING
(unaudited) 690,000 690,000 939,826
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Note 1)
------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Warrants Paid-in Accumulated Equity
Stock Outstanding Capital Deficit (Deficit)
--------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
INCEPTION, JUNE 30, 1993 $ -- $ -- $ -- $ -- $ --
Issuance of 470,000 shares of
Common stock to founders 47,000 -- (47,000) -- --
Investment in Common stock of
Princeton Academic Press,
Inc. by majority stockholders
of the Company -- -- 60,000 -- 60,000
Net loss -- -- -- (12,051) (12,051)
-------- -------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1993 47,000 -- 13,000 (12,051) 47,949
Net loss -- -- -- (92,778) (92,778)
-------- -------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1994 47,000 -- 13,000 (104,829) (44,829)
Sale of 200,000 shares of
Common stock and warrants,
net of expenses of $368,361 20,000 26,328 85,311 -- 131,639
Issuance of 59,500 shares of
Common stock to investment
bankers 5,950 -- (5,950) -- --
Issuance of warrants to
officers/stockholders -- 137,500 -- -- 137,500
Issuance of 220,000 shares of
Common stock for certain
assets and liabilities of DTF
Media, Inc. 22,000 -- (178,510) -- (156,510)
Issuance of 10,000 shares
of Common stock to officer 1,000 -- 19,000 -- 20,000
Issuance of 26,250 shares of
Common stock and warrants
to noteholders 2,625 7,000 49,875 -- 59,500
Issuance of warrants to
investment bankers -- 25,000 (25,000) -- --
Issuance of 100,000 shares
of Common stock to investment
bankers 10,000 -- (10,000) -- --
Exercise of 487,500 warrants 48,750 (37,242) 1,688,492 -- 1,700,000
Issuance of 35,000 shares of
Common stock to satisfy
bridge note 3,500 -- 181,997 -- 185,497
Net loss -- -- -- (258,585) (258,585)
-------- -------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1995 $160,825 $158,586 $1,818,215 $(363,414) $1,774,212
======== ======== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
----------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(June 30, Year Ended
1993) to December 31,
December 31, -----------------------
1993 1994 1995
------------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,051) $ (92,778) $ (258,585)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation 3,613 30,219 183,603
Amortization of deferred credit (12,325) (24,650) (24,650)
Amortization, other 2,500 6,000 59,882
Inputed interest on bridge note -- -- 69,997
Deferred income tax provision (benefit) (126,596) 24,954 (42,186)
Minority interest in loss of subsidiary (9,535) (30,465) --
Noncash compensation expense -- -- 32,500
(Increase) decrease in:
Accounts receivable (175,656) (258,436) (267,371)
Inventories 116,793 (233,996) 771,640
Prepaid expenses (44,750) (53,358) 64,558
Other assets -- -- 4,516
Increase (decrease) in:
Accounts payable 423,305 485,691 213,680
Accrued expenses 66,776 (11,103) 270,760
Accrued income taxes 99,400 (99,400) 27,223
Accrued pension and postretirement benefits -- -- 20,001
----------- --------- -----------
Net cash provided by (used in)
operating activities 331,474 (257,322) 1,125,568
----------- --------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES:
Net payments from (transfers to) related party (507,755) 133,750 13,000
Purchase of property and equipment (69,555) (145,657) (29,111)
Purchase of net assets of Princeton (479,024) -- --
Purchase of net assets of Polychem,
net of cash acquired -- -- (3,897,463)
----------- --------- -----------
Net cash used in investing activities (1,056,334) (11,907) (3,913,574)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit 432,526 252,304 1,450,266
Borrowings on term notes 544,000 -- 1,952,000
Proceeds from sale of Common stock and warrants,
net of registration costs 100,000 -- 1,085,639
Repayments of term notes and capital lease
obligations (165,792) (138,949) (317,327)
Repayment of seller note -- -- (750,000)
Deferred financing costs (30,000) -- (206,195)
----------- --------- -----------
Net cash provided by financing activities 880,734 113,355 3,214,383
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 155,874 (155,874) 426,377
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD -- 155,874 --
----------- --------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 155,874 $ -- $ 426,377
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
THE EASTWIND GROUP, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. COMPANY BACKGROUND AND BASIS OF PRESENTATION:
---------------------------------------------
Background
- ----------
The Eastwind Group, Inc. (the "Company") is a management holding company which
has two wholly owned operating subsidiaries, Princeton Academic Press, Inc.
("Princeton") and Polychem Corporation ("Polychem"). Princeton is engaged in
the printing and binding of books and related activities. Polychem manufactures
and sells to distributors plastic molded products, including buckets, sprockets
and bearings and clarifier components for waste water treatment applications.
Princeton was established in June 1993 by the majority stockholders of the
Company to acquire certain assets and assume certain liabilities of Princeton
University Press for approximately $596,000, including a seller note of
approximately $117,000 which was paid in December 1993. The acquisition has
been accounted for using the purchase method of accounting. The fair market
value of the net assets acquired, based on an appraisal of property, plant
and equipment and book value for other assets acquired and assumed
liabilities, exceeded the purchase price by approximately $1,481,000. For
financial reporting purposes, this excess reduced the fair market value of the
property, plant and equipment of $1,235,000 to zero, with the balance of
$246,000 recorded as a deferred credit, which is being amortized into income on
a straight-line basis over ten years.
On August 4, 1993, the stockholders of Princeton contributed their shares to DTF
Media, Inc. ("DTF") in exchange for an equivalent ownership interest in this
newly established holding company. DTF is an affiliated entity of the Company
due to common majority ownership. This exchange was accounted for at historical
cost due to the common majority ownership.
On March 10, 1995, the Company acquired, through a newly established wholly
owned subsidiary, the net assets of the Polychem Division of the Budd Company
for approximately $6,448,000, including seller notes of approximately $2,376,000
(see Note 7). The acquisition has been accounted for using the purchase method
of accounting. The fair market value of the net assets acquired was
recorded based on the carrying value for monetary net assets, with the
remaining portion of the purchase price allocated to property, plant and
equipment. Polychem's results from operations have been included in the
Company's consolidated financial statements from the date of acquisition.
F-8
<PAGE>
Concurrent with the Company's acquisition of Polychem, the Company acquired
DTF's stock interest in Princeton and assumed certain liabilities of DTF in
exchange for 220,000 shares of the Company's Common stock. Goodwill of
approximately $176,000 was recorded for the excess of the value of the Common
stock, which was determined based on the sale of stock to an unrelated party in
March 1995 (see Note 11), issued to the 40% minority stockholders of DTF over
their basis in the equity of Princeton, using the purchase method of accounting.
The 60% interests of the majority stockholders in DTF were recorded at their
historical cost basis since these entities are deemed to be under common
control. At March 10, 1995, the historical cost basis of the majority
stockholders of DTF was a net liability of approximately $332,510. This net
liability, less the value of the shares issued to the minority stockholders of
$176,000, was recorded as a reduction of stockholders' equity.
The following unaudited pro forma information is presented for the
acquisition of Polychem as if the acquisition had occurred on January 1, 1994.
The unaudited pro forma information does not purport to be indicative of the
results that would have been attained if the operations had actually been
combined during the periods presented, and is not necessarily indicative of
operating results to be expected in the future.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1994 1995
------------- -------------
<S> <C> <C>
Net sales $17,987,000 $17,902,000
Net loss (47,000) (297,000)
Pro forma loss per share $ (.05) $ (.30)
=========== ===========
Shares used in computing 985,750 985,750
pro forma loss per share =========== ===========
</TABLE>
Pro Forma Loss Per Share
- ---------------------------
Pro forma loss per share is calculated by dividing the loss by the pro
forma weighted average number of shares outstanding for the respective period.
For all periods presented, pro forma weighted average shares outstanding
includes 220,000 shares issued to DTF in exchange for its stock interest in
Princeton. The outstanding warrants and options have been excluded from the
calculation as they are antidilutive.
Basis of Presentation
- ---------------------
The consolidated financial statements of the Company have been prepared assuming
that Princeton had been a subsidiary of the Company for the periods presented,
since it is considered an entity under common control. Prior to March 10, 1995,
the minority interest of Princeton has been reflected in the accompanying
consolidated financial statements to the extent that Princeton had stockholders'
equity.
F-9
<PAGE>
2. UNAUDITED PRO FORMA BALANCE SHEET:
----------------------------------
In March 1996, the Company issued 75,000 shares of Common stock upon the
exercise of Class A-1 warrants, which generated net proceeds of $300,000. The
unaudited pro forma balance sheet reflects this exercise as if it had occurred
as of December 31, 1995.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company's cash management system provides for the short-term investment of
cash and the transfer or deposit of sufficient funds to cover checks as they are
submitted for payment. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. There were no cash equivalents at December 31, 1995.
Inventories
- -----------
Inventories consist of raw materials, work-in-process, and finished goods.
Work-in-process and finished goods include raw materials, direct labor and a
portion of manufacturing overhead. All inventories are stated at the lower of
cost or market, with cost determined by the last-in, first-out ("LIFO") method.
Property, Plant and Equipment
- -----------------------------
Property, plant, and equipment are stated at cost. Depreciation and
amortization are provided on a straight-line basis for financial reporting
purposes and accelerated methods for income tax purposes. Maintenance and
repair expenditures are charged to operations, while renewals and betterments
are capitalized. For financial reporting purposes, estimated useful lives are
15 years for buildings and three to seven years for machinery and equipment.
F-10
<PAGE>
Goodwill
- --------
Goodwill of approximately $176,000 was recorded in connection with the Company's
acquisition of DTF's stock interest in Princeton and assumption of certain
liabilities of DTF (see Note 1). Goodwill is being amortized on a straight-line
basis over 20 years and accumulated amortization in 1995 was $6,600. The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life may warrant revision or that
the remaining goodwill balance may not be recoverable. If factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related undiscounted operating income over the remaining life in
measuring whether goodwill is recoverable.
Deferred Financing Costs
- ------------------------
Costs related to obtaining debt financing (see Note 7) of $30,000 in 1993 and
$206,195 in 1995 have been capitalized and are being amortized on a straight-
line basis over the term of the debt. Accumulated amortization was $8,500 at
December 31, 1994 and $61,782 at December 31, 1995. Net deferred financing
costs are included in other assets in the accompanying consolidated balance
sheets.
Revenue Recognition
- -------------------
Revenues for Princeton are recorded when the printed material is shipped.
Revenues at Polychem are recorded when goods are shipped or, in certain
circumstances, when the title to goods and risk of ownership are transferred to
the customer. This "bill and hold" practice is common in the construction supply
business, in which contractors often request a hold on delivery of goods to a
construction site for security or logistical reasons.
Income Taxes
- ------------
The Company files a consolidated federal tax return and separate state tax
returns. Certain income and expense items are recorded for financial reporting
purposes in different time periods than for income tax purposes. Provision for
current and deferred taxes are made in recognition of the temporary differences
and are computed in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
Concentration of Credit Risk
- ----------------------------
One of Princeton's customers accounted for 64%, 59% and 16% of consolidated net
sales in 1993, 1994 and 1995, respectively. The Company had receivables from
this customer of approximately $255,000 and $389,000 at December 31, 1994 and
1995, respectively. The loss of this customer would have a material adverse
effect on Princeton and the Company.
F-11
<PAGE>
Pension Plan
- ------------
Polychem accounts for pensions in accordance with Statement of Financial
Accounting Standards No. 87, "Employer's Accounting for Pensions," which
requires the use of explicit assumptions to calculate net periodic pension costs
and the use of the plan's benefit formula as a basis for attributing benefits
earned and their costs to the periods of employee service.
Postretirement Benefits Other Than Pensions
- -------------------------------------------
Polychem provides life insurance benefits to retired hourly employees. Polychem
accounts for these benefits in accordance with Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions," which requires that an estimated cost of postretirement benefits be
accrued over the period earned.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company is required to adopt this standard for the year ending December 31,
1996. The Company has elected to adopt the disclosure requirement of this
pronouncement. The adoption of this pronouncement will have no impact on the
Company's financial position or results of operations.
<TABLE>
<CAPTION>
4. ACCOUNTS RECEIVABLE:
-------------------
December 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Trade receivables $ 752,763 $ 4,345,884
Other receivables 36,549 4,247
Retainage receivables -- 559,091
Bad debt reserve (1,640) (109,576)
----------- -----------
787,672 4,799,646
Less- Retainage receivables due in over one year -- 312,825
----------- -----------
$ 787,672 $ 4,486,821
=========== ===========
</TABLE>
Polychem sells clarifier components to general contractors for use in building
and maintaining waste water treatment facilities operated by government
municipalities. Sale of these components under contracts generally require
retainage provisions which become due upon completion of the entire contract.
Retainage receivables expected to be collected after one year are included in
other assets in the accompanying consolidated balance sheets.
F-12
<PAGE>
<TABLE>
<CAPTION>
5. INVENTORIES:
-----------
December 31,
---------------------
1994 1995
-------- ----------
<S> <C> <C>
Raw materials $594,109 $ 709,728
Work-in-process 258,927 619,165
Finished goods -- 583,076
-------- ----------
$853,036 $1,911,969
======== ==========
</TABLE>
Had the first-in, first-out (FIFO) method of valuing all inventories been used,
inventories would be higher by approximately $31,000 at December 31, 1995. The
difference using a FIFO inventory valuation was not material at December 31,
1993 and 1994.
<TABLE>
<CAPTION>
6. PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
December 31,
-----------------------
1994 1995
---------- -----------
<S> <C> <C>
Land $ -- $ 56,221
Buildings -- 963,180
Machinery and equipment 316,212 810,851
-------- ----------
316,212 1,830,252
Less- Accumulated depreciation (33,832) (217,435)
-------- ----------
$282,380 $1,612,817
======== ==========
</TABLE>
Machinery and equipment at December 31, 1995 includes $212,878 of production
equipment under capital leases, with accumulated depreciation of $31,633.
F-13
<PAGE>
<TABLE>
<CAPTION>
7. DEBT FINANCING:
--------------
December 31,
-----------------------
1994 1995
--------- ----------
<S> <C> <C>
Princeton term note payable to bank, secured by
all of its assets, due in 60 monthly installments of
$8,333, plus interest at the bank's prime plus
4.25% (12.75% at December 31, 1995) $ 358,337 $ 258,341
Princeton capital lease obligation, secured by related
equipment, payable in 60 monthly installments of
$2,397, including interest at 16.1% 98,698 83,569
Polychem term note payable to the Budd Company,
interest at 8%, principal payable in 20 quarterly -- 1,626,093
installments of $81,305, beginning March 31, 1998
Polychem note payable to bank, interest at the
bank's prime plus 2.25% (11% at December 31,
1995), payable in 18 monthly installments of
$21,155 and 41 monthly installments of $29,617
plus interest, with a final payment in March 2000 -- 1,586,607
Eastwind loan payable to Cooke Publishing -- 25,000
Capital lease obligations of Polychem and Eastwind -- 100,269
--------- ----------
457,035 3,679,879
Less- Current portion (114,502) (458,294)
--------- ----------
$ 342,533 $3,221,585
========= ==========
</TABLE>
Interest expense of $25,005, $66,793 and $317,573 on the term notes and capital
lease obligations was charged to operations in 1993, 1994 and 1995,
respectively.
Princeton has a $1,000,000 demand line of credit with a bank through June 30,
1996, subject to renewal. Borrowings under the line of credit bear interest at
the bank's prime plus 4.25% (12.75% at December 31, 1995) and are limited to 80%
of eligible accounts receivable plus the lesser of 50% of paper stock inventory
or $350,000. Outstanding borrowings were $684,830 and $411,349 at December 31,
1994 and December 31, 1995, respectively. Interest expense of $19,764, $71,231
and $93,946 was charged to operations in 1993, 1994 and 1995, respectively. The
line is collateralized by substantially all of Princeton's assets and the
personal guarantees of three of the Company's stockholders. An annual commitment
fee of $15,000 is required under the line and the financing arrangement places
restrictions on payment of dividends, capital expenditures, sale of assets and
change in ownership, among other items. The arrangement also includes a material
adverse change clause that can be exercised at the sole discretion of the bank.
In 1995, the bank waived the exercise of this clause as the Company infused cash
of $300,000 to Princeton as required by the bank.
F-14
<PAGE>
Polychem entered into a loan and security agreement with a bank on March 10,
1995, which provides for a three-year $9,000,000 revolving line of credit and
term note. Borrowings under the revolver bear interest at the bank's prime plus
1.75% (10.50% at December 31, 1995) and are limited to 75% of eligible accounts
receivable plus the lesser of 55% of eligible inventory or $1,000,000 minus 55%
of then-undrawn amounts of outstanding letters of credit for inventory
purchases. Outstanding borrowings were $1,723,747 at December 31, 1995. Interest
expense of $119,715 was charged to operations for the period from acquisition
(March 10, 1995) through December 31, 1995. The line is collateralized by
substantially all of Polychem's assets, except for a mortgage on the land and
building and a $2,500,000 limited guarantee by the Company. In addition, the
financing agreement requires that Polychem maintain adjusted working capital of
at least $2,200,000 and maximum adjusted net deficit of $500,000, and places
restrictions on the payment of dividends to the Company and investment in, loans
or advances directly to any other subsidiary and other expenditures, among other
items. The adjusted working capital and adjusted net worth of Polychem, as
defined in the loan and security agreement, at December 31, 1995 was
approximately $4,308,000 and $1,087,000 respectively.
In September 1995, Polychem repaid a retainage seller note payable to the Budd
Company of $750,000. This note did not bear interest.
In connection with a $175,000 bridge loan entered into in March 1995, the
Company issued the noteholders 26,250 shares of Common stock and Class D
Warrants to purchase 35,000 shares of Common stock at $5 per share. One of the
noteholders is also a shareholder. The warrants are exercisable through March
1998. The estimated fair value of the stock and warrants of $59,500 was
recorded as a debt discount and a credit to stockholders' equity. As discussed
in Note 11, this note and related accrued interest thereon was settled in
exchange for the issuance of 35,000 shares of the Company's Common stock in
December 1995. Interest expense of $69,997 was charged to operations for the
year ended December 31, 1995 related to this note.
Interest expense of $2,500, $6,000, and $53,282 was charged to expense in 1993,
1994 and 1995, respectively, related to amortization of deferred financing costs
(see Note 3).
Future maturities of long-term debt are as follows at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 458,294
1997 514,168
1998 787,137
1999 702,538
2000 567,302
Thereafter 650,440
----------
$3,679,879
==========
</TABLE>
F-15
<PAGE>
8. RELATED PARTY TRANSACTIONS:
---------------------------
Princeton advanced funds to DTF Media, Inc., a related party (see Note 1) for
working capital purposes, and had a receivable of $374,005 at December 31, 1994.
This related party receivable was assumed by the Company as part of the
acquisition of the net liabilities of DTF Media, Inc.
In April 1995, the Company advanced funds, on a secured basis, to Lavelle
Aircraft Company ("Lavelle Aircraft") (see Note 16). Two of the principal
stockholders of the Company are also principal stockholders of DTM Aerospace,
Inc., which owns 100% of Lavelle Aircraft. The Company had a receivable of
$78,000 from Lavelle Aircraft at December 31, 1995, $55,000 was repaid by
Lavelle Aircraft and the remainder was assumed by Lavelle Company (see Note 16).
9. EMPLOYEE BENEFIT PLANS:
-----------------------
Defined Contribution Plans
- --------------------------
Management and nonunion employees of Polychem participate in a qualified 401(k)
savings plan. Participants can contribute a portion of their pretax
compensation, and the Company matches 50% of the first 4% of compensation
contributed by the employee. Contributions to the plan in 1995 were $21,742.
