SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(X ) Filed by the Registrant
( ) Filed by a Party other than the Registrant
Check the appropriate box:
(X ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12
J.A. INDUSTRIES, INC.
(Name of Registrant as Specified In Its Charter)
J.A. INDUSTRIES, INC.
(Name of Person(s) Filing Proxy Statement If Other Than Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
( ) $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
(Set forth the amount on which the filing fee is calculated and state how
it was determined)
(X) Fee previously paid with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[Preliminary Proxy Statement]
J.A. Industries, Inc.
34A-2755 Lougheed Highway
Port Coquitlam, B.C. V3B 5Y9 Canada
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Meeting Date: , 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of J.A.
INDUSTRIES, INC. a Delaware corporation ("Company" or "JA"), will be held at the
offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., at
2500 First Union Capitol Center Raleigh, North Carolina 27601 on , 1996 at 8:00
a.m. in the forenoon, for the following purposes:
1. To consider and vote upon a proposal to approve and
adopt an Agreement and Plan of Merger by and among
the Company, J.A. Industries of North Carolina,
Inc., a newly formed wholly owned subsidiary of the
Company ("Sub") and Kenmar Business Groups, Inc.
("Kenmar") (the "Merger Agreement") and the
transactions contemplated thereby. The Merger
Agreement provides for a reverse triangular merger
whereby Kenmar will become a wholly-owned subsidiary
of JA. Pursuant to the Merger Agreement each share
of Kenmar's common stock shall be converted into the
right to receive 41 shares (subject to adjustment)
of unregistered common stock of the Company (the
"Exchange Ratio"). The Exchange Ratio shall be a
number that upon consummation of the merger will
result in the Kenmar stockholders owning an
aggregate number of shares of the Company equal to
50 percent of the Company's issued and outstanding
shares. The Exchange Ratio will be adjusted at the
consummation of the merger. The Company's common
stock issued and exchanged for the Kenmar common
stock is referred to collectively herein as the
("Merger Consideration"). Contemporaneously with
the issuance of the Merger Consideration, the
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Company shall grant to Kenmar an option to acquire 750,000
shares of its Common Stock for an aggregate purchase price of
one dollar upon the occurrence of a breach of any
representation, warranty, covenant or other obligation of the
Company under the Merger Agreement.
2. To elect (5) directors of the Company for the
ensuing year.
3. To approve an amendment to the Company's Certificate
of Incorporation to provide for a change in name to
Electronic Manufacturing Services Group, Inc.
4. To approve a 1 for 4 reverse stock split of each
outstanding share of the Company's Common Stock.
5. To transact such other business as may properly come
before the meeting.
Please fill out, sign and mail the enclosed form of proxy, whether or not you
expect to be present at the Special Meeting. A self-addressed envelope is
enclosed for your convenience.
By Order of the Board of Directors
PORT COQUITLAM, B.C. ROBERT KNIGHT, PRESIDENT
, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN,
DATE AND RETURN THE PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED
IN THE UNITED STATES.
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION SET FORTH ELSEWHERE IN
THIS PROXY STATEMENT AND IS NOT INTENDED TO BE COMPLETE. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT, THE ACCOMPANYING APPENDICES AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE.
THE COMPANIES
J.A. INDUSTRIES, INC. The Company was organized under the laws of the State of
Delaware in 1987 and presently has no operations. As of March 31, 1996 the
Company had no assets. The principal executive offices of the Company are
located at 34A-2755 Lougheed Highway #522, Port Coquitlam, B.C. V3B 5Y9 Canada
and its telephone number is (604) 941-3413.
J.A. INDUSTRIES OF NORTH CAROLINA, INC. Sub was organized under the laws of the
State of North Carolina in January 1996 and presently has no operations. As of
March 31, 1996 Sub had no assets. The principal executive offices of Sub are
located at 34A- 2755 Lougheed Highway #522, Port Coquitlam, B.C. V3B 5Y9 Canada
and its telephone number is (604) 941-3413.
KENMAR BUSINESS GROUPS, INC. Kenmar was organized under the laws of the State of
North Carolina in 1984 and is a contract provider of manufacturing services to
the electronics industry. As of February 29, 1996 Kenmar had total assets of
$3,069,000. The principal executive offices of Kenmar are located at 6638 Old
Forest Wake Road, Raleigh, North Carolina and its telephone number is (919)
876-6049.
Kenmar provides manufacturing services to original equipment
manufacturers ('OEM's') in the electronics industry, including producers of
industrial controls, computers & peripherals and instrumentation. Primary
services include materials procurement, printed circuit card and chassis
assembly, and testing. Kenmar has approximately 20 customers, 6 of which
accounted for 79% of its sales for the six months ending February 29, 1996.
Prior to the loss of its largest
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customer in 1995, Kenmar conducted its operations in 42,000 square feet of flex
space with 85 employees. Since such loss, steps have been taken to size the
operations to more closely match the revenue without losing its key employees
and skills required to regrow the business. To date, this has caused Kenmar to
incur losses from operations for fiscal 1996. Kenmar currently operates one
facility in Raleigh, North Carolina with approximately 40 employees in 21,000
square feet of flex space. Operations are near 40% capacity with one shift
active.
SPECIAL MEETING
A Special meeting of Shareholders of the Company will be held on , 1996
at 8:00 a.m. local time at the offices of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P. at 2500 First Union Capitol Center Raleigh, North
Carolina 27601 at which time the shareholders of the Company will be asked to
approve the Merger Agreement and the transactions contemplated thereby; elect
directors, amend the Company's Certificate of Incorporation and approve a 1 for
4 reverse stock split. The record holders of the Company's common stock at the
close of business on March 15, 1996 (the "Record Date") are entitled to notice
of and to vote at the special meeting. On the Record Date, there were
approximately 305 holders of record of the Company's common stock and 9,417, 304
shares of Company common stock outstanding.
The affirmative vote of the holders of a majority of the
outstanding shares of the Company's common stock present at the meeting is
required to approve the Merger Agreement and other proposals presented herein.
Directors will be elected by a plurality of the votes cast. It is expected that
all of the 307,259 shares of the Company's common stock beneficially owned by
the directors and executive officers of the Company and their affiliates at the
Record Date will be voted for the proposals set forth herein.
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Effective Time of the Merger
The Merger will become effective upon the filing of properly
executed Articles of Merger relating thereto with the Secretary of the State of
North Carolina, or at such later time as may be specified therein. See "The
Merger-Effective Time of the Merger".
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information 1
Incorporation of Certain Documents by Reference 1
Information Concerning the Special Meeting
Summary i
Date, Place and Time of Special Meeting ii
Voting; Revocation of Proxy 2
Solicitation of Proxies 2
Quorum and Vote Required 2
Dissenters' Rights 3
Proposal One - Approval of the Merger 5
Approval Sought 5
History of JA 6
Background of the Merger 6
Terms of the Merger 8
Business of Kenmar 9
Recommendation of the Board of Directors 11
Additional Terms of the Merger Agreement 12
Issuance of Restricted Shares 16
Registration Rights 18
Effective Time of the Merger 19
Accounting Treatment 19
Federal Income Tax Consequences 19
Rights of Dissenting Stockholders 21
Option Agreement 23
Selected Financial Data for the Company and Kenmar 23
JA 23
Kenmar 25
Per Share Data 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
JA 27
Liquidity 29
Notes Payable and Long Term Debt 31
Results of Operations 36
Kenmar 40
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Results of Operations 40
Liquidity and Capital Resources 42
Statements of Income 44
Proposal Two - Election of Directors 47
Nominees 47
Executive Compensation 48
Security Ownership of Certain Beneficial
Owners and Management 51
Principal Stockholders (post merger) 52
Common Stock of the Company 53
Market Price Information 53
Dividend Policy 54
Post Meeting Financing 54
Proposal Three - Approval of Amendment to
Certificate of Incorporation 55
Description of Capital Stock of the Company 55
Proposal Four - Reverse Stock Split 56
Financial Statements 56
Presence of Accountants at Special Meeting 57
Stockholder's Proposals 57
Other Matters 58
EXHIBITS
Section 262 of the Delaware General Corporation
Law - Appraisal Rights A
Agreement and Plan of Merger B
Option Agreement C
Proposed Amendment to Certificate of Incorporation D
Financial Statements E
</TABLE>
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AVAILABLE INFORMATION
JA is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files proxy statements, reports and other information with the
Securities and Exchange Commission (the "Commission"). Proxy statements, reports
and other information concerning JA can be inspected and copied at Room 1024 of
the Commission's offices at 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices in New York (7 World Trade Center, 13th
Floor, New York, New York 10048) and in Chicago (Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661). Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement and, if given or made, such
information or representation should not be relied upon as having been
authorized. Neither the delivery of this Proxy Statement, nor any distribution
of the securities issuable in connection with the Merger Agreement, shall, under
any circumstances, create any implication that there has been no change in the
information concerning JA contained in this Proxy Statement since the date of
such information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange
Commission by the Company pursuant to the Exchange Act accompany this Proxy
Statement:
1. Form 10-KSB/A for its fiscal year ended June
30, 1995;
2. Form 10-QSB/A for the quarters ended September
30 and December 31, 1995;
3. Forms 8-K dated June 30, July 18 and September
15, 1995 and January 26, 1996.
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SOLICITATION OF PROXIES
This Proxy Statement, together with the accompanying Proxy, is
furnished in connection with the solicitation of proxies to be used at the
Special Meeting of Stockholders of J.A. Industries, Inc., a Delaware corporation
(hereinafter called the "Company"), to be held at the offices of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan L.L.P., 2500 First Union Capitol
Center, Raleigh, North Carolina on __________, 1996 at 8:00 in the forenoon or
any adjournment thereof.
A stockholder signing and returning a proxy in the enclosed form
has the power to revoke it any time before the exercise thereof by giving
written notice to that effect to the Secretary of the Company, by the submission
of another signed proxy bearing a later date or by the stockholder's personal
attendance at the meeting and voting by ballot.
The solicitation of proxies in the enclosed form is made on
behalf of the Board of Directors of the Corporation.
The cost of preparing, assembling and mailing the proxy material
and of reimbursing brokers, nominees and fiduciaries for the out-of-pocket and
clerical expense of transmitting copies of the proxy material to the beneficial
owners of stock held in their names will be borne by the Company. The Company
does not intend to solicit proxies other than by the use of the mails, but
certain officers and regular employees of the Company or its subsidiaries, for
no additional remuneration, may use their personal efforts, by telephone or
otherwise, to obtain proxies. No firm has ben retained to assist in the
solicitation of broker and nominee proxies.
VOTING SECURITIES OUTSTANDING
At the close of business of March 15, 1996, the record date for
the meeting, the Company had outstanding 9,417,304 shares of Common Stock, each
of which shares is entitled to one vote.
QUORUM AND VOTE REQUIRED
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The presence, in person or by proxy, of the holders of at least
a majority of the outstanding shares of Common Stock is necessary to constitute
a quorum at the Special Meeting. Approval of each Proposal will require the
affirmative vote of the holders of at least a majority of the shares of Common
Stock of the Company present in person or by proxy except directors will be
elected by a plurality of the votes cast. Management of the Company recommends
that holders vote their shares in favor of all proposals.
In situations where brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned Proxies to
the brokers (so-called "broker non-votes"), the affected shares will be counted
for purposes of determining the presence or absence of a quorum for the
transaction of business but will not be included in the vote totals and,
therefore, will have no effect on the outcome of the votes.
Dissenters' Rights.
Pursuant to Section 262 of the General Corporation Law of the
State of Delaware, a copy of which is attached hereto as Exhibit A, any holder
of JA Common Stock who objects to the Merger will be entitled to dissent and
exercise appraisal rights. That Section enables an objecting stockholder to be
paid, in cash, the value of his JA Common Stock as determined by the Delaware
Court of Chancery, provided that the following conditions are satisfied:
(1) Such stockholder must file with the Company a written demand
for appraisal of his shares, separate and apart from any proxy or vote
against the Merger, before the taking of the vote on the Merger. If a
stockholder elects to exercise dissenters' rights, such right may only
be exercised as to all shares of JA capital stock held by the
dissenting stockholder.
(2) Such stockholder must not vote in favor of the Merger, nor
submit a proxy in which directions are not given.
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(3) Within 120 days after the Effective Date of the Merger,
either the Company or any stockholder who has complied with Section 262
may, by petition filed in the Delaware Court of Chancery, demand a
determination by the Court of the value of the shares of all objecting
stockholders with whom agreements as to the value of such shares have
not been reached.
Within 10 days after the Effective Date of the Merger, the Company will notify
each stockholder who has complied with Section 262 and not voted for, or
consented to, the Merger of the date on which the Merger became effective.
If the Company and the dissenting stockholder cannot agree on
the value of the shares, the Court, based upon an appraisal prepared by an
independent appraiser, will make its own determination. Under Delaware law, the
dissenting shares would be valued on a going concern and not a liquidation
basis. An appraiser would be obligated to determine the intrinsic value of the
shares, without giving effect to the proposed Merger, considering all factors
and elements which reasonably may enter into such a determination, including
market value, asset value, earnings prospects and the nature of the enterprise.
The value determined by the court may be more than, less than or equal to the
Merger consideration (i.e., the value of the JA Common Stock after the Merger).
Notwithstanding the foregoing, at any time within 60 days after
the Effective Date of the Merger or thereafter, with the written approval of the
Company, any objecting stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered pursuant to the Merger, provided
that no appraisal proceeding in the Delaware Court of Chancery may be dismissed
without the approval of such Court. The cost of an appraisal proceeding may be
determined by such Court and taxed upon the parties as the Court deems equitable
under the circumstances.
FAILURE BY A STOCKHOLDER TO FOLLOW THE STEPS REQUIRED
BY DELAWARE LAW FOR PERFECTING HIS DISSENTER'S RIGHTS WILL
RESULT IN THE LOSS OF SUCH RIGHTS.
4
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PROPOSAL ONE
APPROVAL OF THE MERGER
Approval Sought.
Stockholders are being asked to approve an Agreement and Plan of
Merger, dated as of March 1,1996 (the "Merger Agreement"), a copy of which,
including all schedules and exhibits, is annexed hereto as Exhibit B, among the
Company, Sub and Kenmar, which provides for, among other things (i) the merger
of Sub with and into Kenmar, with Kenmar continuing as a surviving corporation
and a wholly-owned subsidiary of JA (the "Merger"), and (ii) the conversion of
each outstanding share of common stock, no par value, of Kenmar ("Kenmar Common
Stock") into 41 shares (subject to adjustment) of JA Common Stock.
The Exchange Ratio of 41 shares of JA Common Stock for each
share of Kenmar Common Stock was negotiated by the board of directors of the
Company in its independent judgment concerning the relative value of a share of
Kenmar Common Stock and a share of JA Common Stock, taking into consideration
such factors as the market value of the JA Common Stock, the value of Kenmar's
assets, and value of Kenmar's business and future prospects. See "Background of
the Merger."
Pursuant to the Merger Agreement and taking into account the 1
for 4 reverse stock split, approximately 2,734,326 shares of the Company's
common stock will be issued to Kenmar shareholders in exchange for all of the
outstanding shares of Kenmar. It is the intention of the parties that the former
shareholders of Kenmar shall receive such number of shares of the Company to
enable them to obtain a 50% interest in the post transaction entity. The
Exchange Ratio is subject to adjustment to insure that Kenmar shareholders will
receive a 50% interest in the post transaction entity.
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HISTORY OF JA
JA was incorporated in the State of Delaware on July 21, 1987
and was inactive until September 1991 when its Board made the decision to
acquire companies in the contract manufacturing business. A total of 3 such
companies were acquired. However, because the growth and profitability of its
acquired operations fell short of expectations, beginning in June 1995, the
Company began disposing of its operations. By November 1995 the Company had sold
or disposed of all of its operations.
BACKGROUND OF THE MERGER
In December 1995, the Company initiated discussions with Kenmar,
a privately held company engaged in the contract manufacturing business. After
an analysis by the Board of opportunities available to the Company, in January
1996 the Company agreed to seek to effect a merger between Kenmar and the
Company. The terms of the Merger would be subject to execution of a definitive
merger agreement, stockholder approval and the completion of due diligence. None
of the current members of the Board of Directors of the Company is affiliated
with Kenmar.
The Board also considered the risks and potential disadvantages
associated with the Merger. Effectively, the Merger will result in a change in
control. After the Merger, the stockholders of Kenmar will, in the aggregate,
hold 50% of the outstanding JA Common Stock. Kenmar has 38 Common Stockholder
and 42 Class A Preferred Stockholders. If such shares are voted together, the
shares held by the former Kenmar stockholders might constitute a plurality of
the outstanding shares. Moreover, pursuant to the terms of the Merger Agreement,
for a period of 3 years after the Merger, the Company is to be managed by the
present management of Kenmar. See "Additional Terms of the Merger", page 35.
As a "shell company" with no existing business and an
insignificant net worth, the Board believes that the merger poses little
additional risk to stockholders. The Board believes that if the Merger is not
approved, the only alternatives available to the Company would be to liquidate
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(in which case it is unlikely that there would be any distribution to
stockholders), or to continue as a "dormant" company until another business
combination is identified and the Company is uncertain whether any other viable
business combination could be identified. In any event the Board believes that
given the current financial condition of the Company, it is unlikely that any
other business combination would provide the same value to stockholders as the
proposed merger with Kenmar.
As a result of the merger, the Company would assume the
liabilities of Kenmar which as of February 29, 1996 totaled $1,355,000 and
included the following:
Current maturites of long-term debt $ 4,317
Current obligations under capital leases $ 35,203
Accounts payable - trade $ 621,852
Other accrued liabilities $ 94,833
==========
Total Current Liabilities $ 756,205
Long term debt, less current maturities $ 541,236
Long-term obligations under capital lease $ 57,750
==========
Total Liabilities $1,355,191
The above presentation does not reflect the redemption and
dividend obligations of Kenmar's preferred stock (See "Preferred Stock of
Kenmar", page 35).
Kenmar's expenses related to the Merger include legal and
accounting fees estimated at $80,000 and travel and miscellaneous expenses
estimated at $20,000. The Company's expenses are estimated at $93,000, including
legal and accounting expenses estimated at $70,000; travel and miscellaneous
expenses estimated at $20,000; shareholder meeting $2,000; organization of J.A.
Industries Inc. of North Carolina $1,000. In addition, the Company will pay to
George Solloum, an unrelated third party, a finder's fee of 20,000 shares of
pre-split Common Stock. No cash remuneration will be paid to Mr. Solloum . To
the extent monies are raised to fund expenses associated with the Merger, the
Company will pay fees equal to 10% of the monies raised.
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Terms of the Merger.
At the effective time of the Merger (the "Effective Time"), Sub
will merge with and into Kenmar, with Kenmar continuing as a surviving
corporation and a wholly-owned subsidiary of JA. All of the common stock of
Kenmar issued and outstanding immediately prior to the consummation of the
Merger (other than dissenting shares, if any), will be converted into shares of
JA Common Stock. All of the JA Common Stock which is issued and outstanding
immediately prior to the consummation of the Merger will remain outstanding and
will not change as a result of the Merger. 9,417,994 shares of JA Common Stock
are presently outstanding (there would be 10,937,304 shares outstanding upon the
closing of the private placement, see Post Meeting Financing, page 54). At the
Effective Time after the reverse stock split is consummated, 5,468,652 shares
would be outstanding after issuance of share to the Kenmar shareholders. The
Certificate of Incorporation of JA shall be and remain the certificate of
incorporation of the surviving corporation and the by-laws of JA shall be the
by-laws of the surviving corporation.
At the Effective Time, each share of Kenmar Common Stock
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger, be converted into the right to receive 41 shares of JA Common Stock
subject to adjustment. It is anticipated that the same number of shares of JA
Common Stock presently outstanding will be issued pursuant to the Merger. After
giving effect to the issuance of such shares, the former Kenmar stockholders
will hold approximately 50% of the outstanding JA Common Stock.
On or immediately after the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of Kenmar Common Stock, shall surrender the same to JA. Each Kenmar stockholder
who shall have surrendered its certificate representing shares of Kenmar common
stock shall be entitled to receive in exchange therefor, a certificate or
certificates representing the number of whole shares of JA Common Stock into
which the Kenmar Common Stock shall have been converted.
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When the Merger becomes effective, the former stockholders of
Kenmar shall thereupon cease to have any rights in respect of Kenmar Common
Stock, other than the right to receive the certificates for JA Common Stock.
Unless and until any certificates shall be so surrendered and exchanged, (i) the
holders of Kenmar Common Stock shall not have any voting rights in respect of
the JA Common Stock into which the shares of Kenmar Common Stock shall have been
converted, and (ii) dividends or other distributions (if any) payable to holders
of record of shares of JA Common Stock shall not be paid to the holder of the
certificate.
Upon surrender of the certificate representing shares of Kenmar
Common Stock, the dividends or other distributions which shall be or become
payable subsequent to the Effective Time with respect to the number of whole
shares of JA Common Stock represented by the certificate issued in exchange for
the surrendered Kenmar certificate, shall be paid, but without interest. No
fraction of a share of JA Common Stock will be issued pursuant to the Merger.
Business of Kenmar
Kenmar was organized in 1984 to provide high quality electronic
manufacturing services. The principal offices of Kenmar are located at 6638 Old
Wake Forest Road, Raleigh, North Carolina and the telephone number at that
address is (919) 876-6049.
Kenmar provides manufacturing services to original equipment
manufacturers ('OEM's') in the electronics industry, including producers of
industrial controls, computers & peripherals and instrumentation. Primary
services include material procurement, printed circuit cards and chassis
assembly, and testing. Kenmar currently has approximately 20 customers, 6 of
which comprise the majority of its sales. Prior to the loss of its largest
customer in 1995, the Company conducted its operations in 42,000 square feet of
flex space with 85 employees. Since such loss described above, steps have been
taken to size the operations to more closely match the revenue without losing
the key employees and skills required to regrow the business. To date, this has
caused the Company to incur losses from operations for fiscal 1996. The
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Company currently operates one facility in Raleigh, North Carolina with
approximately 40 employees in 21,000 square feet of flex space. Operations are
near 40% capacity with one shift active.
In anticipation of the Merger, Kenmar has begun
exploratory discussions with numerous potential acquisition
candidates. To date, Kenmar has not consummated any
agreements or letters of intent with any of such candidates.
Preferred Stock
Kenmar currently has nine thousand nine hundred twenty-six
(9,926) shares of Class A Cumulative Redeemable Preferred Stock ("Class A
Preferred Stock"), Fifty Dollars ($50) par value, issued and outstanding. The
Class A Preferred Stock will not be converted, exchanged or otherwise affected
as a result of the Merger, and will remain issued and outstanding, subject to
the terms described below. The Class A Preferred Stock represents a significant
obligation of Kenmar, and may accordingly have a significant adverse effect on
the value of the Kenmar Common Stock acquired by JA pursuant to the Merger.
Commencing in 1997, the Class A Preferred Stock may be called or
put at any time after five (5) years. Dividends are cumulative from the issue
date and payable quarterly at the rate of ten percent (10%) annually, subject to
the provisions of North Carolina law. Assuming statutory requirements are met
regarding the declaration of dividends, the dividends are declared payable on
3/31, 6/30, 9/30, and 12/31 or each year until the shares are redeemed for
shareholders of record as of 3/15, 6/15, 9/15, and 12/15 of each such year. Any
dividends in arrears may be declared and paid at any time. If only a partial
dividend can be paid, the unpaid balance immediately accumulates. Dividends
payable for any period less than a full period are calculated on a day to day
basis on the basis of a three hundred sixty (360) day year. No other dividends
on any other stock(s) can be either declared or paid until the dividends on the
Class A Preferred Stock are fully paid from all previous periods.
If the Class A Preferred Stock is redeemed, it will
be redeemed at a multiple of one and one half (1 1/2) times the
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issue price. Additionally, from the time the securities are either put or
called, Kenmar will have the option to complete the redemption within twelve
(12) months. Dividends will continue to accrue during the phased redemption
period. To put the Class A Preferred Stock to Kenmar, a stockholder must notify
Kenmar of said action by first class mail.
The Class A Preferred Stock has no preemptive or subscription
rights. Reacquired shares of Class A Preferred Stock may be redesignated and
reissued by Kenmar.
In the event of a liquidation of Kenmar, the Class A Preferred
Stock would be redeemed at Fifty Dollars ($50) per share plus accrued dividends
from assets of Kenmar. If assets are insufficient to fully redeem, the
distribution would be made ratably. A sale of Kenmar or a merger of Kenmar with
another company does not constitute a liquidation.
As of August 31, 1995, cumulative unpaid dividends are $73,008.
Redemption requirements of the Class A Preferred Stock are currently:
1997 $150,000
1998 447,000
1999 68,700
2000 86,250
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Total $751,950
Recommendation of the Board of Directors
On January 22, 1996, the Board of Directors of JA unanimously
agreed for the Company to enter into a Merger Agreement with Kenmar. The Board
believes that the Merger is in the best interests of stockholders and recommends
that stockholders vote for the proposed Merger.
Numerous factors were considered by the Board in approving and
recommending that stockholders approve the Merger Agreement.
11
<PAGE>
Factors considered by the Board included the agreed upon
exchange ratio and the tax-free nature of the transaction to the stockholders of
both companies for federal income tax purposes. The board also evaluated and
took into consideration the following:
(i) the Board's familiarity with the financial condition,
business prospects and strategic objectives of JA. The Company is
unable to enter into a new line of business without a significant
capital infusion. The Board believes that a sale of the Company is not
feasible since the Company has no significant assets to sell.
Accordingly, the Board believes that it is in the best interests of
stockholders to merge with another company.
(ii) the trading history of JA Common Stock;
(iii) the Board's analysis of Kenmar's history,
business, financial condition and prospects;
(iv) the terms and conditions of the Merger Agreement, including
the fact that the consideration will consist of the issuance of
additional shares of Common Stock of the Company.
While Kenmar reported income of $181,000 on sales of $15,566,000
in 1995, sales and revenues for the 6 months period ending February 29, 1996
(unaudited) were $1,354,383. Despite the deterioration in financial results
(primarily attributable to the loss of Kenmar's largest customer), Kenmar listed
assets of $2,377,000 including cash of $745,000. Management of the Company
believes, but cannot assure, Kenmar's relationships with electronic
manufacturers will enable Kenmar to increase its level of sales and achieve
profitability.
Additional Terms of the Merger Agreement.
The Merger Agreement provides for customary representations and
warranties by each party to the transaction including, among others, (i) its due
incorporation and organization, (ii) capitalization, (iii) title and condition
of assets, (iv) material contracts, (v) absence of
12
<PAGE>
employee benefit plans, (vi) licenses and permits, (vii) compliance with other
instruments, (viii) need for consents, (ix) compliance with laws, (x) accuracy
of financial statements, (xi) authority and enforceability of Merger Agreement,
and (xii) absence of litigation.
Prior to the Effective Time (as defined in the Merger
Agreement), each corporation has agreed to conduct its business only in the
ordinary course of business and to provide access to the other company to
facilitate the completion of all necessary due diligence investigations.
The obligations of JA and Kenmar to consummate the Merger are
subject to the satisfaction of the following conditions, among others, unless
waived: (i) approval and adoption of the Merger Agreement by the requisite
stockholder votes by the stockholders of JA and Kenmar respectively, (ii) the
absence of any pending litigation or proceeding initiated by any governmental
authority to enjoin or prohibit the Merger, (iii) the continued accuracy of the
representations and warranties made by the parities, (iv) the performance by
each party of its respective obligations under the Merger Agreement, and (v) the
receipt of certain opinions, certificates and consents.