Participants vest in the Company's contributions pro rata over two to five
years. At the direction of the board of directors, Polychem may elect to
contribute a maximum of 9% of each employees compensation in addition to the
regular match, if sufficient profits are generated. No additional contributions
were made to the plan since the date of acquisition.
All employees of Princeton that meet minimum eligibility requirements, as
defined, may participate in a qualified 401(k) savings plan. Participants can
contribute a portion of their pretax compensation to the plan. Princeton may
make contributions to the plan at its discretion. Participants vest in employer
contributions 20% per year beginning in year three while they are always vested
in their contributions. Princeton has not made any discretionary contributions
to the plan since the date of acquisition.
Defined Benefit Plans
- ---------------------
In accordance with the terms of the Polychem acquisition agreement (see Note 1),
the pension plan for hourly union employees was amended to name the Company as
the plan sponsor. The Company assumed all assets, liabilities, and future
obligations of the plan. The pension benefits are based on years of service and
the benefit rate in effect at the date of retirement. The plan was fully funded
by the Budd Company as of the acquisition date, based on actuarial assumptions
defined in the acquisition agreement. As of the acquisition date, the plan's
assets and liabilities were remeasured in accordance with provisions of the
Statement of Financial Accounting Standards No. 87, "Employer's Accounting for
Pensions," which resulted in the recognition of an assumed pension liability of
$157,370.
F-16
<PAGE>
The plan's funded status as of December 31, 1995 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of:
Vested benefit obligation $2,287,329
Nonvested benefit obligation 921
----------
Accumulated benefit obligation 2,288,250
Effect of projected future salary increases --
----------
Projected benefit obligation 2,288,250
Fair market value of plan assets 1,904,007
----------
Projected benefit obligation in excess of
plan assets 384,243
Unrecognized net (loss) (220,387)
----------
Accrued pension cost $ 163,856
==========
</TABLE>
A discount rate of 7.0% and an expected long-term rate of return on plan assets
of 8.5% was used in determining the actuarial present value of the obligations
at December 31, 1995. The pension plan assets held at December 31, 1995 consist
of amounts invested in fixed income money market funds.
The net periodic pension cost of $7,815 for the year ended December 31, 1995
includes the following components:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Service cost benefits earned during the period $ 5,128
Interest cost on projected benefit obligation 132,387
Return on assets (71,559)
Net amortization and deferrals (58,141)
--------
$ 7,815
========
</TABLE>
Postretirement Life Insurance Benefits
- --------------------------------------
Polychem provides postretirement life insurance benefits to all union employees.
The life insurance plan provides coverage ranging from $3,000 to $6,000 for
qualifying retired employees. A discount rate of 7.0% was used in determining
the actuarial present value of the obligations at December 31, 1995. The
unfunded accumulated postretirement benefit obligation as of December 31, 1995
was $36,654, and the net periodic postretirement benefit cost for the period
from acquisition to December 31, 1995 was immaterial.
F-17
<PAGE>
10. INCOME TAXES:
-------------
The components of income taxes are as follows:
<TABLE>
<CAPTION>
Period from
Inception Year Ended
(June 30, 1993) to December 31,
December 31, ---------------------
1993 1994 1995
------------------- ---------- ----------
<S> <C> <C> <C>
Current-
Federal $ 75,000 $(69,400) $ --
State 24,400 -- 27,223
--------- -------- --------
99,400 (69,400) 27,223
--------- -------- --------
Deferred-
Federal (99,984) 33,064 (32,874)
State (26,612) (8,110) (9,312)
--------- -------- --------
(126,596) 24,954 (42,186)
--------- -------- --------
$ (27,196) $(44,446) $(14,963)
========= ======== ========
</TABLE>
The reconciliation of the statutory federal rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Period from
Inception Year Ended
(June 30, 1993) to December 31,
December 31, --------------------------
1993 1994 1995
------------------- -------------- -----------
<S> <C> <C> <C>
Statutory tax benefit (34.0)% (34.0)% (34.0)%
State income tax (benefit) provision,
net of federal tax benefits (6.2) (6.2) 4.3
Net operating losses for which
no tax benefit is currently available -- 13.7 24.2
Other (15.5) -- --
------ ------ ------
(55.7)% (26.5)% (5.5)%
====== ====== ======
</TABLE>
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
F-18
<PAGE>
The tax effect of temporary differences that give rise to deferred income taxes
is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Gross deferred tax asset:
Property, plant and equipment $ 108,050 $ 5,572
Accruals -- 1,211
Pension and postretirement benefits -- 82,716
Net operating loss carryforwards -- 119,852
Valuation allowance on deferred tax asset -- (79,828)
--------- ---------
$ 108,050 $ 129,523
========= =========
Gross deferred tax liabilities:
Inventory $(168,418) $(147,705)
Receivables -- --
--------- ---------
$(168,418) $(147,705)
========= =========
</TABLE>
The Company has net operating loss carryforwards at December 31, 1995 of
approximately $368,000 for income tax reporting purposes which begin to expire
in 2008.
11. EQUITY TRANSACTIONS:
--------------------
In January 1995, the Company entered into a Securities Purchase Agreement (the
Agreement) with a third party to sell 200,000 shares of Common stock, 250,000
Class A Warrants, 187,500 Class B Warrants and 250,000 Class C Warrants for an
aggregate price of $500,000. The value assigned to these securities was $2.00
per Common share, $.25 per Class A Warrant, $.167 per Class B Warrant and $.025
per Class C Warrant. The Agreement provides the holder of the equity securities
the right of first refusal for a defined period of time to purchase additional
shares of Company stock offered for sale and immediate registration rights for
the securities issued thereunder. The securities have been recorded in the
accompanying balance sheet net of the costs of filing the related registration
statement of $368,361.
The Class A, B and C Warrants are exercisable at any time through March 2005 at
$3 per share, $4 per share and $6 per share, respectively, which prices reflect
a subsequent negotiated reduction between the Company and warrant holders. The
Company has the right to call the warrants for redemption at $.001 per warrant
if consolidated net income in any year is $400,000 and net income per share is
at least $.40, or if the Company acquires an entity, exclusive of the Polychem
acquisition in March 1995, that has revenues of at least $10,000,000.
In connection with the sale of securities, the Company issued warrants to two
officers/ stockholders to purchase an aggregate of 500,000 shares of Common
stock at $4 per share (A-1 Warrants) for identifying and closing the acquisition
of Polychem. The estimated
F-19
<PAGE>
value of these warrants of $125,000 was included in the aggregate purchase price
of Polychem. These warrants are exercisable at any time through March 2005 and
are not subject to redemption by the Company.
In January 1995, the Company entered into an agreement with two investment
banking firms to provide advisory services. As compensation for services
rendered in connection with arranging for the sale of securities, the Company
issued 50,000 shares of Common stock at $2 per share. In addition, the
Company agreed to issue 100,000 shares of Common stock and 100,000 warrants to
purchase Common stock at $4 per share upon the occurrence of certain funding
events. These shares and warrants were issued in December 1995 in accordance
with these agreements. Another investment banker was issued 9,500 shares of
Common stock at $2 per share in connection with the sale of securities.
The value of these shares and warrants was recorded as a reduction in
additional paid-in capital.
Two officers/stockholders of the Company, the holders of securities issued under
the Agreement and two of the investment banking firms have entered into a voting
agreement whereby the parties thereto agreed to vote for certain Board of
Director representatives designated by such stockholder groups. The two
officers/stockholders have the right to designate representatives for five of
the seven seats on the Board of Directors, while the remaining two seats are
designated by the holders of the Securities issued under the Agreement. The
voting agreement will continue in effect until the earlier of January
25, 1998 or the completion of an underwritten public offering which results in
aggregate cash proceeds of not less than $7.5 million at a per share
price of not less than $5 per share.
In March 1995, the Company issued 10,000 shares of Common stock and 25,000 A-1
Warrants to an executive officer upon commencement of his employment. The
$26,250 estimated fair value of the Common stock and warrants was charged to
operations for the year ended December 31, 1995.
In March 1995, the Company issued 25,000 A-1 warrants to an employee of
Princeton as a bonus. The $6,250 estimated fair value of the warrants was
charged to operations for the period ended December 31, 1995.
In December 1995, 250,000 Class A warrants, 187,500 Class B warrants, and 50,000
Class A-1 warrants were exercised. The Class A warrants were exercised for $3
per share and the Class B and A-1 warrants were exercised for $4 per share. The
total proceeds from the exercise of these warrants were $1,700,000, of which
$746,000 has been recorded as a stock subscription receivable at December 31,
1995. The subscriptions receivable were collected in early January 1996.
In December 1995, the Company satisfied the bridge note (see Note 7) through the
issuance of 35,000 shares of Common stock. The face value of the note of
$175,000 plus accrued interest of $10,497 has been recorded as Common stock and
additional paid-in capital.
The Company has reserved 1,272,500 shares of Common stock for issuance upon
exercise of the outstanding warrants and contingent stock and warrants issuable
under the agreement with two investment banking firms.
F-20
<PAGE>
12. STOCK PLANS:
------------
The Company has two stock plans which provide for the granting of both incentive
and nonqualified stock options and stock appreciation rights (SARs) to officers,
employees, consultants and nonemployee directors. Under the plans, 1,000,000
shares of Common stock have been reserved for issuance and are
available for future grants. The number of options/SARs and exercise price/base
price, respectively, are determined by the Board of Directors in accordance with
the terms of the plans. In November 1995, the Company granted certain
officers/employees options to acquire an aggregate of 300,000 shares of Common
stock at $6 per share. In addition, in December 1995 the Company granted
options to non-employee directors to acquire 120,000 shares of Common stock at
$7.50 per share. These options vest ratably over three years.
13. COMMITMENTS:
------------
The Company leases certain office space and equipment under noncancelable
operating leases that expire through June 2000. Rent expense of $95,000,
$190,420, and $257,153 has been charged to operations in 1993, 1994 and 1995,
respectively. Minimum future rental payments under leases are as follows at
December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $375,143
1997 251,555
1998 107,144
1999 89,793
2000 34,110
$857,745
========
</TABLE>
Effective January 1, 1995, the Company entered into five-year employment
agreements with two executive officers/stockholders. These agreements provide
for aggregate base compensation of $340,000 per year plus scheduled increases in
base compensation of $50,000 for every $1,000,000 increase in pretax income
above $1,500,000. The base compensation is also subject to increases upon the
Company acquiring a third operating company. The officers/stockholders are each
entitled to incentive compensation equal to 3% of pretax income if their
respective stock ownership is reduced to 10% or less. No additional
compensation was earned in 1995. The employment agreements also provide for
certain payments upon termination of employment and change in control of the
Company.
The Company also entered into a one-year employment agreement with another
executive officer effective March 1, 1995. This agreement provides for a base
compensation of $84,000 per year plus benefits.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES:
-----------------------------------
Interest expense paid was $43,153, $134,427, and $498,714 in 1993, 1994 and
1995, respectively.
F-21
<PAGE>
In 1994, Princeton entered into a $101,000 capital lease obligation for
production equipment. In 1995, Polychem entered into a $40,601 capital lease
obligation for computer equipment and the Company entered into a $71,277 capital
lease obligation for various furniture and fixtures and computer equipment.
Princeton and Polychem purchased the net assets of certain entities in June
1993 and March 1995, respectively (see Note 1). In connection with the
acquisitions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
Princeton Polychem
---------- -----------
<S> <C> <C>
Assigned value of assets acquired $1,232,500 $ 7,037,071
Cash paid for the assets, including cash
acquired of none and $48,326, respectively (479,024) (3,945,789)
Deferred credit (246,499) --
Notes payable to seller (116,776) (2,376,293)
---------- -----------
Liabilities assumed $ 390,201 $ 714,989
========== ===========
</TABLE>
In connection with the Company's acquisition of certain assets of DTF in March
1995 (see Note 1), the Company assumed a loan payable of $25,000, accounts
payable of $24,505 and a payable to Princeton of $283,005.
In December 1995, the Company issued 35,000 shares of Common stock in settlement
of the $175,000 bridge note obligation and accrued interest thereon
(see Note 7).
15. INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION:
- ----------------------------------------------------
The Company operates in two business segments through its wholly owned
subsidiaries-Polychem and Princeton (see Note 1). Net sales, operating income,
identifiable assets, capital expenditures and depreciation and amortization are
presented below for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Polychem Princeton
---------- ----------
<S> <C> <C>
Net Sales $9,858,000 $5,576,000
Operating income (loss) 1,189,000 (52,000)
Identifiable assets 7,651,000 1,565,000
Capital expenditures 40,601 14,000
Depreciation and amortization 146,000 34,000
</TABLE>
The operating results and reported assets in 1993 and 1994 relate only to
Princeton.
For the period ended December 31, 1995, Polychem's sales to foreign customers
were approximately $4,304,000, or 28% of consolidated net sales and consist of
sales to customers in Asia (12%), Europe (9%), North America (5%) and other
(2%). Receivables from these customers were approximately $1,350,000 at
December 31, 1995. There were no foreign sales prior to the acquisition of
Polychem in March 1995.
F-22
<PAGE>
16. INVESTMENT IN LAVELLE COMPANY:
------------------------------
In March 1996, the Company invested $450,000 in Lavelle Company ("Lavelle") in
the form of a subordinated debenture. The debenture matures in March 2001 and
pays quarterly interest at a rate of 20% per year. In connection with its
investment, the Company has guaranteed the indebtedness of Lavelle under a
$900,000 equipment facility. The Company's debenture is subordinate to the
equipment facility indebtedness. In addition, the Company has pledged a
$100,000 security interest in favor of the equipment facility lender.
Lavelle was incorporated to purchase the net assets of Lavelle Aircraft (see
Note 8) which was liquidated under Chapter 11 of the U.S. Bankruptcy Law. The
stock of Lavelle is owned by non-affiliates of the Company. Of the $78,000
receivable due from Lavelle Aircraft at December 31, 1995, $55,000 was repaid by
Lavelle Aircraft and the remainder was assumed by Lavelle.
The $450,000 debenture will be recorded as a non-current asset on the balance
sheet of the Company. Because of the Company's guarantee and pledge relating to
Lavelle's equipment facility, any loss of Lavelle will be recognized by the
Company in its statement of operations and recorded as a reduction in the
carrying amount of its investment. To the extent Lavelle's losses exceed the
amount of the investment, a liability will be recorded on the Company's balance
sheet.
F-23
<PAGE>
THE EASTWIND GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
---------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 754,490 $ 426,377
Accounts receivable, net 3,779,832 4,486,821
Stock subscription receivable -- 746,000
Due from related party 47,976 78,000
Inventories 1,846,834 1,911,969
Prepaid expenses 94,700 63,912
---------- -----------
Total current assets 6,523,832 7,713,079
---------- -----------
Property, plant and equipment, net 1,688,786 1,612,817
---------- -----------
Other Assets:
Subordinated note receivable 450,000 --
Deferred income taxes 128,312 128,312
Other assets, net 482,627 492,878
Goodwill, net 167,200 169,400
---------- -----------
1,228,139 790,590
---------- -----------
Total other assets $9,440,757 $10,116,486
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 746,213 $ 2,135,096
Current portion of long-term debt 513,608 458,294
Accounts payable 1,771,536 1,571,010
Accrued expenses 367,784 397,188
Accrued income taxes 83,323 27,223
Deferred income taxes 146,494 146,494
---------- -----------
Total current liabilities 3,628,958 4,735,305
---------- -----------
Long-term debt 3,209,875 3,221,585
---------- -----------
Accrued pension and postretirement
benefits 204,260 200,510
---------- -----------
Deferred credit, net 178,712 184,874
---------- -----------
Stockholders' equity:
Preferred stock, $.10 par value,
3,000,000 shares authorized and none
issued and outstanding -- --
Common stock, $.10 par value, 5,000,000
shares authorized, 1,683,250 and
1,608,250 shares issued and outstanding 168,325 160,825
Warrants outstanding 139,836 158,586
Additional paid-in capital 2,129,465 1,818,215
Accumulated deficit (218,674) (363,414)
---------- -----------
Total stockholders' equity 2,218,952 1,774,212
---------- -----------
$9,440,757 $10,116,486
========== ===========
</TABLE>
F-24
<PAGE>
THE EASTWIND GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- ------------
<S> <C> <C>
Net sales $4,966,982 $1,913,520
Cost of goods sold 3,688,753 1,672,827
---------- -----------
Gross profit 1,278,229 240,693
Selling, general and administrative
expenses 926,696 340,921
---------- -----------
Operating income (loss) 351,533 (100,228)
Interest expense 150,293 74,614
---------- -----------
Income (loss) before income taxes 201,240 (174,842)
Income taxes (benefit) 56,500 (33,163)
---------- -----------
Net income (loss) $ 144,740 $ (141,679)
========== ===========
Pro Forma Earnings Per Share -- $ (0.19)
========== ===========
Pro Forma Weighted Average Number of
Common Shares Outstanding -- 762,294
========== ===========
Earnings per Share $ 0.08 --
========== ===========
Shares used in computing earnings
per share 2,511,490 --
========== ===========
</TABLE>
F-25
<PAGE>
THE EASTWIND GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1996 1995
---------- ------------
<S> <C> <C>
Cash flows from operating activites:
Net income (loss) $ 144,740 $ (141,679)
----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 70,410 20,699
Amortization of deferred credit (6,162) (6,162)
Amortization, other 12,451 4,478
Deferred income tax provision (benefit) -- (33,163)
Non-cash compensation expense -- 32,500
(Increase) decrease in assets:
Accounts receivable 706,989 609,531
Inventories 65,135 189,047
Prepaid expenses (30,788) 57,532
Other assets -- (63,738)
Increase (decrease) in liabilities:
Accounts payable 200,526 397,544
Accrued expenses (29,404) 346,161
Accrued income taxes 56,100 --
Accrued pension and postretirement
benefits 3,750 --
----------- -----------
Net cash provided by operating
activities 1,193,747 1,412,750
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (254) (1,072)
Net payments from related party 30,024 91,000
Subordinated note receivable of
Lavelle Company (450,000) --
Purchase of net assets of Polychem,
net of cash acquired -- (3,779,963)
----------- -----------
Net cash used in investing
activities (420,230) (3,690,035)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under lines
of credit (1,388,883) 809,436
Principal payments on term notes and
capital leases (102,521) (29,922)
Proceeds from sales of common stock and
warrants 1,046,000 500,000
Borrowings on term note -- 1,952,000
Deferred financing costs -- (206,195)
----------- -----------
Net cash provided by (used in)
financing activities (445,404) 3,025,319
----------- -----------
Net increase in cash and cash equivalents 328,113 748,034
Cash and cash equivalents, beginning
of period 426,377 --
----------- -----------
Cash and cash equivalents, end of period $ 754,490 $ 748,034
=========== ===========
</TABLE>
F-26
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
- ------- ---------------------
The unaudited consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. In the
opinion of management, all adjustments, consisting of only normal
recurring adjustments necessary to present fairly the financial
position at March 31, 1996 and December 31, 1995, and the results of
operations and cash flows for the three months ended March 31, 1996
and 1995, have been made. The results of operations for the three
month period ended March 31, 1996 are not necessarily indicative of
the results for the year ending December 31, 1996. These financial
statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB which was filed for the year ended December 31,
1995.