Pursuant to the Merger Agreement, JA, Kenmar, Sub, and Kenneth
H. Marks ("Marks") (as representative of the Kenmar stockholders, the
"Representative") will enter into an option agreement, the form of which is
attached as Exhibit C to the Merger Agreement (the "Option Agreement"). Under
the Option Agreement, the Representative will be issued an option (the "Option")
to purchase, upon the occurrence of certain conditions, Seven Hundred Fifty
Thousand (750,000) shares of JA Common Stock for an aggregate purchase price of
One Dollar ($1). The conditions to the exercise of the Option are a breach of
any representation, warranty, covenant, or other obligation of JA or Sub under
the Merger Agreement. In the event the Option is exercised, the Representative
will distribute the shares purchased thereby to the Kenmar stockholders.
The purpose of the Option Agreement is to provide a
remedy to the Kenmar stockholders in the event of any breach
13
<PAGE>
of the Merger Agreement by JA. Because Kenmar will become a subsidiary of JA
pursuant to the Merger, and because the Kenmar stockholders will receive JA
Common Stock in exchange for their Kenmar stock pursuant to the Merger,
customary remedies for breach (such as indemnification payments by JA to Kenmar)
are of little value to the Kenmar stockholders. In light of the circumstances of
this transaction, the parties negotiated the Option Agreement as a mechanism to
address Kenmar's desire for a remedy in the event of any breach by JA.
If exercised, the Option would have the effect of increasing the
ownership position in JA of the current Kenmar stockholders and diluting the
current ownership position of the existing JA stockholders. Immediately upon the
consummation of the Merger, JA anticipates that there will be approximately
5,468,652 shares of its Common Stock outstanding, with the current JA
stockholders owning fifty percent (50%) and the current Kenmar stockholders
owning fifty percent (50%). If the Option were to be exercised (and assuming no
further changes in the capitalization of JA), the current Kenmar stockholders'
ownership position in JA would be increased to 3,125,000 aggregate shares or
approximately fifty-seven percent (57%) of the total shares; the percentage
ownership position of the current JA stockholders would decrease to
approximately forty-three percent (43%).
The Merger Agreement (at Section 6.2) also provides that JA
shall use its best efforts to permit Marks to control and elect a majority of
JA's board of directors for a period of thirty-six (36) months following the
Effective Time. During any period within such thirty-six (36) months when a
majority of JA's board of directors is not comprised of directors voted for and
elected by Marks, except in the event that he intentionally fails to cast his
votes in a manner that would result in his voting for and electing a majority of
JA's board of directors during such period, the written consent of Marks will be
required prior to the occurrence of any "material transactions." "Material
transactions" are defined to include (but not be limited to): (i) any contract
or agreement; (ii) any decision to transfer any material portion of the assets
of JA or any subsidiary; (iii) any amendment to the Certificate of Incorporation
of JA; (iv) the sale, issuance or repurchase of any shares of stock of JA; (v)
the
14
<PAGE>
investment of over Ten Thousand Dollars ($10,000) by JA or any subsidiary in any
venture or business investment; (vi) any amendment of the Bylaws of JA or any
subsidiary; (vii) the declaration or payment by JA or any subsidiary of any
dividends on its Common Stock or the distribution by JA of its assets to the
holders of its Common Stock; (viii) the incurrance of any indebtedness by JA or
any subsidiary; (ix) the sale of stock by JA or any subsidiary; (x) any decision
to pledge or mortgage any assets of JA or any subsidiary; (xi) any decision to
hire or terminate any officer or executive employee, including but not limited
to Marks; (xii) any change in compensation or responsibilities or any officer or
executive employee; (xiii) any contract payments or payment of consulting fees
to G.M. Capital Partners Ltd., or any other consultant.
In the event that a majority of JA's board of directors is not
comprised of directors voted for and elected by Marks during any period within
thirty-six (36) months from the Effective Time (except in the event that Marks
intentionally fails to cast his votes in a manner that would result in his
voting for and electing a majority of JA's board of directors during such
period), and in the further event that JA undertakes a material transaction
during such period without Marks' written consent, (i) the Option shall become
immediately exercisable by the Representative, as more specifically set forth in
the Option Agreement, and (ii) JA shall, immediately upon Marks' request: (A)
grant Marks access to all of JA's books, records, and shareholder lists (any
notice that might be otherwise required to be given by Marks being expressly
waived), and (B) pay Marks Fifty Thousand Dollars ($50,000) in cash. Also, in
the event that Marks shall fail to serve (except as a result of his voluntary
resignation) as JA's President and Chief Executive Officer, then JA must
promptly pay or prepay, as the case may be, each of the following promissory
notes: (i) Promissory Note, dated October 15, 1992, made by Kenmar in favor of
Lee K. Simon in the original principal amount of Four Hundred Forty-five
Thousand Five Hundred Dollars ($445,000); (ii) Promissory Note, dated October
15, 1992, made by Kenmar in favor of Daniel David Cameron in the original
principal amount of One Hundred Forty-Eight Thousand Five Hundred Dollars
($148,500); and (iii) Promissory Note, dated October 15, 1992, made by
15
<PAGE>
Kenmar in Favor of Joseph T. Hunt in the original principal amount of One
Hundred Forty-Eight Thousand Five Hundred Dollars ($148,500). As of February 29,
1996, the unpaid balances of the Promissory Notes had been reduced to $304,930,
$101,643 and $101,643 respectively.
The purpose of the provisions relating to control of the board
of directors is to protect the interests of the Kenmar stockholders by ensuring
(through affirmative covenants as well as financial incentives) that Marks will
have operating control of JA for the first three (3) years after the
consummation of the Merger. Kenmar's operations will be JA's sole operations
during the initial period after the Merger (as described above, JA is currently
a "shell company"), and Marks has served as the President or Chief Executive
Officer of Kenmar since its formation in 1984. During the negotiation of the
Merger Agreement, Kenmar indicated that because of Marks' experience in that
regard, it would require that the Merger Agreement be structured to ensure that
Marks would lead the combined entity for the
initial three (3)-year period after consummation of the Merger. The provisions
of the Merger Agreement described above represent the results of the
negotiations in that regard.
At or before the Effective Time of the Merger,JA will undertake
and consummate a 1 for 4 reverse stock split, whereby every 4 shares of JA's
issued and outstanding Common Stock will be converted into 1 share of JA's
Common Stock.
Issuance of Restricted Shares.
The shares of JA Common Stock issuable pursuant to the Merger
will not be registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state, but will be issued in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act and Regulation D promulgated by the Securities and Exchange
Commission thereunder and similar exemptions from registration available under
state securities laws. As provided in the Merger Agreement, the shares of JA
Common
16
<PAGE>
Stock which will be received by the Kenmar stockholders will not be registered
under the Securities Act or applicable state securities laws and such shares may
not be transferred, sold or assigned until such shares are registered pursuant
to the Securities Act and applicable state securities laws upon certain other
circumstances as described in the Merger Agreement. Kenmar shall notify each of
its stockholders prior to the Effective Time of Merger that such stockholder may
not sell, pledge, transfer, or otherwise dispose of such shares except in
compliance with all applicable federal and state securities laws, rules and
regulations and upon (i) the registration and qualification of such shares under
all applicable federal and state securities laws, (ii) such stockholder's
delivery to JA of a no-action letter from the state and federal agencies having
jurisdiction over such transfer of such shares to the effect that such
registration or qualification is not required in connection therewith, or (iii)
such stockholder's delivery to JA of an opinion prepared by counsel reasonably
acceptable to JA to the effect that neither the sale nor the proposed transfer
constitutes a violation of any federal or state securities laws.
The JA Common Stock issuable to the Kenmar stockholders may not be sold
or transferred in the absence of registration under the Securities Act and
applicable state securities laws, or the availability of an exemption from such
registration requirements. Each certificate of JA Common Stock issued pursuant
to the Merger will bear an appropriate restrictive legend prohibiting the
transfer of such shares.
17
<PAGE>
Registration Rights
The Merger Agreement (in Section 6.8) provides that the Kenmar
stockholders will have demand and "piggyback" registration rights with regard to
the shares of JA Common Stock issued to them in the Merger. Pursuant to the
demand registration rights, JA must use its best efforts to register JA Common
Stock if the holders of fifty percent (50%) or more of JA's "Registrable
Securities" submit a written demand for such registration to JA and the demand
is for a registration of at least fifty percent (50%) of JA's Registrable
Securities. The Merger Agreement defines "Registrable Securities" to mean JA's
Common Stock that has not been (i) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or (ii)
sold or made available for sale, in the opinion of counsel to JA, in a single
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are or may be removed upon the consummation of such sale.
Pursuant to the "piggyback" registration rights, JA must register the shares of
any stockholder who so requests in the event that JA undertakes a registration
of any of its securities (with the exception of registrations relating to
employee benefit plans and registrations relating solely to an SEC Rule 145
transaction).
All registration expenses incurred in connection with one demand
registration and any and all "piggyback" registrations are to be borne by JA.
Generally, all selling expenses relating to securities registered on behalf of
the stockholders and all other registration expenses are to be borne by the
stockholders of such securities pro rata on the basis of the number of shares so
registered.
18
<PAGE>
Other provisions regarding such registration rights are also
included in Section 6.8 of the Merger Agreement, including registration
procedures and indemnification.
Effective Time of the Merger.
The Merger will become effective (the "Effective Time") at the
time that a Certificate of Merger is filed in accordance with the North Carolina
Business Corporation Act. These filings will be made immediately after the
Merger Agreement is approved by the stockholders of JA, unless the parties agree
to a later date.
Accounting Treatment.
The Merger will be accounted for as a reverse acquisition
whereby, for accounting purposes, Kenmar will be the acquirer of JA and the
transaction will be accounted for as a recapitalization of Kenmar. It is
characterized as a reverse acquisition because even though JA will continue as
the surviving corporation, only Kenmar has significant assets or operations.
Also, Kenmar management will manage the combined entity and its stockholders
will initially control the election of the board and other matters.
The unaudited pro forma financial information contained in this
Proxy Statement has been prepared accounting for the Merger as a reverse
acquisition.
Federal Income Tax Consequences.
THE FOLLOWING IS A SUMMARY OF THE OPINION PROVIDED BY COUNSEL TO
THE COMPANY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS
SUMMARY IS A COMPLETE DESCRIPTION OF ALL THE CONSEQUENCES OF THE MERGER.
THIS SUMMARY IS BASED UPON RELEVANT PROVISIONS OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED, THE APPLICABLE TREASURY REGULATIONS
PROMULGATED THEREUNDER, JUDICIAL AUTHORITY AND CURRENT ADMINISTRATIVE RULINGS
AND PRACTICE, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE
BASIS. THIS SUMMARY DOES NOT ADDRESS ALL ASPECTS OF FEDERAL
19
<PAGE>
INCOME TAXATION THAT MAY BE RELEVANT TO PARTICULAR STOCKHOLDERS IN LIGHT OF
THEIR PERSONAL CIRCUMSTANCES, OR TO STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT
UNDER THE CODE (FOR EXAMPLE, S CORPORATIONS, CERTAIN ESTATES AND TRUSTS,
INSURANCE COMPANIES, FOREIGN PERSONS, TAX EXEMPT ORGANIZATIONS, TAXPAYERS
SUBJECT TO THE ALTERNATIVE MINIMUM TAX, FINANCIAL INSTITUTIONS, BROKERS, DEALERS
OR HOLDERS THAT OWN 10% OR MORE OF THE VOTING POWER OF KENMAR.) THE COMPANY HAS
NOT REQUESTED A RULING FROM THE INTERNAL REVENUE SERVICE WITH RESPECT TO THESE
MATTERS.
EACH STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE FOREIGN, STATE OR LOCAL LAWS. CONSEQUENTLY, EACH KENMAR STOCKHOLDER
IS ADVISED TO CONSULT ITS OWN TAX ADVISOR AS TO THE SPECIFIC IMPACT ON SUCH
STOCKHOLDER OF FEDERAL, FOREIGN, STATE OR LOCAL LAWS.
Counsel to the Company has provided its opinion that the
Merger will be treated as a tax-free reorganization as defined in Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), and
that, accordingly, (i) no gain or loss will be recognized by the stockholders of
Kenmar upon the exchange of their shares of Kenmar Common Stock solely for
shares of JA Common Stock pursuant to the Merger; (ii) the basis of the JA
Common Stock received by each stockholder of Kenmar in exchange for shares of
Kenmar Common Stock will be the same, immediately after the exchange, as the
basis of such stockholder's Kenmar Common Stock exchanged therefor, and (iii)
the holding period for any JA Common Stock received in exchange for Kenmar
Common Stock will include the period during which the Kenmar Common Stock
surrendered for exchange was held, provided such stock was held as a capital
asset on the date of the exchange.
A dissenting Kenmar stockholder who receives only cash for his
shares of Kenmar Common Stock will recognize gain or loss for federal income tax
purposes measured by the difference, if any, between such holder's basis in the
stock and the amount received by him for his stock. The gain or loss will be
characterized for federal income tax purposes as
20
<PAGE>
capital gain or loss or as ordinary income. The gain or loss will be
characterized as capital if (i) the holder's shares of Kenmar Common Stock are
held as capital asset, and (ii) the holder receives cash with respect to all
shares of Kenmar Common Stock which he owns, including shares owned by
application of the attribution rules of Section 318 of the Code.
Section 318 of the Code provides, in part, that a stockholder
will be considered to be the owner of shares which are owned by certain
corporations, partnerships, trusts and estates in which the stockholder has a
beneficial ownership interest, shares which such stockholder has an option to
acquire, and shares owned by certain members of his family (not including
brothers and sisters). Under certain circumstances, the attribution rules with
respect to shares attributed from a family member may be waived.
Rights of Dissenting Stockholders.
Pursuant to Section 262 of the General Corporation Law of the
State of Delaware, a copy of which is attached hereto as Exhibit A, any holder
of JA Common Stock who objects to the Merger will be entitled to dissent and
exercise appraisal rights. That Section enables an objecting stockholder to be
paid, in cash, the value of his JA Common Stock as determined by the Delaware
Court of Chancery, provided that the following conditions are satisfied:
(1) Such stockholder must file with the Company a written demand
for appraisal of his shares, separate and apart from any proxy or vote
against the Merger, before the taking of the vote on the Merger. If a
stockholder elects to exercise dissenters' rights, such right may only
be exercised as to all shares of JA capital stock held by the
dissenting stockholder.
(2) Such stockholder must not vote in favor of the Merger, nor
submit a proxy in which directions are not given.
(3) Within 120 days after the Effective Date of the Merger,
either the Company or any stockholder who has
21
<PAGE>
complied with Section 262 may, by petition filed in the Delaware Court
of Chancery, demand a determination by the Court of the value of the
shares of all objecting stockholders with whom agreements as to the
value of such shares have not been reached.
Within 10 days after the Effective Date of the Merger, the Company will notify
each stockholder who has complied with Section 262 and not voted for, or
consented to, the Merger of the date on which the Merger became effective.
If the Company and the dissenting stockholder cannot agree on
the value of the shares, the Court, based upon an appraisal prepared by an
independent appraiser, will make its own determination. Under Delaware law, the
dissenting shares would be valued on a going concern and not a liquidation
basis. An appraiser would be obligated to determine the intrinsic value of the
shares, without giving effect to the proposed Merger, considering all factors
and elements which reasonably may enter into such a determination, including
market value, asset value, earnings prospects and the nature of the enterprise.
The value determined by the court may be more than, less than or equal to the
Merger consideration (i.e., the value of the JA Common Stock after the Merger).
Notwithstanding the foregoing, at any time within 60 days after
the Effective Time of the Merger or thereafter, with the written approval of the
Company, any objecting stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered pursuant to the Merger, provided
that no appraisal proceeding in the Delaware Court of Chancery may be dismissed
without the approval of such Court. The costs of an appraisal proceeding may be
determined by such Court and taxed upon the parties as the Court deems equitable
under the circumstances.
FAILURE BY A STOCKHOLDER TO FOLLOW THE STEPS REQUIRED
BY DELAWARE LAW FOR PERFECTING HIS DISSENTER'S RIGHTS WILL
RESULT IN THE LOSS OF SUCH RIGHTS.
22
<PAGE>
Option Agreement
As provided in an option agreement constituting an exhibit to the
Merger Agreement, the Company granted Kenmar an option to acquire 750,000 shares
of its post-split Common Stock for a purchase price of $1.00. The option may be
exercised upon the occurrence any breach of any representation, warranty,
covenant or other obligation of the Company under the Merger Agreement. The
option agreement provides for arbitration to resolve any disputed assertion of a
breach of the Merger Agreement by the Company.
SELECTED FINANCIAL DATA
FOR THE COMPANY AND KENMAR
The following is a summary of selected financial data for the JA
and Kenmar. See the financial statements included herein for more complete
information.
J.A. INDUSTRIES
The following year end financial information has been derived
from JA's audited financial statements for each of the fiscal years set forth
below, which statements for the years ended December 31, 1991 and 1992; June 30,
1994 and 1995 are included herein (in December, 1993, the Company changed its
fiscal year to June). The financial information for the six month periods ended
June 30, 1993 and March 31, 1996 was derived from audited and unaudited
financial statements respectively. In the opinion of management, the unaudited
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary to present the financial data for such periods. The
following should be read in conjunction with the financial statements and notes
related thereto included elsewhere herein.
23
<PAGE>
FOR THE PERIOD ENDING
<TABLE>
<CAPTION>
DEC 31-91 DEC 31-92 JUNE 30-93 JUNE 30-94 JUNE 30-95 MAR 31-96
<S> <C> <C> <C> <C> <C> <C>
SALES $ - - $ - - $191,836 $4,042,940 $4,330,211 $
COST OF SALES - - - - 144,451 3,674,699 3,618,347
GROSS PROFIT - - - - 47,38 368,252 711,864
SELL AND MARKETING - - - - 8,232 134,163 1,593,838 --
EXP
G&A EXPENSES 121,140 47,933 175,566 1,256,765 1,593,838 (1,043,970)
LOSS FROM
OPERATIONS (121,140) (47,933) (136,413) (1,467,617) (1,384,114) (1,043,970)
OTHER INCOME
(EXPENSES) (500,000) - - ( 21,126) (85,656) ( 330,412) (74,591)
CONSOLIDATED
NET LOSS (621,140) (47,933) (157,539) (1,553,273) (1,714,526) (1,118,561)
LOSS PER
SHARE (3.03) (0.05) (0.04) (0.28) (0.25) ( 0.12)
WORKING CAPITAL
(DEFICIT) (178,572) (7,728) 24,238 (245,683) (751,726) (203,695)
TOTAL ASSETS 3 656,677 610 2,616,445 1,020,723 16,981
TOTAL
LIABILITIES 178,575 8,33 539,344 1,948,887 1,061 ,226 220,676
LONG TERM DEBT - - 143,247 249,927 18,046
STOCKHOLDER'S
EQUITY (178,572) (7,728) 117,333 667,558 (40,503) (203,695)
</TABLE>
24
<PAGE>
KENMAR BUSINESS GROUP, INC.
The following year end financial information has been derived from Kenmar's
audited financial statements for fiscal years 1995 and 1994 and unaudited
financial statements for fiscal years 1993, 1992 and 1991 set forth below, which
statement are included herein. In the opinion of management, the unaudited
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary to present the financial data for such periods. The
following should be read in conjunction with the financial statements and notes
related thereto included elsewhere herein.
(In thousands)
at August 31 and for the years then ended
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
SALES $ 1,816 $ 10,015 $ 22,732 $ 22,928 $ 15,566
NET INCOME
(LOSS) 39 51 129 (1,359) 181
WORKING CAPITAL
( deficit) 219 265 387 (1,123) (346)
TOTAL ASSETS 1,298 2,475 5,526 5,175 3,069
TOTAL LIABILITIES 1,080 2,024 4,694 5,619 3,326
LONG TERM DEBT 122 127 742 780 636
PREFERRED STOCK 136 351 529 626 730
STOCKHOLDERS
EQUITY (deficit) 82 99 303 (1,071) (986)
</TABLE>
25
<PAGE>
PER SHARE DATA
J.A. INDUSTRIES, INC. SHARES OUTSTANDING
June 30, 1995 - 7,551,603
February 29, 1995 - 7,906,603
KENMAR BUSINESS GROUPS, INC. SHARES OUTSTANDING
August 31, 1995 - 64,714
February 29, 1996 - 65,714
<TABLE>
<CAPTION>
J.A. INDUSTRIES, INC. KENMAR BUSINESS GROUPS, INC.
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR END 6 MONTHS YEAR END 8 MONTHS YEAR END 6 MONTHS YEAR END 6 MONTHS
JUN-30-95 DEC-31-95 JUNE-30-95 FEB-29-96 AUG-31-95 FEB-29-96 AUG-31-95 FEB-29-96
--------- --------------------- --------- --------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value per Share $ (0.01) $ (0.03) $ 0.18 N/A $ (15.24) $ 15.54 $ 21.48 N/A
Cash Dividend Declared $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
per Share
Income (loss) per Share $ (0.25) $ (0.09) $ 0.09 $ 0.08 $ 1.26 $ 19.64 $ 11.07 $ 9.72
</TABLE>
26
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
J.A. Industries, Inc.
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes appearing subsequently under the caption "Financial
Statements".
Overview
In July of 1992, the existing management took over the direction of J
A. Industries, Inc. It was the intention of the management to enhance the value
of its shares on behalf of its shareholders by acquiring cash flow entities
which were, firstly, synergistic with existing subsidiaries and secondly were
companies with consistent growth potential.
The first acquisition was Torik, Inc. in September, 1992, which at that
time was just breaking even on its sales of $300,000 per month. Subsequent to
the Torik acquisition, the Company had entered into litigation and lost the case
to the former management of Torik returning all shares back to the Torik
management. The Company was booking that acquisition at the cost of $200 which
has been written off.
The second acquisition of the assets of Pacific Rim Polytech, took
place in February, 1993 by the Company's wholly owned subsidiary J.A.
Industries (Canada) Inc. ("J.A. Canada"). J.A. Canada immediately started the
manufacturing of underground junction boxes and cable tray. In June, 1995 the
Company sold J.A. Canada to a non-affiliate British Columbia Corporation.
The Company also entered into two licensing agreements and
manufacturing agreements for the manufacture and distribution of electronic
ballasts of which both licenses are inactive.
In September of 1993, the Company acquired Hutronix, Inc., of Tucson,
Az ("Hutronix"). Subsequent to the year ended, 1996, the Company returned the
shares of Hutronix to Baboquivari Cattle Company ("BCC") to settle outstanding
liabilities with BCC.
In December of 1993, the Company acquired the assets of Capital City
Plastic ("CCP"). CCP had been inactive since May of 1993. As CCP was unable to
deliver the equipment as detailed in the purchase agreement, the Company
cancelled the purchase agreement.
In May, 1994 the Company signed an option agreement to acquire 100% of
Link Technologies (Canada) Ltd. ("Link"). The Company was to pay $500,000 USD
plus issue
27
<PAGE>
500,000 shares of common stock to acquire 100% of Link. The Company was also to
provide $1,500,000 USD in working capital for Link. Subsequent to this agreement
the option has expired and no further agreement has been reached.
On March 30, 1994 Granite Marketing Corporation. ("Granite"), then a
wholly owned subsidiary of the Company, entered into an agreement with
Queensland Industries, Inc. ("Queensland") whereby Queensland purchased from
Granite an exclusive license to manufacture, promote, market, sell and
distribute the products of J.A. Canada relating to polyurethane underground
junction boxes. Queensland is a wholly owned subsidiary of Wincanton,
Corporation ("Wincanton"), a publicly traded Washington State Corporation.
Subsequent to this agreement, the Company rescinded the licensing agreement in
exchange for a $50,000 USD payment by Queensland Industries to Granite. Granite
is currently inactive. Subsequent to the year end, Granite was sold to an
unrelated third party in exchange for assumption of Granite's liabilities.
On June 28, 1995 the Company signed a letter of intent to merge with
privately held MiNT Corporation ("Mint") through a stock for stock exchange. The
share exchange would have resulted in a change of control of J.A. Industries to
the majority shareholders of Mint. Mint is in the business of providing high
quality contract manufacturing of electronic and electromechanical printed
circuit board assemblies. Subsequent to this letter of intent and subsequent to
the year ended June 30, 1995, the shareholders of Mint elected not to proceed
with the acquisition.
Subsequent to the year ended June 30, 1995, the Company entered into an
Agreement and Plan of Merger with Kenmar of Raleigh, NC. Kenmar founded in 1984,
is a provider of high quality electronic manufacturing services. It is located
in the Research Triangle area of North Carolina. Kenmar has a broad array of
technical capabilities to bring products to the market from concept to final
production. Kenmar's manufacturing team has experience in producing electronic
and electro-mechanical subassemblies and products for use in the
telecommunication, industrial control, computer, medical and instrumentation
industries. Kenmar has both Surface Mount Technology and Pin Thru-Hole
capabilities as well as cable, harnesses and interconnect assembly lines.
Pursuant to the terms of the agreement, current shareholders of Kenmar
will receive common stock of J.A. Industries such that Kenmar shareholders will
own approximately 50% of the outstanding shares of J.A. Industries, Inc. on
closing. Upon completion of the Merger, current management of Kenmar would
assume management of the Company. The merger is subject to shareholder's
approval of both companies. Another condition of the Merger is the settlement of
a dispute with a former stockholder, Karl Ronstadt and Hutronix, Inc. Subsequent
to the year ended June 30, 1995, the Company did resolve its outstanding dispute
with Baboquivari Cattle Company as described above (see "Hutronix").
28
<PAGE>
Prior to the Merger, the Company must reduce its liabilities and
contingent liabilities to zero and have working capital of a minimum of two
hundred thousand ($200,000) dollars. To this end, the Company has disposed of,
settled or is in the process of settling all outstanding liabilities. The
Company has reached agreements and has signed releases for potential contingent
liability claims arising or potentially arising from several of the Company's
former agreements.
The Company intends to fund its capital requirements through a private
placement to meet the terms of the agreement. To date the funds necessary to
complete the Merger are being held in escrow pending shareholder approval of the
merger and will be released to the Company upon such approval . If Shareholder's
approval is not obtained to complete the Merger, then the funds in escrow would
not be released to the Company.
Management believes that the trend towards outsourcing in the
electronic manufacturing industry is expanding. To this end, management still
believes that its strategy to acquire synergistic businesses in the contract
manufacturing industry is a sound plan. The planned Merger between the Company
and Kenmar is the first step in trying to re-establish that plan.
Seasonal factors do not influence the Company's sales.
Liquidity and Capital Resources
During fiscal 1994 the Company principally provided for its cash needs
through equity financing from a Regulation D Rule 504 offering. Most
acquisitions were completed with a combination of shares and cash. The
day-to-day operations were funded from cash flow provided by the operating
entities and an infusion of working capital from the parent Company. The
subsidiary J.A. Industries (Canada) Inc. lost money in 1995, and it was sold to
a non-affiliate in June, 1995. The agreement called for the buyer to assume all
of the liabilities of J.A. Canada. Hutronix, Inc. also lost money for the year
ending June 30, 1995. Subsequent to the year end, Hutronix was returned to
Baboquivari Cattle Company (former shareholder of Hutronix, "BCC") for release
of all liabilities owed by the Company to BCC and BCC's assumption of all
liabilities associated with Hutronix.