NOTE 2: INVENTORIES
- -------- -----------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -------------
<S> <C> <C>
Raw Materials $ 663,127 $ 709,728
Work in Process 864,107 619,165
Finished Goods 319,600 583,076
---------- ----------
$1,846,834 $1,911,969
========== ==========
</TABLE>
NOTE 3: INVESTMENT IN LAVELLE COMPANY
- ------------------------------------
In March 1996, the Company invested $450,000 in Lavelle Company
("Lavelle") in the form of a subordinated debenture. The debenture
matures in March 2001 and pays quarterly interest at a rate of 20% per
year. In connection with its investment, the Company has guaranteed
the indebtedness of Lavelle under a $900,000 equipment facility. The
Company's debenture is subordinate to the equipment facility
indebtedness. In addition, the Company has pledged a $100,000
security interest in favor of the equipment facility lender.
F-27
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: INVESTMENT IN LAVELLE COMPANY (CONTINUED)
- ------- -----------------------------------------
Lavelle was incorporated to purchase the net assets of Lavelle
Aircraft which was liquidated under Chapter 11 of the U.S. Bankruptcy
Law. The stock of Lavelle is owned by non-affiliates of the Company.
Of the $78,000 receivable due from Lavelle Aircraft at December 31,
1995, $55,000 was repaid by Lavelle Aircraft and the remainder was
assumed by Lavelle.
The $450,000 debenture was recorded as a non-current asset in the
March 31, 1996 balance sheet. Because of the Company's guarantee and
pledge relating to Lavelle's equipment facility, any loss of Lavelle
will be recognized by the Company in its statement of operations and
recorded as a reduction in the carrying amount of its investment. To
the extent Lavelle's losses exceed the amount of the investment, a
liability will be recorded on the Company's balance sheet.
There were no losses during the period from the date of investment to
March 31, 1996.
F-28
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: LONG-TERM DEBT
- ----------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- --------------
<S> <C> <C>
Princeton term note payable to bank,
secured by all of its assets, due in
60 monthly installments of $8,333,
plus interest at prime plus 4.25%
(12.5% at March 31, 1996) $ 233,338 $ 258,341
Princeton capital lease obligation,
secured by related equipment, payable
in 60 monthly installments of $2,397,
including interest at 16.1% 78,075 83,569
Polychem term note payable to the
Budd Company, interest at 8%, principal
payable in 20 quarterly installments of
$81,315, beginning March 31, 1998. 1,626,294 1,626,294
Polychem note payable to bank, interest
at prime plus 2.25% (10.5% at March 31,
1996) payable in 18 monthly installments
of $21,155 and 41 monthly installment of
$29,617 plus interest, beginning
April 1, 1995 with a final payment
in March 2000 1,523,143 1,586,607
Polychem chemical lease obligation,
secured by related equipment, payable
in 60 monthly installments of $2,480,
including interest at 10.65% 146,341 --
Eastwind loan payable to Cooke Publishing 25,000 25,000
Other capital lease obligations 91,292 100,068
---------- ----------
3,723,483 3,679,879
Less current portion (513,608) (458,294)
---------- ----------
$3,209,875 $3,221,585
========== ==========
</TABLE>
F-29
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: LONG-TERM DEBT (CONTINUED)
- ------- --------------------------
Princeton has a $1,000,000 demand line of credit with a bank through
June 30, 1996, subject to renewal. Borrowings under the line of
credit bear interest at prime plus 4.25% (12.5% at March 31, 1996) and
are limited to 80% of eligible accounts receivable plus the lesser of
50% of paper stock inventory or $350,000. Outstanding borrowings were
$316,398 and $411,349 at March 31, 1996 and December 31, 1995,
respectively. The line is collateralized by substantially all of
Princeton's assets and the personal guarantees of three of the
Company's shareholders. An annual commitment fee of $15,000 is
required under the line and the financing arrangement places
restrictions on payment of dividends, capital expenditures, sale of
assets and change in ownership, among other terms. The arrangement
also includes a material adverse change clause that can be invoked at
the sole discretion of the bank.
Polychem entered into a loan and security agreement with a bank on
March 10, 1995, which provides for a three-year $9,000,000 revolving
line of credit and term note. Borrowings under the revolver bear
interest at prime plus 1.75% (10.0% at March 31, 1996) and are limited
to 75% of eligible accounts receivable plus the lesser of 55% of
eligible inventory or $1,000,000 minus 55% of then-undrawn amounts of
outstanding letters of credit for inventory purchases. Outstanding
borrowings were $429,815 and $1,723,747 at March 31, 1996 and December
31, 1995, respectively. The line is collateralized by substantially
all of Polychem's assets, a mortgage on the land and building and a
$2,500,000 limited guarantee by the Company. In addition, the
financing agreement requires that Polychem maintain adjusted working
capital of at least $2,200,000 and maximum adjusted net deficit of
$500,000, and places restrictions on the payment of dividends to the
Company and investment in, loans or advances directly to any other
subsidiary and other expenditures, among other items. Polychem was in
compliance with these covenants as of March 31, 1996.
F-30
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: LONG-TERM DEBT (CONTINUED)
- ------- --------------------------
Future maturities of long-term debt at March 31, 1996 are as
follows:
<TABLE>
<S> <C>
March 31, 1997 $ 513,608
March 31, 1998 636,079
March 31, 1999 789,323
March 31, 2000 710,428
March 31, 2001 504,846
Thereafter 569,198
----------
$3,723,483
==========
</TABLE>
NOTE 5: ACQUISITION OF POLYCHEM
- ------- -----------------------
On March 10, 1995, the Company acquired, through a newly established
wholly owned subsidiary, the net assets of the Polychem Division of
the Budd Company for approximately $6,448,000, including the seller
notes of approximately $2,376,000. The acquisition has been accounted
for using the purchase method of accounting. The fair market value of
the net assets acquired was recorded based on the carrying value for
monetary net assets, with the remaining portion of the purchase price
allocated to property, plant, and equipment. Polychem's results from
operations have been included in the Company's consolidated financial
statements from the date of acquisition.
The following unaudited pro forma information is presented for the
acquisition of Polychem as if the acquisition had occurred on January
1, 1995. The operating results for the period March 11, 1995 to March
31, 1995 are included in the Company's historical consolidated
statement
F-31
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: PROFORMA INFORMATION AS IF POLYCHEM ACQUISITION OCCURRED JANUARY 1,
- ------- -------------------------------------------------------------------
1994
- ----
of operations for the three months ended March 31, 1995. The pro
forma information does not purport to be indicative of the results
that would have been attained if the operations had actually been
combined during the periods presented and is not necessarily
indicative of operating results to be expected in the future.
<TABLE>
<CAPTION>
Three months ended
March 31, 1995
-------------------
<S> <C>
Total Revenues $4,382,000
==========
Net loss $ (149,000)
==========
Proforma loss per share $ (.20)
==========
Shares used in computing proforma
net loss per share 762,294
==========
</TABLE>
NOTE 6: EARNINGS (LOSS) PER SHARE
- ------- -------------------------
For the three months ended March 31, 1996, the Company's total
outstanding common stock options and warrants exceed 20% of the total
outstanding common stock. Therefore, the income per share
computations are modified, as required under Accounting Principles
Board Opinion No. 15, to assume all outstanding common stock options
and warrants were exercised and the related proceeds were used to
repurchase up to 20% of the total outstanding common stock. Any
remaining proceeds are assumed to be used to reduce borrowings,
thereby reducing interest expense, net of tax.
F-32
<PAGE>
THE EASTWIND GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: EARNINGS (LOSS) PER SHARE (CONTINUED)
- ------- --------------------------------------
Details of the calculation of earnings per share for the three months
ended March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Weighted average number of shares outstanding 1,618,140
Assumed exercise of options and warrants 1,230,000
Less assumed repurchase of stock (336,650)
----------
Shares used in computing earnings per
share 2,511,490
==========
Net income for the three months ended
March 31, 1996 $ 144,740
Adjustment to net income for assumed reduction
in interest expense, net of tax 51,471
----------
Adjusted net income for computation
of earnings per share $ 196,211
==========
Earnings per share $.08
==========
</TABLE>
Earnings (loss) per share for the three months ended March 31, 1995 is
calculated by dividing the period loss by the proforma weighted
average number of shares outstanding for the period.
NOTE 7: CONCENTRATION OF CREDIT RISK
- ------- ----------------------------
One customer accounted for 15% and 40% of net sales for the three
months ended March 31, 1996 and 1995, respectively. The Company had
receivables from this customer of approximately $271,000 and $389,000
at March 31, 1996 and December 31, 1995, respectively. The loss of
this customer would have a material adverse effect on Princeton and
the Company.
NOTE 8: SUPPLEMENTAL COST FLOW DISCLOSURE
- ------- ---------------------------------
In March 1996, Polychem entered into a capital lease for $146,125 of
equipment.
F-33
<PAGE>
No dealer, salesperson or other person has been authorized in
connection with this offering to give any information or to make any
representations other than those contained in this Prospectus. This Prospectus
does not constitute an offer or a solicitation in any jurisdiction to any person
to whom it is unlawful to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
circumstances of the Company or the facts herein set forth since the date
hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY...............4
THE COMPANY......................4
THE OFFERING.....................7
RISK FACTORS.....................9
USE OF PROCEEDS.................14
MARKET PRICE OF THE COMMON
STOCK.........................15
CAPITALIZATION..................16
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS....................17
BUSINESS OF THE COMPANY.........24
MANAGEMENT......................35
PRINCIPAL STOCKHOLDERS..........48
DESCRIPTION OF SECURITIES.......49
CERTAIN TRANSACTIONS............55
SELLING SECURITY HOLDERS........58
PLAN OF DISTRIBUTION............60
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE....................61
LEGAL MATTERS...................62
STATEMENT OF INDEMNIFICATION....62
EXPERTS.........................62
ADDITIONAL INFORMATION..........63
</TABLE>
1,749,500 shares of Common Stock offered by certain Selling Securityholders
including shares of Common Stock which may be acquired upon exercise of certain
outstanding Warrants
---------------------
THE EASTWIND GROUP, INC.
---------------------
P R O S P E C T U S
---------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 23. Other Expenses of Issuance and Distribution
-------------------------------------------
The following is a list of the estimated expenses to be incurred by
the Registrant in connection with the preparation and filing of this
Registration Statement.
S.E.C. Registration Fee..................................... 4,342
Printing and Engraving...................................... 5,000
Accountants' Fees and Expenses.............................. 10,000
Blue Sky Filing Fees and Expenses........................... --
Legal Fees and Expenses..................................... 20,658
------
TOTAL:........................................... 40,000
Item 24. Indemnification of Directors and Officers
-----------------------------------------
The Company has adopted the provisions of Section 102(b)(7) the
Delaware General Corporation Law (the "Delaware Act") which eliminate or limit
the personal liability a director to the Company or its stockholders for
monetary damages for breach of fiduciary duty under certain circumstances.
Furthermore under Section 145(d) the Delaware Act, the Company may indemnify
each of its directors and officers against his expenses (including reasonable
costs, disbursements and counsel fees) in connection with any proceeding
involving such person by reason of his having been an officer or director to the
extent he acted in good faith and in a manner reasonably believed to be in, or
not opposed to, the best interest of the Company, and, with respect to any
criminal action or proceeding, if he had no reasonable cause to believe his
conduct was unlawful. The determination of whether indemnification is proper
under the circumstances, unless made by a court, shall be determined by the
Board of Directors.
Reference is made to Item 17 for the undertakings of the Registrant
with respect to arising under the Securities Act 1933, as amended.
Item 26. Recent Sales of Unregistered Securities
---------------------------------------
The following tables show sales by the Registrant of securities within
the past three years which were not registered under the Securities Act 1933, as
amended. Unless otherwise noted, all sales were made in reliance on the
exemption from registration afforded by Section 4(2) the Securities Act of 1933.
<TABLE>
<CAPTION>
Total Cash Consideration
------------------------
Number of Shares of
Date of Purchase Common Stock Purchaser Price Per Share Total Amount
<S> <C> <C> <C> <C>
August 4, 1993 235,000/(1)/ Paul A. DeJulliis -0- -0-
August 4, 1993 235,000/(1)/ John R. Thach -0- -0-
March 10, 1995 200,000 Sector Associates, Ltd. $2.00 $400,000
March 10, 1995 40,000 FAC Enterprises, Inc. $0/(2)/ $0
March 10, 1995 10,000 Andrew Panzo $0/(2)/ $0
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Total Cash Consideration
------------------------
Number of Shares of
Date of Purchase Common Stock Purchaser Price Per Share Total Amount
<S> <C> <C> <C> <C>
March 10, 1995/*/ 9,500 Mitchell K. Posner $0/(2)/ $0
March 10, 1995 66,000 Graeme B. Frazier, IV $0/(3)/ $0
March 10, 1995 22,000 Robert N. Spahr $0/(3)/ $0
March 10, 1995 66,000 Paul A. DeJuliis $0/(3)/ $0
March 10, 1995 66,000 John R. Thach $0/(3)/ $0
March 10, 1995 10,000 William B. Miller $0/(4)/ $0
March 31, 1995 9,000 FAC Enterprises, Inc. $0/(5)/ $0
March 31, 1995 7,500 Centaur Financial Corp. $0/(5)/ $0
March 31, 1995 6,000 Rozel International Holdings, Ltd. $0/(5)/ $0
March 31, 1995 3,750 HST Partners $0/(5)/ $0
December 29, 1995 8,000 Rozel International Holdings, Ltd. $0/(6)/ $40,000/(7)/
December 29, 1995 10,000 Centaur Financial Corp. $0/(6)/ $50,000/(7)/
December 29, 1995 12,000 FAC Enterprises, Inc. $0/(6)/ $60,000/(7)/
December 29, 1995 5,000 HST Partners $0/(6)/ $25,000/(7)/
</TABLE>
/(1)/ 235 shares originally issued, but in February 1995 the Board of
Directors declared a 1,000 for 1 stock split.
/(2)/ Shares issued in exchange for investment banking services and at
issuance shares were sold to Sector Associates, Ltd. at an allocated
price of $1.30 per share.
/(3)/ Shares issued by the Company to DTF Media, Inc., in exchange for all
of the issued and outstanding shares of Princeton Academic Press and
assumption of certain liabilities. Subsequent to the exchange, the
shares were distributed, pro rata, to the stockholders DTF Media, Inc.
/(4)/ Shares issued as an inducement for Mr. Miller to assume the position
of Chief Financial Officer of the Company, as in the nature of a
signing bonus.
/(5)/ Shares issued to lender as an inducement for Bridge Financing Loan.
/(6)/ Shares issued in consideration for the cancellation of outstanding
debt at the rate of one (1) share for every $5.00 of outstanding
debt canceled and reduction in the exercise price of the Class C
Warrants to $3.50.
/(7)/ Represents cancellation of outstanding debt.
II-2
<PAGE>
<TABLE>
<CAPTION>
Total Cash
Number of Warrants Consideration
and Class of Warrants
to Purchase Shares of Price per Total
Date of Purchase Common Stock Purchaser Warrant Amount
- ---------------- ------------ --------- ------- ------
<S> <C> <C> <C> <C>
March 10, 1995 250,000 Class A-1 Paul A. DeJuliis $0/(1)/ $0
March 10, 1995 250,000 Class A-1 John R. Thach $0/(1)/ $0
March 10, 1995 250,000 Class A Sector Associates, $0.60 $150,000
Ltd.
March 10, 1995 187,500 Class B Sector Associates, $0.40 $75,000
Ltd.
March 10, 1995 250,000 Class C Sector Associates, $0.06 $15,000
Ltd.
March 10, 1995 25,000 Class A-1 Graeme B. Frazier, IV $0/(3)/ $0
March 10, 1995 25,000 Class A-1 William B. Miller $0/(4)/ $0
March 31, 1995 12,000 Class D FAC Enterprises, Inc. $0/(2)/ $0
March 31, 1995 10,000 Class D Centaur Financial $0/(2)/ $0
Corp.
March 31, 1995 8,000 Class D Rozel International $0/(2)/ $0
Holdings, Ltd.
March 31, 1995 5,000 Class D HST Partners $0/(2)/ $0
</TABLE>
/(1)/ Warrants issued for acquisition - related services performed for benefit
of the Company.
/(2)/ Warrants issued as inducement for lender to make Bridge Investment Loan.
/(3)/ Issued to employee of operating subsidiary as bonus for performance of
services.
/(4)/ Warrants issued as inducement for Mr. Miller to assume the position of
Chief Financial Officer of the Company, as a signing bonus
II-3
<PAGE>
<TABLE>
<CAPTION>
Total Cash
Consideration
-------------
Amount and Price per
Type of Share/ Total
Date of Purchase Securities Purchaser Unit/Warrant Amount
---------------- ---------- --------- -------------- -------
<S> <C> <C> <C> <C>
May 20, 1996 1,000 Series Odyssey Capital $1,000 $1,000,000
A Preferred Group, L.P.
Stock;
220,000 $.001 $220
Common Stock
Purchase
Warrants
June 14, 1996 200,000 Clifton Capital $6.00 $1,200,000
Units/(1)/ Ltd.
June 20, 1996 $500,000 Mentor Special
Subordinated Situation Fund $500,000 $500,000
Debenture; L.P.
80,000 $.001 $80
Common Stock
Purchase
Warrants
</TABLE>
/1/ Each unit consists of one (1) share of Common Stock and one and one quarter
(1 1/4)Common Stock Purchase Warrants.
Except as noted above, no commissions or underwriting discounts were paid with
respect to any of the foregoing transactions.
Item 16. Financial Statements and Exhibits
A. Financial Statements filed as part of this Report:
-------------------------------------------------
Incorporated by reference to page F-1 of the Prospectus included as
Part I of this Registration Statement.
B. The following Exhibits are filed as part of this Report:
-------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.1 Asset purchase agreement Incorporated by reference to Exhibit
between Polychem 2.1 to the Registrant's Registration
Corporation and The Budd Statement on Form SB-2 filed under
Company dated March 10, the Securities Act of 1933, as
1995. amended, Registration no. 33-94252.
2.2 Agreement of Incorporated by reference to Exhibit
reorganization exchange 2.2 to the Registrant's Registration
between the Company and Statement on Form SB-2 filed under
DTF Media, Inc. dated the Securities Act of 1933, as
March 6, 1995. amended, Registration no. 33-94252.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
2.3 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 2.3 to the Registrant's Registration
company and Sector Statement on Form SB-2 filed under
Associates, Ltd. dated the Securities Act of 1933, as
January 25, 1995. amended, Registration no. 33-94252.
2.4 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 2.4 to the Registrant's Registration
Company, FAC Enterprises, Statement on Form SB-2 filed under
Inc., Centaur Financial the Securities Act of 1933, as
Corp., Rozel International amended, Registration no. 33-94252.
Holdings, Ltd. and HST
Partners dated March 31,
1995.
3.1 Amended and Restated Incorporated by reference to Exhibit
Certificate of 3.1 to the Registrant's Registration
Incorporation of the Statement on Form SB-2 filed under
Company. the Securities Act of 1933, as
amended, Registration no. 33-94252.
3.2 Restated and Amended Incorporated by reference to Exhibit
Bylaws of The Company. 3.2 to the Registrant's Registration
Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.1 Specimen common stock Incorporated by reference to Exhibit
certificate of the Company. 4.1 of Amendment No. 2 to the
Registrants Registration Statement on
Form SB-2 filed under The Securities
Act of 1933, as amended, File No.
33-94252.
4.2 Specimen form of series Incorporated by reference to Exhibit
A-1 common stock purchase 4.2 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.3 Specimen form of series C Incorporated by reference to Exhibit
common stock purchase 4.5 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
4.4 Specimen form of series D Incorporated by reference to Exhibit
common stock purchase 4.6 to the Registrant's Registration
warrant of the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
4.5 Specimen form of Common Filed herewith.
Stock Purchase Warrant
issued to Clifton Capital,
Ltd.