Subsequent to the year ended June 30, 1995, the Company had disposed of
all of its operating assets and there is currently not an adequacy of cash flow
from operations to cover capital resources and liquidity requirements. In the
year ending June 30, 1994 the Company had revenues of $4,042,940 to allow the
Company to manage its day to day operations. The Company's financial results
were prepared assuming it would continue as a going concern. However, the report
of its auditor raised substantial doubts about the Company's ability to continue
as a going concern. For the year ending June 30, 1995, the Company's audited
report reflected the subsequent disposition of all operations. Revenue of
$4,330,211 from operations for the period ended June 30, 1995, though, was used
to fund the day to day operations of the subsidiaries. Currently, the Company
has no cash
29
<PAGE>
flow and its ability to maintain operations is severely impaired. If the Company
cannot raise additional capital it is unlikely the Company would be able to
operate and it may be forced to seek protection under Chapter 11 of the
Bankruptcy Act.
During the period commencing September, 1992 and ending June 30, 1995,
the Company raised $1,185,000 through two Regulation D Rule 504 offerings and
$496,250 through private placements of the Company's common stock. It is the
Company's goal in the fiscal year ending June 30, 1996 to find a suitable
acquisition candidate. Management anticipates that the Company will do further
equity financing. Management believes that from these sources the Company will
adequately fund the operations of the Company and allow it to maintain its
aggressive acquisition strategy. To date, no commitments for such capital have
been received and the likelihood of such financing cannot be guaranteed.
To address the accountant's report of a "going concern" uncertainty, it
is anticipated that the Company will continue to look for new opportunities in
the contract manufacturing area. On March 1, 1996 the Company entered into an
agreement to merge with Kenmar to fulfill the Company's business strategy. As
part of the Merger, the Company must eliminate all outstanding liabilities and
have working capital of $200,000. At the date of this report, the Company has
approximately $133,000 in liabilities it must satisfy to complete the Merger. As
of May 15, 1996, the Company has raised the required funds to complete the
Merger through a private placement of its common stock. The funds are in escrow
with the Company's legal counsel and will be released to the Company upon it
shareholder's approval of the Merger. In the event the Company does not receive
shareholder approval, the funds would not be released from escrow and the
Company would not be able to meet its financial requirements pursuant to the
Merger Agreement.
In the event that the conditions of the Merger are satisfied and the
Merger is completed it is anticipated that cash flow from ongoing operations
will satisfy the day to day needs of the Company. Furthermore, as of February
29, 1996, Kenmar had approximately $744,500 in cash or cash equivalents
(unaudited). It is anticipated that the merged company will use these funds to
maintain and grow the existing business that it has. It is also the Company's
goal to try and arrange an equity financing in the amount of $3 million dollars
to expand its business. No commitment for such financing has been arranged and
the likelihood of its completion cannot be guaranteed. In the event the merged
company could not raise any additional capital, it is anticipated that current
rates of growth of the merged company would satisfy its working capital
requirements.
Future cash needs of the merged entity would include funds to implement
the Company's acquisition strategy and to sustain the Company through a period
of restructuring and growth.
30
<PAGE>
Notes Payable and Long term debt
Hutronix, Inc. a former subsidiary has a note payable to Bank One
executed through the Industrial Development Authority of the City of Douglas due
in quarterly instalments of $12,821, plus interest at 65% of prime (7.25% as of
June 30, 1994), due may 2005; secured by a deed of trust on the real estate held
for sale and an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance guaranteed by the Company. At June 30, 1995 the
amount outstanding was $546,125. The subsequent agreement between BCC and the
Company calls for BCC and Hutronix to indemnify the Company against any
liability under this bond. As the solvency of Hutronix, Inc. is uncertain, the
ability for Hutronix, Inc. to indemnify the Company is unlikely. Furthermore, on
November 21, 1995 an agreement was reached between Baboquivari Cattle Company,
Karl and Marilyn Ronstadt, Hutronix, Inc. and the Company whereby the parties
exchanged mutual releases relieving the Company of any liabilities that it had
or might have in the future with the parties. On March 4, 1996 the liability
under the guarantee to Bank One was satisfied.
On closing of the Merger between Kenmar and the Company, the Company is
obligated to pay a former minority shareholder of Hutronix, Inc. $10,000 and
issue 50,000 shares of restricted common stock in exchange for a release from
all future obligations the minority shareholder may be entitled to. Also, on
closing, the Company is obligated to pay the former landlord of Hutronix, Inc. a
fee for releasing the Company from a Corporate guarantee on the lease of the
building located at 1150 E. Palmdale, Tucson, AZ. The funds for these
transactions are part of the funding needed for the closing of the Merger
agreement. If the Merger is not completed, these liabilities would still be
outstanding.
On June 30, 1995 the Company sold its wholly owned subsidiary, J.A.
Industries (Canada) Inc. to an unrelated third party. The sale relieved the
Company of any long term debt associated with the subsidiary. Furthermore, the
Company obtained releases for all corporate guarantees that it had provided for
the subsidiary subject to certain cash payments as follows. The Company settled
with one creditor by issuing shares of restricted stock in the amount of 136,000
shares to satisfy approximately $34,000 USD of debt. On completion of the Merger
between Kenmar and the Company, the Company will incurred a cost of $5,000 USD
to settle with one creditor that comes from a corporate guarantee of the
Company. The funds for settling this amount will come from the funds necessary
to close the Merger transaction. If the Merger is not completed, then this
liability would still be outstanding with the creditor.
In March, 1996, the Company came to a final agreement with the former
owners of Capital City Plastics whereby Capital City Plastic and John Szaniszlo
will provide the Company with a release from all liabilities and deliver to the
Company 600,000 shares of common stock issued to Capital City Plastics in
exchange for the Company's release from liabilities, $10,000 and the issuance of
50,000 restricted common stock of the Company.
31
<PAGE>
The funds necessary to complete this transaction are part of the funding needs
of the Merger. If the necessary funds were not raised or the Merger was not
completed, the Company's position would be that there are no liabilities
outstanding with Capital City Plastic or John Szaniszlo as they had breached the
original agreement between the parties.
On completion of the Merger, for which there can be no guarantee, the
Company will be assuming the following liabilities based on the Kenmar audited
financial statements for the period ending August 31, 1995 and unaudited
financial statements for the six month period ending February 29, 1996:
Line of credit/loans $ 0
Current maturities of long term debt $ 4,317
Current obligations under capital lease $ 35,203
Accounts payable - trade $ 621,852
Income tax payable $ 0
Other accrued liabilities $ 94,833
===========
Total Current Liabilities $ 756,205
Long Term Debt, less current maturities $ 541,236
Long term obligations under capital lease $ 57,750
===========
Total Liabilities as of February 29, 1996 $ 1,021,386
(See also "Preferred Stock of Kenmar", Page 35)
Line of Credit: In March, 1994, Kenmar negotiated a $4 million revolving line of
credit with a commercial lender which allowed it to borrow up to 80% of eligible
receivables and was secured by a first lien on all the Company's receivables and
inventory. Borrowing under this line bears interest at prime plus 2.5% (minimum
7.5%) in addition to an annual facility fee and other costs. Kenmar paid off the
line of credit in the fourth quarter of its fiscal year ended August 31, 1995.
Kenmar has not requested a renewal of the line of credit.
Long-term Debt: Long term debt of Kenmar consists of the following:
1995 1994
-------- --------
Subordinated promissory notes payable monthly $524,855 $646,674
instalments of $9,009 including interest at 8%
through October 2002
Bank debt collateralized by a first lien on all the -- $217,932
Company's plant, equipment, furniture and
fixtures payable in monthly instalments of
$7,950, including interest at prime +1%. this
loan was paid off prior to august 31, 1995
32
<PAGE>
Uncollateralized note payable to stockholder $ 39,482 $ 43,468
repayable with interest at 8% in 59 monthly
installments of 4610 and a balloon payment
of $30,083 on October 15, 1997
Notes payable secured by equipment repayable $ 18,403 $ 42,202
in monthly installments of $2,435 including
interest at 16.85% through April 1996.
(Subsequently, this note was satisfied)
Note payable to stockholder in monthly -- --
installments of $2,535 including interest
at 8% through April, 1994, collateralized
by certain equipment.
$582,380 $950,276
Less current maturities $ 22,359 $293,242
-------- --------
$560,021 $657,034
======== ========
========
Principal maturities of debt Kenmar at August 31, 1995 are as follows:
Year ending August 31
1996 $ 22,359
1997 $ 73,269
1998 $104,776
1999 $ 80,451
2000 $ 87,130
Thereafter $214,395
--------
Total Long-term debt $582,380
=======
Obligations Under Capital Leases of Kenmar:
Kenmar leases equipment under capital leases which expire on various
dates through 1998.
1995 1994
---- ----
Machinery and equipment $200,066 $200,066
Vehicles - $ 27,871
-------- --------
Total $200,006 $227,937
The following is a schedule by years of future minimum lease payments
under capital leases as of august 31, 1995 for Kenmar
Year ending August 31
33
<PAGE>
1996 $ 48,272
1997 $ 49,701
1998 $ 29,431
--------
Total minimum lease payment $127,404
Further Kenmar Commitments:
Kenmar leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1995, 1994 and 1993, Kenmar
incurred rental expenses of $214,505, $271,488 and $230,175 respectively under
these leases. Future minimum lease payments under the terms of the above leases
are as follows:
1996 $38,422
1997 $ 2,952
1998 $ 2,460
Preferred Stock of Kenmar:
The aggregate number of authorized shares of preferred stock is
100,000. Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors of Kenmar.
Kenmar issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred") in 1994. During 1993, the Company issued
716 shares of Class A Preferred including upon receipt of the issue price, 200
shares subscribed at August 31, 1992. Each share of Class A Preferred may be
called or put at any time after five years from the date of issuance at a rate
of one and one-half times the issue price. Redemption requirements of Class A
Preferred stock at August 31, 1995 were as follows:
1997 $150,000
1998 $447,000
1999 $ 68,700
2000 $ 86,250
--------
Total $751,950
========
The Class A Preferred is entitled to a 10% cumulative dividend payable
quarterly, subject to the provisions of North Carolina law. Cumulative unpaid
dividends are $73,008, $23,378, and $7,643 as of August 31, 1995, 1994, and 1993
respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price plus cumulative dividends in
arrears. Cash dividends of $0, $32,910 and $40,031 were paid in 1995, 1994, and
1993, respectively.
34
<PAGE>
Results of Operations
The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
Fiscal Period Year Ended June 30, 1995 Compared to Fiscal Period Year
Ended June 30, 1994. The auditors report for the period ending June 30, 1995
states that as a result of the discontinuation of operations of the Company
there is substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In June, 1995 the Company disposed of one of its wholly owned operating
subsidiaries J.A. Industries (Canada) Inc. Subsequent to the year end the
Company disposed of an inactive subsidiary, Granite Marketing Corporation. In
early March 1995, the Company entered into negotiations with Karl G. Ronstadt
and Baboquivari Cattle Company, former shareholders of Hutronix, Inc. to settle
outstanding issues and potential liabilities. The Company and the former
shareholders could not come to any resolution. On September 23, 1995, the former
shareholder of Hutronix, Inc. exercised his right under a put/call agreement
dated September 23, 1993 and attached to the original purchase agreement of
Hutronix, Inc. dated September 15, 1993. The put option allowed the former
shareholder to put 262,000 shares of the Company to the Company at a price of
$2.25 creating a liability of $589,500. The Company did not have the resources
to pay the liability. On November 21, 1995, subsequent to the year end, the
Company entered into an agreement to reverse the acquisition of Hutronix, Inc.
the only remaining operating subsidiary of the Company to satisfy all
outstanding liabilities between the former shareholder of Hutronix and the
Company. The condition that effected the decision to enter into the agreement to
reverse the Hutronix acquisition occurred prior to the Company's year end.
Although the assets and operations of Hutronix were included in the Company's
June 30, 1995 financial statement, they were subsequently disposed of and it was
so reported in the Company's December 31, 1995 financial statement.
As of June 30, 1995, the Company had revenue of $4,330,211 which was a
7.8% increase over the comparable period ended June 30, 1994. Cost of sales were
$3,618,347 for the period ended June 30, 1995 as compared cost of sales of
$3,674,688 for the corresponding period ending June 30, 1994. The maintaining of
cost of sales at the same level as 1994 but an increase in revenue by 7.8%
generated a gross margin of $711,864 or 16.9% of Sales for the period ended June
30, 1995 compared to gross margin of $368,252 or 9.1% for the period ended June
30, 1994. General and administrative expenses for June 30, 1995 were $1,623,487
which was a 22.8% increase compared to the corresponding period for June 30,
1994 of $1,256,765. The increase is partly reflected by the increase in
management expenses to increase the revenue for the period. Part of the General
and Administrative expenses for 1995 were paid of non-cash items whereby the
Company issued restricted common shares for services rendered or settlement of
debt in the amount of $51,982 compared to the issuance of no shares for the
corresponding
35
<PAGE>
period ending June 30, 1994 for similar reasons. The Company had a total loss
for the year of $1,714,526 or ($0.25)/shares as compared to a total loss of
$1,497,305 or ($0.28)/share for the period ending June 30, 1994.
Subsequent to the year ending June 30, 1995 the Company entered into a
Merger with Kenmar. A condition of the Merger is that the Company is to have no
liabilities and working capital of $200,000. To this end, though the Company has
an inactive status, there are substantial one time charges to eliminate all
liabilities and to settle contract obligations.
For the first quarter period ending September 30, 1995 the Company had
revenue of $532,310. compared to sales of $1,179,629 for the corresponding
period in 1994. The decrease in sales can be attributed to the disposition of
J.A. Industries (Canada) Inc. prior to year end June 30, 1995 as Hutronix, Inc.,
the only remaining operating subsidiary, had an increase in sales of 18% over
the corresponding period ended September 30, 1994. Cost of sales for the 3 month
period ended September 30, 1995 were $455,030 generating a gross profit margin
of $77,280 or 14.5% of sales compared to a cost of sales of $1,013,768
generating a gross profit of $165,861 or 14% of sales for the 3 month period
ended September 30, 1994. Again, the decrease in cost of sales can be attributed
to the disposition of J.A. Industries (Canada) Inc. prior to the year ended June
30, 1995. For the three month period ending September 30, 1995 G&A was $781,384
compared to $239,620 for the corresponding period in 1994. Increased legal and
accounting expenses accounted for approximately $75,000 of the expense. As well,
a large portion of the expense was a one time charge to pay outstanding
liabilities and the termination of outstanding contracts. The preceding items,
except for accounting fees, were mostly settled with the issuance of restricted
common stock of the Company. On September 23, 1995, Baboquivari Cattle Company
exercise its put option under a put/call agreement dated September 23, 1993. The
option obligated the Company to purchase 262,000 shares of the Company's stock
from Baboquivari at a price of $2.25 creating an unfunded liability of $589,500.
Subsequent to the first quarter ended September 30, 1995, the Company entered
into an agreement with Baboquivari Cattle Company to reverse its September 15,
1993 acquisition agreement of Hutronix, Inc. in exchange for the release of all
liabilities from Hutronix, Inc and Baboquivari Cattle Company.
On November 21, 1995 the Company entered into an agreement with
Baboquivari Cattle Company to transfer all title of Hutronix, Inc. to
Baboquivari Cattle Company in exchange for a release of all liabilities. Due to
this disposition of the last operating subsidiary of the Company, the Company
had no revenue for the three month period ending December 31, 1995 compared to
of $1,237,956 for the three month period and $2,417,585 for the six month period
ending December 31, 1994. General and administrative expenses for the period
three month period ended December 31, 1995 were $81,921 compared to the
corresponding three month period in 1994 of $239,877. The Company experienced a
net loss of $83,316 for the three month period ending December 31, 1995 compared
to a loss of $86,107 for the corresponding period in 1994. The net loss from
operations for the six month period ending December 31, 1995 was $746,960
compared to $190,989 for the corresponding period in 1994. The loss in 1995 is
36
<PAGE>
attributed to the reorganization and elimination of ongoing contracts and
liabilities the Company needed to satisfy to proceed with its Merger with
Kenmar. The Company had a shareholder's deficit of $282,683 for the period ended
December 31, 1995 compared to net equity of $595,265 for the corresponding
period in 1994. Accounts payable at December 31, 1995 were $138,167 compared to
$928,358 for the corresponding period 1994. Due to the discontinuation of
operations, the Company's payables were reduced dramatically. Most of the
expense is attributed to legal and accounting costs due to the restructuring of
the Company. Subsequent to the disposition of Hutronix, the Company was relieved
of its obligation to guarantee the mortgage on the facilities occupied by
Hutronix in Douglas, Arizona. Therefore, long term debt was reduced to zero from
$561,842 in the corresponding prior year period.
For the three month period ending March 31, 1996 the Company had no
operations and therefore no revenue compared to sales of $1,035,397 for the
three month period ended March 31, 1995 and sales of $3,452,982 for the nine
month period ended March 31, 1995. General and Administrative expenses for the
three month period ended March 31, 1996 were $298,405 compared to $262,027 for
the corresponding period in 1995. G&A for the nine month period ended March 31,
1996 was $1,043,970 compared to $741,524 for the corresponding period in 1995.
The G&A costs can be attributed to the restructuring and reorganization the
Company experienced from the disposition and discontinuation of operations and
the Merger agreement the Company entered into with Kenmar Business Groups, Inc.
The Company had a net loss from operations of $1,118,561 for nine month period
ended March 31, 1996 compared to $300,884 for the corresponding nine month
period in 1995. The Company had a Shareholder's deficit of $203,695 at March 31,
1996 compared to Net Equity of $670,141 for the same period 1995. Current
liabilities were significantly reduce due to cessation of operations to 220,276e
for the period ended March 31, 1996 compared to Current Liabilities of $964,465
for the corresponding period ended March 31, 1995.
37
<PAGE>
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38
<PAGE>
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39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Kenmar provides manufacturing services to original equipment manufacturers
('OEM's') in the electronics industry, including producers of industrial
controls, computers & peripherals and instrumentation. Primary services include
materials procurement, printed circuit card and chassis assembly, and testing.
Kenmar has approximately 20 customers, 6 of which accounted for 79% of its sales
for the six months ending February 29, 1996. Following to the loss of its
largest customer in 1995, Kenmar conducted its operations in 42,000 square feet
of flex space with 85 employees. Since such loss, steps have been taken to size
the operations to more closely match the revenue without losing the key
employees and skills required to regrow the business. To date, this has caused
Kenmar to incur losses from operations for fiscal 1996. Kenmar currently
operates one facility in Raleigh, North Carolina with approximately 40 employees
in 21,000 square feet of flex space.
Operations are near 40% capacity with one shift active.
Operating results are generally affected by a number of factors, including the
relative mix of higher volume/lower margin business and lower volume/higher
margin business, price competition, raw material costs, labor efficiencies, the
degree of automation that can be used in the assembly process and the
efficiencies achieved by Kenmar in managing inventories and fixed assets. The
amount of sales Kenmar has derives from turnkey manufacturing in which it
procures some or all of the components necessary for production vs the amount of
sales derived from labor sales directly effects the overall gross margin of the
business. Inflation has not been a significant factor in the results of Kenmar's
operations because Kenmar's price quotations for turnkey jobs are generally
valid for thirty days and Kenmar typically reserves the right to pass on certain
cost increases under some of its turnkey orders or contracts.
The financial information and discussion below should be read in conjunction
with the unaudited financial statements dated February 29, 1996 and February 28,
1995 and the audited financial statements, and the notes attached thereto, dated
August 31, 1995.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED FEBRUARY 28, 1995 AND FEBRUARY 29,
1996 BASED ON THE UNAUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
Six Months Ending February 29, 1996
& February 28, 1995
1996 1995
<S> <C> <C>
Net sales 100% 100%
Cost of goods sold 101.4 90.1
------ ------
Gross profit (1.4) 9.9
Selling, general, and administrative 29.3 5.4
Operating income (30.7) 4.5
Interest & other expenses (net) 126.1 (1.7)
------ ------
Income before income taxes 95.4 2.8
Income taxes -- --
Net income 95.4 2.8
====== ======
</TABLE>
The factors affecting changes in the percentages shown in the foregoing table
are discussed below. SETTLEMENTS: During the first quarter of fiscal 1996,
Kenmar reached various Settlements with its largest customer, which represented
80% of Kenmar's ongoing order input at such time, and its suppliers for the
40
<PAGE>
cancellation and discontinuation of production of nearly fifty products and
assemblies. As a part of the settlement, Kenmar signed an agreement with its
then largest customer that relieved Kenmar of trade accounts payable to the
customer and other suppliers of $1,121,151. The agreement provided the customer
relief of trade payables to Kenmar of $52,957. Further, suppliers to Kenmar for
materials and services used on behalf of its largest customer and related
product lines relieved Kenmar of approximately $500,000 of accounts payable.
Supplier Settlements were essentially 50% of the amount owed with half of the
50% being paid in quarterly installments beginning January 1, 1996. Though a
significant number of suppliers were involved above, Kenmar has been able to
continue to purchase materials through ordinary sources, including some of the
suppliers mention above.
With eighty percent less order input than that of the prior period and a reduced
infrastructure, Kenmar continued operations with a core group of employees and
an average base revenue of approximately $225,000 per month. Kenmar's financial
performance more closely mirrors that of a company emerging from a new company
with fixed overheads established to support higher levels of revenue than are
currently attainable; however, without such overhead and infrastructure, Kenmar
will not be able to attract its targeted business.
NET SALES. Net sales for 1996 were $1,354,383, $6,911,885 less than that of the
same period in 1995 primarily due to a $7,434,602 decrease in shipments to
Kenmar's largest customer, offset by increases to other customers. Three new
customers with approximately $250,000 of new orders were added in 1996.
GROSS PROFIT. Gross profit was reduced $835,702 from 1995 to 1996 resulting
primarily from the substantial drop in net sales. Material cost of sales were
18% lower, offsetting the effect of volume reduction. There were also offsetting
cost reductions in direct labor of $366,554 and manufacturing overhead of
$280,155. Operations were run at a loss, as planned, due to the fixed overhead
expenses kept in place to regrow the business during 1996. Such overhead could
not be fully absorbed by the level of sales during the six month period
discussed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A expense for 1996 was
$49,175 less than that of 1995, resulting from $86,050 reduction in sales
commissions, partially offset by compensation to a new sales employee. Kenmar
evaluates, when circumstances warrant, the recoverability of the cost in excess
of net assets of acquired businesses by comparing the sum of the undiscounted
projected future cash flows attributable to each customer to the carrying value
of the related asset. Projected cash flows are estimated for a period
approximating the remaining lives of Kenmar's long-lived assets. As a result of
such evaluation Kenmar took a writedown of $160,000 during the year ended August
31, 1995.
OPERATING INCOME. Profit from operations for 1996 prior to the addition of
misc. income was ($416,760) or $664,240 less than that of 1995. This is the
result of substantial lower volume offset by margin mix and cost reductions
as explained above. The misc. income of $1,724,781 reflects the income
generated from the Settlements described above.
INTEREST EXPENSE. Interest for 1996 of $29,214 was substantially reduced from
$141,968 in 1995 as a result of Kenmar's cash and cash equivalents position
which has permitted operations without outside banking or any other lending
sources.
INCOME TAX EXPENSE. Kenmar has not recorded an income tax provision at this time
due to the tax loss carry forward from fiscal 1994. In addition, Kenmar believes
that it met the insolvency tests per section 108 of the Internal Revenue Code
prior to the Settlements causing the income at that time to be exempt from
taxation. If Kenmar fails to pass the aforementioned insolvency test, the
booking of a tax provision could adversely effect its net income and earnings
per share for the period ending February 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Kenmar's cash and cash equivalents increased by $699,187 from 2/28/95 through
2/29/96. The majority of the cash flow generated during 1996 came from the
Settlements as described above.
41
<PAGE>
Kenmar used approximately $50,000 in cash in investing activities primarily for
capital expenditures in new test equipment to support new customer programs.
Payments were made to reduce long-term debt during 1996 as well as the first
quarterly installment due per the Settlements, as described above, in an
approximate amount of $46,500 on January 1, 1996. Dividends for the Class A
Cumulative Preferred stock were paid during 1996 for the first quarter ending
11/30/95 in the amount of $12,408.
As of February 29, 1996, Kenmar has not required financing from outside banking
or any lending sources.
COMPARISON OF YEARS ENDED AUGUST 31, 1994 AND AUGUST 31, 1995 BASED ON
THE AUDITED FINANCIAL STATEMENTS REFERENCED HEREIN
The follow table sets forth certain operating data as a percentage of net sales:
Year Ending August 31st
1995 1994
Net sales 100% 100%
Cost of goods sold 89.2 98.9
------ ------
Gross profit 10.8 1.1
Selling, general, and administrative 7.9 6.4
Operating income 2.9 (5.3)
Interest & other expenses (net) (1.7) (1.0)
------ ------
Income before income taxes 1.2 (6.4)
Income taxes -- (0.4)
Net income 1.2 (6.0)
====== ======
The factors affecting changes in the percentages shown in the foregoing table
are discussed below.
NET SALES. Net sales are net of discounts and customer returns and are
recognized upon shipment of an order to a customer. Net sales decreased
$7,361,935 or 32% from $22,927,597 in 1994 to $15,565,662 in 1995 due to a
decrease of $8,070,393 of our highest volume product line at that time, offset
by other increases. Shipments to Kenmar's largest customer accounted for
approximately 81% of sales in 1995 and approximately 65% of sales during 1994.
GROSS PROFIT. Gross Profit equals net sales less cost of goods sold, which
consist of labor and material, manufacturing costs (primarily lease payments
for, and depreciation of, manufacturing equipment and facilities) and other
manufacturing costs. Gross profit increased in 1995 to $1,682,572 from $242,429
in 1994 as Kenmar consolidated its operations from two facilities into one and
focused on its strategic customers and their key products. The negative effect
of the $7,361,935 volume drop was offset by a better product mix and by
reductions in direct labor of $193,393 and manufacturing expenses of $506,902.
There were also non-recurring expenses related to downsizing. During 1995,
Kenmar reviewed its leasehold improvements, machinery, equipment and computer
hardware and software for impairment as a result of it ceasing to do business
with its major customer. Kenmar estimated future cash flows and compared it with
the net asset value of the related assets. This analysis resulted in a write
down of approximately $180,000 which is included as part of cost of goods sold
in the income statement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ('SG&A') consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SG&A expense were
reduced from $1,466,289 in 1994 to $1,223,587 in 1995 as the above mentioned
consolidation was effected. Changes made included a reduction of sales and
marketing expenses of $148,000, mostly sales
42
<PAGE>
commissions of $136,000, and other reductions of administrative expenses of
$35,000. There were also non-recurring expenses in 1994 of approximately
$60,000.
OPERATING INCOME. Operating income is gross profit less SG&A. Operating income
increased from a loss of $1,223,860 in 1994 to $448,985 in 1995 as Kenmar
eliminated the above mentioned product lines and consolidated its operations.
INTEREST & OTHER INCOME. The interest & other income for 1995 increased slightly
from $233,795 in 1994 to $267,487 due mainly to the increased cost of capital
from its lenders.
INCOME TAX EXPENSE. Kenmar did not book an income tax provision due to the
tax loss carry forward from fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
In past years Kenmar has financed its operations primarily with borrowing from
banks, lending institutions, private lenders and cash flow from operating
activities. Cash flow provided by operating activities was $3,392,419 and used
by operating activities was $184,162 in 1995 and 1994 respectively. Of the cash
provided/(used) in 1995, the major items were a 55% reduction of inventory, 30%
reduction of accounts receivable, and a (22%) reduction of accounts payable. The
majority of the cash flow from operating activities in 1995 was the result of
the phase-out of the manufacturing activities that resulted in the Settlements
described above in 'Results of Operations'.
Kenmar used cash in investing activities primarily for capital expenditures in
1994 and 1995. These outlays consisted primarily of manufacturing equipment and
leasehold improvements.
Kenmar generated cash from financing activities in 1994 from the issuance of
short & long-term debt and Class A Cumulative Preferred and Common stock
totaling $443,982. In 1995 Kenmar repaid $1,810,054 in debt obligations.
43
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Statements of Income
Six-month periods ended February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ending
February 29, February 28,
1996 1995
<S> <C> <C>
Sales $ 1,354,383 $ 8,266,268
Cost of Goods Sold 1,373,793 7,449,976
----------- -----------
Gross profit (19,410) 816,292
General, selling and administrative expenses 397,350 446,525
----------- -----------
Operating income (loss) (416,760) 369,767
Other income (expense)
Interest income 30,443 2,610
Miscellaneous income 1,724,781 --
Interest expense (29,214) (141,968)
Miscellaneous expense (18,300) --
----------- -----------
Other income (expense) 1,707,710 (139,358)
----------- -----------
Income (loss) before income taxes 1,290,950 230,409
Income tax benefit (expense) -- --
----------- -----------
Net income 1,209,950 230,409
Accretion of preferred stocks (29,285) (27,003)
Undeclared dividend on preferred stock (12,408) (24,323)
----------- -----------
Net income applicable to common stockholders $ 1,249,258 $ 179,084
----------- -----------
Weighted average number of shares 64,714 60,369
----------- -----------
Net income per common share and common
equivalent $ 19.30 $ 2.97
----------- -----------
</TABLE>
44
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
February 29, February 28,
1996 1995
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 744,533 $ 45,346
Accounts receivable - trade, net of allowance for
doubtful accounts of $5,500 in 1996 and $65,807
in 1995. Also net of allowance for returns of
$22,410 in 1995 531,478 2,165,026
Accounts receivable - other 15,865 3,609
Inventories 317,531 1,256,409
Prepaid expenses and other current assets 110,085 51,296
---------- ----------
Total current assets 1,719,492 3,521,686
---------- ----------
Property and equipment - net 496,337 908,665
---------- ----------
Other assets:
Deposits and other assets 72,998 352,382
Cost in excess of net assets of acquired business
net of accumulated amortization of $ 212,250
In 1996 and $ 35,000 in 1995 87,750 265,000
---------- ----------
Total other assets 160,748 617,382
---------- ----------
Total assets 2,376,577 5,047,733
---------- ----------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit -- 1,911,547
Current maturities of long-term debt 4,317 132,003
Current obligations under capital leases 35,203 35,203
Accounts payable, trade 621,852 2,397,521
Ohter accrued liabilities 94,833 57,182
---------- ----------
Total current liabilities 756,205 4,533,456
---------- ----------
Long-term debt, less current maturities 541,236 627,614
---------- ----------
Long-term obligations under capital leases 57,750 94,283
---------- ----------
Class A preferred stock, including accretion and
accrued dividends 759,129 626,206
---------- ----------
</TABLE>
45
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
<TABLE>
<CAPTION>
February 29, February 28,
1996 1995
<S> <C> <C>
Stockholders' equity (deficit)
Common stock, $1 par value; authorized 100,000
shares in 1996 and 1995 issued and outstanding 64,714 64,714
Additional paid-in capital 213,941 243,226
Retained earnings (deficit) (16,398) (1,141,766)
---------------- ---------------
Total stockholders' equity (deficit) 262,257 (833,826)
---------------- ---------------
Total liabilities and stockholders' equity (deficit) 2,376,577 5,047,733
---------------- ---------------
</TABLE>
46
<PAGE>
Proposal 2
ELECTION OF DIRECTORS
Five (5) directors are to be elected at the Special Meeting,
each to hold office until the next Annual Meeting of Stockholders and until a
successor is elected. It is the intention of the persons named in the enclosed
proxy form to vote, if authorized, the proxies for the election as directors of
the five (5) persons named below as nominees. If any nominee declines or is
unable to service as a director (which is not anticipated), the persons named as
proxies reserve full discretion to vote for any other persons who may be
nominated.
None of the nominees have previously held positions with the
Corporation. Election of the nominees is a condition precedent for the
effectiveness of the Merger Agreement. The following table sets forth for each
nominee for election as a director his or her name and his or her principal
occupation:
<TABLE>
<CAPTION>
PERSONAL INFORMATION DIRECTOR
NAME AGE AND OCCUPATION SINCE
<S> <C> <C> <C>
Kenneth H. Marks 32 Has been Chief Executive, --
President, and a director
of Kenmar since 1984. Kenneth
H. Marks is the son of Kenneth
L. Marks listed below
Craig Macnab 39 Has been a director of Kenmar --
Since 1993. He has been a
managing partner with McNeil
Advisors since 1992. Prior
to joining McNeil Advisors, Mr.
Macnab was the Managing Partner
Of Bradford & Co. He is a
director of J.D.N. Realty.
47
<PAGE>
Alan G. Finkel 62 Has been a director of Kenmar --
since 1992. Has been a Manage-
ment consultant since 1989
Prior to 1989 he held numerous
Positions with ITT, including
President & General Manager of
MacKay Communications, a division
of ITT
Kenneth L. Marks(1) 61 Has been a director of Kenmar --
since 1984. Management Consultant
Since October 1995. Director of
Labor Relations and personnel
positions from 1974 thru 1995
with Carolina Freight Carriers
Corporation. Is the father of
Kenneth H. Marks, listed above
Ray Steckenrider 71 has been a director of Kenmar --
since 1995. Has been President
of Autotron Corporation since
1986
</TABLE>
(1) Kenneth L. Marks is the father of Kenneth H. Marks
Executive Compensation
The following table shows all the cash compensation paid or to be paid
by the Company or any of its subsidiaries, as well as certain other compensation
paid or accrued, during the fiscal years indicated, to the Chief Executive
Officer for such period in all capacities in which he served. No other Executive
received total annual salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------- ------ ------ ------ ------ ------- ------ ------- -----
Other Restrict All other
Annual ed stock LTIP Compensa-
Name and Principal Bonus/ Compen- Award Options Payouts tion
Position Year Salary ($) sation($) ($) SARs ($) (i)
- ------------------ ---- ------ ------ --------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Knight 1995 $36,000 0 0 0 0
President 1994 $36,000 0 10,000
1993 $36,000
Alexander Michie 1995 $10,000 0 0 0
former director 1994 $36,000 0 10,000
1993 $36,000
Karl Ronstadt 1995 $62,000 0 0 0
former director 1994 $72,000 0 10,000
1993 $54,000
48
<PAGE>
James Burns 1995 $55,000 0 0 0 0
Chairman of the 1994 0
Board 1993 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Percent of total
Options/SARs
Options/ Granted to
SARs Employee Exercise or base Expiration
Name Granted Fiscal Year Price ($/SH) Date
<S> <C> <C>
Robert W. Knight 0 0 N/A N/A
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-money
Options/SAR Options/SAR
Shares at FY-end (#) at FY-end (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert W. Knight 0 N/A 10,000 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive officer concerning the grants of options and Stock Appreciation Rights
("SAR") during the past fiscal year:
Estimated Future Payout under Non-Stock
Price Based Plans
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other maturation or Threshold Target Maximum
Name Rights (#) Payout ($ or#) $ or #) ($ or #)
- ------------------ ------------- ------------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Robert W. Knight 0 0 N/A N/A N/A
</TABLE>
49
<PAGE>
Under the terms of the Merger Agreement, the following persons
have been designated to serve as executive officers of the Company following the
consummation of the Merger:
Present
Name Age Title Position at Kenmar
Kenneth H. Marks 32 President President
Chief Executive Chief Executive
Officer Officer
Gene Smith 45 Chief Operating Chief Oper.
Officer Officer
Kenneth L. Marks 61 Secretary Secretary
As a condition precedent of the Merger, JA shall enter into a
management consulting agreement with G.M. Capital Partners Ltd. ("GMCP") a,
corporation unaffiliated with any parties to the Merger Agreement. The agreement
provides for a term of 12 months with monthly payments to GMCP of $5,000. In
addition, certain additional fees shall be paid to GMCP in the event it arranges
any financing for the benefit of the Company.
These additional fees include a cash payment equal to 10% of the
gross proceeds of any private financing it arranges for the Company. In the
event GMCP arranges a public offering or sells more than 5% of the Company, its
fees shall be a cash payment of 3% of the gross proceeds of the offering. GMCP
had no role in connection with the proposed merger between the Company and
Kenmar.
The Company has sole discretion in accepting financing arranged
by GMCP and all additional fees earned by GMCP shall be paid on the closing of
the transaction.
50
<PAGE>
Commencing at the Effective Time of the Merger, the Company
shall enter into an employment agreement with Kenneth H. Marks providing for Mr.
Marks to become its Chief Executive Officer for a period of 5 years at a salary
of $125,000 per year. Among additional terms, the agreement also provides for a
yearly bonus equal to 8% of the net after tax profit of the Company; a 5% annual
salary increase; a grant of 350,000 options pursuant to a Qualified Stock Option
Plan and either a $100,000 (1) loan or (2) payment upon the signing of an
employment agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT
The following table sets forth, as of March 15, 1996 information
with respect to (1) any person known by the Company to own beneficially more
than five percent (5%) of the Company's Common Stock, (2) the shares of Common
Stock beneficially owned by each officer and director of the Company, and (3)
the total of the Company's Common Stock beneficially owned by the Company's
officers and directors as a group.
Stockholder Beneficially owned Class
Karl Gelbard 10,000 0.1%
4001 South Ocean Drive
Hollywood, FL 33019
Robert W. Knight 297,259 3.2%
4025 Sunset Boulevard
North Vancouver, B.C
Canada
All directors and 307,259 3.2%
offices as a group
(2 persons)
51
<PAGE>
PRINCIPAL STOCKHOLDERS OF J.A. INDUSTRIES, INC.
(AFTER MERGER WITH KENMAR)
The following table sets forth as of the effective date of the merger
and after the 1 for 4 reverse split, certain information with respect to the
shares of the Company's Common Stock to be beneficially owned by (i)
stockholders owning more than 5% of the Company's Common Stock, (ii) the
Company's directors and officers, and (iii) all of the Company's directors and
officers as a group.
Stockholder Beneficially owned Class
Kenneth H. Marks 417,088 7.6%
Craig Macnab 66,534 1.2%
Royal Bank of Scotland 375,000 6.9%
Kenneth L. Marks 18,204 0.3%
Ray Steckenrider 1,154 nil
All directors and
officers as a group
(4 persons) 502,980 9.2%
52
<PAGE>
COMMON STOCK OF THE COMPANY
Market Price Information
The Company's Common Stock is traded over-the-counter and its
quotations are carried in the National Quotation Bureau's daily "Pink Sheets."
The following table shows the range of high and low bid or last
trade quotations for the Company's Common Stock in the over-the-counter market
as reported to the Company by the National Quotation Bureau Incorporated. The
quotations reflect prices between dealers, without retail mark-ups, mark-downs
or commissions and may not necessarily represent actual transactions or be
indicative of prices at which the Company's stock was traded. In November of
1992, the Company effected a reverse stock split on a one for five basis. All
bids reflected below have been adjusted to give effect to the reverse split.
COMMON STOCK
Period Bid Price
High Low
through April 30, 1996 3/4 13/32
Quarter ended March 31, 1996 21/32 13/32
Quarter ended December 31, 1995 11/16 .19
Quarter ended September 30, 1995 1 3/8 27/32
Quarter ended June 30, 1995 1 3/8 1
Quarter ended March 31, 1995 2 1
Quarter ended December 31, 1994 2 1/8 1 9/16
Quarter ended September 30, 1994 2 1 1/2
Quarter ended June 30, 1994 2 1 3/4
Quarter ended March 31, 1994 2 1/4 1 5/8
Quarter ended December 31, 1993 2 3/8 1 3/8
Quarter ended September 30, 1993 21/2 1 1/2
The number of record holders of the Company's Common Stock, as
of March 15, 1996, was approximately 305. However, the Company believes that
there may be substantially more beneficial holders.
53
<PAGE>
Dividend Policy.
The Company has not paid any dividends on its Common Stock since
its inception. The Company anticipates that for the foreseeable future,
earnings, if any, will be retained for use in the business or for other
corporate purposes, and it is not anticipated that cash dividends will be paid
on its Common Stock.
POST MEETING FINANCING
In a private transaction, subject to stockholder approval of the Merger
Agreement, the Company has raised $510,000 through the sale of 1,500,000 shares
(pre-split) of its Common Stock. The monies are being held in escrow, to be
released to the Company upon the approval by stockholders of the terms of the
Merger Agreement. As of May 31, 1996 there were approximately 9,437,304 shares
of the Company's Common Stock outstanding. In the event the Merger Agreement is
approved by the stockholders an additional 1, 500,000 shares would be issued and
accordingly , approximately 10, 937,304 shares will then be outstanding. As a
result of the issuance of these additional 1,500,000 shares, the existing
shareholders of the Company will receive a 43 % interest in the merged entity
and the holder of the 1,500,000 shares 7% interest. The interest of the former
Kenmar shareholders in the merged entity remains at 50%.
Proceeds of the post meeting financing shall be used as follows:
Commissions $ 51,000
Professional Fees 70,000
Accounts Payable 168,000
Working Capital 221,000
--------
$ 510,000
54
<PAGE>
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO
PROVIDE FOR A CHANGE OF NAME
On January 22, 1996, the Company's Board of Directors approved
subject to stockholder approval, an amendment to the Company's Certificate of
Incorporation to provide for a change in name of the Corporation to Electronic
Manufacturing Services Group, Inc. The purpose of the change in name is to more
adequately describe the future operations of the Company.
The affirmative vote of a majority of the votes present or
represented by proxy and entitled to vote at the Special Meeting of
Stockholders, at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present and voting, either in person or
by proxy, is required for approval of this proposal. Abstentions and broker non-
votes will each be counted as present for purposes of determining the presence
of a quorum. Abstentions will have the same effect as a negative vote. Broker
non-votes, on the other hand, will have no effect on the outcome of the vote.
The Board of Directors unanimously recommends a vote "FOR"
approval of the proposed amendment to the Certificate of Incorporation to
provide for a change of name.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue twenty million (20,000,000)
shares of Common Stock, $.0025 par value per Share and 2,000,000 shares of
Preferred Stock, $.01 par value per share. Each outstanding Share of Common
Stock is entitled to one vote, either in person or by proxy, on all matters that
may be voted upon by the owners thereof at meetings of the stockholders.
The holders of Common Stock (i) have equal ratable rights to
dividends from funds legally available therefor, when, and if declared by the
Board of Directors of the Company; (ii) are entitled to share ratably in all of
the assets of the Company available for distribution to holders of Common Stock
upon liquidation, dissolution or winding up of the affairs of the Company; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per Share on all matters on which stockholders may vote at
all meeting of stockholders.
There are no preferred shares currently designated, issued or
outstanding. The Board of Directors is empowered to designate classes of the
Company's Common and Preferred Stock and to establish relative rights,
preferences, qualifications and restrictions with regard to any designated
classes.
55
<PAGE>
Proposal 4
Approval for a 1 for 4 Reverse Stock Split
On January 22, 1996 the Company's Board of Directors approved,
subject to stockholder approval, a 1 for 4 reverse stock split in which one (1)
share of Common Stock will be outstanding for each four (4) shares of Common
Stock previously outstanding. The primary reason for the proposed reverse stock
split is to reduce the number of outstanding shares as well as comply with the
provisions of the Merger Agreement.
Currently, the Company is authorized pursuant to its Certificate
of Incorporation to issue 20,000,000 shares of Common Stock and 2,000,000 shares
of Preferred Stock. As of May 31, 1996, there were 9,437,304 shares of Common
Stock outstanding and no shares of Preferred Stock outstanding. Presuming the
issuance 1,500,000 pre split shares of Common Stock in the private transaction,
the reverse split will result in a reduction in the number of shares of Common
Stock outstanding to approximately 2,734,326 shares. The reverse split will not
alter the number of authorized shares of stock or any other provision of the
Company's Certificate of Incorporation.
Presently, the Company has 9,437,304 shares of Common Stock
outstanding and 10,562,696 unissued shares. If the reverse split and merger are
approved by the stockholders (and 1,500,000 shares are issued pursuant to the
private placement), outstanding shares will be reduced to 2,734,326 and unissued
shares increased to 17,265,674. Potential uses for such authorized unissued
shares include acquisitions, additional stock option plans and stock dividends.
At the present time, the Company is not authorized unissued shares.
The Board of Directors unanimously recommends a vote "For"
approval of a proposed amendment to the Certificate of Incorporation to provide
for 1 for 4 Reverse Stock Split of each outstanding share of the Company's
common stock.
Financial Statements
The audited financial statements of JA for the years ended
December 31, 1991 and 1992 and June 30, 1994 and 1995 and Kenmar for the years
ended August 31, 1994 and 1995 included in this proxy statement have been
audited by Semple & Cooper and KPMG Peat Marwick LLP independent certified
public accountants, respectively.
Presence of Accountants
at Special Meeting
Representatives of JA's and Kenmar's independent accountants are
not expected to be present at the Special Meeting, but will be available by
telephone to respond to appropriate questions of stockholders.
56
<PAGE>
Stockholder's Proposal
From time to time, stockholders present proposals which may be
proper subjects for inclusion in the Proxy Statement and for consideration at
the Annual Meeting. To be considered, proposals must be submitted on a timely
basis. Proposals for the 1996 Annual Meeting must be received by the Corporation
no later than March 15, 1997.
Other Matters
At the date of the proxy statement, the only business which
management intends to present or knows that others will present at the meeting
is hereinabove set forth. If any other matter or matters are properly brought
before the meeting, or any adjournment thereof, it is the intention of the
persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their best judgment.
Robert Knight,
President
Dated: March ____, 1996
57
<PAGE>
J.A. INDUSTRIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
SPECIAL MEETING ON , 1996
The undersigned hereby constitutes and appoints Robert W. Knight
who is authorized to act as attorney and proxy with full power of substitution
according to the number of shares of Common Stock of J.A. Industries, Inc. which
the undersigned may be entitled to vote with all powers which the undersigned
would possess if personally present at the Special Meeting of its Stockholders
to be held on _________, 1996 at 8:00 a.m. in the forenoon at the offices of
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. at 2500 First
Union Capitol Center Raleigh, North Carolina 27601 and at any adjournment
thereof, on matters properly coming before the Meeting. Without otherwise
limiting the general authorization hereby given, said attorney and proxy is
instructed to vote on the proposals set forth below and described in the Proxy
Statement dated ______________, 1996.
The undersigned acknowledges receipt of the Notice of Special
Meeting and Proxy Statement, each dated _________, 1996.
UNLESS OTHERWISE SPECIFIED IN THE SPACE PROVIDED, THE
UNDERSIGNED'S VOTE IS TO BE CAST "FOR" THE ELECTION OF ALL LISTED NOMINEES;
"FOR" APPROVAL OF AGREEMENT AND PLAN OF MERGER; "FOR" APPROVAL OF AMENDMENT TO
THE CERTIFICATE OF INCORPORATION AND "FOR" THE APPROVAL OF A REVERSE STOCK SPLIT
AND IN ACCORDANCE WITH THE DIRECTOR'S RECOMMENDATIONS, ON ANY OTHER MATTERS THAT
MAY PROPERLY COME BEFORE THE MEETING.
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY.
A vote "FOR" is recommended by the Board of Directors on the following
proposals.
58
<PAGE>
I. Approval of Agreement and Plan of Merger
( ) FOR ( ) AGAINST ( ) ABSTAIN
II. The election of five directors
NOMINEES: KENNETH H. MARKS, CRAIG MACNAB, ALAN G. FINKEL, KENNETH L. MARKS
AND RAY STACKENRIDER
( ) FOR ( ) AGAINST ( ) ABSTAIN
For all nominees except as noted above
III. Approval of Amendment to the Certificate of Incorporation to provide for
change of name.
( ) FOR ( ) AGAINST ( ) ABSTAIN
IV. Approval of a 1 for 4 reverse stock split.
( ) FOR ( ) AGAINST ( ) ABSTAIN
IMPORTANT: IN SIGNING THIS PROXY, PLEASE SIGN YOUR NAME OR NAMES ON THE
SIGNATURE LINES BELOW IN THE EXACT FORM APPEARING ON THIS PROXY. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE YOU FULL
TITLE AS SUCH.
EACH JOINT TENANT MUST SIGN.
SIGNATURE: DATE:
SIGNATURE: DATE:
59
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AMENDMENT (the "Amendment") TO AGREEMENT AND PLAN OF MERGER,
dated as of , 1996 (the "Agreement") by and among J.A. Industries, Inc., a
Delaware corporation ("JAI"), J.A. Industries of North Carolina, Inc., a North
Carolina corporation and a wholly-owned subsidiary of JAI ("Acquisition"), and
Kenmar Business Groups, Inc., a North Carolina corporation ("Kenmar").
WITNESSETH:
WHEREAS, the parties to the Agreement desire to amend the Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement herein contained and of other good and valuable consideration, the
receipt and legal sufficiency of which they hereby acknowledge, and intending to
be legally bound hereby, the parties hereto agrees as follows:
1. Section 6.7(d) of the Agreement is hereby amended to delete the
following language from the certificate legend set forth therein: "THIS
RESTRICTIVE LEGEND SHALL BE VOID AND OF NO FURTHER EFFECT AS OF APRIL 12, 1998."
2. Except as expressly provided this Amendment, all terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, all of the date
first above written.
KENMAR BUSINESS GROUPS, INC.
ATTEST: BY:
NAME:
TITLE:
BY:
NAME:
TITLE: J.A. INDUSTRIES, INC.
ATTEST: BY:
NAME:
TITLE:
BY:
NAME:
TITLE: J.A. INDUSTRIES OF NORTH CAROLINA, INC.
ATTEST:
BY:
BY: NAME:
NAME: TITLE
TITLE:
<PAGE>
MacKay
& Partners
Chartered Accountants
Independent Auditors' Report
To the Shareholders
J.A. Industries Inc.
We have audited the consolidated balance sheet of J.A. Industries Inc.
as at June 30, 1994 and related consolidated statements of loss, changes
in shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at
June 30, 1994, and the results of its operations and the changes in the
shareholders' equity and changes in its financial position for the year
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As shown in
the financial statements, the company incurred a net loss of $1,497,305
and a cash flow deficit from operations of $976,513 during the year
ended June 30, 1994, and as at that date had a working capital
deficiency of $180,031 and a net worth of $667,558. As described in
Notes 8 and 11 to the financial statements, the company is not in
compliance with certain loan covenants on two notes and the company's
revolving line of credit matures in October 1994. These conditions raise
substantial doubt about the company's ability to continue as a going
concern, however, no adjustments have been made to reflect this outcome.
The financial statements as at June 30, 1993 and for the period then
ended were audited by other independent auditors who expressed an
opinion without restriction on those statements in their report dated
September 29, 1993.
/s/ MacKay & Partners
Chartered Accountants
Vancouver, Canada
September 29, 1994
(except for notes 8, 11, and 12
as to which the date is October 19, 1994)
<PAGE>
EXHIBIT A
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to 228 of this
title shall be entitled to an appraisal by the Court of Chancery
of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of
a nonstock corporation; the words "stock" and "share" mean and include
what is ordinarily meant by those words and also membership interest
of a member of a nonstock corporation; and the words "depository receipt" mean
a receipt or other instrument issued by a depository representing an interest
in one or more shares, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were
either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record
by more than 2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the vote
of the holders of the surviving corporation as provided in subsection (f) of
251 of this title.
<PAGE>
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby
to demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
<PAGE>
228 or 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this section. The
notice shall be sent by certified or registered mail, return receipt
requested, addressed to the stockholder at his address as it appears on
the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall, within 20 days after such service, file in the office of the Register
of Chancery in which the petition was filed a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall
be accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving
or resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Court may dismiss
the proceedings as to such stockholder;
<PAGE>
appraisal, the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted his certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and in the case of
holders of shares represented by certificates, upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this State
or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled
to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an
appraisal shall cease, notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
<PAGE>
EXHIBIT B
AGREEMENT AND PLAN OF MERGER
by and among
KENMAR BUSINESS GROUPS, INC.,
J.A. INDUSTRIES, INC.
and
J.A. INDUSTRIES OF NORTH CAROLINA, INC.
Dated as of March 1, 1996
<PAGE>
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
ARTICLE I THE MERGER
Section 1.1 The Merger.
Section 1.2 Option Shares.
Section 1.3 Closing.
Section 1.4 Transaction Documents.
ARTICLE II REPRESENTATIONS AND WARRANTIES OF JAI AND ACQUISITION
Section 2.1 Existence and Good Standing of JAI and Acquisition.
Section 2.2 Corporate Authority of JAI and Acquisition.
Section 2.3 Capital Stock.
Section 2.4 Subsidiaries.
Section 2.5 SEC Reports and Financial Statements.
Section 2.6 Liabilities.
Section 2.7 Litigation.
Section 2.8 Compliance with Laws.
Section 2.9 No Violations; Consents and Approvals.
Section 2.10 Books and Records.
Section 2.11 Assets; Title to Assets; Encumbrances.
Section 2.12 Leases.
Section 2.13 Contracts.
Section 2.14 Taxes.
Section 2.15 Employee Benefit Plans.
Section 2.16 Independent Contractor Status.
Section 2.17 Broker's or Finder's Fees.
Section 2.18 Insurance.
Section 2.19 Intellectual Property.
Section 2.20 Governmental Regulation.
Section 2.21 Environmental Matters.
(a) Certain Definitions.
(b) Compliance with Environmental Laws.
(c) Asbestos, PCBs, Urea Formaldehyde, and Underground
Storage Tanks.
(d) Investigations.
(e) Liens.
(f) Hazardous Substances.
(g) Environmental Approvals.
Section 2.22 Employee Relations.
Section 2.23 Restrictive Documents; Consents.
Section 2.24 Interests in Clients, Suppliers, Etc.
Section 2.25 Bank Accounts; Powers of Attorney.
-i-
<PAGE>
Section 5.3 Conditions Precedent to Obligations of JAI and Acquisition.
(a) Accuracy of Representations and Warranties.
(b) Performance by Kenmar.
(c) Legal Opinion.
(d) Good Standing and Other Certificates.
(e) No Adverse Change.
(f) No Litigation Threatened.
(g) Consents Under Agreements.
(h) Proceedings.
(i) Marks Employment Agreement.
(j) GMCP Agreement.
ARTICLE VI CERTAIN COVENANTS AND AGREEMENTS OF THE PARTIES
Section 6.1 Reverse Stock Split.
Section 6.2 Control of Board of Directors of JAI; President and Chief
Executive Officer.
Section 6.3 Best Efforts.
Section 6.4 Consent of Stockholders; Proxy Statement.
(a) Consent of Stockholders.
(b) Proxy Statement.
Section 6.5 Employee Benefits; Continued Employment.
Section 6.6 Officers' and Directors' Insurance; Indemnification.
Section 6.7 Stock Transfer Restrictions and Related Matters.
(a) Compliance with Securities Laws.
(b) Tax-Free Reorganization.
(c) Stop Transfer Order.
(d) Certificate Legend.
Section 6.8 Demand Registration Rights.
(a) Certain Definitions.
(b) Demand Registration.
(c) Piggy-Back Registration.
(i) Notice of Registration
(ii) Underwriting.
(d) Expenses of Registration.
(e) Registration Procedures.
(f) Indemnification.
Section 6.9 Interim Financial Statements.
-iv-
<PAGE>
ARTICLE VII SURVIVAL OF REPRESENTATIONS; INDEMNITY
Section 7.1 Survival of Representations.