4.6 Certificate of Designation Incorporated by reference to Exhibit
for Series A Preferred 4.1 to the Registrant's Form 8-K dated
Stock. May 10, 1996 filed under the
Securities Exchange Act of 1934.
4.7 $500,000 Subordinated 12% Filed herewith.
Debenture issued to Mentor
Special Situation Fund,
L.P.
5.1 Opinion letter of Buchanan Filed herewith.
Ingersoll Professional
Corporation re legality of
issuance of securities.
9.1 Voting agreement of Incorporated by reference to Exhibit
certain stockholders of 9.1 to the Registrant's Registration
the Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.1 Investment banking advisor Incorporated by reference to Exhibit
agreement among the 10.1 to the Registrant's Registration
Company, FAC Enterprise, Statement on Form SB-2 filed under
Inc. and American Maple the Securities Act of 1933, as
Leaf Financial Corporation amended, Registration no. 33-94252.
dated January 25, 1995.
10.2 Employment agreement Incorporated by reference to Exhibit
between the Company and 10.2 to the Registrant's Registration
Paul A. DeJullis. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.3 Employment agreement Incorporated by reference to Exhibit
between the Company and 10.3 to the Registrant's Registration
John R. Thach. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.4 Employment agreement Incorporated by reference to Exhibit
between the Company and 10.4 to the Registrant's Registration
William B. Miller. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.5 Loan agreement between Incorporated by reference to Exhibit
Princeton Academic Press 10.5 to the Registrant's Registration
and Fremont Financial Statement on Form SB-2 filed under
Corporation. the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.6 Loan agreement between Incorporated by reference to Exhibit
Polychem Corporation and 10.6 to the Registrant's Registration
Congress Financial Statement on Form SB-2 filed under
Corporation. the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.7 Term note of the Company Incorporated by reference to Exhibit
in favor of The Budd 10.7 to the Registrant's Registration
Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.8 Term note (retainage) of Incorporated by reference to Exhibit
the Company in favor of 10.8 to the Registrant's Registration
The Budd Company. Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
10.9 Surety agreement of the Incorporated by reference to Exhibit
Company in favor of The 10.13 to the Registrant's
Budd Company. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.10 Limited guaranty of the Incorporated by reference to Exhibit
Company in favor of 10.14 to the Registrant's
Congress Financial Registration Statement on Form SB-2
Corporation. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.11 Intercreditor agreement Incorporated by reference to Exhibit
between Congress Financial 10.15 to the Registrant's
Corporation and The Budd Registration Statement on Form SB-2
Company dated March filed under the Securities Act of
10,1995 to which Polychem 1933, as amended, Registration no.
Corporation has signed an 33-94252.
Acknowledgment and
Agreement.
10.12 Mortgage on Phoenixville, Incorporated by reference to Exhibit
Pennsylvania property by 10.16 to the Registrant's
Polychem Corporation in Registration Statement on Form SB-2
favor of Congress filed under the Securities Act of
Financial Corporation. 1933, as amended, Registration no.
33-94252.
10.13 Property lease for tower Incorporated by reference to Exhibit
by Polychem Corporation, 10.17 to the Registrant's
successor in interest to Registration Statement on Form SB-2
The Budd Company, and filed under the Securities Act of
Awacs, Inc., trading as 1933, as amended, Registration no.
Metrophone dated March 6, 33-94252.
1990.
10.14 Real property license Incorporated by reference to Exhibit
agreement between Polychem 10.18 to the Registrant's
Corporation, as successor Registration Statement on Form SB-2
to The Budd Company, with filed under the Securities Act of
Awacs, Inc., trading as 1933, as amended, Registration no.
Metrophone and Chester 33-94252.
County Department of
Emergency Services dated
October 19, 1993
10.15 Real estate lease between Incorporated by reference to Exhibit
Polychem Corporation, as 10.19 to the Registrant's
successor to The Budd Registration Statement on Form SB-2
Company, and Industrial filed under the Securities Act of
Construction Environmental 1933, as amended, Registration no.
dated December 1, 1994. 33-94252.
10.16 Real estate lease between Incorporated by reference to Exhibit
Polychem Corporation, as 10.20 to the Registrant's
successor to The Budd Registration Statement on Form SB-2
Company, and Windsor filed under the Securities Act of
Designs, Inc. for a term 1933, as amended, Registration no.
expiring November 30, 1999. 33-94252.
10.17 Real estate lease between Incorporated by reference to Exhibit
Princeton University 10.21 to the Registrant's
Press, as lessor, and Registration Statement on Form SB-2
Princeton Academic Press, filed under the Securities Act of
Inc., as lessee dated 1933, as amended, Registration no.
July, 1, 1993. 33-94252.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.18 Transition services Incorporated by reference to Exhibit
agreement between Polychem 10.22 to the Registrant's
Corporation and The Budd Registration Statement on Form SB-2
Company. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.19 Collective bargaining Incorporated by reference to Exhibit
agreement between The Budd 10.23 to the Registrant's
Company and Local Union Registration Statement on Form SB-2
#130 and the United filed under the Securities Act of
Textile Workers of America 1933, as amended, Registration no.
AFL-CIO, as amended. 33-94252.
10.20 Assumption by Polychem Incorporated by reference to Exhibit
Corporation and collective 10.24 to the Registrant's
bargaining agreement and Registration Statement on Form SB-2
union pension plan from filed under the Securities Act of
The Budd Company with 1933, as amended, Registration no.
Local Union #130 of the 33-94252.
United Textile Workers of
America, AFL-CIO.
10.21 The Corporate Plan for the Incorporated by reference to Exhibit
Profit Sharing/401 (k) 10.25 to the Registrant's
Plan Fidelity Basic as Registration Statement on Form SB-2
Document No. 07. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.22 Spectra Regional Prototype Incorporated by reference to Exhibit
Non-Standardized Cash or 10.26 to the Registrant's
Deferred Profit Sharing Registration Statement on Form SB-2
Plan and Trust. filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.23 Adoption Agreement for the Incorporated by reference to Exhibit
Spectra Regional Prototype 10.27 to the Registrant's
Non-Standardized Cash or Registration Statement on Form SB-2
Deferred Profit Sharing filed under the Securities Act of
Plan and Trust. 1933, as amended, Registration no.
33-94252.
10.24 The Eastwind Group, Inc. Incorporated by reference to Exhibit
Stock Option Incentive 10.28 to the Registrant's
Plan. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
10.25 The Eastwind Group, Inc. Incorporated by reference to Exhibit
Non-Employee Directors 10.29 to the Registrant's
Stock Option Plan. Registration Statement on Form SB-2
filed under the Securities Act of
1933, as amended, Registration no.
33-94252.
10.26 Securities Purchase Incorporated by reference to Exhibit
Agreement between the 10.1 to the Registrant's form 8-K
Company and Odyssey dated May 10, 1996 filed under the
Capital Group, LP dated Securities Exchange Act of 1934.
May 10, 1996.
10.27 Amendment No. 1 to Filed herewith.
Securities Purchase
Agreement between the
Company and Odyssey
Capital Group, LP dated
June 20, 1996.
10.28 Securities Purchase Filed herewith.
Agreement between the
Company and Mentor Special
Situation, LP dated June
20, 1996.
21.1 Subsidiaries of the Incorporated by reference to Exhibit
Registrant. 21.1 to the Registrant's Registration
Statement on Form SB-2 filed under
the Securities Act of 1933, as
amended, Registration no. 33-94252.
23.1 Consent of Arthur Andersen Filed herewith.
LLP.
23.2 Consent of Kreischer Filed herewith. Letter is incorporated
Miller & Co. And Letter by reference to Exhibit 24.3 to the
Pursuant to Item 304. Registrant's Registration Statement on
Form SB-2 filed under the Securities
Act of 1933, as amended, Registration
No. 33-94252.
</TABLE>
Item 28. Undertakings
------------
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events using after the effective date of
the Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement, and (iii) include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
2. That for the purpose of determining any liability under the Securities
Act of 1933, each such post effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-10
<PAGE>
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person in connection with the securities being registered), the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issuer.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, "thereunto duly authorized, in the city of
Philadelphia, Commonwealth of Pennsylvania, on July 15, 1996.
THE EASTWIND GROUP, INC.
By:/s/ Paul A. DeJuliis
-----------------------------
Paul A. DeJuliis
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on July 15, 1996, by the following
persons in the capacities indicated.
Signature Title
--------- -----
/s/ Paul A. DeJuliis Chief Executive Officer and Chairman of
- ---------------------------------- Board of Directors (Principal Executive
Officer)
/s/ John R. Thach President, Chief Operating Officer
- ---------------------------------- and a Director
John R. Thach
/s/ William B. Miller Chief Financial Officer and Treasurer
- ---------------------------------- (Principal Financial Officer) and
William B. Miller a Director
/s/ William B. Miller Controller (Principal Accounting
- ---------------------------------- Officer)
William B. Miller
/s/ Bruce Muray Director
- ----------------------------------
Bruce Murray
/s/ Anthony Medicino Director
- -----------------------------------
Anthony Mendicino
/s/ Andrew Panzo Director
- -----------------------------------
Andrew Panzo
/s/ Porter Bibb Director
- -----------------------------------
Porter Bibb
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<C> <S> <C>
4.5 Specimen form of Common Stock Purchase
Warrant issued to Clifton Capital, Ltd.
4.7 $500,000 Subordinated 12% Debenture
issued to Mentor Special Situation
Fund, L.P.
5.1 Opinion letter of Buchanan Ingersoll
Professional Corporation re legality of
issuance of securities.
10.27 Amendment No. 1 to Securities Purchase
Agreement between the Company and
Odyssey Capital Group, LP dated June
20, 1996.
10.28 Securities Purchase Agreement between
the Company and Mentor Special
Situation, LP dated June 20, 1996.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Kreischer Miller & Co. And
Letter Pursuant to Item 304. (Letter
Previously Filed)
</TABLE>
<PAGE>
EXHIBIT 4.5
THIS WARRANT AND THE SHARES OF COMMON STOCK TO BE ISSUED IN CONNECTION WITH THIS
WARRANT WERE ISSUED PURSUANT TO REGULATION D UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION, UNDER
THE ACT AND SUCH LAWS, BASED UPON AN OPINION OF HOLDER'S COUNSEL SATISFACTORY TO
THE COMPANY, OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
WARRANT TO PURCHASE
COMMON STOCK OF
THE EASTWIND GROUP, INC.
Void after 5:00 p.m. Eastern Time on , 1999.
-----------------
THE EASTWIND GROUP, INC., a Delaware corporation (the "Company"), FOR
VALUE RECEIVED, hereby certifies that CLIFTON CAPITAL LTD., a B.V.I. Company
("Holder"), is entitled to purchase, subject to the terms and conditions hereof,
_________ shares of Common Stock, par value $.10 per share, of the Company (the
"Common Stock") during the period commencing at 9:00 a.m., Eastern Time on
_________, 1996 (the "Commencement Date") and ending at 5:00 p.m. Eastern
Standard Time on ___________, 1999 (the "Termination Date") at an exercise price
of $6.00 per share of Common Stock. The number of shares of Common Stock
purchasable upon exercise of this Warrant (the "Warrant(s)") and the exercise
price per share shall be subject to adjustment from time to time upon the
occurrence of certain events as set forth below.
The shares of Common Stock or any other shares or other units of stock
or other securities or property, or any combination thereof then receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to hereinafter as "Exercise Shares". The exercise price per share as from time
to time in effect is referred to hereinafter as the "Exercise Price".
1. Exercise of Warrant; Issuance of Exercise Shares.
------------------------------------------------
(a) Exercise of Warrant. This Warrant may be exercised in whole or in part
-------------------
at any time or from time to time on or after the Commencement Date and until and
including the Termination Date. This Warrant may be surrendered on any business
day to the Company at its principal office, presently located at the address of
the Company set forth in Paragraph 9 hereof (or such other office of the
Company, if any, as shall theretofore have been designated by the Company by
written notice to the Holder), together with: (i) a completed and executed
Notice of Warrant Exercise in the form set forth in Appendix A hereto and made a
part hereof and (ii) payment of the full Exercise Price for the amount of
Exercise Shares set forth in the Notice of Warrant Exercise, in lawful money of
the United States of America by certified check or cashier's check, made payable
to the order of the Company.
<PAGE>
In the event that this Warrant shall be duly exercised in part prior to the
Termination Date, the Company shall issue a new Warrant or Warrants of like
tenor evidencing the rights of the Holder thereof to purchase the balance of the
Exercise Shares purchasable under the Warrant so surrendered that shall not have
been purchased.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of the Warrant. The Company shall cancel Warrant
Certificates surrendered upon exercise of Warrants.
(b) Issuance of Exercise Shares; Delivery of Warrant Certificate. The
------------------------------------------------------------
Company shall, within ten (10) business days or as soon thereafter as is
practicable of the exercise of this Warrant, issue in the name of and cause to
be delivered to the Holder (or such other person or persons, if any, as the
Holder shall have designated in the Notice of Warrant Exercise) one or more
certificates representing the Exercise Shares to which the Holder (or such other
person or persons) shall be entitled upon such exercise under the terms hereof.
Such certificate or certificates shall be deemed to have been issued and the
Holder (or such other person or persons so designated) shall be deemed to have
become the record Holder of the Exercise Shares as of the date of the due
exercise of this Warrant.
(c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
---------------------------------------------
covenants that all Exercise Shares issuable upon the due exercise of the Warrant
represented by this Warrant Certificate will, upon issuance in accordance with
the terms hereof, be duly authorized, validly issued, fully paid and non-
assessable and free and clear of all taxes (other than taxes which, pursuant to
Paragraph 2 hereof, the Company shall not be obligated to pay) or liens,
charges, and security interests created by the Company with respect to the
issuance thereof.
(d) Reservation of Exercise Shares. At the time of or before taking any
------------------------------
action which would cause an adjustment pursuant to Paragraph 6 hereof increasing
the number of shares of capital stock constituting the Exercise Shares, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company have remaining, after such adjustment, a
number of shares of such capital stock unissued and unreserved for other
purposes sufficient to permit the exercise of all the then outstanding Warrants.
At the time of or before taking any action which would cause an adjustment
pursuant to Paragraph 6 hereof, reducing the Exercise price below the then par
value (if any) of the Exercise Shares issuable upon exercise of the Warrants,
the Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order to assure that the par value per share of the
Exercise Shares is at all times equal to or less than the Exercise Price per
share and so that the Company may validly and legally issue fully paid and non-
assessable Exercise Shares at the Exercise Price, as so adjusted; the Company
will also from time to time take such action if at any time the Exercise Price
is below the then par value of the Exercise Shares.
(e) Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares of capital stock upon the exercise of this Warrant or to
deliver Warrant Certificates which
2
<PAGE>
evidence fractional shares of capital stock. In the event that any fraction of
an Exercise Share would, except for the provisions of this subparagraph (e), be
issuable upon the exercise of this Warrant, the Company shall pay to the Holder
exercising the Warrant an amount in cash equal to such fraction multiplied by
the Current Market Value of the Exercise Share. For the purposes of this
Agreement, the Current Market Value shall be determined as follows:
(i) if the Exercise Shares are traded in the over-the-counter market
and not on any national securities exchange and not in the NASDAQ Reporting
System, the average of the mean between the last bid and asked prices per share,
as reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, for the ten (10) business days prior to the date on
which this Warrant is exercised, or if not so reported, the average of the
closing bid and asked prices for an Exercise Share during such ten (10) business
day period Share as furnished to the Company by any member of the National
Association of Securities Dealers, Inc., selected by the Company for that
purpose.
(ii) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ National Market System, the average closing
prices on the principal national securities exchange on which they are so listed
or traded or in the NASDAQ National Market System, as the case may be, for the
ten (10) business days prior to the date of the exercise of this Warrant. The
closing price referred to in this clause (ii) shall be the last reported sales
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case on the national
securities exchange on which the Exercise Shares are then listed or in the
NASDAQ Reporting System; or
(iii) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.
2. Payment of Taxes. The Company will pay all documentary stamp taxes, if
----------------
any, attributable to the initial issuance of Exercise Shares upon the exercise
of this Warrant; provided, however, that the Company shall not be required to
pay any tax or taxes which may be payable in respect of any transfer involved in
the issue of any Warrant Certificates or any certificates for Exercise Shares in
a name other than that of the Holder of a Warrant Certificate surrendered upon
the exercise of a Warrant, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
3. Mutilated or Missing Warrant Certificates. In case any Warrant Certificate
-----------------------------------------
shall be mutilated, lost, stolen or destroyed, the Company may in its discretion
issue, in exchange and substitution for and upon cancellation of the mutilated
Warrant Certificate, or in lieu of and in substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate or Warrant
Certificates of like tenor and in the same aggregate denomination, but only (i)
in the case of loss, theft or destruction, upon receipt of evidence satisfactory
to the Company of such loss, theft or destruction of such Warrant Certificate
and indemnity or bond, if requested, also
3
<PAGE>
satisfactory to them and (ii) in the case of mutilation, upon surrender of the
mutilated Warrant. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company or its counsel may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything contained in
----------------
this Warrant Certificate or otherwise, be entitled to any right whatsoever,
either in law or equity, of a stockholder of the Company, including without
limitation, the right to receive dividends or to vote or to consent or to
receive notice as a shareholder in respect of the meetings of shareholders or
the election of directors of the Company or any other matter.
5. Registration of Transfers and Exchanges. The Warrant shall be
---------------------------------------
transferable, subject to the provisions of Paragraph 7 hereof, only upon the
books of the Company if any, to be maintained by it for that purpose, upon
surrender of the Warrant Certificate to the Company at its principal office
accompanied (if so required by it) by a written instrument or instruments of
transfer in form satisfactory to the Company and duly executed by the Holder
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney or a no-action letter by the Securities and Exchange
Commission, and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. In all cases of transfer by an attorney, the
original letter of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited and remain with the Company. In case of transfer
by executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited and remain with the Company in its discretion. Upon any such
registration of transfer, a new Warrant Certificate shall be issued to the
transferee named in such instrument of transfer, and the surrendered Warrant
Certificate shall be canceled by the Company.
Any Warrant Certificate may be exchanged, at the option of the Holders
thereof and without change, when surrendered to the Company at its principal
office, or at the office of its transfer agent, if any, for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate the right to purchase from the Company a like number and kind of
Exercise Shares as the Warrant Certificate surrendered for exchange or transfer,
and the Warrant Certificate so surrendered shall be canceled by the Company or
transfer agent, as the case may be.
6. Adjustment of Exercise Shares and Exercise Price. The Exercise price and
------------------------------------------------
the number and kind of Exercise Shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the happening of
certain events as hereinafter provided. The Exercise Price in effect at any
time and the number and kind of securities purchasable upon exercise of each
Warrant shall be subject to adjustment as follows:
(a) In the case the Company shall (i) pay a dividend or make a distribution
on its shares of Common Stock in shares of Common Stock, (ii) subdivide or
classify its outstanding Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
4
<PAGE>
combination or reclassification shall be proportionally adjusted so that the
Holder of this Warrant exercised after such date shall be entitled to receive
the aggregate number and kind of shares which, if this Warrant had been
exercised by such Holder immediately prior to such date, he would have owned
upon such exercise and been entitled to receive upon such dividend, subdivision,
combination or reclassification. For example, if the Company declares a 2 for 1
stock dividend or stock split and the Exercise Price immediately prior to such
event was $5.00 per share, the adjusted Exercise Price immediately after such
event would be $2.50 per share. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall hereafter issue additional shares of common
stock at a price less than the effective Exercise Price of the Warrant
("Additional Shares") the Exercise Price shall be adjusted so that the same
shall equal the price determined by multiplying the then effective Exercise
Price by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the date of issuance of
the Additional Shares and the number of additional shares of Common Stock which
the aggregate consideration for the total number of shares of Common Stock so
issued would purchase at the then effective Exercise Price, and the denominator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the date of issuance of the additional Shares and the
number of additional shares of Common Stock issued. Such adjustment shall be
made successively whenever such Additional Shares are issued and shall become
effective immediately after the Additional Shares are issued.