Section 7.2 Indemnification by JAI.
Section 7.3 Indemnification by Kenmar.
ARTICLE VIII TERMINATION AND ABANDONMENT
Section 8.1 Termination.
Section 8.2 Effect of Termination.
ARTICLE IX MISCELLANEOUS
Section 9.1 Fees and Expenses.
Section 9.2 Representations and Warranties.
Section 9.3 Extension; Waiver.
Section 9.4 Public Announcements.
Section 9.5 Notices.
Section 9.6 Entire Agreement.
Section 9.7 Binding Effect; Benefit; Assignment.
Section 9.8 Amendment and Modification.
Section 9.9 Further Actions.
Section 9.10 Headings.
Section 9.11 Counterparts.
Section 9.12 Applicable Law.
Section 9.13 Severability.
Section 9.14 Certain Definitions.
Section 9.15 Signatures.
Schedules
Schedule 2.3 JAI subscriptions, options, warrants, etc.
Schedule 2.5 Form 10SB
Schedule 2.7 Litigation
Schedule 2.8 Compliance with Laws
Schedule 2.9 Certain Notices
Schedule 2.11 Assets
Schedule 2.13 Contracts
Schedule 2.14 Taxes
Schedule 2.16 Independent Contractors
Schedule 2.18 Insurance Policies
Schedule 2.19 Trademarks, Etc.
Schedule 2.20 Governmental Regulation
Schedule 2.21 Environmental Matters
Schedule 2.22 Employee Relations
-v-
<PAGE>
Schedule 2.23 Restrictive Documents
Schedule 2.24 Interests in Clients, Suppliers, Etc.
Schedule 2.25 Bank Accounts
Schedule 3.2 Corporate Authority of Kenmar
Schedule 3.4 Kenmar subscriptions, options, warrants, etc.
Schedule 3.6 Restrictive Documents
Schedule 3.7 Litigation
Schedule 3.8 Compliance with Laws
Schedule 3.9 No Violations; Consents and Approvals
Schedule 3.11 Contracts
Schedule 3.12 Taxes
Schedule 3.13 Governmental Regulation
Schedule 3.14 Environmental Matters
Schedule 3.15 Employee Relations
Schedule 3.16 Interests in Clients, Suppliers, Etc.
Schedule 3.17 Absence of Certain Changes
Schedule 3.18 Disclosure
Exhibits
Exhibit A Plan of Merger
Exhibit B Number of Option Shares Per Stockholder
Exhibit C Form of Option Agreement
Exhibit D Form of Legal Opinion of Steven A. Sanders, P.C.
Exhibit E Form of Marks Employment Agreement
Exhibit F Form of Agreement Regarding Substitute Option Agreement
Exhibit G Form of Guaranty Agreement
Exhibit H Form of Legal Opinion of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
Exhibit I Form of GMCP Agreement
-vi-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 1, 1996 (this
"Agreement") by and among J.A. Industries, Inc., a Delaware corporation ("JAI"),
J.A. Industries of North Carolina, Inc., a North Carolina corporation and a
wholly-owned subsidiary of JAI ("Acquisition"), and Kenmar Business Groups,
Inc., a North Carolina corporation ("Kenmar").
WITNESSETH:
WHEREAS, the respective Boards of Directors of JAI and Kenmar have
approved the merger of JAI and Kenmar; and
WHEREAS, to facilitate such acquisition, the parties hereto desire for
Acquisition and Kenmar to engage in, and the Boards of Directors of JAI,
Acquisition and Kenmar have approved, the merger of Acquisition with and into
Kenmar (the "Merger") upon the terms and subject to the conditions set forth
herein and in the related Plan of Merger attached as Exhibit A hereto (the "Plan
of Merger");
WHEREAS, Kenmar and JAI intend and desire for the Merger to constitute
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, as amended, for income tax purposes.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements herein contained and of
other good and valuable consideration, the receipt and legal sufficiency of
which they hereby acknowledge, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
(a) Upon the performance of all covenants and obligations of
the parties contained herein and upon the fulfillment of all conditions to the
obligations of the parties contained herein (other than such covenants,
obligations and conditions as shall have been waived in accordance with the
terms hereof), and in accordance with the North Carolina Business Corporation
Act, as amended (the "NCBCA"), at the Effective Time (as defined in subsection
(b) below), Acquisition shall be merged with and into Kenmar in accordance with
the Plan of Merger, the separate existence of Acquisition shall cease, and
Kenmar shall be the surviving corporation (sometimes referred to herein as the
"Surviving Corporation") and shall continue its corporate existence under the
laws of the State of North Carolina.
(b) The Merger shall be effected by the filing of articles of
merger with the Secretary of State of the State of North Carolina in accordance
with the provisions of Article 11 of the NCBCA. The merger shall become
effective at the time set forth in the articles of merger, which shall be filed
contemporaneously with the closing conducted pursuant to Section 1.3 below. The
time and date when the Merger shall become effective is hereinafter referred to
as the "Effective Time".
(c) For purposes of exchanging shares of Kenmar's Common Stock
for unregistered shares of Common Stock of JAI pursuant to the Plan of Merger,
each share of Kenmar's Common Stock shall be converted into the right to receive
Forty-One (41) shares of unregistered Common Stock of JAI (the "Exchange
Ratio"). The Exchange Ratio shall be a number that upon consummation of the
Merger (and taking into account the Reverse Stock Split, as defined in Section
6.1, and the exercise of any outstanding
<PAGE>
warrants, whether before or after the Reverse Stock Split, including but not
limited to warrants granted to Fahnestock & Co., Inc. and/or Bruce Kurchak) will
result in the Kenmar stockholders (the "Stockholders") owning an aggregate
number of shares of JAI equal to fifty percent (50%) of the issued and
outstanding shares of JAI as of the Effective Time, and the number set forth
above shall be adjusted accordingly at the Effective Time. The JAI Common Stock
issued in exchange for the Kenmar Common Stock is referred to collectively
herein as the "Merger Consideration." Any fractional share remaining after
calculation of the total number of shares of Common Stock of JAI issuable to
each Stockholder shall be eliminated.
(d) Kenmar's Class A Preferred Stock shall not be converted,
exchanged or otherwise affected by the Merger.
1.2 Option Shares. Contemporaneously with, and in addition to, the
issuances required by Section 1.1 above and pursuant to the Plan of Merger, and
notwithstanding any provision therein to the contrary, JAI shall grant to the
Representative (as defined in the Option Agreement referred to below), on behalf
of the Stockholders, an option (the "Option") to purchase Seven Hundred Fifty
Thousand (750,000) shares of JAI's Common Stock (the "Option Shares") for a
total consideration of One Dollar ($1.00) upon the occurrence of any breach of
any representation, warranty, covenant or other obligation of JAI or Acquisition
contained in this Agreement. The number of Option Shares in respect of each
Stockholder is designated in Exhibit B hereto as "Number of Option Shares Per
Stockholder." JAI, Acquisition and Kenmar shall enter into an option agreement,
substantially in the form of Exhibit C hereto (the "Option Agreement"), which
shall contain the terms and conditions relating to the Option. Upon exercise of
the Option, the Representative shall distribute the Option Shares to the
Stockholders pursuant to the terms of the Option Agreement.
1.3 Closing. Consummation of the Merger and the other transactions
contemplated by this Agreement and the Plan of Merger shall take place at 10:00
a.m. at the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P. on April 12, 1996, or at such other time and date as JAI and Kenmar shall
designate by written instrument (such specified or other time and date, the
"Closing Date").
1.4 Transaction Documents. As used in this Agreement, the term
"Transaction Documents" shall mean, collectively, this Agreement, the Plan of
Merger (and any related articles or certificates of merger), the Option
Agreement, the Marks Employment Agreement (as defined in Section 5.2(k) below),
the Substitute Option Agreements (as defined in Section 5.2(l) below), the GMCP
Agreement (as defined in Section 5.3(j) below), and all agreements, instruments,
certificates and other documents executed or delivered in accordance with the
terms of this Agreement or any Transaction Document.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF JAI AND ACQUISITION
JAI and Acquisition jointly and severally represent and warrant to
Kenmar and agree as follows:
2.1 Existence and Good Standing of JAI and Acquisition. Each of JAI and
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and each has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of JAI and Acquisition
is duly qualified or licensed as a foreign corporation to do business, and is in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so duly qualified or
licensed would not, either individually or in the aggregate, have a material
adverse effect on the business, financial condition or results of operations of
JAI or Acquisition taken as a whole.
-2-
<PAGE>
2.2 Corporate Authority of JAI and Acquisition. Each of JAI and
Acquisition has the corporate power and authority to make, execute, deliver and
perform this Agreement, and this Agreement has been duly authorized and approved
by all required corporate action of JAI and Acquisition (other than the
requisite vote or consent of the stockholders of JAI in accordance with
applicable law and its Certificate of Incorporation and By-Laws, if any). This
Agreement is a valid and binding obligation of JAI and Acquisition enforceable
against JAI and Acquisition in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy and other laws of general
application relating to creditors' rights or general principles of equity.
2.3 Capital Stock. JAI currently has an authorized capitalization
consisting of 20,000,000 shares of Common Stock, 9,217,904 of which are issued
and outstanding, and 2,000,000 shares of Preferred Stock, 0 of which are
outstanding; as of the Effective Time (after the Reverse Stock Split), JAI will
have an authorized capitalization consisting of 20,000,000 shares of Common
Stock, approximately 2,375,000 of which will be outstanding, and 2,000,000 of
Preferred Stock, 0 of which will be outstanding. None of such outstanding shares
have (or will have) been issued in violation of the preemptive rights of any
Person. All such outstanding shares have been (or will have been) duly
authorized and validly issued and are (or will be) fully paid and nonassessable.
There are no outstanding subscriptions, options, warrants, rights, calls,
commitments, conversion rights, rights of exchange, plans or other agreements of
any character providing for the purchase, issuance or sale of any shares of the
capital stock of JAI, except as set forth in Schedule 2.3 attached hereto. All
shares constituting the Merger Consideration to be issued in accordance with
this Agreement shall be (i) duly authorized and validly issued and shall be
fully paid and nonassessable, (ii) entitled to full voting rights, dividend
rights, and the right to receive the proceeds of any liquidation, (iii) free and
clear of all liens, encumbrances, charges, restrictions and claims of every
kind, and (iv) subject to a valid exemption from registration under applicable
federal and state securities laws.
2.4 Subsidiaries. JAI does not own, directly or indirectly, any share
capital, loan capital, capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, association, trust, joint venture or
other entity other than Acquisition. JAI is the direct, record and beneficial
owner of 100% of the outstanding shares of capital stock of Acquisition. No
Person other than JAI has the right to vote any of the outstanding stock of
Acquisition. All of such shares so owned by JAI are validly issued, fully paid
and nonassessable. There are no outstanding subscriptions, options, warrants,
rights, calls, commitments, conversion rights, rights of exchange, plans or
other agreements providing for the purchase, issuance or sale of any shares of
the capital stock of Acquisition. The term "Subsidiary" as used in this
Agreement shall mean with respect to Kenmar or JAI, as the case may be, any
Person of which Kenmar or JAI, as the case may be, (either alone or together
with any Subsidiary of Kenmar or JAI, as the case may be) owns, directly or
indirectly, more than 50% of the stock or other equity interests that are
generally entitled to vote for the election of a majority of the Board of
Directors or governing body of such Person (as defined in Section 9.14(a));
provided, however, that with respect to JAI, the term "Subsidiary" shall include
any and all current and former Subsidiaries of JAI, including, without
limitation, Hutronix, Inc. ("Hutronix") and J.A. Industries (Canada), Inc.
2.5 SEC Reports and Financial Statements.
(a) JAI has heretofore delivered to Kenmar true and complete
copies of all forms, reports, registration statements and other filings, filed
by JAI with the United States Securities and Exchange Commission ("SEC") since
February 28, 1994, including JAI's Report on Form 10-Q for the quarter ended
December 31, 1995 (such forms, reports, registration statements and other
filings, together with any amendments thereto and any documents incorporated by
reference or required to be incorporated by reference, collectively the "SEC
Filings"). JAI has filed all forms and reports it has been required to file with
the SEC. As of their respective dates, the SEC Filings (i) did not contain any
untrue statement of a material fact or omit
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to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (ii) complied as to form and content in all material respects
with all applicable requirements of the federal securities laws and the SEC
rules and regulations promulgated thereunder.
(b) The Form 10SB dated February 28, 1994, the General Form
for Registration of Securities of Small Business Issuers issued under Section
12(b) or (g) of the Exchange Act and filed with SEC is attached as Schedule 2.5
hereto, and all of the information contained therein, at the time filed, was
true and complete in every respect. All information reflecting any material
changes to the Form 10SB has been filed in subsequent reports on Form 10-QSB or
Form 10KSB.
(c) The audited consolidated balance sheet of JAI and its
Subsidiaries (the "JAI Balance Sheet") as at June 30, 1995 (the "JAI Balance
Sheet Date"), and the audited consolidated balance sheets of JAI and its
Subsidiaries as at June 30, 1994 and June 30, 1993, and in each case the related
audited consolidated statements of income, retained earnings and cash flows and
notes to financial statements and related reports of accountants for the fiscal
years then ended, all as included in the SEC Filings, fairly present in all
material respects the financial condition and results of operations of JAI and
its Subsidiaries at such dates and for such periods in accordance with generally
accepted accounting principles. The unaudited consolidated balance sheets of JAI
and its Subsidiaries as at December 31, 1995 and September 30, 1995, and in each
case the related unaudited consolidated statements of income, retained earnings
and cash flows and notes to financial statements and related reports of
accountants for the six months then ended do, and all unaudited financial
statements delivered by JAI to Kenmar pursuant to Section 6.9 hereof will,
fairly present in all material respects the financial condition and results of
operations of JAI and its Subsidiaries at such dates and for such periods in
accordance with generally accepted accounting principles.
2.6 Liabilities. The liabilities, obligations and indebtedness of and
claims against JAI and Acquisition, known or unknown, due or not yet due,
asserted or unasserted (whether or not probable of assertion), fixed,
contingent, or otherwise do not, in the aggregate, exceed Five Thousand Dollars
($5,000), and JAI shall provide documentary evidence to that effect,
satisfactory to Kenmar, on the Closing Date. There are no liabilities,
obligations or indebtedness of or claims against any of JAI's Subsidiaries that
threaten to, or could conceivably, have a material adverse effect on the
business or financial condition of JAI.
2.7 Litigation. Except as set forth in Schedule 2.7 attached hereto,
there is no action, suit, proceeding at law or in equity, arbitration or
administrative or other proceeding or investigation by or before any
governmental or other instrumentality or agency pending or, to JAI's knowledge,
threatened or likely to be threatened, against or affecting JAI or any of its
Subsidiaries or rights which could reasonably be expected to have a material
adverse effect on the right or ability of JAI or Acquisition to carry on their
business as now conducted or on the condition, whether financial or otherwise,
or properties of JAI or Acquisition; and JAI does not know of any basis for any
such action, proceeding or investigation. Neither JAI nor any of its
Subsidiaries is subject to any judgment, order or decree entered in any lawsuit
or proceeding which may affect any of JAI's or Acquisition's operations or
business practices or their ability to acquire any property or conduct business
in any area.
2.8 Compliance with Laws. Except as set forth in Schedule 2.8 attached
hereto, JAI and its Subsidiaries are in compliance with all applicable laws,
regulations, orders, judgments and decrees. There exists no event, occurrence,
condition or act which, with the giving of notice, the lapse of time or the
happening of any further event or condition would constitute a violation by JAI
or any of its Subsidiaries of any applicable law, regulation, order, judgment or
decree.
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2.9 No Violations; Consents and Approvals. The execution and delivery
of this Agreement by JAI and Acquisition and the consummation of the
transactions contemplated hereby (a) will not violate any provision of the
Certificate of Incorporation or Bylaws of JAI or Acquisition, (b) will not
violate any state or federal statute, rule, regulation, order or decree of any
public body or authority by which JAI or Acquisition is bound or which is
binding upon any of their respective properties or assets, (c) will not result
in a violation or breach of, or constitute a default under, any material
license, franchise, permit, indenture, agreement or other instrument to which
JAI or Acquisition is a party, or by which JAI or Acquisition or any of their
respective assets or properties is bound and (d) will not require on the part of
JAI or Acquisition any filing with, or permit, consent or approval of, or the
giving of any notice to, any state or federal governmental or regulatory body,
agency or authority or any other Person, except for (i) as set forth in Schedule
2.9 attached hereto, (ii) the filing of the articles of merger and other
appropriate merger documents, if any, as required by the NCBCA, (iii) the
requisite approval of this Agreement and the Merger by the stockholders of JAI,
(iv) the filing with the SEC of the Proxy Statement (as defined in Section 6.4)
and such reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with the transactions
contemplated by this Agreement, (v) filings under state securities laws, and
(vi) such consents, approvals, orders and authorizations contemplated by Section
5.1(e). JAI has disclosed to Kenmar in writing all consents contemplated by
Section 5.1(e).
2.10 Books and Records.
(a) The minute books of JAI and Acquisition, as
previously made available to Kenmar and its representatives, contain accurate
records of all meetings of and corporate action taken by (including action taken
by written consent) the shareholders and Board of Directors of JAI and
Acquisition. No meetings of or material actions taken by the Board of Directors
or shareholders of either of JAI or Acquisition have occurred except as
described in the minutes and actions by written consent. JAI and Acquisition do
not have any of the originals of their records, systems, controls, data or
information recorded, stored, maintained, operated or otherwise wholly or partly
dependent upon or held by any means (including any electronic, mechanical or
photographic process, whether computerized or not) which (including all means of
access thereto and therefrom) are not under the exclusive ownership and direct
control of JAI and Acquisition.
(b) All the books, accounts, ledgers, financial and
other records of JAI and Acquisition (i) have been fully, properly and
accurately kept and completed in all respects, (ii) do not contain any
inaccuracies or discrepancies of any kind, and (iii) show a true and fair view
of their respective trading transactions and their respective financial,
contractual and trading positions.
2.11 Assets; Title to Assets; Encumbrances. All of JAI's and
Acquisition's assets are described in Schedule 2.11 attached hereto and except
as set forth therein, JAI and Acquisition have good and marketable title to all
such assets, free of all liens and encumbrances except for liens for current
taxes, assessments or governmental charges or levies on property not yet due.
2.12 Leases. Neither JAI nor Acquisition is a party to any lease.
2.13 Contracts. Except as set forth in Schedule 2.13 attached hereto,
neither JAI nor Acquisition has, is a party to, or is bound by any agreement,
contract, guarantee, loan or commitment whatsoever. Except as disclosed on
Schedule 2.13 attached hereto, neither JAI nor Acquisition, nor to JAI's
knowledge any other Subsidiary of JAI, has violated any term or condition of any
contract or agreement. True and correct copies of all items listed on Schedule
2.13 have been delivered by JAI to Kenmar.
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(a) JAI has not experienced, and does not anticipate, any
adverse change in relations between JAI and Baboquivari Cattle Company ("BCC"),
Karl G. Ronstadt ("KGR") and Marilyn H. Ronstadt ("MHR"), whether as a result of
the announcement or consummation of the transactions contemplated by this
Agreement or otherwise. JAI does not have notice or reason to believe that BCC,
KGR or MHR or Hutronix intends to terminate, void, cancel, file suit in
connection with, or otherwise seek to avoid their obligations under, that
certain Settlement Agreement dated as of November 10, 1995 between JAI and BCC,
KGR, MHR and Hutronix (the "Settlement Agreement"). The Settlement Agreement (i)
is valid and binding and enforceable in accordance with its terms, and "Final
Closing" (as defined in the Settlement Agreement) has occurred and has been
expressly acknowledged in writing by all parties thereto, (ii) releases JAI from
any and all claims that BCC, KGR and MHR have against JAI (other than claims
relating to the Settlement Agreement and to "Retained Stock" (as defined in the
Settlement Agreement)), and (iii) provides for indemnification by BCC, Hutronix,
KGR and MHR of JAI from and against third party claims relating in any manner to
BCC, Hutronix, KGR, or MHR, or the relationship of JAI with any of those
parties. No money or property in excess of $10,000 in the aggregate has been
advanced or "upstreamed" by any of the HTX Group (as defined in the Settlement
Agreement) to or for the account of any of the JAI Group (as defined in the
Settlement Agreement) and/or their officers, shareholders or directors since
January 1, 1995.
2.14 Taxes. Except as set forth in Schedule 2.14 attached hereto, JAI
and Acquisition have filed or caused to be filed, or will file or cause to be
filed within the times required by law, all federal, state and local income tax
returns and tax reports, which are required to be filed by, or with respect to,
JAI and Acquisition (taking into account any extension of time to file granted
to or on behalf of JAI or Acquisition) (collectively, the "JAI Returns"). True
and correct copies of all federal and state JAI Returns for JAI's 1992, 1993 and
1994 fiscal years will be delivered by JAI to Kenmar by the Closing Date. JAI
will provide to Kenmar a copy of any other JAI Return as Kenmar may reasonably
request. Except as set forth in Schedule 2.14 attached hereto, all federal,
state, local and other income, profits, gain, value added, franchise, sales,
use, occupancy, excise and other taxes, duties and assessments (including
interest and penalties) ("Taxes") shown to be due and payable on the JAI Returns
by or with respect to JAI or Acquisition have been or, within the times required
by law, will be paid. Except as disclosed on Schedule 2.14, (a) there are no
waivers in effect of the applicable statute of limitations for federal, state or
local income taxes of JAI and Acquisition for any taxable period, and (b) no
deficiency assessment or proposed adjustment with respect to any tax liability
of JAI or Acquisition for any taxable period is pending or, to the knowledge of
JAI or Acquisition, threatened. Except as set forth in Schedule 2.14, to the
best of JAI's knowledge, all Subsidiaries of JAI have filed or caused to be
filed all federal, state, local or other income tax returns and tax reports,
which are required to be filed by, or with respect to, such Subsidiaries and
have paid all taxes shown to be payable in connection therewith. Neither JAI nor
Acquisition has, since the JAI Balance Sheet Date, engaged in or been a party to
any scheme or arrangement of which the main purpose, or one of the main
purposes, was the avoidance of or a reduction in liability to Taxes.
2.15 Employee Benefit Plans. Neither JAI nor Acquisition has an
employee benefit plan within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
2.16 Independent Contractor Status. Schedule 2.16 attached hereto sets
forth a complete list of the Persons (other than employees of JAI or
Acquisition) that have been engaged by JAI or Acquisition to render management,
consulting, or similar services to JAI or Acquisition as an independent
contractor (each such Person, a "JAI Contractor") during the past three (3)
years. No such person is currently engaged by JAI and JAI and Acquisition have
no obligations in connection with any such prior engagement. Each of JAI
Contractor was at all times during the course of such JAI Contractor's
engagement by JAI or Acquisition an
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independent contractor to, and not an employee of, JAI or Acquisition for
purposes of all applicable income tax withholding requirements and otherwise.
2.17 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of JAI or Acquisition is, or will be, entitled to any commission or
broker's or finder's fees from any of the parties hereto, or from any Person
controlling, controlled by or under common control with any of the parties
hereto, in connection with any of the transactions contemplated herein, except
for Rudy Miller and/or the Miller Group and George Salloum, whose fees and
expenses will be paid in accordance with Section 9.1.
2.18 Insurance. Set forth in Schedule 2.18 attached hereto is a
complete list of insurance policies which JAI and Acquisition maintain with
respect to their business, properties and employees, together with a description
of all claims thereon in excess of $10,000 during the past three years. Such
policies are in full force and effect and are free from any right of termination
on the part of the insurance carriers. Such policies, with respect to their
amounts and types of coverage, are customary for companies engaged in the same
or similar business as JAI and Acquisition, including without limitation
professional liability, and do not require the payment of any unusual premium or
surcharge as a result of the experience of JAI's or Acquisition's business.
There are no outstanding unpaid premiums except in the ordinary course of
business, and neither JAI nor Acquisition has received any notice of
cancellation or non-renewal of any such policy or any increase in premiums
therefor. Since the JAI Balance Sheet Date, there has not been any material
adverse change in JAI's or Acquisition's relationship with its insurers or in
the premiums payable pursuant to such policies. There exists no event of default
or event, occurrence, condition or act (including the transactions contemplated
by this Agreement) which, with the giving of notice, the lapse of time or the
happening of any further event or condition would reasonably be expected to
become a default or occasion a premium increase under any such policy or give
rise to, and JAI and Acquisition have no anticipation of, any termination or
cancellation thereof or premium increase therefor.
2.19 Intellectual Property. Neither JAI nor Acquisition have any
registered Intellectual Property (as defined below) and have not applied for
registration of any rights in respect of Intellectual Property. Schedule 2.19
sets forth a complete list of all trademarks and tradenames and Third Party
Intellectual Property (as defined below) used by JAI or Acquisition during the
past three years. The lawful operation of the business of JAI and Acquisition as
currently conducted and as currently planned to be conducted requires no rights
under Third Party Intellectual Property other than rights under Intellectual
Property listed in Schedule 2.19 and rights granted to JAI or Acquisition
pursuant to agreements listed in Schedule 2.19. No claim adverse to the
interests of JAI or Acquisition in any Intellectual Property used by JAI or
Acquisition has been made in litigation against JAI or Acquisition. To JAI's and
Acquisition's knowledge, no such claim has been threatened or asserted and no
basis or alleged basis exists for any such claim. To JAI's and Acquisition's
knowledge, no Person has infringed or otherwise violated JAI's or Acquisition's
rights in any Intellectual Property. Neither the Intellectual Property listed in
Schedule 2.19 nor JAI's nor Acquisition's use of any Intellectual Property
infringes or has infringed at any time upon the valid Intellectual Property
rights of another, and no litigation is pending wherein JAI or Acquisition is
accused of infringing or otherwise violating the Intellectual Property right of
another, or of breaching a contract conveying rights under Intellectual
Property. To JAI's and Acquisition's knowledge, no claim for infringement has
been asserted or threatened against JAI or Acquisition, nor are there any facts
that would give rise to such a claim. For purposes of this Section 2.19,
"Intellectual Property" means domestic and foreign patents, patent applications,
registered and unregistered trademarks and service marks, trademark and service
mark applications, trade names, registered and unregistered copyrights, computer
programs, data bases, trade secrets, know how and proprietary information.
"Third Party Intellectual Property" means Intellectual Property owned by any
person other than JAI or Acquisition.
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2.20 Governmental Regulation. Except as set forth in Schedule 2.20
attached hereto, each of JAI and Acquisition hold all licenses, certificates,
permits, franchises, authorizations, approvals and rights from all appropriate
governmental authorities and regulatory commissions which are necessary for the
conduct of its business as presently conducted (the "Operating Rights"). JAI and
Acquisition are in compliance with the terms of the Operating Rights. Except as
set forth in Schedule 2.20 attached hereto, there are pending no suits or
proceedings with respect to suspension, revocation or nonrenewal of any of the
Operating Rights and, to the knowledge of JAI and Acquisition, no event which
will or may result in a suspension, revocation or failure to renew any thereof
has occurred.