(c) Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to Subparagraph (a) or (b) above, the number of Exercise
Shares purchasable upon exercise of this Warrant shall simultaneously be
adjusted by multiplying the number of Exercise Shares initially issuable upon
exercise of this Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(d) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments which by reason of this
Subparagraph (c) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Paragraph (6) shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Paragraph (6) to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the exercise Price, in
addition to those required by this Paragraph (6), as it, in its sole discretion,
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, reclassification or combination of Common
Stock, referred to hereinabove in this Paragraph (6) hereafter made by the
Company to the Holders of its Common Stock shall not result in any tax to the
Holders of its Common Stock or securities convertible into Common Stock.
(e) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of each Warrant to be
mailed to the Holders, at their last addresses
5
<PAGE>
appearing in the Warrant Register, and shall cause a certified copy thereof to
be mailed to its transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this Paragraph (6), and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(f) In the event that at any time, as a result of an adjustment made
pursuant to Subparagraph (a) above, the Holder of this Warrant thereafter shall
become entitled to receive any Exercise Shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
common Stock contained in Subparagraphs (a) to (d), inclusive above.
(g) Irrespective of any adjustments in the Exercise Price or the number or
kind of Exercise Shares purchasable upon exercise of this Warrant, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
(h) Whenever the Exercise Price shall be adjusted as required by the
provisions of the foregoing Paragraph, the Company shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Exercise Price determined as herein provided, setting forth in
reasonable detail the facts requiring such adjustment, including a statement of
the number of additional shares of Common Stock, if any, and such other facts as
shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the Holder and the Company shall, forthwith
after each such adjustment, mail a copy by certified mail of such certificate to
the Holder.
7. Restrictions on Transferability; Restrictive Legend. Neither this Warrant
---------------------------------------------------
nor the Exercise Shares shall be transferable except in accordance with the
provisions of this paragraph.
(a) Restrictions on Transfer; Indemnification. Neither this Warrant
-----------------------------------------
nor any Exercise Share may be offered for sale or sold, or otherwise transferred
or sold in any transaction which would constitute a sale thereof within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), unless (i)
such security has been registered for sale under the 1933 Act and registered or
qualified under applicable state securities laws relating to the offer and sale
of securities, or (ii) exemptions from the registration requirements of the 1933
Act and the registration or qualification requirements of all such state
securities laws are available and the Company shall have received an opinion of
counsel satisfactory to the Company, or a no-action letter from the Securities
and Exchange Commission, that the proposed sale or other disposition of such
securities may be effected without registration under the 1933 Act and would not
result in any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such counsel and such
opinion to be satisfactory to the Company.
6
<PAGE>
The Holder agrees to indemnify and hold harmless the Company against any
loss, damage, claim or liability arising from the disposition of this Warrant or
any Exercise Share held by such Holder or any interest therein in violation of
the provisions of this Paragraph 7.
(b) Securities Subscription Agreement. This Warrant and the underlying
---------------------------------
shares of Common Stock are subject to the terms contained within a certain
Confidential Private Offering Memorandum dated May 29, 1996 and that certain
Securities Subscription Agreement by and between the Company and Holder (the
"Agreement").
(c) Restrictive Legends. Unless and until otherwise permitted by this
-------------------
Paragraph 7 or in the Agreement, this Warrant Certificate, each Warrant
Certificate issued to the Holder or to any transferee or assignee of this
Warrant Certificate, and each Certificate representing Exercise Shares issued
upon exercise of this Warrant or to any transferee of the person to whom the
Exercise Shares were issued, shall bear a legend setting forth the requirements
of paragraph (a) of this Paragraph 7 together with such other legend or legends
as may otherwise be deemed necessary or appropriate by counsel to the Company.
(d) Notice of Proposed Transfers. Prior to any transfer, offer to transfer
----------------------------
or attempted transfer of this Warrant or any Exercise Share, the Holder of such
security shall give written notice to the Company of such Holder's intention to
effect such transfer. Each such notice shall (x) describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall contain
an undertaking by the person giving such notice to furnish such other
information as may be required, to enable counsel to render the opinions
referred to below, or to seek a no-action letter from the Securities and
Exchange Commission referred to below and shall (y) designate the counsel for
the person giving such notice, such counsel to be satisfactory to the Company.
The person giving such notice shall submit a copy thereof to the counsel
designated in such notice and the Company shall submit a copy thereof to its
counsel, and the following provisions shall apply:
(i) If, in the opinion of each such counsel, or no-action letter from
the Securities and Exchange Commission the proposed transfer of this Warrant or
Exercise Share, as appropriate, may be effected pursuant to the terms of the
Agreement and without registration of such security under the 1933 Act, the
Company shall, as promptly as practicable, so notify the Holder of such security
and such Holder shall thereupon be entitled to transfer such security in
accordance with the terms of the notice delivered by such Holder to the Company.
Each certificate evidencing the securities thus to be transferred (and each
certificate evidencing any untransferred balance of the securities evidenced by
such certificate) shall bear the restrictive legends referred to in subparagraph
(b) above, unless in the opinion of each such counsel or no-action letter by the
Securities and Exchange Commission such legend is not required in order to
insure compliance with the 1933 Act.
(ii) If, in the opinion of either of such counsel, the proposed
transfer of securities may not be effected without registration under the 1933
Act, the Company shall, as promptly as practicable, so notify the Holder
thereof. However, the Company shall have no
7
<PAGE>
obligation to register such securities under the 1933 Act, except as provided
herein or in that certain Confidential Private Offering Memorandum dated May 29,
1996.
The Holder of the securities giving the notice under this subparagraph (c)
shall not be entitled to transfer any of the securities until receipt of notice
from the Company under paragraph (i) of this subparagraph (c) or registration of
such securities under the 1933 Act has become effective.
(e) Removal of Legend The Company shall, at the request of any registered
-----------------
Holder of a Warrant or Exercise Share, exchange the certificate representing
such security for a certificate representing the same security not bearing the
restrictive legend required by subparagraph (b) if, in the opinion of counsel to
the Company, such restrictive legends are no longer necessary.
8. Redemption
----------
(a) The Company shall have the right, upon thirty (30) days written notice,
to call this Warrant for redemption, in whole or in part at a call price of
$.001 per Warrant Share (i) following any calendar year in which the Company's
consolidated financial statements evidence net income of at least $400,000 and
net income per share of at least $.40 per share or (ii) at any time after the
Company proposes to consummate the acquisition of all of the stock or assets of
another company whose annual gross revenues from operations is at least
$10,000,000; provided, however, that in the event that this Warrant is called
-------- -------
for redemption pursuant to clause (ii) above and this Warrant is not thereafter
exercised in accordance with the terms hereof, then the holder shall deliver
this Warrant to the Company and the Company shall hold this Warrant in escrow
pending the consummation of such transaction. In the event such transaction is
terminated prior to consummation, this Warrant shall be returned to the holder
and all terms of this Warrant shall continue in full force and effect as if such
call had not been made, and in the event the transaction is consummated the
Company shall pay the redemption proceeds to the holder and cancel the Warrant.
(b) In the event the Company shall desire to exercise its right to so
redeem the Warrants, it shall mail a notice or redemption to each of the
Registered Holders of the Warrants to be redeemed, first class, postage prepaid,
not later than the thirtieth (30th) day before the date fixed for redemption, at
their last address as shall appear on the records of the Warrants. Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption price; (ii)
the date fixed for redemption; (iii) the place where the Warrant Certificates
shall be delivered and the redemption price paid; and (iv) that the right to
exercise the Warrant shall terminate at 5:00 P.M. (New York City time) on the
business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrants shall be the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Holder (a) to whom notice was not mailed or (b)
8
<PAGE>
whose notice was defective. An affidavit of any agent of the Company that notice
of redemption has been mailed shall, in the absence of fraud, will be prima
facie evidence of the facts stated therein. Any document evidencing hand
delivery to the Holder at the Holder's address as set forth in section 9 herein,
such as a signed receipt of acceptance of the notice, or affidavit of the person
making the hand delivery and any document evidencing delivery by U.S. Mail to
Holder's address as set forth in section 9 herein, such as a certified mail
receipt, shall be conclusive evidence of delivery of notice to Holder.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York
City time) on the business day immediately preceding the Redemption Date. On or
after the Redemption Date, Holders of the Warrants shall have no further rights
except to receive, upon surrender of the Warrant, the Redemption Price.
(e) From and after the date specified for redemption, the Company shall, at
the place specified in the notice of redemption, upon presentation and surrender
to the Company by or on behalf of the Registered Holder thereof of one or more
Warrants to be redeemed, deliver or cause to be delivered to or upon the written
order of such Holder a sum in cash equal to the redemption price of each such
Warrant. From and after the date fixed for redemption and upon the deposit or
setting aside by the Company of a sum sufficient to redeem all the Warrants
called for redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the redemption price, shall cease.
9. Notices. All notices or other communications under this Warrant
-------
Certificate shall be in writing and shall be deemed to have been given if
delivered by hand or mailed by certified mail, postage prepaid, return receipt
request, addressed as follows:
If to the Company:
The Eastwind Group, Inc.
100 Four Falls Corporate center
Suite 305
West Conshohocken, PA 19428
Attention: Paul A. DeJuliis
With a Copy to:
Joseph P. Galda, Esquire
Buchanan Ingersoll Professional Corporation
Two Logan Square, 12th Floor
18th and Arch Streets
Philadelphia, PA 19103-6933
and to the Holder:
9
<PAGE>
At the address appearing on the Securities Purchase Agreement by and
between Holder and the Company.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. Supplements and Amendments. The Company may from time to time supplement
--------------------------
or amend this Warrant Certificate without the approval of any Holders of
Warrants in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision, or to make any other provisions in regard to matters or questions
herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interests of the Holder.
11. Successors and Assigns. This Warrant shall inure to the benefit of and be
----------------------
binding on the respective successors, assigns and legal representatives of the
Holder and the Company.
12. Severability. If for any reason any provision, paragraph or terms of this
------------
Warrant Certificate is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
13. Governing Law. This Warrant shall be deemed to be a contract made under
-------------
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of State of Delaware, without regard to
that State's laws regarding choice of law.
14. Headings. Paragraph and subparagraph headings, used herein are included
--------
herein for convenience of reference only shall not affect the construction of
this Warrant Certificate nor constitute a part of this Warrant Certificate for
any other purpose.
IN WITNESS WHEREOF, the Company has caused these presents to be duly
executed this _______ day of ____________, 1996
THE EASTWIND GROUP, INC.
By:
------------------------------------
(Authorized Executive Officer)
10
<PAGE>
APPENDIX A
----------
NOTICE OF WARRANT EXERCISE
--------------------------
Pursuant to a Warrant by and between the CLIFTON CAPITAL LTD.. a B.V.I.
Company ("Holder"), and THE EASTWIND GROUP, INC., a Delaware corporation (the
"Company"), dated as of _______________________, and subject to the vesting
periods set forth therein, Holder hereby irrevocably elects to exercise its
warrant to the extent of purchasing ______________ shares of Common Stock (the
"Warrant Shares"), of the Company as provided for therein.
Holder hereby represents and agrees that the Warrant Shares purchased
pursuant hereto are being purchased for investment and not with a view to the
distribution or resale thereof, and that the undersigned understands that said
Warrant Shares have not been registered under the Securities Act of 1933, as
amended.
Payment of the full Purchase Price of the Warrant Shares is enclosed
herewith, in the form of a check made payable to the Company.
The undersigned requests that a certificate for the Warrant Shares be
issued in the name of:
---------------------------------------
---------------------------------------
---------------------------------------
(Please print name, address and social security number)
Dated: ,
--------------------------------------- -----
Address:
----------------------------------------------
----------------------------------------------
----------------------------------------------
Signature:
--------------------------------------------
11
<PAGE>
EXHIBIT 4.7
EXHIBIT "A"
12% SUBORDINATED DEBENTURE
$500,000 DATED: June 20, 1996
Philadelphia, PA
FOR VALUE RECEIVED, the undersigned, THE EASTWIND GROUP, INC., a
Delaware corporation ("Borrower"), hereby promises to pay to the order of MENTOR
SPECIAL SITUATION FUND, L.P., a Pennsylvania limited partnership ("Lender") at
its office at P.O. Box 560 Yardley, PA, 19067 or at such other place as the
Lender may designate in writing, the principal sum of Five Hundred Thousand and
00/100 Dollar ($500,000), together with interest (computed on the basis of a
360-day year of twelve 30-day months) from the date hereof on the outstanding
principal balance hereof, to be fixed at a rate equal to 12% per annum, in
accordance with the following terms:
1. The principal amount of this Debenture shall be due and payable as follows:
(a) $166,667 on June 30, 1999; (b) $166,667 on June 30, 2000, and (c) $166,666
on June 30, 2001 at which time all unpaid interest which has accrued on the
Debenture shall also be due and payable ("Maturity").
2. Interest on the outstanding principal balance of this Debenture shall accrue
at the rate of 12% per annum and shall be payable quarterly in arrears on March
31, June 30, September 30, and December 31 of each year until Maturity,
commencing on June 30, 1996.
3. This Debenture may not be offered for sale or sold, or otherwise transferred
in any transaction which would constitute a sale thereof within the meaning of
the Securities Act of 1933, as amended (the "Act"), unless: (i) such security
has been registered for sale under the Act and registered or qualified under
applicable state securities laws relating to the offer and sale of securities;
or (ii) exemptions from the registration requirements of the Act and the
registration or qualification requirements of all such state securities laws are
available and the Borrower shall have received an opinion of counsel reasonably
satisfactory to the Borrower that the proposed sale or other disposition of such
securities may be effected without registration under the Act and would not
result in any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale.
4. The indebtedness evidenced in this Debenture is subordinated to the prior
payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness" (as defined below) of the Borrower as follows: Upon any
distribution
<PAGE>
of its assets in a liquidation or dissolution of the Borrower, or in bankruptcy,
reorganization, insolvency, receivership or similar proceedings relating to the
Borrower, the Lender shall not be entitled to receive payment until the holders
of Senior Indebtedness are paid in full. Until a payment default occurs with
respect to any Senior Indebtedness, all payments of principal and interest due
to Lender under this Debenture shall be made in accordance with this Debenture.
Upon the occurrence of any payment default with respect to any Senior
Indebtedness then, upon written notice thereof to Borrower and Lender by any
holder of such Senior Indebtedness or its representative, no payments of
principal or interest on the Debenture shall be made by Borrower until such
payment default has been cured to the satisfaction of the holder of such Senior
Indebtedness or waived by such holder, provided, however, that if during the
-----------------
180 day period following such default, the holder of Senior Indebtedness has not
accelerated its loan, commenced foreclosure proceedings or otherwise undertaken
to act on such default, then Borrower shall be required to continue making
payments under the Debenture, including any which had not been paid during such
180 day period. In the event that any institutional lender to the Borrower at
any time so requires, the Lender shall execute, upon request of the Borrower,
any intercreditor or subordination agreement(s) with any such institutional
lender on terms not materially more adverse to the Lender than the subordination
terms contained in this Debenture. "Senior Indebtedness" means (a) all direct or
indirect, contingent or certain indebtedness of any type, kind or nature
(present or future) created, incurred or assumed by the Borrower with respect to
any present or future bank or other financial institutional indebtedness of the
Borrower and any guaranty by Borrower of any present or future bank or other
financial institutional indebtedness of any Subsidiaries (as defined below) or
(b) any indebtedness created, incurred, or assumed, by the Borrower secured by a
lien on any assets of the Borrower. Notwithstanding anything herein to the
contrary, Senior Indebtedness does not include (i) unsecured accounts payable to
trade creditors of Borrower incurred in the ordinary course of business, (ii)
any debt owed by Borrower, or any Subsidiary to any officer, director or
stockholder of Borrower or its Subsidiaries, (iii) any obligation of Borrower or
any Subsidiary, issued or contracted for as payment in consideration of the
purchase by Borrower or any Subsidiary of the capital stock or substantially all
of the assets of another person or in consideration for the merger or
consolidation with respect to which the Borrower or any Subsidiary was a party,
(iv) any operating lease obligations of Borrower or any Subsidiary or any other
indebtedness which by its terms is subordinated to the Debenture, (v) any "other
indebtedness" which is subordinated to all indebtedness to which the Debenture
is subordinated in substantially like terms as the Debenture; which such "other
indebtedness" shall be treated as equal with the indebtedness evidenced by this
Debenture, or (vi) any indebtedness owed to the holders of the Borrower's Series
A Preferred Stock in payment for
2
<PAGE>
the redemption thereof which shall be subordinated to this Debenture.
"Subsidiaries" means Polychem Corporation, Princeton Academic Press, Inc. and
any and all other subsidiaries of the Borrower existing in the future.
5. An "Event of Default" under this Debenture means the occurrence of any of
the following events (whether the reason for such Event of Default shall be
voluntary or involuntary or be or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body): (i) nonpayment of any principal or
interest installment when and as due hereunder which is not cured by Borrower
within thirty (30) days after the due date; (ii) any other breach of the terms
hereof which is not cured by Borrower within thirty (30) days after notice from
Lender; (iii) any breach by the Borrower of any representation or warranty, or
any noncompliance by Borrower with any affirmative or negative covenant of the
Borrower contained in the Securities Purchase Agreement (the "Agreement") dated
June 20, 1996 between the Borrower and the Lender or in the Warrant or
Registration Rights Agreement included as exhibits thereto, or in the Financial
Advisory Fee Agreement dated June 20, 1996 between Mentor Management Company and
the Borrower, which is not cured by Borrower within thirty (30) days after
notice by Lender; (iv) the institution of any proceedings by or against Borrower
under any law relating to bankruptcy, insolvency, reorganization or other form
of debtor relief or Borrower's making an assignment for the benefit of
creditors, or the appointment of a receiver, trustee, conservator or other
judicial representative for Borrower or any of its respective properties, or the
admission in writing by Borrower of its inability to pay its debts generally as
they become due; (v) any default by Borrower under any agreement for borrowed
money which default continues after expiration of the applicable notice and
grace period, if any, provided in the agreement and which permits the holder
thereof to accelerate the indebtedness due thereunder; (vi) any default by any
Subsidiary under any agreement for borrowed money which is guaranteed by
Borrower which default continues after expiration of the applicable notice and
grace period, if any, provided in the agreement and that permits the holder
thereof to accelerate the indebtedness due thereunder against the Borrower; or
(vii) the occurrence of any event of default under the Odyssey Agreement (as
defined in the Agreement) which permits the holders of Series A Preferred Stock
to demand redemption of their shares of the Company's Series A Preferred Stock.
Upon the occurrence of an Event of Default, the entire principal and any accrued
interest due hereunder shall accelerate and become immediately due and payable
without presentation, demand, protest or further demand or notice of any kind,
all of which are expressly waived by Borrower, and Lender shall thereupon have
all rights and remedies provided hereunder, in any other agreement between
Lender and Borrower or otherwise available at law or in equity. The period of
time commencing from the date of the occurrence of an Event of
3
<PAGE>
Default until the date such default is cured shall be referred to as the
"Default Period". During any Default Period, any late interest or principal
payments will accrue interest at a rate of 1% per month, cumulative and
compounding until all accrued and unpaid principal and interest is paid in full.
6. This Debenture is issued in connection with a private placement of the 12%
Subordinated Debentures and Common Stock Purchase Warrants issued by the
Borrower pursuant to the terms of the Agreement, the terms of which are
incorporated herein by reference.
7. Borrower shall have the right to prepay this Debenture in whole or in part
in increments of $100,000 or, in the event that Borrower prepays the total
outstanding principal, in any such lesser amount, at any time and in its sole
and absolute discretion without incurring any penalties or additional
obligations of any kind.
8. This Debenture shall be construed and enforced in accordance and governed by
the laws of the Commonwealth of Pennsylvania without regard to Pennsylvania's
conflict of laws provisions.
9. No failure or delay on the part of the Lender to insist on strict
performance of Borrower's obligations hereunder or to exercise any remedy shall
constitute a waiver of the Lender's rights in that or any other instance. No
waiver of any of the Lender's rights shall be effective unless in writing, and
any waiver of any default or any instance of non-compliance shall be limited to
its express terms and shall not extend to any other default or instance of non-
compliance.
10. Any provision hereof found to be illegal, invalid or unenforceable for any
reason whatsoever shall not affect the validity, legality or enforceability of
the remainder hereof.
11. If the effective interest rate on this Debenture would otherwise violate
any applicable usury law, then the interest rate shall be reduced to the maximum
permissible rate and any payment received by the in excess of the maximum
permissible rate shall be treated as a prepayment of the principal of this Note.
12. Borrower shall pay all reasonable costs and expenses (including
attorney's fees) incurred by the Lender relating to the enforcement of this
Debenture.
13. This Debenture shall be binding upon Borrower's successors and assigns
and shall inure to the benefit of each holder of this Debenture and such
holder's successors, endorsees and assigns.
4
<PAGE>
Intending to be legally bound, the Borrower has caused this Debenture to
be executed in its corporate name, by its duly authorized representative and to
be dated as of the date and year first above written.
THE EASTWIND GROUP, INC.
By:
------------------------------
Authorized Executive Officer
5
<PAGE>
EXHIBIT 5.1
BUCHANAN INGERSOLL
------------------
Professional Corporation
Attorneys
[LETTERHEAD OF BUCHANAN INGERSOLL PROFESSIONAL CORPORATION APPEARS HERE]
July 15, 1996
The Eastwind Group, Inc.
100 Four Falls Corporate Center
Suite 305
West Conshohocken, Pa 19428
Re: The Corporation's Registration Statement on Form SB-2
-----------------------------------------------------
Gentlemen:
We have participated in the preparation of a Registration Statement on Form
SB-2 (the "Registration Statement") filed with the Securities and Exchange
Commission by The Eastwind Group, Inc. (the "Corporation") for the purpose of
registering for resale under the Securities Act of 1933, as amended (the
"Securities Act"), 1,185,000 shares of Common Stock of the Corporation, $.10 par
value (the "Common Stock"), which consist of 785,000 shares of Common Stock
issued by the Corporation in certain private placement transactions (the "Issued
Shares"), 150,000 shares of Common Stock (the "Clifton Shares") issuable to
Clifton Capital, Ltd. ("Clifton") pursuant to a certain Securities Purchase
Agreement dated as of June 14, 1996 (the "Clifton Agreement") and 250,000 shares
of Common Stock issuable upon the exercise of Common Stock Purchase Warrants
("Clifton Warrants") issued or issuable by the Corporation to Clifton pursuant
to the Clifton Agreement (the "Clifton Warrant Shares").
As counsel to the Corporation, we have examined such corporate records,
certificates and other documents as we considered to be relevant and necessary
to express the opinions hereinafter set forth. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us, the conformity to original documents of all documents submitted
to us as certified or photostat copies, and the authenticity of the originals of
such latter documents.
We are admitted to the Bar of the Commonwealth of Pennsylvania and express
no opinion as to the laws of any other jurisdiction, except Delaware corporate
law.
On the basis of the foregoing and of our consideration of such other legal
and factual matters as we have deemed appropriate, we are of the opinion that
(1) the Issued Shares have been duly authorized, and are validly issued, fully
paid and non-assessable, and (2) the Clifton Shares and the Clifton Warrant
Shares have been duly authorized and upon payment of the applicable purchase
and/or exercise price with respect to each Clifton Share and Clifton Warrant
Share and compliance with the other terms of the Clifton Agreement and the
Clifton Warrants, such shares will be validly issued, fully paid and non-
assessable.
This opinion is being delivered to you in compliance with Item 601(b)(5)(i)
of Regulation S-K under the Securities Act. This firm consents to the filing of
this opinion as an exhibit to the Registration Statement and to the reference to
this firm under the caption "Legal Matters" in the Prospectus forming a part of
the Registration Statement.
Very truly yours,
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
By:
-------------------------------
Joseph P. Galda
JPG/cpc
<PAGE>
EXHIBIT 10.27
ODYSSEY CAPITAL GROUP, L.P.
950 West Valley Road
Suite 2902
Wayne, PA 19087
June 17, 1996
Mr. Paul A. DeJuliis
Chairman and Chief Executive Officer
The Eastwind Group, Inc.
100 Four Falls Corporate Center
Suite 305
West Conshohocken, PA 19428
Re: Amendment to Securities Purchase Agreement
------------------------------------------
Dear Mr. DeJuliis:
Odyssey Capital Group, L.P., (the "Investor") and The Eastwind Group, Inc.
(the "Company") are parties to a Securities Purchase Agreement dated May 10,
1996. The parties hereby agree to amend Section 9.1 of the Agreement such that
the term "Other Shares" shall not include the shares of common stock issuable or
issued to Mentor Special Situation Fund, L.P. ("MSSF") by the Company pursuant
to a Warrant dated June ___, 1996 (the "MSSF Shares"). Additionally, Section
9.1 is hereby amended to provide that the MSSF Shares shall be treated equally
with the Warrant Shares in the event of an underwritten public offering as
contemplated by Section 9.1 of the Agreement.
Very truly yours,
ODYSSEY CAPITAL GROUP, L.P.
By: Odyssey Capital Group, Inc.
General Partner
By:
------------------------------
John P. Kirwin, III, President
of the General Partner
Agreed and Accepted:
THE EASTWIND GROUP, INC.
By:
----------------------------
Paul A. DeJuliis, Chairman
and Chief Executive Officer
<PAGE>
CONFIDENTIAL EXHIBIT 10.28
- ------------
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into as of
the 20th day of June, 1996, by and between THE EASTWIND GROUP, INC., a Delaware
corporation (the "Company"), and MENTOR SPECIAL SITUATION FUND, L.P., a
Pennsylvania limited partnership ("MSSF"). The Company and MSSF are hereinafter
collectively referred to as the "Parties."
Background
The Company wishes to obtain additional financing in order to acquire
additional companies, assets, or product lines and for general working capital
purposes and MSSF desires to provide such financing to the Company through the
purchase of an aggregate $500,000 principal amount of the Company's 12%
Subordinated Debentures and 80,000 Common Stock Purchase Warrants being
privately offered by the Company to MSSF pursuant to this Agreement.
Agreement
In consideration of the premises hereof and the agreements set forth below,
the Parties hereto, intending to be legally bound, hereby agree as follows:
1. Sale and Purchase of Securities.
-------------------------------
(a) Subject to the terms and conditions herein, the Company agrees to
issue and sell to MSSF, and MSSF agrees to purchase, at the Closing provided in
Section 2, (i) an aggregate $500,000 principal amount of the Company's 12%
Subordinated Debentures in the form of Exhibit A hereto (the "Debenture") and
(ii) a Common Stock Purchase Warrant to purchase up to 80,000 shares of the
Company's common stock, par value $.01 per share (the "Common Stock" at an
exercise price of $6.00 per share in the form of Exhibit B hereto (the
"Warrant"). The shares of Common Stock of the Company issuable upon the
exercise of the Warrant are hereinafter referred to as the "Exercise Shares."
The Debenture, Warrant, and Exercise Shares are hereinafter collectively
referred to as the "Securities."
(b) The purchase price for the Securities shall be $500,080 (the
"Purchase Price"), payable in cash by wire transfer of immediately available
funds at the time provided in Section 2.
2. Closing. The closing of the purchase and sale of the Securities
-------
offered hereunder (the Closing") shall occur concurrently upon the execution of
this Agreement by the Parties. At
<PAGE>
the Closing, MSSF shall pay the Company the Purchase Price in cash by wire
transfer of immediately available funds against delivery of (i) the executed
Debenture in the principal amount of $500,000 (with all blanks appropriately
completed) registered in the name of MSSF and (ii) the executed Warrant
registered in the name of MSSF.
3. Description of Securities and Other Deliverables.
------------------------------------------------
The Securities consist of a Debenture, Warrant, and shares of Company
Common Stock issuable upon exercise of the Warrant, each of which is described
below.
3.1 Debentures
The terms and conditions of the Debenture are as set forth in the form
of Debenture attached hereto and made a part hereof as Exhibit "A." The
Debenture shall be in the aggregate principal amount of $500,000 and shall be
due and payable on December 31, 2000 ("Maturity").
The indebtedness evidenced by the Debenture is subordinated to the
prior payment when due of the principal of, premium, if any, and interest on all
"Senior Indebtedness" (as defined below) of the Borrower (as defined below) as
follows: Upon any distribution of its assets in a liquidation or dissolution of
the Borrower, or in bankruptcy, reorganization, insolvency, receivership or
similar proceedings relating to the Borrower, the Lender (as defined below)
shall not be entitled to receive payment until the holders of Senior
Indebtedness are paid in full. Until a payment default occurs with respect to
any Senior Indebtedness, all payments of principal and interest due to Lender
under this Debenture shall be made in accordance with this Debenture. Upon the
occurrence of any payment default with respect to any Senior Indebtedness then,
upon written notice thereof to Borrower and Lender by any holder of such Senior
Indebtedness or its representative, no payments of principal or interest on the
Debenture shall be made by Borrower until such payment default has been cured to
the satisfaction of the holder of such Senior Indebtedness or waived by such
holder, provided, however, that if during the 180 day period following such
-----------------
default, the holder of Senior Indebtedness has not accelerated its loan,
commenced foreclosure proceedings or otherwise undertaken to act on such
default, then Borrower shall be required to continue making payments under the
Debenture, including any which had not been paid during such 180 day period. In
the event that any institutional lender to the Borrower at any time so requires,
the Lender shall execute, upon request of the Borrower, any intercreditor or
subordination agreement(s) with any such institutional lender on terms not
materially more adverse to the Lender than the subordination terms contained in
this Debenture. "Senior Indebtedness" means (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred, or assumed by the Borrower with respect to any
present or future bank or other financial institutional indebtedness of the
Borrower and any guaranty by Borrower of any present or future bank or other
financial institutional indebtedness of any Subsidiaries (as defined below) or
(b) any indebtedness created, incurred, or assumed, by the Borrower secured by a
lien on any assets of the Borrower. Notwithstanding anything herein to the
contrary, Senior Indebtedness does not include (i) unsecured accounts payable to
trade creditors of Borrower incurred in the ordinary course of business, (ii)
any debt
2
<PAGE>
owed by Borrower or any Subsidiary to any officer, director or stockholder of
Borrower or its Subsidiaries, (iii) any obligation of Borrower or any Subsidiary
issued or contracted for as payment in consideration of the purchase by Borrower
or any Subsidiary of the capital stock or substantially all of the assets of
another person or in consideration for the merger or consolidation with respect
to which the Borrower or any Subsidiary was a party, (iv) any operating lease
obligations of Borrower or any Subsidiary or any other indebtedness which by its
terms is subordinated to the Debenture, (v) any "other indebtedness" which is
subordinated to all indebtedness to which the Debenture is subordinated in
substantially like terms as the Debenture; which such "other indebtedness" shall
be treated as equal with the indebtedness evidenced by this Debenture, or (vi)
any indebtedness owed to the holders of the Borrower's Series A Preferred Stock
in payment for the redemption thereof which shall be subordinated to this
Debenture. "Subsidiaries" means Polychem Corporation, Princeton Academic Press,
Inc. and any and all other subsidiaries of the Borrower existing in the future,
"Borrower" means the Company and "Lender" means MSSF.
3.2 Warrant
The terms and conditions of the Warrant are set forth in the Warrant
attached hereto and made a part hereof as Exhibit "B." The Warrant entitles
MSSF to purchase up to 80,000 shares of Common Stock of the Company at an
exercise price of $6.00 per share for a period of seven (7) years commencing
from the Closing Date. Prior to the exercise of the Warrant, MSSF shall not be
entitled to voting rights or other rights provided by law to security holders of
the Company except as otherwise provided herein.
3.3 Restricted Securities
The Debenture, Warrant, and Exercise Shares constitute "Restricted
Securities," as that term is defined in Rule 144 under the Securities Act of
1933, as amended (the "Act"). Accordingly, the Securities may not be offered
for sale or sold, or otherwise transferred in any transaction which would
constitute a sale thereof within the meaning of the Act, unless (i) such
security has been registered for sale under the Act and registered or qualified
under applicable state securities laws relating to the offer and sale of
securities, or (ii) exemptions from the registration requirements of the Act and
the registration or qualification requirements of all such state securities laws
are available and the Company shall have received an opinion of counsel
reasonably satisfactory to the Company that the proposed sale or other
disposition of such securities may be effected without registration under the
Act and would not result in any violation of any applicable state securities
laws relating to the registration or qualification of securities for sale, such
counsel and such opinion to be reasonably satisfactory to the Company.
3.5 Registration Rights
MSSF shall have certain registration rights with regard to the
Exercise Shares as set forth in the Registration Rights Agreement by and among
the Parties attached hereto and made a part hereof as Exhibit "C", (the
"Registration Rights Agreement") which agreement shall be executed and delivered
concurrently with the execution and delivery of this Agreement.
3
<PAGE>
4. Representations and Warranties of MSSF. MSSF represents and warrants
--------------------------------------
to the Company as follows:
4.1 Organization and Standing. MSSF is a limited partnership duly
-------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania.
4.2 Authority; Enforceability; No Conflict. MSSF has all requisite
---------------------------------------
power and authority to enter into this agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
agreement by MSSF has been duly and validly authorized by all requisite
partnership proceedings on the part of MSSF. This Agreement is a valid and
binding obligation of MSSF , enforceable against it in accordance with its
terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium, rehabilitation, liquidation,
conservatorship, receivership or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The execution and delivery of this
agreement by MSSF do not, and consummation by MSSF of the transactions
contemplated hereunder will not, result in or constitute (i) a default, breach
or violation of or under the organizational documents of MSSF, or (ii) a
default, breach or violation of or under any mortgage, deed of trust, indenture,
note, bond, license, lease agreement or other instrument or obligation to which
MSSF is a party or by which any of its properties or assets are bound, or (iii)
a violation of any material statute, rule, regulation, order, judgment or decree
of any court, public body or authority applicable to MSSF's business.
4.3 Deliveries at Closing. MSSF shall deliver to the Company at
----------------------
Closing copies of its Certificate of Limited Partnership and partnership
agreement or other organizational documents, and resolutions of its General
Partner authorizing the transactions contemplated by this Agreement.
4.4 Access to Information. MSSF has had access to information
---------------------
concerning the Company, its management, financial condition, capitalization,
market information, properties and prospects in order to enable MSSF to make an
informed investment decision with respect to its investment in the Securities.
MSSF acknowledges that it has had the opportunity to ask questions of and
receive answers from, and to obtain additional information from, representatives
of the Company concerning the terms and conditions of the acquisition of the
Securities and the present and proposed business and financial condition of the
Company and has had all such questions answered to its satisfaction and has been
supplied all information requested.
4.5 Review of Securities and Exchange Commission Filings. MSSF
-----------------------------------------------------
acknowledges that it has been provided with and has reviewed (i) a copy of the
Company's Quarterly Report for the quarter ended March 31, 1996 on Form 10-QSB
as filed with the SEC including all exhibits thereto (the "10-Q"), (ii) a copy
of the Company's current report on Form 8-K dated May 10, 1996 as filed with the
SEC including all exhibits thereto (the "8-k"); (iii) a copy of the Company's
Annual Report for the year ended December 31, 1995 as filed with the Securities
and Exchange Commission ("SEC") on Form 10-KSB, including all exhibits thereto
4
<PAGE>
(the "10-K") and (iv) a copy of the Company's Registration Statement filed with
the SEC on Form SB-2 as it was declared effective on November 13, 1995,
including all exhibits thereto (the "Registration Statement") including, without
limitation, the description of the business of the Company, and the "Risk
Factors" contained therein.
4.6 Sophisticated Investor. MSSF, and each of its general and
-----------------------
limited partner(s), has such knowledge and experience in business and financial
matters, such that they are capable of evaluating the merits and risks of
purchasing the Securities. Each of the limited partners of MSSF is an
accredited investor as that term is defined in Rule 501 of Regulation D under
the Act.
4.7 Investment Intent. (i) MSSF is acquiring the Securities for its
-----------------
own account and not on behalf of any other person; (ii) MSSF is acquiring the
Securities for investment and not with a view to the distribution thereof or
with the intent to divide its participation with others by reselling or
otherwise distributing the Securities; and (iii) MSSF will hold the Securities
and will not sell, offer to sell, or otherwise transfer or sell the Securities
in any transaction which would constitute a sale thereof under the meaning of
the Act unless the Company receives an opinion of counsel reasonably acceptable
to it (as to both counsel and the opinion) to the effect that such registration
is not necessary or such securities are registered under the Act.
4.8 Review of Odyssey Agreement MSSF has received and reviewed the
---------------------------
Odyssey Agreement (as defined in Section 5.21).
4.9. Understanding of Investment Risks. MSSF acknowledges and
---------------------------------
understands that the Securities offered hereby have not been approved or
disapproved by the SEC, or any state securities commissions, nor has the SEC or
any state securities commission passed upon the adequacy or accuracy of this
Agreement or any exhibit hereto. Prior to making an investment in the
Securities, MSSF has considered the risk factors enumerated in the Registration
Statement. MSSF understands that the indebtedness represented by the Debenture
is unsecured and is subordinated to the prior payment when due of all "Senior
Indebtedness" of the Company as provided in the Debenture and fully set forth in
Section 3.1 above; and that there will be no sinking fund established for the
retirement of the Debenture.
4.10 Understanding of Nature of Securities. MSSF acknowledges and
-------------------------------------
understands that:
(a) The Securities have not been registered under the Act or any state
securities laws and are being issued and sold in reliance upon certain of the
exemptions contained in the Act and pursuant to the exemption from registration
for limited offerings contained in the Pennsylvania Securities Act of 1972, as
amended and the regulations thereunder.
(b) The Securities are "restricted securities" as that term is
defined in Rule 144 promulgated under the Act.
5
<PAGE>
(c) The Securities cannot be sold or transferred without registration
under the Act and applicable state securities laws, unless the Company receives
an opinion of counsel reasonably acceptable to it (as to both counsel and the
opinion) that such registration is not necessary.
(d) The Securities and any certificates issued in replacement therefor
shall bear the following legend, in addition to any other legend required by law
or otherwise:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR THE SECURITIES LAWS
OF ANY STATE IN RELIANCE ON CERTAIN EXEMPTIONS FROM REGISTRATION THEREUNDER. THE
SALE, PLEDGE, HYPOTHECATION OR OTHER TRANSFER OF SUCH SECURITIES IS SUBJECT TO
COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS AND CERTAIN
RESTRICTIONS CONTAINED IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF JUNE,
1996 BETWEEN MENTOR SPECIAL SITUATION FUND, L.P. AND THE EASTWIND GROUP, INC. A
COPY OF THE SECURITIES PURCHASE AGREEMENT IN ON FILE WITH THE SECRETARY OF THE
EASTWIND GROUP.