2.21 Environmental Matters.
(a) Certain Definitions. For purposes of this Section 2.21 and
Section 3.14, the following terms shall have the following meanings: (A)
"Facilities" shall mean any and all portions of any and all buildings,
structures and properties of any sort owned, leased, operated or occupied by JAI
or its Subsidiaries at any time; (B) "Hazardous Materials" shall mean any solid
or liquid substance, waste, or material characterized, defined or listed as
"hazardous" or "toxic" or regulated under Environmental Laws (as defined below),
including any and all constituents of such substance, waste, or material, and
shall include, without limitation, solid or liquid raw materials, wastes,
petroleum and petroleum products, and source, special nuclear or by-product
material as defined by the Atomic Energy Act of 1954, as amended; and (C)
"Environmental Laws" shall mean any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
judicial decisions, permits, concessions, grants, franchises, licenses,
agreements or other governmental restrictions or requirements relating to the
environment or hazardous or toxic materials or substances, the protection of
human health and the environment, or the release of any materials or substances
into the environment, whether existing or hereafter enacted or issued which
govern behavior, activities or conditions with respect to the Facilities prior
to the Closing Date, including without limitation The Hazardous Substance
Accounting Act of 1981, as amended, and The Hazardous Substance Control
Accounting Act of 1981, as amended.
(b) Compliance with Environmental Laws. Each of JAI and
Acquisition is in compliance with all applicable Environmental Laws, including
without limitation those relating to product registration, pollution control and
environmental contamination and those governing the generation, use, collection,
discharge, or disposal of Hazardous Materials and record keeping, notification
and reporting requirements respecting Hazardous Materials. Except as disclosed
in Schedule 2.21 attached hereto, JAI and Acquisition have not violated or been
alleged to have violated, nor has JAI or Acquisition been subject to any
administrative or judicial proceeding pursuant to, any Environmental Law at any
time. Except as disclosed in Schedule 2.21, there are no facts or circumstances
which could form the basis for the assertion of any claim against JAI or
Acquisition relating to environmental matters, including without limitation any
claim arising from past or present environmental practices asserted under any
Environmental Law, which might have an adverse effect on the business, results
of operations, financial condition or prospects of JAI or Acquisition.
(c) Asbestos, PCBs, Urea Formaldehyde, and Underground Storage
Tanks. There is not and has never been constructed, placed, deposited, stored,
disposed of nor located on or at any Facility any asbestos or
asbestos-containing-materials, any PCBs or any insulating materials containing
urea formaldehyde in any form, and no underground treatment or storage tanks
(excluding septic tanks) or sumps are or have ever been located on the
Facilities, except as listed in Schedule 2.21.
(d) Investigations. There have been no environmental
investigations, studies, audits, tests, reviews or other analyses conducted by,
or on behalf of, or which are in the possession or control of
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JAI or Acquisition in relation to the Facilities, except those identified on
Schedule 2.21 attached hereto, copies of which have been provided by JAI to
Kenmar.
(e) Liens. There are no liens arising under or pursuant to any
Environmental Law on the Facilities and no actions by any governmental authority
have been taken or are in process which likely would subject the Facilities to
such liens, and neither JAI nor Acquisition is required to place any notice or
restriction relating to the presence of any Hazardous Materials at any Facility.
(f) Hazardous Substances.
(i) Except as set forth on Schedule 2.21 attached
hereto, neither JAI nor Acquisition, nor any previous owner, tenant, occupant or
user of the Facilities, nor any other person, has engaged in or permitted any
operations or activities upon, or any use or occupancy of the Facilities, or any
portion thereof, for the purpose of or in any way involving the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining,
dumping or disposal of any Hazardous Substance on, under, or in the Facilities,
or transported any Hazardous Substance to, from or across the Facilities, which
activity violated or violates or created, creates, or could create liability
under any Environmental Laws, nor is any Hazardous Substance presently
deposited, stored, or otherwise located on, under, in or about the Facilities,
nor has any Hazardous Substance migrated from the Facilities upon or beneath
other properties, nor has any Hazardous Substance migrated or threatened to
migrate from other properties on, under, or beneath the Facilities, which
activity violated or violates or created, creates or could create liability
under any Environmental Laws.
(ii) Except as set forth on Schedule 2.21 attached
hereto, neither JAI nor Acquisition has transported or arranged for the
transportation of any Hazardous Substance from the Facilities to any location
which is listed on the National Priorities List under CERCLA, or listed for
possible inclusion on the National Priorities List by the Environmental
Protection Agency in CERCLIS or on any similar state list or which is the
subject of federal, state, or local enforcement actions or other investigations
which may lead to claims against JAI or Acquisition for cleanup costs, remedial
work, damages to natural resources or for personal injury claims, including, but
not limited to, claims under CERCLA.
(iii) No Hazardous Substance generated by JAI or
Acquisition at the Facilities has been recycled, treated, stored, disposed of or
released by JAI or Acquisition or its agents or contractors at any location
other than those listed in Schedule 2.21 attached hereto.
(g) Environmental Approvals. Schedule 2.21 contains a complete
and accurate list of all registrations, licenses, permits, and governmental
approvals that are or are expected to be required under Environmental Laws of
JAI or Acquisition, for the ownership, operation, and maintenance of the
Facilities (the "Environmental Approvals"). All such Environmental Approvals set
forth in Schedule 2.21 attached hereto have been duly obtained by JAI or
Acquisition and are in full force and effect and all conditions contained
therein that need to be satisfied as of the date hereof have been satisfied.
There is no proceeding or investigation pending or, to JAI's or Acquisition's
knowledge, threatened which seeks, or may reasonably be expected, to rescind,
terminate, modify, suspend, or decline to renew any Environmental Approval, nor
are there to the best of JAI's or Acquisition's knowledge after reasonable
inquiry, any facts or circumstances which may cause a governmental body to
rescind, terminate, modify, suspend, or decline to renew or reissue an
Environmental Approval.
2.22 Employee Relations. Schedule 2.22 attached hereto contains an
accurate list of all of JAI's and Acquisition's employees, showing for each his
or her position, date of birth, date of employment, 1995 compensation or
remuneration, and current annualized salary. To JAI's and Acquisition's
knowledge, there
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has not been and will not be any adverse change in relations with employees of
JAI and Acquisition as a result of any announcement of the transactions
contemplated by this Agreement. Except as set forth in Schedule 2.22 attached
hereto, no employees of JAI or Acquisition are represented by a union or other
labor organization or covered by any collective bargaining agreement. There are
no material controversies pending or, to the knowledge of JAI or Acquisition,
threatened between JAI or any of its Subsidiaries and any representatives of
their respective employees, and, to the knowledge of JAI and Acquisition, there
are no material organizational efforts presently being made involving any of the
presently unorganized employees of JAI or Acquisition. JAI and its Subsidiaries
have, to the knowledge of JAI and Acquisition, complied in all material respects
with all laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining and the payment of social security and similar taxes, and no Person
has, to the knowledge of JAI or Acquisition, asserted that JAI or any of its
Subsidiaries is liable in any material amount for any arrears of wages or any
taxes or penalties for failure to comply with any of the foregoing. Except as
set forth in Schedule 2.22 attached hereto, there is no material action, suit or
proceeding by any Person pending or, to the knowledge of JAI or Acquisition,
threatened, against JAI or any of its Subsidiaries involving employment
discrimination or wrongful discharge or similar claims.
2.23 Restrictive Documents; Consents. Except as set forth in
Schedule 2.23 attached hereto, neither JAI nor Acquisition is subject
to, or a party to, any charter, bylaw, mortgage, lien, lease, license,
agreement, contract, permit, instrument, law, rule, ordinance, regulation,
order, judgment or decree, or any other restriction of any kind or character,
which adversely affects the business practices, operations or condition
of JAI or Acquisition or any of their assets or property, or which would
be violated by, prevent or impair (whether by acceleration of any
liability, creation of any lien or encumbrance or otherwise) or require any
approval, consent, clearance, notice or assumption (other than any approvals or
consents already obtained and in effect) of any Person in connection with the
consummation of the transactions contemplated by this Agreement or any
Transaction Document, compliance by JAI and Acquisition with the terms,
conditions and provisions hereof or thereof, or continued operation of JAI's or
Acquisition's business after the date hereof or the Closing Date on
substantially the same basis as heretofore operated or which would restrict the
ability of JAI or Acquisition to acquire any property or conduct business in any
area.
2.24 Interests in Clients, Suppliers, Etc. Except as described in
Schedule 2.24 attached hereto, no officer, director, or greater than three
percent (3%) shareholder of JAI possesses, directly or indirectly, any financial
interest in (other than ownership of less than 5% of the equity capital or
similar interest), or is a director, officer or employee of, any corporation,
firm, association or business organization which is a client, supplier,
customer, lessor, lessee, or competitor of JAI or Acquisition (a "Related
Person"). Each of JAI and Acquisition has conducted each and every transaction
with any Related Person on an arm's-length basis in a manner fair and
commercially reasonable to JAI and Acquisition and such Related Person.
2.25 Bank Accounts; Powers of Attorney. Set forth in Schedule 2.25
attached hereto is an accurate and complete list showing (a) the name and
address of each bank in which JAI or Acquisition has an account or safe deposit
box, the number of any such account or any such box and the names of all persons
authorized to draw thereon or to have access thereto, and (b) the names of all
persons, if any, holding powers of attorney from JAI or Acquisition and a
summary statement of the terms thereof.
2.26 Absence of Certain Changes. Since the JAI Balance Sheet Date, (i)
there has not been any adverse change in the business, financial condition or
the results of operations of JAI or Acquisition; (ii) the businesses of JAI and
Acquisition have been conducted only in the ordinary course; (iii) neither JAI
nor Acquisition has incurred any liabilities (direct, contingent or otherwise)
or engaged in any material transaction or entered into any material agreement
outside of the ordinary course of business; (iv) JAI and Acquisition
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have not increased the compensation of any officer or granted any general salary
or benefits increase to their employees; and (v) neither JAI nor Acquisition has
taken any action prohibited by Section 4.1 hereof except as permitted or
required by this Agreement.
2.27 Disclosure. None of this Agreement, the financial statements
referred to in Section 2.5 hereof (including the notes thereto), any Transaction
Document, or any Schedule, Exhibit or certificate attached hereto or delivered
in accordance with the terms hereof contains any untrue statement of a material
fact or omits any statement of a material fact necessary in order to make the
statements contained herein or therein not misleading. All appraisals,
valuations, estimates or other projections concerning JAI and Acquisition or
JAI's securities (in each case whether in the possession of JAI or Acquisition,
or any affiliate thereof) which would be material to a reasonable investor's
investment decision with respect to the transactions contemplated by this
Agreement have been provided to Kenmar. There is no fact known to JAI or
Acquisition, or any of their officers or directors, which materially and
adversely affects the business, prospects, valuation or financial condition of
JAI or Acquisition or either of their properties or assets which has not been
set forth in this Agreement, the financial statements referred to in Section 2.5
hereof (including the notes thereto), or any Schedule, Exhibit or certificate
attached hereto or delivered in accordance with the terms hereof or any document
or statement in writing which has been supplied by or on behalf of JAI or
Acquisition or by any of their directors or officers in connection with the
transactions contemplated by this Agreement.
2.28 Copies of Documents. JAI and Acquisition have delivered to Kenmar
and its advisers true, complete and correct copies of all documents referred to
in this Article II or in any Schedule attached hereto.
2.29 Independent Operations of JAI. All revenues and expenses which
properly should have been allocated or attributed to JAI have been so allocated
or attributed in the financial statements referred to in Section 2.5, and there
are no intercompany transactions between JAI and any of its shareholders or any
affiliate of JAI which have not been disclosed in such financial statements.
2.30 Securities Exemption. The Merger Consideration shall be issued
pursuant to a valid exemption from registration under applicable federal and
state securities laws, including but not limited to the Securities Act of 1933,
as amended.
2.31 Officer's Certificate. The certificate required by Section 5.2(a)
shall be true and correct.
2.32 Absence of Certain Conditions. To JAI's and Acquisition's
knowledge, there exists no event, occurrence, condition or act which, with
the giving of notice or the lapse of time, would constitute a breach of or
cause any of the representations and warranties in this Article II to become
untrue.
The representations and warranties set forth in this Article II are
cumulative. The subject matter covered by any Section of this Article II shall
not be exclusive as to such subject matter to the extent covered by another
Section of this Article II, and the specificity of any representation and
warranty shall not affect or limit the generality of any other representation or
warranty.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KENMAR
Kenmar represents and warrants as follows:
3.1 Existence and Good Standing of Kenmar. Kenmar is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted. Kenmar is duly qualified or licensed as a foreign
corporation to do business, and is in good standing in each jurisdiction in
which the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so duly qualified or licensed would not, either individually or in the
aggregate, have a material adverse effect on the business, financial condition
or results of operations of Kenmar taken as a whole.
3.2 Corporate Authority of Kenmar. Except as set forth in Schedule 3.2
attached hereto, Kenmar has the corporate power and authority to make, execute,
deliver and perform this Agreement, and this Agreement has been duly authorized
and approved by all required corporate action of Kenmar (other than the
requisite vote or consent of the Stockholders in accordance with applicable law
and its Certificate of Incorporation and By-Laws, if any). This Agreement is a
valid and binding obligation of Kenmar enforceable against Kenmar in accordance
with its terms, except as the enforcement thereof may be limited by bankruptcy
and other laws of general application relating to creditors' rights or general
principles of equity.
3.3 Subsidiaries. The only Subsidiary of Kenmar is Test Services, Inc.,
a North Carolina corporation. Kenmar is the direct, record and beneficial owner
of 100% of the outstanding shares of capital stock of such Subsidiary. No Person
other than Kenmar has the right to vote any of the outstanding stock of such
Subsidiary. All of such shares so owned by Kenmar are validly issued, fully paid
and nonassessable and are owned free and clear of any claim, lien, encumbrance
or agreement with respect thereto.
3.4 Capital Stock. Kenmar has an authorized capitalization consisting
of 100,000 Common Shares, 65,714 of which are issued and outstanding, and 30,000
shares of Class A Preferred Stock, 9,926 of which are issued and outstanding.
None of such outstanding shares have been issued in violation of the preemptive
rights of any Person. All such outstanding shares have been duly authorized and
validly issued and are fully paid and nonassessable. There are no outstanding
subscriptions, options, warrants, rights, calls, commitments, conversion rights,
rights of exchange, plans or other agreements of any character providing for the
purchase, issuance or sale of any shares of the capital stock of Kenmar, except
as set forth in Schedule 3.4 attached hereto.
3.5 Financial Statements; Exchange Act.
(a) Kenmar has heretofore furnished JAI with an unaudited
consolidated balance sheet and an unaudited statement of income of Kenmar and
its Subsidiary as at December 31, 1995, and an audited consolidated balance
sheet and related audited consolidated statements of income, retained earnings
and cash flows and notes to financial statements and related reports of
accountants, for the fiscal year ended August 31, 1995 (collectively, the
"Financial Statements"). Such Financial Statements fairly present in all
material respects the financial condition and results of operations of Kenmar at
such dates and for such periods in accordance with generally accepted accounting
principles consistently applied.
(b) Kenmar is not subject to the reporting requirements of the
Exchange Act.
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3.6 Restrictive Documents. Except as set forth in Schedule 3.6
attached hereto, Kenmar is not subject to, or a party to, any charter,
bylaw, mortgage, lien, lease, license, permit, agreement, contract,
instrument, law, rule, ordinance, regulation, order, judgment or decree, or any
other restriction of any kind or character which would be violated by, prevent
or impair materially (whether by acceleration of any liability, creation of any
lien or encumbrance or otherwise) or require any approval or consent in
connection with consummation of the transactions contemplated by this Agreement
or compliance by Kenmar with the terms, conditions and provisions hereof.
3.7 Litigation. Except as set forth in Schedule 3.7 attached hereto,
there is no action, suit, proceeding at law or in equity, arbitration or
administrative or other proceeding or investigation by or before any
governmental or other instrumentality or agency pending or, to Kenmar's
knowledge, threatened or likely to be threatened, against or affecting Kenmar or
rights which could reasonably be expected to have a material adverse effect on
the right or ability of Kenmar to carry on its business as now conducted or on
the condition, whether financial or otherwise, or properties of Kenmar; and
Kenmar does not know of any basis for any such action, proceeding or
investigation. Kenmar is not subject to any judgment, order or decree entered in
any lawsuit or proceeding which may affect any of Kenmar's operations or
business practices or its ability to acquire any property or conduct business in
any area.
3.8 Compliance with Laws. To Kenmar's knowledge, except as set forth in
Schedule 3.8 attached hereto, Kenmar is in material compliance with all
applicable laws, regulations, orders, judgments and decrees. To Kenmar's
knowledge, there exists no event, occurrence, condition or act which, with the
giving of notice, the lapse of time or the happening of any further event or
condition would constitute a violation of any applicable law, regulation, order,
judgment or decree.
3.9 No Violations; Consents and Approvals. The execution and delivery
of this Agreement by Kenmar and the consummation of the transactions
contemplated hereby (a) will not violate any provision of the Certificate of
Incorporation or Bylaws of Kenmar, (b) will not materially violate any state or
federal statute, rule, regulation, order or decree of any public body or
authority by which Kenmar is bound or which is binding upon any of its
properties or assets, (c) will not result in a material violation or breach of,
or constitute a default under, any material license, franchise, permit,
indenture, agreement or other instrument to which Kenmar is a party, or by which
Kenmar or any of its assets or properties is bound and (d) will not require on
the part of Kenmar any filing with, or permit, consent or approval of, or the
giving of any notice to, any state or federal governmental or regulatory body,
agency or authority or any other Person, except for (i) as set forth in Schedule
3.9 attached hereto, (ii) the filing of the articles of merger and other
appropriate merger documents, if any, as required by the NCBCA, (iii) the
requisite approval of this Agreement and the Merger by the Stockholders, and
(iv) such consents, approvals, orders and authorizations contemplated by Section
5.1(e).
3.10 Books and Records.
(a) To Kenmar's knowledge, the minute book of Kenmar contains
accurate records of all material meetings of and corporate action taken by
(including action taken by written consent) the shareholders and Board of
Directors of Kenmar. No meetings of or material actions taken by the Board of
Directors or shareholders of Kenmar have occurred except as described in the
minutes and actions by written consent. Kenmar does not have any of the
originals of its records, systems, controls, data or information recorded,
stored, maintained, operated or otherwise wholly or partly dependent upon or
held by any means (including any electronic, mechanical or photographic process,
whether computerized or not) which (including all means of access thereto and
therefrom) are not under the exclusive ownership and direct control of Kenmar.
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(b) To Kenmar's knowledge, all the books, accounts, ledgers,
financial and other records of Kenmar (i) have been fully, properly and
accurately kept and completed in all respects, (ii) do not contain any material
inaccuracies or discrepancies, and (iii) show a true and fair view of their
respective trading transactions and their respective financial, contractual and
trading positions.
3.11 Contracts. Except as set forth in Schedule 3.11 attached hereto,
Kenmar does not have, and is not a party to, and is not bound by any agreement,
contract, guarantee, loan or commitment pursuant to which Kenmar is entitled to
receive, or is required to pay, $100,000 or more. Except as disclosed on
Schedule 3.11 attached hereto, to Kenmar's knowledge, it is not in violation of
any material term or condition of any contract or agreement listed on Schedule
3.11. True and correct copies of all items listed on Schedule 3.11 have been
delivered by Kenmar to JAI.
3.12 Taxes. To Kenmar's knowledge, it has filed or caused to be filed,
or will file or cause to be filed within the times required by law, all federal,
state and local income tax returns and tax reports, which are required to be
filed by, or with respect to, Kenmar (taking into account any extension of time
to file granted to or on behalf of Kenmar) (collectively, the "Kenmar Returns").
True and correct copies of all federal and state Kenmar Returns for Kenmar's
1992, 1993 and 1994 fiscal years have been delivered by Kenmar to JAI, or will
be delivered by Kenmar to JAI prior to the Effective Time. Kenmar will provide
to JAI a copy of any other Kenmar Return as JAI may reasonably request. Except
as set forth in Schedule 3.12 attached hereto, all federal, state, local and
other income, profits, gain, value added, franchise, sales, use, occupancy,
excise and other taxes, duties and assessments (including interest and
penalties) ("Taxes") shown to be due and payable on the Kenmar Returns by or
with respect to Kenmar have been or, within the times required by law, will be
paid. Except as disclosed on Schedule 3.12, (a) there are no waivers in effect
of the applicable statute of limitations for federal, state or local income
taxes of Kenmar for any taxable period, and (b) no deficiency assessment or
proposed adjustment with respect to any tax liability of Kenmar for any taxable
period is pending or, to the knowledge of Kenmar, threatened. Kenmar has not,
since the date of the most current balance sheet provided to JAI pursuant to
Section 3.5 above, engaged in or been a party to any scheme or arrangement of
which the main purpose, or one of the main purposes, was the avoidance of or a
reduction in liability for Taxes.
3.13 Governmental Regulation. Except as set forth in Schedule 3.13
attached hereto, to Kenmar's knowledge, it holds all material licenses,
certificates, permits, franchises, authorizations, approvals and rights from all
appropriate governmental authorities and regulatory commissions which are
necessary for the conduct of its business as presently conducted (the "Kenmar
Operating Rights"). To its knowledge, Kenmar is in material compliance with the
terms of the Kenmar Operating Rights. Except as set forth in Schedule 3.13
attached hereto, there are pending no suits or proceedings with respect to
suspension, revocation or nonrenewal of any of the Kenmar Operating Rights and,
to the knowledge of Kenmar, no event which will or may result in a suspension,
revocation or failure to renew any thereof has occurred.
3.14 Environmental Matters. To its knowledge, Kenmar is in material
compliance with all applicable Environmental Laws and is in material compliance
with the requirements of any permits issued under Environmental Laws. To
Kenmar's knowledge, except as set forth in Schedule 3.14 attached hereto,
Hazardous Substances have not at any time been generated, used, treated or
stored on, or transported to or from, or released or disposed of on, Kenmar's
real property outside of the ordinary course of Kenmar's business. To Kenmar's
knowledge, there are not now and never have been any underground storage tanks
located on Kenmar's real property.
3.15 Employee Relations. Schedule 3.15 attached hereto contains
Kenmar's current payroll listing. To Kenmar's knowledge, there has not been and
will not be any materially adverse change in relations with
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employees of Kenmar as a result of any announcement of the transactions
contemplated by this Agreement. Except as set forth in Schedule 3.15 attached
hereto, no employees of Kenmar are represented by a union or other labor
organization or covered by any collective bargaining agreement. To Kenmar's
knowledge, there are no material controversies pending or threatened between
Kenmar and any representatives of their respective employees, and, to the
knowledge of Kenmar, there are no material organizational efforts presently
being made involving any of the presently unorganized employees of Kenmar. To
its knowledge, Kenmar has complied in all material respects with all laws
relating to the employment of labor, including, without limitation, any
provisions thereof relating to wages, hours, collective bargaining and the
payment of social security and similar taxes, and no Person has, to the
knowledge of Kenmar, asserted that Kenmar is liable in any material amount for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. Except as set forth in Schedule 3.15 attached hereto, to Kenmar's
knowledge, there is no material action, suit or proceeding by any Person pending
or threatened against Kenmar involving employment discrimination or wrongful
discharge or similar claims.
3.16 Interests in Clients, Suppliers, Etc. Except as described in
Schedule 3.16 attached hereto, to Kenmar's knowledge, no officer, director, or
greater than three percent (3%) shareholder of Kenmar possesses, directly or
indirectly, any financial interest in (other than ownership of less than 5% of
the equity capital or similar interest), or is a director, officer or employee
of, any corporation, firm, association or business organization which is a
client, supplier, customer, lessor, lessee, or competitor of Kenmar (a "Kenmar
Related Person"). To Kenmar's knowledge, it has conducted each and every
transaction with any Kenmar Related Person on an arm's-length basis in a manner
fair and commercially reasonable to Kenmar and such Kenmar Related Person.
3.17 Absence of Certain Changes. Except as described in Schedule 3.17
attached hereto, to the best of Kenmar's knowledge, since the date of the most
current balance sheet provided to JAI pursuant to Section 3.5 above, (i) there
has not been any material adverse change in the business, financial condition or
the results of operations of Kenmar; (ii) the business of Kenmar has been
conducted only in the ordinary course; (iii) Kenmar has not incurred any
liabilities (direct, contingent or otherwise) or engaged in any material
transaction or entered into any material agreement outside of the ordinary
course of business; (iv) Kenmar has not materially increased the compensation of
any officer or granted any material general salary or benefits increase to its
employees; and (v) Kenmar has not taken any action prohibited by Section 4.1
hereof except as permitted or required by this Agreement.
3.18 Disclosure. To Kenmar's knowledge, none of this Agreement, the
financial statements referred to in Section 3.5 hereof (including the notes
thereto), any Transaction Document, or any Schedule, Exhibit or certificate
attached hereto or delivered in accordance with the terms hereof contains any
materially untrue statement of a material fact or omits any statement of a
material fact necessary in order to make the statements contained herein or
therein not materially misleading. To Kenmar's knowledge, all appraisals,
valuations, estimates or other projections concerning Kenmar's securities
(whether in the possession of Kenmar or any affiliate thereof) which would be
material to a reasonable investor's investment decision with respect to the
transactions contemplated by this Agreement have been provided to JAI. There is
no fact known to Kenmar or any of its officers or directors, which materially
and adversely affects the business, prospects, valuation or financial condition
of Kenmar or its properties or assets which has not been set forth in this
Agreement, the financial statements referred to in Section 3.5 hereof (including
the notes thereto), or any Schedule, Exhibit or certificate attached hereto or
delivered in accordance with the terms hereof or any document or statement in
writing which has been supplied by or on behalf of Kenmar or by any of its
directors or officers in connection with the transactions contemplated by this
Agreement.
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3.19 Copies of Documents. To its knowledge, Kenmar has delivered to JAI
and its advisers true, complete and correct copies of all documents referred to
in this Article III or in any Schedule attached hereto.
3.20 Absence of Certain Conditions. To Kenmar's knowledge, there exists
no event, occurrence, condition or act which, with the giving of notice or the
lapse of time, would constitute a material breach of or cause any of the
representations and warranties in this Article III to become materially untrue.
The representations and warranties set forth in this Article III are
cumulative. The subject matter covered by any Section of this Article III shall
not be exclusive as to such subject matter to the extent covered by another
Section of this Article III, and the specificity of any representation and
warranty shall not affect or limit the generality of any other representation or
warranty.
ARTICLE IV
CONDUCT OF BUSINESS; EXCLUSIVE DEALING; REVIEW
4.1 Conduct of the Business of JAI, Acquisition and Kenmar Pending the
Effective Time. JAI, Acquisition and Kenmar each agree that, except as
permitted, required or specifically contemplated by, or otherwise described in,
this Agreement or otherwise consented to or approved in writing by JAI, during
the period commencing on the date hereof and ending at the Effective Time:
(a) JAI, Acquisition and Kenmar will conduct their respective
operations only according to their ordinary and usual courses of business and
will use their best efforts to preserve intact their respective business
organizations, keep available the services of their officers and employees and
maintain satisfactory relationships with licensors, suppliers, distributors,
clients and others having business relationships with them; and
(b) Neither JAI, Acquisition nor Kenmar shall (i) make any
change in or amendment to its Certificate of Incorporation or Bylaws (or
comparable governing documents); (ii) issue or sell any shares of its capital
stock or any of its other securities, or issue any securities convertible into,
or options, warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of, any shares of
its capital stock or any of its other securities, or make any other changes in
its capital structure, except as may be agreed by JAI and Kenmar in writing;
(iii) declare, pay or make any dividend or other distribution or payment with
respect to, or split, redeem or reclassify, any shares of its capital stock,
other than the Reverse Stock Split (as defined below) and dividends payable or
which become payable with respect to any Kenmar preferred stock; (iv) purchase
or otherwise acquire any shares of its capital stock except in a fiduciary
capacity; (v) enter into any contract or commitment or incur any debt, including
without limitation, any acquisition of a material amount of assets or
securities, any disposition of a material amount of assets or securities or
release or relinquish any material contract rights, provided, that Kenmar may do
any of the foregoing in the ordinary course of its business; (vi) amend or
terminate any employee or non-employee benefit plan or program, employment
agreement, license agreement or retirement agreement, or pay any bonus or
contingent compensation; (vii) agree, in writing or otherwise, to take any of
the foregoing actions; or (viii) agree to the settlement of any material
litigation.