(e) Under applicable Pennsylvania law, MSSF has a right to
rescind its purchase of the Securities as set forth below:
(i) AS A PENNSYLVANIA RESIDENT, MSSF HAS THE RIGHT TO CANCEL AND
WITHDRAW THIS SECURITIES PURCHASE AGREEMENT AND ITS PURCHASE OF SECURITIES UPON
WRITTEN NOTICE TO BE GIVEN WITHIN TWO BUSINESS DAYS FOLLOWING THE DATE OF
RECEIPT BY THE COMPANY OF MSSF'S EXECUTED SECURITIES PURCHASE AGREEMENT. UPON
SUCH CANCELLATION OR WITHDRAWAL, MSSF WILL HAVE NO OBLIGATION OR DUTY UNDER THIS
SECURITIES PURCHASE AGREEMENT AND WILL BE ENTITLED TO THE FULL RETURN OF ANY
AMOUNT PAID BY IT PURSUANT TO THIS AGREEMENT. THE UNDERSIGNED FURTHER
ACKNOWLEDGES THAT IT UNDERSTANDS THAT ANY NOTICE OF CANCELLATION OR WITHDRAWAL
SHOULD BE MADE BY TELEGRAPH OR CERTIFIED OR REGISTERED MAIL AND WILL BE
EFFECTIVE UPON DELIVERY TO WESTERN UNION OR DEPOSIT IN THE UNITED STATES MAIL,
POSTAGE OR OTHER TRANSMITTAL FEES PAID.
(ii) AS A PENNSYLVANIA RESIDENT, EXCEPT FOR THE RIGHT OF CANCELLATION
DESCRIBED IN SUBSECTION (A), MSSF MAY NOT SELL ITS SECURITIES FOR TWELVE MONTHS
FROM THE DATE OF PURCHASE AS SUCH A SALE WOULD VIOLATE SECTION 203(D) OF THE
PENNSYLVANIA SECURITIES ACT OF 1972 AND THE REGULATIONS PROMULGATED THEREUNDER.
5. Representations and Warranties of the Company. The Company hereby
----------------------------------------------
represents and warrants to MSSF as follows:
6
<PAGE>
5.1 Organization and Standing of the Company. The Company is a duly
----------------------------------------
organized and validly existing corporation in good standing under the laws of
the state of Delaware with the power and authority to conduct the business in
which it is now engaged, to own and lease its properties and to carry out the
transactions contemplated hereby and is in good standing in and qualified to do
business in such other states or jurisdictions as is necessary to enable it to
carry on its business
5.2 Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 7,000,000 shares of Common Stock, par value $.10 per share, of
which 1,903,250 shares (excluding shares held in treasury) are outstanding, and
(ii) 3,000,000 shares of preferred stock, par value $.10 per share (the
"Preferred Stock"),1,000 of which have been designated as Series A Preferred
Stock, $.10 per value per share (the "Series A Preferred Stock") and are issued
and outstanding. All of the outstanding shares of Common Stock and Series A
Preferred Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. Except as set forth in Schedule 5.2 delivered by the Company
to MSSF concurrently with the execution and delivery of this Agreement, there
are no outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon the Company for the purchase or
acquisition of any shares of capital stock of the Company or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any shares of such capital stock. Except as set forth on Schedule
5.2, the Company is not subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of the
Company or any convertible securities, rights, or options.
5.3 Corporate Power and Authority. The Company has all requisite
-----------------------------
corporate power and authority to enter into this Agreement, the Warrant, the
Debenture, the Registration Rights Agreement, and each other agreement or
instrument to be delivered by it at Closing (collectively the "Transaction
Documents") and to carry out its obligations hereunder and thereunder. The
execution, delivery and performance of the Transaction Documents and the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of the Company. When duly executed and
delivered by the Parties hereto, each Transaction Document will constitute a
valid and legally binding obligation of the Company enforceable against it in
accordance with its terms.
5.4 Securities. All of the Securities have been duly authorized by
----------
the Company. When the shares of Common Stock are issued and paid for upon the
exercise of the Warrant in accordance with the terms of the Warrant, such shares
will be validly issued, fully paid and non-assessable and will be free and clear
of all liens, claims and encumbrances and not subject to any preemptive rights..
5.5 Subsidiaries. The Company owns all of the issued and outstanding
-------------
capital stock of its two wholly-owned Subsidiaries, Polychem Corporation and
Princeton Academic Press, Inc.
5.6 Deliverables. The Company has delivered to MSSF true and correct
-------------
copies of the Company's Certificate of Incorporation and By-Laws, each as
amended to date, the
7
<PAGE>
10-K, 10-Q, 8-K and Registration Statement. The 10-K, 10-Q, 8-K and Registration
Statement are hereinafter collectively referred to as the "SEC Filings." The SEC
Filings contain, inter alia, copies of all material agreements providing for a
----------
security interest and lien on any of the Company's or its Subsidiary's assets;
all material written agreements with officers, directors or employees of the
Company; all material lease agreements to which the Company or any of its
Subsidiaries is a party, (including any requiring lease payments in excess of
$50,000 per annum) and all other material contracts to which the Company is a
party, including, without limitation, (i) all distributor and agency agreements,
(ii) all agreements for the purchase of equipment requiring payments in excess
of $200,000, and (iii) any non-compete agreements. All such agreements (together
with those described in Sections 5.13 and 5.14) are hereinafter referred to
collectively as "Material Contracts." There are no other contracts which are
material to the business, condition or results of operations of the Company
other than the Material Contracts. Each Material Contract is in full force and
effect and constitutes a legal, valid and binding obligation of the Company and,
to the Company's knowledge, the other parties thereto and, to the Company's
knowledge, neither the Company nor the other parties thereto, is in default or
breach of (with or without the giving of notice or passage of time) any such
Material Contract. As of their respective dates, the SEC Filings complied in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act, and the rules and regulations thereunder, and did not on the date
of effectiveness or filing, as the case may be, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Company has made all filings
required to be made under the Exchange Act as of the date hereof.
5.7 Financial Statements. The Company has delivered to MSSF true and
---------------------
complete copies of the Company's audited income statement and balance sheet for
year-ended December 31, 1995 (included in the SEC Filings ) and true and
complete copies of the Company's unaudited balance sheet and income statement
for the interim period ended March 31, 1996 (collectively, the "Financial
Statements"). The Financial Statements fairly and accurately present in
accordance with generally-accepted accounting principles ("GAAP") consistently
applied, the consolidated financial position of the Company and its Subsidiaries
as of their respective dates and the results of operations for the periods
covered thereby.
5.8 Reservation of Common Stock. The Company has duly authorized and
----------------------------
reserved for issuance 80,000 shares of Common Stock of the Company to cover the
exercise of the Warrant granted to MSSF hereunder.
5.9 Burdensome Restrictions. No contract, lease, agreement or other
------------------------
instrument to which the Company or any of its Subsidiaries is a party or is
bound limits the Company or any of its Subsidiaries' ability to compete in a
business, or in a geographic area or, insofar as the Company reasonably
foresees, will have, individually or in the aggregate, a material adverse affect
on the business condition (financial or otherwise) prospects or results of
operations of the Company and its Subsidiaries taken as a whole (hereinafter, a
"Material Adverse Effect".)
8
<PAGE>
5.10 Environmental Surveys. Except for an environmental survey
----------------------
obtained in connection with the acquisition of Polychem, copies of which have
been provided to MSSF, the Company is not aware of any environmental surveys
which have been conducted with regard to the Company and its Subsidiaries'
business and property interests.
5.11 Property. All real property owned by the Company or its
--------
Subsidiaries is described in the SEC Filings. All real property leased by the
Company or any of its Subsidiaries is described and all leases related thereto
are described and/or included in the SEC Filings. Each such lease is valid and
enforceable in accordance with its terms and is in full force and effect.
Neither the Company nor any Subsidiary is in default (with or without the giving
of notice or the passage of time) of its obligations under any such lease. To
the knowledge of the Company and its Subsidiaries, no other party to any such
lease is in default of its obligation thereunder nor has the Company or any of
its Subsidiaries given any written notice of default under any such lease to any
party thereto. Except as disclosed in the SEC Filings, the Company owns
outright all of its material property and assets, real, personal or mixed,
tangible or intangible, subject to no mortgages, liens, security interests,
pledges charges or other encumbrances of any kind
5.12 Litigation. Except as disclosed in the SEC Filings, there are
----------
no actions, suits, claims, investigations or arbitration proceedings
(collectively, "Claims") pending or threatened against or affecting the Company,
whether at law or in equity, whether civil or criminal in nature or whether
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, and,
to the knowledge of the Company, there is no basis for any such action, suit,
claim, investigation or proceeding. Except as set forth in Section 5.12 of the
Disclosure Schedule, there are no orders, judgments or decrees of any court or
governmental agency which apply to the Company.
5.13 Employment and Labor Agreements. All material employment,
--------------------------------
consulting, servicing or management agreements with respect to the management of
the Company or any of its Subsidiaries are described and/or included in the SEC
Filings. All collective bargaining agreements or other labor agreements
covering any employees of the Company or any of its Subsidiaries are also
described and/or included in the SEC Filings.
5.14 Licenses. All material licenses utilized by the Company and its
--------
Subsidiaries in the conduct of their business are described and/or included in
the SEC Filings.
5.15 Compliance with Laws. Except as set forth in Section 5.15 of
--------------------
the Disclosure Schedule, the Company has all governmental approvals,
authorizations, consents, licenses and permits necessary or required to conduct
its business as presently conducted or as proposed to be conducted which if not
obtained could reasonably be expected to have a Material Adverse Effect on the
Company. The Company is in material compliance with all federal, state, local
and foreign laws, ordinances, regulations and orders applicable to it, its
assets or its business as currently conducted; and all such licenses and permits
are in full force and effect and no violations exist in respect of any such
licenses or permits and no proceeding is pending or, to the best of the
Company's knowledge, threatened to revoke or limit any thereof. All real
property used in the conduct of the Company's business, and the use and
occupancy thereof, are
9
<PAGE>
in material compliance with all governmental regulations and applicable leases
and insurance requirements. The Company is in compliance with the provisions of
all federal, state and local laws relating to pollution or protection of the
environment applicable to it or to real property leased by it or to the use,
operation or occupancy thereof, except for violations or liabilities which
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect. The Company has not engaged in any activity in
violation of any provision of any federal, state or local law relating to
pollution or protection of the environment, which violation could reasonably be
expected to have a Material Adverse Effect. The Company has no liability,
absolute or contingent, under any federal, state or local law relating to
pollution or protection of the environment, except for liabilities which
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect.
5.16 Taxes. Except as provided in Section 5.16 of the Disclosure
-----
Schedule, all federal, state and local tax returns and tax reports required to
be filed by the Company have been filed with the appropriate governmental
agencies in all jurisdictions in which such returns and reports are required to
be filed and all of the foregoing are true, correct and complete. All federal,
state, local and foreign income, profits, franchise, sales, use, occupation,
property, excise, payroll, withholding and other taxes (including interest and
penalties) required to have been paid or accrued by the Company have been fully
paid or are adequately provided for in the Financial Statements for the quarter
ended March 31, 1996 (the "March Financial Statements"). No issues have been
raised (and are currently pending) by the Internal Revenue Service or any other
taxing authority in connection with any of the returns and reports referred to
above. The Company has not waived any statute of limitations with respect to
taxes or agreed to any extension of time with respect to any tax assessment or
deficiency. All tax deficiencies asserted or assessments (including interest
and penalties) made have been fully paid or are adequately provided for in the
Financial Statements and no proposed (but unassessed) additional taxes, interest
or penalties have been asserted. The provisions for taxes in the March
Financial Statements are sufficient for the payment of all accrued and unpaid
federal, state or local and foreign taxes as of such date. The Company has not
made any election or filed any consent pursuant to Section 341(f) of the Code
relating to collapsible companies.
5.17 Intellectual Property. (i) Section 5.17 of the Disclosure
---------------------
Schedule sets forth a true and complete list and summary description of all
patents, registered or common law trademarks, trade names, service marks,
licenses and copyrights and applications for any of the foregoing (collectively,
"Intellectual Property") owned by or licensed to the Company or its
Subsidiaries, which constitutes all the Intellectual Property necessary for use
in the United States and in such other jurisdictions as is necessary for the
conduct of the business of the Company and its Subsidiaries as presently
conducted. Except as disclosed in Section 5.17 of the Disclosure Schedule, the
Company owns, or has the right to use for the term set forth in Section 5.17 of
the Disclosure Schedule, without payment to or interference from any other
party, all Intellectual Property listed in Section 5.17 of the Disclosure
Schedule and has not authorized any person in any jurisdiction to use any such
Intellectual Property. All Intellectual Property listed in Section 5.17 of the
Disclosure Schedule which may be so registered or filed has been duly registered
and filed in or issued by the appropriate governmental agency in the
jurisdictions indicated, all necessary affidavits of continuing use have been
filed, and all necessary
10
<PAGE>
maintenance fees have been paid to continue all such rights in effect. Except as
set forth in Section 5.17 of the Disclosure Schedule, the Company has no notice
or knowledge of any objection or claim being asserted by any person with respect
to the ownership, validity, enforceability or use of any Intellectual Property
listed in Section 5.17 of the Disclosure Schedule or challenging or questioning
the validity or effectiveness) of any such license, and has not received any
such notice within the last five years.
5.18 Insurance. Schedule 5.18 lists all insurance of any nature
---------
maintained by the Company and its Subsidiaries, as well as a summary of the
terms of such insurance. All applicable premiums have been paid by the Company
or its Subsidiaries and no premiums are currently past due.
5.19 Use of Proceeds. The net cash proceeds received by the Company
---------------
from the sale of the Debenture and Warrant shall be used by the Company for the
acquisition of businesses, assets or product lines and for working capital
purposes.
5.20 Agreements Affecting the Company's Common Stock. Except as
-----------------------------------------------
disclosed on Schedule 5.20 and except for the Registration Rights Agreement and
Odyssey Agreement (as defined below), there are no agreements, written or oral,
between the Company and any record owner of its capital stock or, to the
knowledge of the Company, among any record owners of its capital stock, relating
to the acquisition, disposition, registration or voting of its capital stock.
True and correct copies of the agreements listed on Schedule 5.20 have been
provided to MSSF.
5.21 Odyssey Agreement. On May 10, 1996, the Company entered into a
-----------------
Securities Purchase Agreement with Odyssey Capital Group, L.P. ("Odyssey")
pursuant to which the Company issued 1,000 shares of its Series A Preferred
Stock and a Warrant to purchase 220,000 shares of Common Stock to Odyssey in
exchange for $1,000,220. The company has delivered to MSSF true and correct
copies of the Odyssey Securities Purchase Agreement and all exhibits and
schedules related thereto (collectively, the "Odyssey Agreement").
5.22 Absence of Undisclosed Liabilities; Past Due Liabilities.
--------------------------------------------------------
Except as disclosed in the March Financial Statements or arising in the ordinary
course of business since March 31, 1996 or listed in Section 5.22 of the
Disclosure Schedule, (a) the Company had no material liability of any nature
(matured or unmatured, fixed or contingent), required to be provided for or
disclosed on a balance sheet prepared in accordance with generally accepted
accounting principles, which was not provided for or disclosed in the March
Financial Statements, and (b) all liability reserves established by the Company
in the March Financial Statements were adequate in all material respects.
Except as listed in Section 5.22 of the Disclosure Schedule, there were no loss
contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March,
1975) which were not adequately provided for in all material respects in the
Financial Statements. Section 5.22 of the Disclosure Schedule contains a list
of (i) the Company's past due liabilities and (ii) the Company's liabilities to
be paid effective as of the Closing.
11
<PAGE>
5.23 Related Transactions. Except as set forth in the SEC Filings,
--------------------
no current or former partner, shareholder, director, officer or key employee of
the Company and no affiliate or member of the Immediate Family (as hereinafter
defined) of any such person, is directly or indirectly, through his affiliation
with any other person or entity, a party to any transactions with the Company
(other than as an employee) providing for the furnishing of services by or to,
or rental of real or personal property from or to, or otherwise requiring cash
payments to or by any such person or any such person's affiliates or members of
his Immediate Family (any such transaction being hereinafter referred to as a
"Related Transaction"). As used herein, the term "Immediate Family" shall have
the meaning given thereto in Item 404 of Regulation S-K promulgated under the
Securities Act.
5.24 ERISA. Section 5.24 of the Disclosure Schedule contains a true
-----
and complete list of each employee benefit plan, as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other bonus, severance or termination pay, stock option or stock purchase,
incentive pay or other plan, program or arrangement covering present or former
employees of the Company which is maintained or contributed to by the Company or
any of its subsidiaries (the "Plans"). None of the Plans is subject to the
provisions of Title IV of ERISA, and none of the Plans is a multi-employer Plan
as defined in Section 3(37) of ERISA (a "Multiemployer Plan"). The Company has
not incurred (directly or indirectly) any liability to the Pension Benefit
Guaranty Corporation or with respect to a Multiemployer Plan. None of the Plans
is subject to the minimum funding standards set forth in Section 302 of ERISA or
Section 412 of the Internal Revenue Code of 1986, as amended (the "Code"). None
of the Company or any of its officers or employees has engaged in a "prohibited
transaction" as defined in Section 406 of ERISA or Section 4975 of the Code with
respect to any Plan which would subject any of such parties to a civil penalty
under section 502(i) of ERISA or an excise tax under Section 4975 of the Code.
Each of the Plans has been operated in all material respects in accordance with
applicable law, including ERISA and the Code. None of the Plans is an employee
welfare plan, as defined in Section 3(1) of ERISA, which provides health or life
insurance benefits to employees of the Company following their retirement (other
than coverage mandated by applicable law). Each Plan that is intended to be
qualified under Section 401(a) of the Code is so qualified.
5.25 No Consent or Approval Required. No consent of any person and,
-------------------------------
except for approvals required under state securities or blue sky laws (all of
which have been obtained), no consent, approval or authorization of, or
declaration to or filing with, any governmental or regulatory authority is
required for the valid authorization, execution, delivery and performance by the
Company of this Agreement, the Debenture, the Warrant or the Registration Rights
Agreement or for the valid authorization, issuance, sale and delivery of the
Debenture, the Warrant or the Exercise Shares pursuant hereto or thereto other
than those consents, approvals, authorizations, declarations or filings which
have been obtained or made.
5.26 Disclosure. Neither this Agreement nor any other document,
----------
certificate or written statement furnished to MSSF by or on behalf of the
Company in connection with the transactions contemplated hereby contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not
12
<PAGE>
misleading in light of the circumstances in which they were made. There is no
fact which materially adversely affects, or in the future may, insofar as the
Company now foresees, materially adversely affect the business, operations,
affairs, prospects, condition, properties or assets of the Company which has not
been set forth in this Agreement or in the other documents, schedules,
certificates, instruments or statements furnished to MSSF by or on behalf of the
Company pursuant hereto.
5.27 Brokers. The Company has not, nor have any of the officers,
-------
directors, employees or stockholders of the Company, employed any broker or
finder in connection with the transactions contemplated by this Agreement.
5.28 Private Offering. Assuming the accuracy of MSSF's
----------------
representations set forth in Section 4 herein, the offer and sale of the
Debenture and the Warrant hereunder is exempt from the registration and
prospectus delivery requirements of the Securities Act. Neither the Company nor
any person acting on behalf of it has taken or will take any action which would
subject the offering and issuance of any of such securities to the provisions of
Section 5 of the Securities Act or to the provisions of any securities law, rule
or regulation of any applicable jurisdiction.