4.2 Exclusive Dealing. During the period from the date of this
Agreement to the Closing Date, neither JAI nor Acquisition shall take (and
neither shall authorize or permit its directors, officers, employees or
representatives so to take) any action to encourage or initiate discussions or
negotiations with any Person, other than Kenmar, concerning any merger, sale of
substantial assets or similar transaction involving JAI or Acquisition.
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4.3 Access to Records and Properties. Between the date of this
Agreement and the Effective Time of the Merger, JAI, Acquisition and Kenmar
agree to give to the other parties hereto and their respective representatives,
including accountants and legal counsel, reasonable access to the premises and
books and records of JAI, Acquisition and Kenmar, as the case may be, and to
cause the officers of JAI, Acquisition and Kenmar, as the case may be, to
furnish the other parties hereto with such financial and operating data and
other information with respect to the business and properties as JAI,
Acquisition and Kenmar, as the case may be, shall from time to time reasonably
request, provided that any such investigation shall be conducted in such manner
as not to interfere unreasonably with the operation of the business of JAI,
Acquisition or Kenmar. Prior to the Effective Date on the event of termination
of this Agreement, the parties shall keep confidential any material information
obtained from the other parties concerning the other parties' properties,
operations and business (unless readily ascertainable from public or published
information or trade sources) until the same ceases to be material (or becomes
so ascertainable) and, at the request of the party from which the information
was obtained, the party obtaining such information shall return all copies of
any schedules, statements, documents or other written information obtained
pursuant to this Section 4.3 or otherwise in the "due diligence" process.
ARTICLE V
CONDITIONS PRECEDENT TO MERGER
5.1 Conditions Precedent to Obligations of JAI, Acquisition and Kenmar.
The respective obligations of JAI and Acquisition, on the one hand, and Kenmar,
on the other hand, to effect the Merger are subject to the satisfaction or
waiver (subject to applicable law) at or prior to the Effective Time of each of
the following conditions:
(a) Approval of Stockholders. This Agreement and the Merger
shall have been approved and adopted by the requisite vote or consent of the
Stockholders in accordance with applicable law and Kenmar's Certificate of
Incorporation and Bylaws.
(b) Approval of JAI's Stockholders. This Agreement and the
Merger shall have been approved and adopted by the requisite vote or consent of
the stockholders of JAI in accordance with applicable law and JAI's Certificate
of Incorporation and Bylaws, regardless of whether such vote is required by such
law, Certificate of Incorporation or Bylaws.
(c) Injunction. No preliminary or permanent injunction or
other order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which prohibits the consummation of the
Merger and the transactions contemplated by this Agreement and which is in
effect at the Effective Time.
(d) Statutes. No statute, rule, regulation, executive order,
decree or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the consummation
of the Merger.
(e) Governmental Regulatory Approval. To the extent required
by applicable law, any orders, consents, authorizations and approvals shall have
been entered by or obtained from all federal, state or local governmental and
regulatory authorities having jurisdiction, granting the authority necessary for
the approval of this Agreement and for the consummation of the Merger.
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(f) Business Combination Statutes. The consummation of the
Merger and the other transactions contemplated by this Agreement shall be
permitted by and not be inconsistent with applicable state law.
5.2 Conditions Precedent to Obligations of Kenmar. The obligation of
Kenmar to effect the Merger is also subject to the satisfaction or waiver, at or
prior to the Effective Time, of each of the following conditions:
(a) Accuracy of Representations and Warranties. All
representations and warranties of JAI and Acquisition contained herein shall be
true and correct in all material respects as of the date hereof and at and as of
the Effective Time, with the same force and effect as though made at and as of
the Effective Time, and Kenmar shall have received (i) a certificate from the
Chief Executive Officer and the Chief Financial Officer of JAI and Acquisition,
respectively, to such effect, and (ii) any additional evidence that Kenmar may
reasonably request to verify that all such representations and warranties are
true and correct.
(b) Performance by JAI and Acquisition. Each of JAI and
Acquisition shall have performed in all material respects all obligations and
agreements, and complied in all material respects with all covenants and
conditions, contained in this Agreement to be performed or complied with by it
prior to the Closing Date, and Kenmar shall have received a certificate from the
Chief Executive Officer and the Chief Financial Officer of JAI and Acquisition,
respectively, to such effect.
(c) Legal Opinion. Kenmar shall have received from Steven A.
Sanders, P.C., counsel to JAI and Acquisition, a favorable opinion dated the
Closing Date in form and substance satisfactory to Kenmar, substantially in the
form of Exhibit D attached hereto.
(d) Good Standing and Other Certificates. JAI shall have
delivered to Kenmar, each as of a recent date prior to the Closing Date: (i) a
copy of JAI's Certificate of Incorporation, including all amendments thereto,
certified by the Secretary of State of Delaware, (ii) a copy of Acquisition's
Articles of Incorporation, including all amendments thereto, certified by the
Secretary of State of North Carolina, (iii) a certificate from the Secretary of
State of Delaware to the effect that JAI is in good standing in Delaware and
listing all charter documents of JAI on file, (iv) a certificate from the
Secretary of State of North Carolina to the effect that Acquisition is in good
standing in North Carolina and listing all charter documents of Acquisition on
file, (v) a certificate from the Secretary of State or other appropriate
official in each state in which JAI is qualified to do business to the effect
that JAI is in good standing in such State, (vi) a certificate as to the tax
status of JAI from the appropriate officials of Delaware and each state in which
JAI is qualified to do business, (vii) a copy of the Bylaws of JAI, certified by
the Secretary of JAI as being true and correct and in effect on the Closing
Date, (viii) a copy of the Bylaws of Acquisition, certified by the Secretary of
Acquisition as being true and correct and in effect on the Closing Date, (ix) a
copy of resolutions, certified as of the Closing Date by the Secretary of JAI,
adopted by the Board of Directors and shareholders of JAI and authorizing the
execution and delivery by JAI of this Agreement and the other Transaction
Documents, the performance by JAI of its obligations hereunder and thereunder
and the consummation by JAI of the transactions contemplated hereby and thereby,
and (x) a copy of resolutions, certified as of the Closing Date by the Secretary
of Acquisition, adopted by the Board of Directors and shareholders of
Acquisition and authorizing the execution and delivery by Acquisition of this
Agreement and the other Transaction Documents, the performance by Acquisition of
its obligations hereunder and thereunder and the consummation by Acquisition of
the transactions contemplated hereby and thereby.
(e) No Adverse Change. Prior to the Closing Date, there shall
be no adverse change in the assets or liabilities, the business or condition,
financial or otherwise, the results of operations, or
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prospects of JAI, whether as a result of any legislative or regulatory change,
revocation of any license or rights to do business, fire, explosion, accident,
casualty, labor trouble, flood, drought, riot, storm, condemnation or act of God
or other public force or otherwise, and the Secretary of JAI shall have
delivered to Kenmar a certificate, dated the Closing Date, to such effect.
(f) Reverse Stock Split. JAI shall have consummated the
Reverse Stock Split (as defined below).
(g) Hutronix/Ronstadt Dispute. There shall have occurred a
"Final Closing" of the Settlement Agreement (as defined in the Settlement
Agreement), and the dispute between JAI, BCC, KGR, MHR and Hutronix shall have
been resolved in a manner satisfactory to Kenmar in its sole discretion. There
shall not be any action pending or threatened to void, cancel, terminate, undo,
or challenge the Settlement Agreement. Bank One of Arizona, N.A. ("Bank One"),
shall have given its irrevocable written release to JAI and any existing, former
or future affiliates of JAI, forever releasing JAI and any such affiliates from
any and all liabilities or obligations whatsover owed to Bank One, in form and
substance satisfactory to Kenmar. JAI shall have received irrevocable releases
from Henry Dahlberg, E.M. Huston, and William Mann, and any other existing or
former shareholder of JAI, Hutronix, or any existing or former affiliate of
either such company, in form and substance satisfactory to Kenmar.
(h) Option Agreement. JAI, the Stockholders, Kenmar and the
Representative (as defined therein) shall have entered into an option agreement
substantially in the form of that attached as Exhibit C hereto (the "Option
Agreement," as defined in Section 1.2 above).
(i) No Litigation Threatened. No action or proceedings shall
have been instituted or threatened before a court or other government body or by
any public authority, and no claim shall have been asserted or threatened to be
asserted, to restrain or prohibit any of the transactions contemplated hereby,
and JAI shall have delivered to Kenmar a certificate, dated the Closing Date, to
such effect.
(j) JAI Stock Price. The trading price of JAI's Common Stock
as of the Effective Time shall be at least $1.50 per share.
(k) Marks Employment Agreement. JAI and Marks shall have
entered into an employment agreement satisfactory to Marks and substantially in
the form of Exhibit E attached hereto (the "Marks Employment Agreement"), and
JAI shall have performed all obligations required of it thereunder as of the
Effective Time.
(l) Options. Kenmar shall have received a written agreement
from each holder of any option to purchase shares of Common Stock of Kenmar in
the form of Exhibit F, completed with the additional terms described below and
duly executed by such holder, to the effect that such holder's option (his or
her "Kenmar Option") shall be cancelled and replaced as of the Effective Time
with a substitute corresponding option to purchase shares of Common Stock of JAI
(such holder's "JAI Option") (collectively, the "Substitute Option Agreements").
Each such holder's JAI Option shall: (i) be granted pursuant to JAI's "1993
Employee Stock Option Plan"; (ii) have term provisions equivalent to those in
such holder's Kenmar Option and be fully vested; (iii) be exercisable to
purchase the number of shares of JAI's Common Stock (less any fractional share,
which shall be eliminated) determined by multiplying the number of shares of
Kenmar's Common Stock then subject to such holder's Kenmar Option by the
Exchange Ratio (as defined in Section 1.1(c) above); and (iv) be exercisable at
an exercise price per share of JAI's Common Stock determined by dividing the
exercise price per share of Kenmar's Common Stock under such holder's Kenmar
Option by the Exchange Ratio. Kenmar also shall have received for cancellation,
together with each such holder's written
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agreement described above, the original agreement evidencing such holder's
Kenmar Option. JAI agrees and acknowledges that the failure to satisfy the
foregoing condition, although relieving Kenmar of its obligations hereunder,
shall not constitute a breach of this Agreement.
(m) Resignations. Kenmar shall have received a written
resignation from Robert Knight as an officer and director of JAI, and a written
resignation from Robert Knight as an officer of Acquisition, both in form and
substance reasonably satisfactory to Kenmar.
(n) Intra-Company Debt. All indebtedness of stockholders,
directors, officers and employees of JAI to JAI shall have been repaid in full.
(o) Satisfaction with Review of JAI and Acquisition. Kenmar
shall have completed its review of the properties, books and records and
financial and legal condition of JAI and Acquisition pursuant to Section 4.3
above and shall be satisfied in all respects, in Kenmar's sole judgment and
discretion, with the results thereof.
(p) Proceedings. All proceedings to be taken in connection
with the transactions contemplated by this Agreement and all documents incident
thereto shall be satisfactory in form and substance to Kenmar, and Kenmar shall
have received copies of all such documents, certificates and other evidences as
it or its counsel may reasonably request in connection with or to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
(q) No Dissent. As of the Closing Date, no Stockholder shall
have demanded or otherwise purported to exercise his or her dissenter's rights,
if any, pursuant to the NCBCA with respect to all or any portion of such
Stockholder's Common Stock.
(r) Securities Exemption. The Merger Consideration shall be
subject to a valid exemption from registration under applicable federal and
state securities laws.
(s) Assets and Liabilities of JAI. At the Effective Time, JAI
shall have a book value of Two Hundred Thousand Dollars ($200,000), consisting
of at least Two Hundred Thousand Dollars ($200,000) in cash, and shall provide
evidence thereof to Kenmar, satisfactory to Kenmar in its sole discretion.
(t) Board of Directors of JAI at the Effective Time. The Board
of Directors of JAI at the Effective Time shall be comprised of the following
five (5) individuals:
Kenneth H. Marks
Alan G. Finkel
Craig Macnab
Kenneth L. Marks
Ray Steckenrider
(u) Certain Corporate Matters.
(i) The name of JAI shall have been changed to
"Electronic Manufacturing Services Group, Inc."
(ii) The stock symbol for JAI shall have been changed
to "EMSG".
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(iii) The principal corporate office and all books,
records and corporate documents of JAI shall have been relocated to 6638 Old
Wake Forest Road, Raleigh, North Carolina.
(v) Guaranty Agreement. JAI shall have executed a Guaranty
Agreement, satisfactory to Kenmar and substantially in the form of Exhibit G
attached hereto, in favor of Lee K. Simon, Daniel David Cameron, Jr., and Joseph
T. Hunt, Jr.
(w) Tax Returns. JAI shall have filed all of the JAI Returns
required to have been filed by applicable law, and shall have presented evidence
to Kenmar, satisfactory to Kenmar in its sole discretion, that such Returns have
been filed and that all Taxes and other obligations and liabilities in
connection therewith have been fully satisfied.
(x) Broker Fees. JAI shall pay, or cause to be paid, prior to
the Closing Date, the fees, costs and expenses of Rudy Miller and/or the Miller
Group, George Salloum, and any other broker or consultant who might be owed
compensation as a result of the transaction contemplated by this Agreement.
(y) Return of Stock. The following entitities and/or
individuals, and any additional entities and/or individuals under a contractual
or other obligation to do so, shall have returned to JAI all JAI stock owned, or
formerly owned by them, which is in their possession or under their control, and
such stock shall have been cancelled on the books and records of JAI: (i) BCC;
(ii) Torik, Inc. (and/or the present or former shareholders of Torik, Inc.); and
(iii) Capital City Plastics, Inc.
(z) Termination of Guaranty of Lease. That certain Guaranty of
Lease, dated November 1, 1993, between Rush Hinsdale and JAI shall have been
terminated in a manner satisfactory to Kenmar in its sole discretion.
5.3 Conditions Precedent to Obligations of JAI and Acquisition. The
obligations of JAI and Acquisition to effect the Merger are also subject to the
satisfaction or waiver, at or prior to the Effective Time, of each of the
following conditions:
(a) Accuracy of Representations and Warranties. All
representations and warranties of Kenmar contained herein shall be true and
correct in all material respects as of the date hereof and at and as of the
Effective Time, with the same force and effect as though made on and as of the
Effective Time, and JAI shall have received a certificate from the President of
Kenmar to such effect.
(b) Performance by Kenmar. Kenmar shall have performed in all
material respects all obligations and agreements, and complied in all material
respects with all covenants and conditions, contained in this Agreement to be
performed or complied with by it prior to the Closing Date, and JAI shall have
received a certificate from the President of Kenmar to such effect.
(c) Legal Opinion. JAI shall have received from Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, counsel to Kenmar, an opinion
dated the Closing Date substantially in the form of Exhibit H attached hereto.
(d) Good Standing and Other Certificates. Kenmar shall have
delivered to JAI, each as of a recent date prior to the Closing Date: (i) a copy
of Kenmar's Articles of Incorporation, including all amendments thereto,
certified by the Secretary of State of North Carolina, (ii) a certificate from
the Secretary of State of North Carolina to the effect that Kenmar is in good
standing in North Carolina and listing all charter documents of Kenmar on file,
(iii) a certificate from the Secretary of State or other appropriate official
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in each state in which Kenmar is qualified to do business to the effect that
Kenmar is in good standing in such State, (iv) a certificate as to the tax
status of Kenmar from the appropriate officials of North Carolina and each state
in which Kenmar is qualified to do business, (v) a copy of the Bylaws of Kenmar,
certified by the Secretary of Kenmar as being true and correct and in effect on
the Closing Date, and (vi) a copy of resolutions, certified as of the Closing
Date by the Secretary of Kenmar, adopted by the Board of Directors and
Stockholders and authorizing the execution and delivery by Kenmar of this
Agreement and the other Transaction Documents, the performance by Kenmar of its
obligations hereunder and thereunder and the consummation by Kenmar of the
transactions contemplated hereby and thereby.
(e) No Adverse Change. Prior to the Closing Date, there shall
be no materially adverse change (other than any change disclosed in Schedule
3.17 attached hereto) in the business, financial condition or results of
operations of Kenmar, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire, explosion,
accident, casualty, labor trouble, flood, drought, riot, storm, condemnation or
act of God or other public force or otherwise, and the Secretary of Kenmar shall
have delivered to JAI a certificate, dated the Closing Date, to such effect.
(f) No Litigation Threatened. No action or proceedings shall
have been instituted or threatened before a court or other government body or by
any public authority, and no claim shall have been asserted or, to the knowledge
of Kenmar, threatened to be asserted, to restrain or prohibit any of the
transactions contemplated hereby, and Kenmar shall have delivered to JAI a
certificate, dated the Closing Date, to such effect.
(g) Consents Under Agreements. Any consents and approvals
shall have been granted by all Persons whose consent or approval shall be
required in order to permit the succession by the Surviving Corporation pursuant
to the Merger or by JAI to any obligation, right or interest of Kenmar under any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement or instrument, or any permit, concession, franchise or license, except
those for which the failure to obtain such consents and approvals would not
individually or in the aggregate have a material adverse effect on the business,
financial condition or results of operations of Kenmar taken as a whole or on
the Surviving Corporation.
(h) Proceedings. All proceedings to be taken in connection
with the transactions contemplated by this Agreement and all documents incident
thereto shall be reasonably satisfactory in form and substance to JAI, and JAI
shall have received copies of all such documents, certificates and other
evidences as it or its counsel may reasonably request in connection with or to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
(i) Marks Employment Agreement. JAI and Marks shall have
entered into the Marks Employment Agreement substantially in the form of Exhibit
E attached hereto.
(j) GMCP Agreement. JAI and G.M. Capital Partners Ltd. shall
have entered into a consulting agreement substantially in the form of Exhibit I
attached hereto (the "GMCP Agreement").
ARTICLE VI
CERTAIN COVENANTS AND AGREEMENTS OF THE PARTIES
6.1 Reverse Stock Split. On or prior to the Closing Date, but in any
event prior to the Effective Time, JAI shall undertake and consummate a 1 for 4
reverse stock split, whereby every four (4) shares of JAI's issued and
outstanding Common Stock will be converted into one (1) share of JAI's Common
Stock (the "Reverse Stock Split"). All fractional shares arising from such
Reverse Stock Split shall be retired and
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cancelled without additional liability on the part of JAI. The Exchange Ratio
shall be calculated and determined after the Reverse Stock Split.
6.2 Control of Board of Directors of JAI; President and Chief Executive
Officer.
(a) JAI shall use its best efforts and undertake all acts
within its power to permit Marks to control and elect a majority of JAI's Board
of Directors for a period of thirty-six (36) months following the Effective
Time. During any period when a majority of JAI's Board of Directors is not
comprised of Directors voted for and elected by Marks, except in the event that
Marks intentionally fails to cast his votes in a manner that would result in his
voting for and electing a majority of JAI's Board of Directors during such
period, the written consent of Marks shall be required prior to the occurrence
of any material transactions, as hereinafter defined. For purposes of this
Section 6.2, "material transactions" shall include but shall not be limited to:
(i) any contract or agreement; (ii) any decision to transfer any material
portion of the assets of JAI or any Subsidiary; (iii) any amendment to the
Certificate of Incorporation of JAI; (iv) the sale, issuance or repurchase of
any shares of stock of JAI; (v) the investment of over Ten Thousand Dollars
($10,000) by JAI or any Subsidiary in any venture or business investment; (vi)
any amendment of the Bylaws of JAI or any Subsidiary; (vii) the declaration or
payment by JAI or any Subsidiary of any dividends on its Common Stock or the
distribution by JAI of its assets to the holders of its Common Stock; (viii) the
incurrence of any indebtedness by JAI or any Subsidiary; (ix) the sale of stock
by JAI or any Subsidiary; (x) any decision to pledge or mortgage any assets of
JAI or any Subsidiary; (xi) any decision to hire or terminate any officer or
executive employee, including but not limited to Marks; (xii) any change in
compensation or responsibilities of any officer or executive employee; (xiii)
any contract payments or payment of consulting fees to Robert Knight, G.M.
Capital Partners Ltd., or any other consultant.
(b) JAI acknowledges and agrees that Kenmar and the
Stockholders have bargained for the right of Marks to control the Board of
Directors of JAI for a period of thirty-six (36) months from the Effective Time
and that Kenmar and the Stockholders would be irreparably harmed if such control
were not effected. Accordingly, in the event of any breach of the provisions of
Section 6.2(a), Kenmar and the Stockholders shall be entitled to specific
performance and other equitable remedies, including but not limited to
injunctive relief, and JAI shall not require Kenmar or the Stockholders to post
a bond with respect to any such remedies.
(c) The provisions set forth in Section 6.2(a) above regarding
Marks' written consent to material transactions are contractual and are in
addition to any rights and obligations he may have as an officer or director.
(d) In the event that a majority of JAI's Board of Directors
is not comprised of Directors voted for and elected by Marks during any period
within thirty-six (36) months from the Effective Time (except in the event that
Marks intentionally fails to cast his votes in a manner that would result in his
voting for and electing a majority of JAI's Board of Directors during such
period), and in the further event that JAI undertakes a material transaction
during such period without Marks' written consent, (i) the Option shall become
immediately exercisable by the Representative, as more specifically set forth in
the Option Agreement, and (ii) JAI shall, immediately upon Marks' request: (A)
grant Marks access to all of JAI's books, records, and shareholder lists (any
notice that might be otherwise required to be given by Marks is hereby expressly
and forever waived), and (B) pay Marks Fifty Thousand Dollars ($50,000) in cash.
(e) Notwithstanding the foregoing, in the event of Marks'
death, incapacitation, inability or unwillingness to control and elect a
majority of JAI's Board of Directors, then each of the rights and powers
described in Sections 6.2(a) - (d) shall reside in any individual selected by
the majority vote of Alan
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G. Finkel, Craig Macnab, Kenneth L. Marks and Ray Steckenrider; provided,
however, that in order for any of the aforementioned individuals to vote with
respect to such matter, he must be either a shareholder, noteholder, or director
of JAI at the time of such vote.
(f) In the event that Marks shall fail to serve (except as a
result of his voluntary resignation) as JAI's President and Chief Excecutive
Officer, then JAI shall promptly pay or prepay, as the case may be, each of the
following promissory notes: (i) Promissory Note, dated October 15, 1992, made by
Kenmar in favor of Lee K. Simon in the original principal amount of Four Hundred
Forty-Five Thousand Five Hundred Dollars ($445,500); (ii) Promissory Note, dated
October 15, 1992, made by Kenmar in favor of Daniel David Cameron in the
original principal amount of One Hundred Forty-Eight Thousand Five Hundred
Dollars ($148,500); and (iii) Promissory Note, dated October 15, 1992, made by
Kenmar in favor of Joseph T. Hunt in the original principal amount of One
Hundred Forty-Eight Thousand Five Hundred Dollars ($148,500).
6.3 Best Efforts. Each of JAI, Acquisition and Kenmar shall cooperate
and use their respective best efforts to take, or cause to be taken, all
appropriate action, and to make, or cause to be made, all filings necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, their respective best efforts (i) to facilitate and preserve the
treatment of the Merger as a tax-free reorganization under Section 368(a) of the
Code including, if necessary, the establishment by Kenmar of an escrow account
for the payment of claims of dissenting shareholders, if any, and (ii) to
obtain, prior to the Closing Date, all licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental and regulatory
authorities and parties to contracts with JAI and Kenmar as are necessary for
consummation of the transactions contemplated by this Agreement and to fulfill
the conditions to the Merger.
6.4 Consent of Stockholders; Proxy Statement.
(a) Consent of Stockholders. As promptly as practicable after
the date hereof, each of JAI and Kenmar will take all action necessary in
accordance with applicable law and its governing instruments to obtain the
approval of this Agreement and the Merger and related transactions by the
holders JAI's Common Stock entitled to vote thereon and by the Stockholders
entitled to vote thereon, respectively. The Boards of Directors of JAI and
Kenmar shall, subject to their respective members' fiduciary duties, recommend
such approval and take all lawful action to solicit such approval.
(b) Proxy Statement. JAI shall promptly prepare a proxy
statement (the "Proxy Statement") satisfying all applicable state and federal
securities laws and will promptly send the Proxy Statement to its stockholders,
for the purpose of considering and voting upon this Agreement and the Merger.
JAI shall be solely responsible for any statement, information or omission in
the Proxy Statement.
6.5 Employee Benefits; Continued Employment.
(a) After the Effective Time, JAI agrees to provide current
officers and employees of Kenmar with employee benefits following the Effective
Time and continuing thereafter for a period of at least three months, which
employee benefits shall be at least equal to the employee benefits, taken as a
whole, provided from time to time by JAI to its officers and employees of
comparable position and responsibility.
(b) JAI agrees that it will refrain from terminating any
employee of Kenmar, for a period of three months commencing at the Effective
Time, except for cause as determined in the good faith judgment of JAI.
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(c) JAI agrees to give credit to each of Kenmar's employees
for the years of service for which such employees would be credited pursuant to
such employee benefit plans if such employees were employed by JAI as of their
initial date of hire by Kenmar.
(d) JAI agrees that it shall maintain or cause to be
maintained for a period of three months after the Effective Time, for each
employee of Kenmar immediately prior to the Merger, the salary or wages of such
employee at least at the level paid by Kenmar immediately prior to the Merger.
Thereafter, salary and wages of such employees then employed by JAI and its
affiliates shall be determined in accordance with JAI's policy.
(e) JAI agrees that retirees of Kenmar who are receiving
medical benefits at the Effective Time will be permitted to participate in JAI's
medical benefit plan, as it may exist from time to time, and that JAI shall pay
the required premium, provided that the right of each such retiree to
participate in such medical benefit plan shall terminate at the time such
retiree attains age 70.
6.6 Officers' and Directors' Insurance; Indemnification. For a period
of six years commencing at the Effective Time, JAI agrees (i) to maintain all
rights to indemnification now existing in favor of the directors and officers of
Kenmar as provided in the Certificate of Incorporation or Bylaws of Kenmar, with
respect to acts and omissions occurring prior to the Effective Time, and (ii) to
have in place and maintain a policy or policies of directors' and officers'
liability insurance covering directors and officers of Kenmar, JAI and
Acquisition having terms no less favorable than the policies presently
maintained by Kenmar on the date of this Agreement. Such policy or policies
shall cover acts and omissions of officers and directors of Kenmar occurring
prior to the Effective Time, and shall cover acts and omissions of officers and
directors of JAI and the Surviving Corporation after the Effective Time.
6.7 Stock Transfer Restrictions and Related Matters.
(a) Compliance with Securities Laws. Kenmar acknowledges that
the shares of Common Stock of JAI issued pursuant to Section 1.1 above and the
Plan of Merger, upon issuance, shall not have been registered under any federal
or state securities laws and may not be sold or transferred without compliance
with the registration or qualification provisions thereof or applicable
exemptions therefrom. Kenmar shall notify each Stockholder prior to the Closing
Date that such Stockholder may not sell, pledge, transfer, or otherwise dispose
of such shares except in compliance with all applicable federal and state
securities laws, rules and regulations and upon (i) the registration and
qualification of such shares under all applicable federal and state securities
law, (ii) such Stockholder's delivery to JAI of a no-action letter from the
state and federal agencies having jurisdiction over the transfer of such shares
to the effect that such registration or qualification is not required in
connection therewith, or (iii) such Stockholder's delivery to JAI of an opinion
prepared by counsel reasonably acceptable to JAI to the effect that neither the
sale nor the proposed transfer constitutes a violation of any federal or state
securities laws.