5.29 Equity Investments. Except for the Subsidiaries and as
------------------
disclosed in the SEC Filings, the Company has never had, nor does it presently
have, any subsidiaries, nor has it owned, nor does it presently own, any capital
stock or other proprietary interest, directly or indirectly, in any company,
association, trust, partnership, joint venture or other entity.
5.30 Conflicts. Subject to the receipt of the consents or approvals
---------
set forth in Section 5.30 of the Disclosure Schedule, the execution and delivery
of the Transaction Documents by the Company do not, and the consummation by the
Company of the transactions contemplated hereby and thereby will not, the
issuance and sale of the Exercise Shares, Debenture and the Warrant will not,
and the performance by the Company of its obligations under the terms of the
Transaction Documents will not, result in or constitute: (i) a default, breach
or violation of or under the Certificate of Incorporation or the By-laws of the
Company, or (ii) a default, breach or violation of or under any mortgage, deed
of trust, indenture, note, bond, license, lease agreement or other instrument or
obligation to which the Company is a party or by which any of their properties
or assets are bound, except for any defaults, breaches or violations which would
not have a Material Adverse Effect, or (iii) a violation of any statute, rule,
regulation, order, judgment or decree of any court, public body or authority by
which the Company or any of its properties or assets are bound, except for any
violations which would not have, individually or in the aggregate, a Material
Adverse Effect, or (iv) an event which (with notice or lapse of time or both)
would permit any person to terminate, accelerate the performance required by, or
accelerate the maturity of, any indebtedness or obligation of the Company under
any agreement or commitment to which the Company is a party or by which the
13
<PAGE>
Company is bound or by which any of its properties or assets are bound, except
for any accelerations or terminations which would not have, individually or in
the aggregate, a Material Adverse Effect, or (v) the creation or imposition of
any lien, charge or encumbrance on any property of the Company under any
agreement or commitment to which the Company is a party or by which the Company
is bound or by which any of its respective properties or assets are bound,
except for any liens, charges or encumbrances which would not have, individually
or in the aggregate, a Material Adverse Effect, or (vi) an event which would
require any consent under any agreement to which the Company is a party or by
which the Company is bound or by which any of its respective properties or
assets are bound, except for any consents which, if not received, would not
have, individually or in the aggregate, a Material Adverse Effect.
5.31. Absence of Changes. Except as disclosed in this Agreement
------------------
(including any Section of the Disclosure Schedule), since March 31, 1996 there
has not been (a) any material adverse change in the financial condition, results
of operations, assets, liabilities or business of the Company, (b) any borrowing
or agreement to borrow any funds or any material liability or obligation of any
nature whatsoever (contingent or otherwise) incurred by the Company, other than
the current liabilities or obligations incurred in the ordinary course of
business, (c) any asset or property of the Company made subject to any lien of
any kind material to the business, property or assets of the Company, (d) except
for adequate consideration, any waiver of any valuable right of the Company,
which waiver or cancellation of any debt or claim held by the Company is
disclosed in Section 5.31 of the Disclosure Schedule, (e) any payment of
dividends on, or other distributions with respect to, or any direct or indirect
redemption or acquisition of, any shares of the capital stock of the Company, or
any agreement or commitment therefore, (f) any issuance of any stock, bonds or
other securities of the Company or options, warrants or rights or agreements or
commitments to purchase or issue such securities or grant such option, warrants
or rights (except for the Odyssey Agreement and the sale of 200,000 Shares of
Common Stock and 250,000 Common Stock Purchase Warrants to Clifton Capital,
Ltd.), (g) any mortgage, pledge, sale, assignment or transfer of any tangible or
intangible assets of the Company, except with respect to tangible assets, in
the ordinary course of business, (h) any loan by the Company to any officer,
director, employee or shareholder of the Company, or any agreement or commitment
therefor, (i) any damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the assets, property or business
of the Company, (j) any extraordinary increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee or agent of the
Company or (k) any change in the accounting methods or practices followed by the
Company.
6. Affirmative Covenants of the Company. From and after the Closing Date
-------------------------------------
and so long as MSSF is owed any principal with respect to the Debenture, unless
MSSF shall otherwise consent in writing, which consent shall not be unreasonably
withheld, the Company hereby covenants and agrees as follows:
6.1 Annual Budget. With respect to each fiscal year of the
-------------
Company, the Company shall prepare and deliver to MSSF a budget with monthly
breakdowns for each fiscal year not less than 30 days prior to the beginning of
such fiscal year, which budget shall include projected balance sheets, projected
profit and loss and projected cash flow statements on a monthly basis for the
coming fiscal year, together with a description of all underlying assumptions
made in or with respect to such budget and a brief qualitative description of
the budget by the Company's Chief Financial Officer in support thereof. The
budget shall be accepted as the budget for such fiscal year when it has been
approved by the Board of Directors
14
<PAGE>
of the Company. The budget shall be reviewed by the Company periodically and all
material changes therein shall be resubmitted to the Board of Directors in
advance and shall be accepted when approved by the Board of Directors. The
budget for the current fiscal year and the budgets to be hereafter delivered to
MSSF under this Section 6.1 are sometimes referred to herein as the "Annual
Budget."
6.2. Monthly Financial Statements. As soon as available and in any
----------------------------
event within 25 days after the end of each month in each fiscal year, Company
shall deliver to MSSF a consolidated statement of income and a consolidated
statement of cash flows of the Company and its Subsidiaries for such month, and
a consolidated balance sheet of the Company and its Subsidiaries as of the end
of such month, prepared in accordance with GAAP and setting forth in each case
in comparative form figures for the corresponding period in the preceding fiscal
year, all in reasonable detail and certified by an authorized financial officer
of the Company, subject to changes resulting from year-end adjustments. The
monthly financial statements delivered to MSSF shall be accompanied by a
narrative analysis of the Company's operations for the corresponding month
prepared by the Company's chief financial officer.
6.3 Independent Audit. As soon as available and in any event within
------------------
105 days after the end of each fiscal year, a consolidated balance sheet, a
consolidated statement of income and a consolidated statement of cash flows of
the Company and its Subsidiaries as of the end of such year, setting forth in
each case in comparative form corresponding consolidated figures from the
preceding annual audit, all in reasonable detail and together with an opinion
directed to the Company of independent accountants of recognized standing
selected by the Company provided, however, that delivery of a copy of the Annual
Report on Form 10-KSB or Form 10-K (or successor forms) of the Company for such
fiscal year filed with the SEC shall be deemed to satisfy the requirements of
this Section 6.3.
6.4 Financial Controls. The Company shall maintain financial
-------------------
control and reporting systems in conformance with GAAP and in compliance with
the requirements of SEC Regulation S-X.
6.5 Access to Records. The Company shall afford to MSSF and its
-----------------
authorized employees, counsel, accountants and other representatives, free and
full access, at all reasonable times, to all of the books, records and
properties of the Company and each of its Subsidiaries (if any) and to all
officers and directors of the Company and each of its Subsidiaries (if any) and
those other employees of the Company and its Subsidiaries (if any) having
responsibility for financial or accounting matters generally, for any reasonable
purpose whatsoever.
6.6 Miscellaneous. Any other financial or other information that
-------------
MSSF shall have reasonably requested shall be provided to MSSF on a timely basis
and financial or other information furnished to members of the Board of
Directors shall be provided to MSSF at the same time it is furnished to the
members of the Board of Directors.
6.6 Notices. The Company shall provide MSSF with written notice
--------
signed by the President and Chief Financial Officer of any material litigation,
disputes, labor controversies,
15
<PAGE>
defaults or other events which have had or may have a Material Adverse Effect as
soon as practicable after the occurrence thereof but in no event later than 10
days thereafter.
6.7 SEC Reports; Stockholder Communications. The Company shall
-----------------------------------------
provide MSSF with copies of all reports, registration statements, proxy
statements, press releases or other forms filed with the Securities and Exchange
Commission, and all written communications sent to its stockholders,
concurrently with the filing thereof or delivery to stockholders, as applicable.
6.8 Board of Directors. The Company shall make a proposal at its
------------------
next annual meeting of stockholders to amend the Company's By-Laws and/or
Certificate of Incorporation, as the Company deems necessary in order to
increase the size of the Board of Directors of the Company by one to permit
Edward F. Sager, Jr. to be elected to the Board of Directors, and shall use its
best efforts to cause such proposal to be adopted and to obtain any consents
that may be necessary for such increase under the Voting Agreement and Sector
Securities Purchase Agreement described on Schedule 5.20 hereto. The Company
shall nominate Edward F. Sager, Jr. to serve as a Director of the Company at the
next annual meeting of stockholders and shall nominate Mr. Sager for election as
a director at each annual or special meeting of the Stockholders held thereafter
for as long as MSSF is owed any principal under the Debenture. Upon Mr.
Sager's election as a Director of the Company, he shall be entitled to receive
stock options under the Company's Non-Employee Directors Stock Option Plan.
During any period in which Edward F. Sager, Jr. is not serving as a director of
the Company and during which MSSF is owed any principal under the Debenture, he
shall have the right to attend each Board meeting as an observer and the Company
shall give him the same notice of meetings that is given to the directors and
copies of the minutes of each meeting.
6.9 Preemptive Rights. In the event that the Company proposes to
------------------
offer any "New Securities" in any "Private Placement Transaction", the Company
shall grant to MSSF the right to purchase, on the same terms and conditions and
prices as other purchasers of securities in such a Private Placement
Transaction, an amount of securities in any such offering equal to its "Pro
Rata Share" so as to maintain its fully diluted ownership interest in the
Company immediately prior to such Private Placement Transaction. "Pro Rata
Share" shall mean the ratio that the sum of the number of shares of Common Stock
(including the shares of Common Stock issuable upon exercise of the Warrant)
held by MSSF immediately prior to such Private Placement Transaction bears to
the sum of the total number of shares of Common Stock then outstanding and the
number of shares of Common Stock issuable upon exercise or conversion of any
outstanding warrants, convertible securities or other rights to acquire Common
Stock. "Private Placement Transaction" shall mean an offering by the Company of
New Securities pursuant to exemptions from registration under Section 4(2) of
the Act and/or Regulation D thereunder and shall not include any issuance of New
Securities in exchange for securities of any company or in connection with the
acquisition of assets constituting the purchase of an ongoing business. "New
Securities" shall mean any equity securities of the Company or warrants, rights,
options or other securities convertible into or exercisable for equity
securities of the Company offered in any Private Placement Transaction. In the
event that the Company proposes to undertake an offering of its New Securities
in a Private Placement Transaction, the following provisions shall apply:
16
<PAGE>
(a) The Company shall give MSSF written notice of its intention to
offer its securities in a Private Placement Transaction, describing the type of
New Securities, and the price and general terms upon which the Company proposes
to issue the New Securities. MSSF shall have ten (10) days from the date of
receipt of any such notice to agree to purchase up to its Pro-Rata Share of such
New Securities for the price and upon the general terms specified in the notice
by giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
(b) In the event that MSSF fails to notify the Company within the
aforementioned ten (10) day period of its intention to purchase New Securities
in such a Private Placement Transaction, the Company shall have ninety (90) days
thereafter to sell or enter into an agreement (pursuant to which the sale of the
New Securities covered thereby shall be closed, if at all, within one hundred
twenty (120) days from the date of said agreement) to sell the New Securities
not elected to be purchased by MSSF at the price and upon the general terms no
more favorable to the purchasers of such New Securities than specified in the
Company's notice. In the event the Company has not sold the New Securities or
entered into an agreement to sell the New Securities within the ninety (90) day
period referenced above (or sold and issued New Securities in accordance with
the foregoing within the one hundred twenty (120) day period set forth above),
the Company shall not thereafter issue or sell any New Securities without first
re-offering such New Securities to MSSF in the manner provided above.
7. Negative Covenants of the Company. For so long as MSSF is owed any
----------------------------------
principal with respect to a Debenture, MSSF's consent, which shall not be
unreasonably withheld, shall be required for each of the following:
7.1 Merger; Consolidation; Recapitalization. Any merger,
-----------------------------------------
consolidation or recapitalization of the Company, or any Subsidiary, other than
any merger, consolidation or recapitalization in which at least a majority of
the Board of Directors of the Company or such Subsidiary prior to any such event
continue to serve as directors of the surviving entity after any such event.
7.2 Liquidation or Sale of Assets. Any liquidation or sale of all
-------------------------------
or substantially all of the assets of the Company or any Subsidiary.
7.3 Redemption or Repurchase Securities. The Company's redemption
------------------------------------
or repurchase of any securities of the Company or payment of dividends with the
exception of (a) those securities which the Company is obligated or potentially
obligated to redeem or repurchase pursuant to the terms of any agreement to
which the Company is a party on the Closing Date as set forth on Schedule 7.3;
(b) the payment of regularly scheduled mandatory dividends on the shares of
Series A Preferred Stock; (c) the redemption of the Shares of Series A Preferred
Stock issued to Odyssey pursuant to the Odyssey Agreement; or (d) the
fulfillment of its obligations under any net exercise provision under any
outstanding warrants or Stock Option Plan (which obligations do not require the
payment of any money by Company), provided, however, that notwithstanding the
-------- -------
foregoing, in no event shall the Company pay any dividends on, redeem,
repurchase or otherwise acquire its Series A Preferred Stock or any other
securities
17
<PAGE>
during any period of time in which an event of default has occurred under the
Debenture until such default is cured or MSSF consents to such payment or
repurchase.
8. Tagalong Rights. Except for sales of Excluded Shares (as hereinafter
----------------
defined), in the event that Paul A. DeJuliis or John R. Thach sell shares of
Common Stock of the Company to any person, other than sales of shares of Common
Stock in a "broker's transaction" (as that term is defined in Rule 144 under the
Act), he or they must offer MSSF the opportunity to participate in any such sale
by granting MSSF the opportunity to sell that number of shares constituting
the same percentage of MSSF's ownership in the Company as that percentage of the
ownership interest being sold by either Paul A. DeJuliis or John R. Thach. In
other words, if Paul A. DeJuliis intends to sell 10% of the Common Stock he owns
in the Company, then MSSF will have the opportunity to sell 10% of the Exercise
Shares that it owns in the same transaction. In such event, Mr. Thach or Mr.
DeJuliis, as applicable, shall provide MSSF with written notice of the proposed
sale at least five (5) days prior to the closing of the proposed sale. MSSF
will then have five (5) days in which to provide written notice to Mr. DeJuliis
or Mr. Thach, as applicable, of its intent to participate in the proposed sale
pursuant to the terms set forth above. If MSSF fails to notify Mr. DeJuliis or
Mr. Thach, as applicable, within this five (5) day period, it will have waived
its right under this Section 8 to participate in the proposed sale. Excluded
shares shall mean any shares of Common Stock of the Company issued to either
Paul A. DeJuliis or John R. Thach upon the exercise of the Company's outstanding
Class A-1 Common Stock Purchase Warrants and Options under any Stock Option Plan
of the Company.
9. Legal Fees. The Company shall be responsible for the legal fees and
-----------
costs incurred by MSSF in connection with the negotiation and review of this
Agreement and all exhibits hereto and any amendments hereto or thereto up to a
maximum of $10,000. Any legal fees payable hereunder shall be paid by the
Company at Closing upon the Company's receipt of a bill for services rendered by
counsel to MSSF and only for the services described in the preceding sentence.
10. Rule 144. The Company shall comply with all reporting requirements of
--------
the Exchange Act (whether or not it shall otherwise be required to do so), and
shall comply with all other public information reporting requirements of the SEC
that are required as a condition to the availability of an exemption from the
Securities Act (under Rule 144 thereof, as amended from time to time, or
successor rule thereto or otherwise) for the sale of the Exercise Shares without
registration. The Company shall cooperate with MSSF in supplying such
information as may be necessary for MSSF to complete and file any reporting
forms required by the Commission as a condition to the availability of an
exemption from the Securities Act (under Rule 144 thereof or otherwise) for the
sale of the Exercise Shares by MSSF without registration.
11. Notices. All notices, requests, consents or other communications
-------
required or permitted hereunder shall be in writing and shall be hand delivered
or mailed first class postage prepaid, registered or certified mail, to the
following addresses:
18
<PAGE>
If to the Company:
The Eastwind Group, Inc.
100 Four Falls Corporate Center
Suite 305
West Conshohocken, PA 19428
Attention: Paul A. DeJuliis
Chairman of the Board & C.E.O.
With a copy to:
Joseph P. Galda, Esquire
Buchanan Ingersoll, P.C.
Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
and
Peter O. Clauss, Esquire
Clark, Ladner, Fortenbaugh & Young
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
If to MSSF:
Mentor Special Situation Fund, L.P.
P.O. Box 560
Yardley, Pa 19067
Attention: Edward F. Sager, Jr.
With copy to:
Robert H. Strouse, Esquire
Drinker, Biddle & Reath
Suite 300
100 Westlakes Drive
Philadelphia, PA 19312-2409
Such notices and other communications shall for all purposes of this
Agreement be treated as being effective upon being delivered personally or, if
sent by mail, five days after it has been deposited in a regularly maintained
receptacle for the deposit of United States Mail, addressed as set forth above,
and postage prepaid.
19
<PAGE>
11. Survival of Representations and Warranties. Representations and
------------------------------------------
warranties contained therein shall survive the execution and delivery of this
Agreement.
12. Parties in Interest. All the terms and provisions of this Agreement
-------------------
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and permitted assigns of the parties hereto, provided that
this Agreement and the interests herein may not be assigned by either party
without the express written consent of the other party.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
that States conflict of laws provisions.
14. Sections and Other Headings. The section and other headings contained
---------------------------
in this Agreement are for the convenience of reference only, do not constitute
part of this Agreement or otherwise affect any of the provisions hereof.
15. Counterpart Signatures. This Agreement may be signed in counterpart
----------------------
and all counterparts together shall become effective only when the
counterpart(s) have been executed and delivered by and on behalf of the Company
and the MSSF.
16. Assignability. This Agreement is assignable by either of the Parties
--------------
hereto provided, however, that MSSF's rights under Sections 6.8, 6.9 and 8 shall
not be assignable.
17. Entire Agreement. This Agreement and Amendments hereto represent the
-----------------
entire agreement among the Parties with respect to the subject matter hereof and
supersede all prior arrangements or understandings with respect thereto.
20
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have
caused this Agreement to be signed by their duly authorized officers.
MENTOR SPECIAL SITUATION FUND, L.P.
By: Mentor Partners, its General Partner
By:
-----------------------------------
Edward F. Sager, Jr., General
Partner
THE EASTWIND GROUP
By:
-----------------------------------
Paul A. DeJuliis, Chairman of the
Board & C.E.O.
PAUL A. DEJULIIS, solely for the purpose of being bound
by of Section 8 of the Agreement.
By:
-----------------------------------
Signature
JOHN R. THACH, solely for the purpose of being bound by
of Section 8 of the Agreement.
By:
-----------------------------------
Signature
21
<PAGE>
Exhibit 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this SB-2
Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
July 12, 1996
<PAGE>
[LETTERHEAD OF KREISCHER MILLER & CO. APPEARS HERE]
EXHIBIT 23.2
Consent Of Independent Public Accountants
-----------------------------------------
To the Stockholders and Directors
The Eastwind Group, Inc.
Conshohocken, Pennsylvania
We hereby consent to the use in this Registration Statement of our report,
dated May 26, 1995, relating to the consolidated financial statements of The
Eastwind Group, Inc. and subsidiary, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
Kreischer, Miller & Co.
Horsham, Pennsylvania
July 12, 1996