(b) Tax-Free Reorganization. Neither JAI nor Kenmar shall take
any action which would disqualify the transactions contemplated by this
Agreement from treatment as a tax-free reorganization of Kenmar, to the extent
that such treatment is otherwise available.
(c) Stop Transfer Order. JAI shall not be bound by any
attempted transfer, sale or other disposition in violation of any of the
restrictions set forth in this Section 6.7, and JAI shall be entitled to deliver
to JAI's transfer agent an appropriate stop transfer order in connection
therewith, pursuant to which such transfer agent shall refrain from registering
any such attempted transfer, sale or disposition.
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(d) Certificate Legend. The certificates representing the
Merger Consideration issued pursuant to Section 1.1 above and the Plan of Merger
shall bear legends in substantially the following forms:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER ANY FEDERAL OR STATE SECURITIES LAWS AND HAVE
BEEN ISSUED UNDER EXEMPTIONS THAT DEPEND IN PART ON THE INTENT
OF THE HOLDER HEREOF NOT TO SELL OR TRANSFER SUCH SHARES IN
ANY MANNER NOT PERMITTED BY SUCH LAWS. THESE SHARES MAY NOT BE
SOLD OR TRANSFERRED EXCEPT UPON REGISTRATION UNDER ALL
APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR UPON DELIVERY
TO JAI OF EITHER (A) A NO-ACTION LETTER FROM THE STATE AND
FEDERAL AGENCIES HAVING JURISDICTION THEREOF OR (B) AN OPINION
OF COUNSEL ACCEPTABLE TO THE CORPORATION THAT NEITHER THE SALE
NOR THE PROPOSED TRANSFER CONSTITUTES A VIOLATION OF ANY
FEDERAL OR STATE SECURITIES LAW.
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO COMPLIANCE WITH CERTAIN TRANSFER RESTRICTIONS SET
FORTH IN A MERGER AGREEMENT DATED AS OF MARCH 1, 1996 AMONG
JAI AND CERTAIN OTHER PARTIES, A COPY OF WHICH IS ON FILE IN
THE OFFICE OF JAI AND AVAILABLE TO THE HOLDER HEREOF UPON
WRITTEN REQUEST THEREFOR.
THIS RESTRICTIVE LEGEND SHALL BE VOID AND OF NO FURTHER EFFECT
AS OF APRIL 12, 1998.
6.8 Demand Registration Rights.
(a) Certain Definitions. As used in this Section 6.8, the
following terms shall have the following respective meanings:
(i) "Initiating Stockholders" shall mean the
Stockholders who in the aggregate hold at least fifty percent (50%) of the
Registrable Securities;
(ii) "Registrable Securities" shall mean any Common
Stock of JAI; provided, however, that shares of Common Stock shall be treated as
Registrable Securities only if and so long as they have not been (A) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, or (B) sold or made available for sale, in the opinion
of counsel to JAI, in a single transaction exempt from the registration and
prospectus delivery requirements of the Securities Act so that all transfer
restrictions and restrictive legends with respect thereto are or may be removed
upon the consummation of such sale;
(iii) "Register," "registered" and "registration"
shall refer to a registration effected by preparing and filing with the SEC a
registration statement in compliance with the Securities Act, and the
declaration or ordering of the effectiveness of such registration statement;
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(iv) "Registration Expenses" shall mean all expenses,
except Selling Expenses, incurred by JAI in complying with Sections 6.8(b) and
6.8(c) hereof, including, without limitation, all registration, qualification
and filing fees, printing expenses, escrow fees, fees and disbursements of
counsel for JAI, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of JAI which shall be paid in any event by JAI) in the
event of one exercise of a demand registration provided for in Section 6.8(b)
hereof and in the event of any piggyback registrations pursuant to Section
6.8(c) hereof;
(v) "Securities Act" shall mean the Securities Act of
1933, as amended, or any similar federal statute and the rules and regulations
of the SEC thereunder, all as the same shall be in effect at the time; and
(vi) "Selling Expenses" shall mean all underwriting
discounts, selling commissions and stock transfer taxes applicable to the
securities registered by the Stockholder and all fees and disbursements of
counsel for any Stockholder.
(b) Demand Registration. In case JAI shall receive from the
Initiating Stockholders a written demand that JAI effect a registration under
the Securities Act with respect to not less than fifty percent (50%) (as
adjusted for recapitalizations) of the Registrable Securities, JAI will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Stockholders, and
(ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Stockholder or Stockholders joining in such request as are specified in a
written request received by JAI within twenty (20) days after receipt of such
written notice from JAI; provided, however, that JAI shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 6.8(b) prior to twelve (12) months after the Effective
Time.
Subject to the foregoing, JAI shall file a registration
statement covering the Registrable Securities so requested to be registered as
soon as practicable after receipt of the request or requests of the Initiating
Stockholders.
(c) "Piggyback" Registration
(i) Notice of Registration. If at any time or from
time to time JAI shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, other than (A) a
registration relating to employee benefit plans or (B) a registration relating
solely to an SEC Rule 145 transaction, JAI will:
(1) promptly give to each Stockholder
written notice thereof; and
(2) include in such registration (and any
related qualification under blue sky laws or other compliance) and in any
underwriting involved therein all the Registrable Securities specified in
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a written request or requests made by any Stockholder or Stockholders within
twenty (20) days after receipt of such written notice from JAI.
(ii) Underwriting. If the registration of which JAI
gives notice is for a registered public offering involving an underwriting, JAI
shall so advise the Stockholders as a part of the written notice given pursuant
to Section 6.8(c)(i)(1). In such event the right of any Stockholder to
registration pursuant to this Section 6.8(c) shall be conditioned upon such
Stockholder's participation in such underwriting and the inclusion of such
Stockholder's Registrable Securities in the underwriting to the extent provided
herein. All Stockholders proposing to distribute their Registrable Securities
through such underwriting (together with JAI and any other stockholders
distributing their securities through such underwriting) shall enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by JAI. Notwithstanding any other provision of this
Section 6.8(c), if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration. JAI shall so advise all Stockholders and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Stockholders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Stockholders at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, JAI may round the
number of shares allocated to any Stockholder or other stockholder to the
nearest one hundred (100) shares. If any Stockholder or other stockholder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to JAI and the managing underwriter. Any securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration, and shall not be transferred in a public distribution prior to
ninety (90) days after the effective date of the registration statement relating
thereto, or such other shorter period of time as the underwriters may require.
JAI may include shares of Common Stock held by stockholders other than
Stockholders in a registration statement pursuant to this Section 6.8(c) if, and
to the extent that, the amount of Registrable Securities otherwise includable in
such registration statement would not thereby be diminished.
(d) Expenses of Registration. All Registration Expenses
incurred in connection with (i) one registration pursuant to Section 6.8(b), and
(ii) any and all registrations pursuant to Section 6.8(c), shall be borne by
JAI. Unless otherwise provided in this Section 6.8, all Selling Expenses
relating to securities registered on behalf of the Stockholders and all other
Registration Expenses shall be borne by the Stockholders of such securities pro
rata on the basis of the number of shares so registered.
(e) Registration Procedures. In the case of each registration,
qualification or compliance effected by JAI pursuant to this Section 6.8, JAI
will keep each Stockholder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense, JAI will:
(i) Prepare and file with the SEC a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
twenty (120) days, and prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for at least one
hundred twenty (120) days, provided that no such registration shall constitute a
shelf registration under Rule 415 promulgated by the SEC under the Securities
Act;
(ii) Enter into a written underwriting agreement in
customary form and substance reasonably satisfactory to JAI, the Stockholders
participating in such registration and the managing underwriter
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or underwriters of the public offering of such securities, if the offering is to
be underwritten in whole or in part;
(iii) Furnish to the Stockholders participating in
such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters
reasonably may request to facilitate the public offering of such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating Stockholders
reasonably may request within ten (10) days prior to the original filing of such
registration statement;
(v) Notify the Stockholders (or their
attorneys-in-fact) participating in such registration, promptly after it shall
receive notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) Notify such Stockholders or their
attorneys-in-fact promptly of any request by the SEC for the amending or
supplementing of such registration statement or prospectus or for additional
information;
(vii) Prepare and file with the SEC, promptly upon
the request of any such Stockholders, any amendments or supplements to such
registration statement or prospectus which, in the reasonable opinion of counsel
for such Stockholders, is required under the Securities Act or the rules and
regulations thereunder in connection with the distribution of the Registrable
Securities by such Stockholders;
(viii) Prepare and promptly file with the SEC, and
promptly notify such Stockholders or their attorneys-in-fact of the filing of,
such amendment or supplement to such registration statement or prospectus as may
be necessary to correct any statements or omissions therein if, at the time when
a prospectus relating to such securities is required to be delivered under the
Securities Act, any event has occurred as the result of which any such
prospectus or any other prospectus as then in effect would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading in light of the circumstances in
which they were made;
(ix) In case any of such Stockholders or any
underwriter for any such Stockholders is required to deliver a prospectus at a
time when the prospectus then in effect may no longer be used under the
Securities Act, prepare promptly upon request such amendment or amendments to
such registration statement and such prospectuses as may be necessary to permit
compliance with the requirements of the Securities Act; and
(x) Advise such Stockholders or their
attorneys-in-fact, promptly after it shall receive notice or obtain knowledge
thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or the initiation or threatening of
any proceeding for that purpose, and promptly use its best efforts to prevent
the issuance of any stop order or to obtain its withdrawal if such stop order
should be issued.
(f) Indemnification. JAI will indemnify each Stockholder, each
of such Stockholder's officers, directors and partners, and each person
controlling such Stockholder within the meaning of Section
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15 of the Securities Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Section 6.8, and each underwriter,
if any, and each person who controls any underwriter within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages,
or liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by JAI of the Securities Act or
any rule or regulation promulgated under the Securities Act applicable to JAI in
connection with any such registration, qualification or compliance, and JAI will
reimburse each such Stockholder, each of such Stockholder's officers and
directors, and each person controlling such Stockholder, each such underwriter
and each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action.
6.9 Interim Financial Statements. Within 30 days after the end of the
each calendar month, occurring after the date of execution of this Agreement and
prior to the Effective Time, JAI shall deliver to Kenmar unaudited interim
financial statements normally generated by JAI for each such month, in each case
certified by the chief financial officer of JAI. All such financial statements
shall fairly present in all material respects the financial condition and
results of operations of JAI at the dates and for the periods indicated in
accordance with generally accepted accounting principles consistent with those
applied in connection with JAI's audited financial statements, subject to normal
year-end audit adjustments.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS; INDEMNITY
7.1 Survival of Representations. The respective representations and
warranties of JAI, Acquisition and Kenmar contained in this Agreement or in any
Schedule attached hereto or delivered in accordance with the terms hereof shall
survive the Closing and shall remain in full force and effect forever
thereafter, notwithstanding any investigation or examination of, or knowledge
with respect to, the subject matter thereof.
7.2 Indemnification by JAI.
(a) JAI agrees to defend, indemnify and hold harmless Kenmar
and its affiliates and their respective officers, directors, employees, agents
and Stockholders (each, an "Indemnitee") to the full extent permitted in law or
equity, from and against any and all losses, claims, actions, damages,
liabilities, costs and expenses (including attorneys' fees and expenses)
(collectively, "Losses"), joint or several, relating to or arising from or in
connection with (i) any misrepresentation, or any non-fulfillment of any
representation, warranty, covenant, obligation or agreement by JAI or
Acquisition contained in or made pursuant to this Agreement or any of the other
agreements, documents, or instruments contemplated hereby, or in any officer's
certificate, or other certificate delivered to Kenmar in connection with this
Agreement, (ii) any litigation, action, claim, proceeding or investigation (in
the case of investigations, only those investigations as to specific occurrences
or events) by any third party relating to or arising out of the business or
operations of JAI or any Subsidiary of JAI prior to the Effective Time, and
(iii) the enforcement by Kenmar of its rights pursuant to this Section 7.2, or
any litigation, proceeding or investigation relating to any of the foregoing;
and (iv) any act or omission by JAI, or its affiliates and their respective
officers, directors, employees, agents and shareholders which occurred prior to
the Effective Time. In addition, JAI agrees to advance or reimburse
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<PAGE>
each Indemnitee, on demand and prior to a final determination, for any and all
expenses reasonably incurred by such Indemnitee in investigating, preparing for,
defending or taking any other action in respect of any such Loss or any
proceeding related thereto, whether or not such Indemnitee is a party to such
proceeding.
(b) JAI's obligations to indemnify and hold harmless Kenmar
pursuant to this Section 7.2 shall survive the consummation of the transactions
contemplated by this Agreement and shall not be to the exclusion of any other
right or remedy available to Kenmar under applicable law.
7.3 Indemnification by Kenmar. Kenmar agrees to defend, indemnify and
hold harmless JAI from and against any and all Losses relating to or arising
from or in connection with any misrepresentation, or any non-fulfillment of any
representation, warranty, covenant, obligation or agreement by Kenmar contained
or made pursuant to this Agreement or any of the other agreements, documents, or
instruments contemplated hereby, or in any officer's certificate, or other
certificate delivered to JAI in connection with this Agreement.
7.4 Matters Involving Third Parties.
(a) If any third party shall notify any party hereto (the
"Indemnified Party") with respect to any matter (a "Third Party Claim") which
may give rise to a claim for indemnification against any other party (the
"Indemnifying Party") under this Article VII, then the Indemnified Party shall
promptly notify the Indemnifying Party thereof in writing; provided, however,
that no delay on the part of the Indemnified Party in notifying any Indemnifying
Party shall relieve the Indemnifying Party from any obligation hereunder unless
(and then solely to the extent) the Indemnifying Party thereby is prejudiced.
(b) The Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
satisfactory to the Indemnified Party so long as (A) the Indemnifying Party
notifies the Indemnified Party in writing within fifteen (15) days after the
Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Losses the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party Claim, (B)
the Indemnifying Party provides the Indemnified Party with evidence reasonably
acceptable to the Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim and fulfill its
indemnification obligations hereunder, (C) the Third Party Claim involves only
money damages and does not seek an injunction or other equitable relief, (D)
settlement of, or an adverse judgment with respect to, the Third Party Claim is
not, in the good faith judgment of the Indemnified Party, likely to establish a
precedential custom or practice adverse to the continuing business interests of
the Indemnified Party, and (E) the Indemnifying Party conducts the defense of
the Third Party Claim actively and diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7.4(b) above, (A)
the Indemnified Party may retain separate co-counsel at its cost and expense and
participate in the defense of the Third Party Claim, (B) the Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnifying Party (not to be withheld unreasonably), and (C) the Indemnifying
Party will not consent to the entry of any judgment or enter into any settlement
with respect to the Third Party Claim without the prior written consent of the
Indemnified Party (not to be unreasonably withheld).
(d) In the event any of the conditions in Section 7.4(b) above
is or becomes unsatisfied, however, (A) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in
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<PAGE>
connection therewith), (B) the Indemnifying Party will reimburse the Indemnified
Party promptly and periodically for the costs of defending against the Third
Party Claim (including reasonable attorneys' fees and expenses), and (C) the
Indemnifying Party will remain responsible for any Losses the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim to the fullest extent provided in this Article
VII.
ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time,
whether before or after approval of the Merger by the Stockholders or JAI's
stockholders:
(a) by mutual consent of Kenmar and JAI;
(b) by either JAI or Kenmar, if the Effective Time shall not
have occurred on or prior to May 31, 1996;
(c) by either JAI or Kenmar if there has been a material
breach of any representation, warranty, covenant or agreement set forth in this
Agreement on the part of the other party;
8.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 8.1 hereof by JAI or Acquisition, on the one hand,
or Kenmar, on the other hand, written notice thereof shall forthwith be given to
the other party or parties specifying the provision hereof pursuant to which
such termination is made, and this Agreement shall become void and have no
effect, and there shall be no liability hereunder on the part of JAI,
Acquisition or Kenmar, except that Article VII, Section 4.3 with respect to
confidentiality, and Section 9.1 hereof shall survive any termination of this
Agreement. Nothing in this Section 8.2 shall relieve any party to this Agreement
of liability for breach of this Agreement, or shall be construed as a limitation
on the rights and remedies of any party for breach of this Agreement, and,
accordingly, each party to this Agreement shall have all the rights and remedies
afforded by law as against any party breaching this Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Fees and Expenses. All costs and expenses incurred in connection
with this Agreement and the consummation of the transactions contemplated hereby
shall be paid by the party incurring such costs and expenses, provided that JAI
agrees to pay, or to cause to be paid, prior to the Closing Date, the fees,
costs and expenses of Rudy Miller and/or the Miller Group and George Salloum.
9.2 Representations and Warranties. The respective representations and
warranties of Kenmar, on the one hand, and JAI and Acquisition, on the other
hand, contained herein or in any certificates or other documents delivered prior
to or at the Effective Time shall not be deemed waived or otherwise affected by
any investigation made by any party.
9.3 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken by or on behalf of the respective Boards of
Directors of Kenmar, JAI or Acquisition, may (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein by any other applicable party or in any
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<PAGE>
document, certificate or writing delivered pursuant hereto by any other
applicable party or (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
9.4 Public Announcements. Kenmar, on the one hand, and JAI and
Acquisition, on the other hand, agree to consult promptly with each other prior
to issuing any press release or otherwise making any public statement with
respect to the transactions contemplated hereby, and shall not issue any such
press release or make any such public statement prior to such consultation and
review by the other party of a copy of such release or statement, unless
required by applicable law.
9.5 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered in person or
sent by telex, telecopy or by registered or certified mail or by recognized
overnight courier, postage prepaid, addressed as follows:
(a) if to Kenmar, to it at:
P.O. Box 58674
Raleigh, North Carolina 27658
Attention: Kenneth H. Marks, Chief Executive Officer
with a copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan
2500 First Union Capitol Center
Raleigh, North Carolina 27601
Attention: Gerald F. Roach, Esq.
(b) if to either JAI or Acquisition, to it at:
1580 Kebet Way
Port Coquitlam, B.C. V3C 5W9
Attention: Robert Knight
with a copy to:
Steven A. Sanders, P.C.
50 Broad Street
Suite 437
New York, New York 10004
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties. All such notices, requests, demands,
waivers and communications shall be deemed to have been given as of the date so
delivered, sent by telecopier, telex or mailed.
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<PAGE>
9.6 Entire Agreement. This Agreement and the schedules, exhibits and
other documents referred to herein or delivered pursuant hereto, collectively
contain the entire understanding of the parties hereto with respect to the
subject matter contained herein and supersede all prior agreements and
understandings, oral and written, with respect thereto.
9.7 Binding Effect; Benefit; Assignment. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties. Nothing
in this Agreement, expressed or implied, is intended to confer on any Person
other than the parties hereto or their respective successors and permitted
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
9.8 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in writing by the parties
hereto in any and all respects before the Effective Time (notwithstanding any
stockholder approval), by action taken by the respective Boards of Directors of
JAI, Acquisition and Kenmar or by the respective officers authorized by such
Boards of Directors, provided that after any such stockholder approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval.
9.9 Further Actions. Each of the parties hereto agrees that, subject to
its legal obligations, it will use its best efforts to fulfill all conditions
precedent specified herein, to the extent that such conditions are within its
control, and to do all things reasonably necessary to consummate the
transactions contemplated hereby.
9.10 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only, do not constitute
a part of this Agreement and shall not affect in any way the meaning or
interpretation of this Agreement.
9.11 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
9.12 Applicable Law. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws of
the State of North Carolina, without regard to the conflict of laws rules
thereof.
9.13 Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
9.14 Certain Definitions.
(a) "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, a group and a government or other department or agency thereof.
(b) References to the "knowledge of Kenmar" or "knowledge of
JAI" contained herein shall mean the actual knowledge after due inquiry of the
executive officers of Kenmar or JAI and Acquisition, as the case may be, and the
actual knowledge of the promoter of JAI, and its affiliates.
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<PAGE>
9.15 Signatures. This Agreement may be signed via telecopier and
signatures obtained in this manner shall be deemed originals.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, all as of the
date first above written.
KENMAR BUSINESS GROUPS, INC.
ATTEST: By:(Signature of Kenneth L. Marks
appears here)
Name: Kenneth L. Marks
Title: CEO
By: (Signature of Joseph Coletta
appears here)
Name: Joseph Coletta
Title: ????????
J.A. INDUSTRIES, INC.
ATTEST: By: (Signature of Robert Knight
appears here)
Name: Robert Knight
Title: President
By: (Signature of Nancy Fox
appears here)
Name: Nancy Fox
Title:
J.A. INDUSTRIES OF NORTH CAROLINA, INC.
ATTEST: By: (Signature of Robert Knight
appears here)
Name: Robert Knight
Title: President
By: (Signature of Nancy Fox
appears here)
Name: Nancy Fox
Title:
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<PAGE>
SCHEDULE 2.3
JAI SUBSCRIPTIONS, OPTIONS, WARRANTS, ETC.
1. 1993 Employee Stock Option Plan (as amended)
2. Options issued under 1993 ESOP
- J.A. Michie 200,000 Post Split
- Robert Knight 50,000 Post Split
3. Warrant outstanding in favor of Fahnestock & Co., Inc.
- 75,000 Pre Split (18,750 Post Split)
4. J.A. Industries, Inc. 1994 Employee, Consultant and Advisor Stock
Compensation Plan
<PAGE>
SCHEDULE 2.5
FORM 10SB
<PAGE>
SCHEDULE 2.7
LITIGATION
None
<PAGE>
SCHEDULE 2.8
COMPLIANCE WITH LAWS
NONE
<PAGE>
SCHEDULE 2.9
CERTAIN NOTICES
NONE
<PAGE>
SCHEDULE 2.11
ASSETS
1. Assets as of January 1, 1996 - None
2. Assets at Closing - Minimum $200,000 USD
<PAGE>
SCHEDULE 2.13
CONTRACTS
J.A. INDUSTRIES, INC.
1. Confidentiality Agreement between Chelsea Capital and J.A. Industries, Inc.
2. Confidentiality Agreement between Chapman Spira and J.A. Industries, Inc.
3. Confidentiality Agreement between J.C. Bradford and J.A. Industries, Inc.
4. G.M. Capital Agreement
5. Knight Agreement
6. Ronstadt/Hutronix Settlement Agreement
ACQUISITION
None
<PAGE>
SCHEDULE 2.14
TAXES
1. Tax returns have not been filed as January 1, 1996.
2. Tax returns will be completed and filed by closing date.
<PAGE>
SCHEDULE 2.16
INDEPENDENT CONTRACTORS
J.A. INDUSTRIES, INC.
1. The Miller Group Agreement
2. Phil Fox Consulting Agreement - March 1, 1995
3. Phil Fox Consulting Agreement - June 1, 1995
4. Admirality Consulting Agreement
5. Phil Fox Consulting Agreement - May 16, 1994
6. Bill Zupner Consulting Agreement
7. D.D.M. Equity Management Corp. Consulting Agreement
8. 427968 B.C. Ltd. Consulting Agreement - May 25, 1994
9. 462610 B.C. Ltd. Consulting Agreement
10. John B. Lowy, P.C. Consulting Agreement
11. International Treasury Consulting Agreement
12. Phil Fox Consulting Agreement - September 1, 1995
13. 427968 B.C. Ltd. Consulting Agreement - December 1, 1995
14. 427968 B.C. Ltd. Consulting Agreement - September 1, 1995
ACQUISITION
None
<PAGE>
SCHEDULE 2.18
INSURANCE POLICIES
NONE
<PAGE>
SCHEDULE 2.19
TRADEMARKS, ETC.
NONE
<PAGE>
SCHEDULE 2.20
GOVERNMENT REGULATIONS
NONE
<PAGE>
SCHEDULE 2.21
ENVIRONMENTAL MATTERS
NONE
<PAGE>
SCHEDULE 2.22
EMPLOYEE RELATIONS
1. Robert Knight - President
4025 Sunset Boulevard
North Vancouver, B.C.
V3C 5W9 Canada
<PAGE>
SCHEDULE 2.23
RESTRICTIVE DOCUMENTS
NONE
<PAGE>
SCHEDULE 2.24
INTEREST IN CLIENTS, SUPPLIERS, ETC
NONE
<PAGE>
SCHEDULE 2.25
BANK ACCOUNTS
J.A. INDUSTRIES, INC.
1. Chase Manhattan Bank
1 Chase Plaza
New York, NY 10081
Account #910-1-849629
Signing Authority - Robert W. Knight
ACQUISITION
None
<PAGE>
Schedule 3.2
Corporate Authority of Kenmar
None
<PAGE>
Schedule 3.4
Kenmar's subscriptions, options, warrants, etc.
Stock options outstanding:
Person Qty of Shares
Gonzalo Fernandez 400
Gene R. Smith 4166
Kenneth E. Mayhew, Jr. 400
Craig Macnab 1400
Kenneth L. Marks 250
Alan G. Finkel 2500
Craig Ostrander 278
Fritz Ackermann 100
Joe Snyder 100
Jim Meese 100
Bernard Hardy 50
Total: 9744
<PAGE>
Schedule 3.6
Restrictive Documents
1. Shareholders Agreement, dated September 1, 1985, by and between
Kenmar and its shareholders party thereto (as amended).
2. Agreement on transfer of corporate ownership, dated October 15,
1992, by and between Lee K. Simon, Daniel D. Cameron, Jr., Joseph
T. Hunt, Jr., and Kenmar, as modified by that certain Modification
and Release Agreement dated as of January 19, 1996 by and among
Kenmar, JAI, Lee K. Simon, Daniel D. Cameron, Jr., Joseph T. Hunt, Jr.
<PAGE>
Schedule 3.7
Litigation
None
<PAGE>
Schedule 3.8
Compliance with Laws
None
<PAGE>
Schedule 3.9
No Violations; Consents and Approvals
None
<PAGE>
Schedule 3.11
Contracts
1. Lease commitment with Copelco Capital pending close in Q1'96 upon
successful installation of Teradyne test equipment. Approx. amount
$188,000; $50,000 down payment with the balance due in 35 monthly
installments.
2. Kenmar anticipates signing an employment agreement with Gene R.
Smith to join EMSG as its Chief Operations Officer upon closing of
this merger. Annual compensation of $125,000 and a 50,000 share
stock option with immediate vesting as consideration for signing.
<PAGE>
Schedule 3.12
Taxes
None
<PAGE>
Schedule 3.13
Governmental Regulation
None
<PAGE>
Schedule 3.14
Environmental Matters
None
<PAGE>
Schedule 3.15
Employee Relations
None
<PAGE>
Schedule 3.16
Interest in Clients, Suppliers, Etc.
None
<PAGE>
Schedule 3.17
Absence of Certain Changes
None
<PAGE>
Schedule 3.18
Disclosure
None
<PAGE>
EXHIBIT A
PLAN OF MERGER
<PAGE>
PLAN OF MERGER
THIS PLAN OF MERGER is made and dated as of ___________________, 1996
by and among KENMAR BUSINESS GROUPS, INC., a North Carolina corporation
("Kenmar" or the "Surviving Corporation"), J.A. INDUSTRIES OF NORTH CAROLINA,
INC., a North Carolina corporation ("Acquisition") and ELECTRONIC MANUFACTURING
SERVICES GROUP, INC., a Delaware corporation and the sole shareholder of
Acquisition ("EMSG") (EMSG has changed its name from J.A.
Industries, Inc.).
WHEREAS, Kenmar, EMSG and Acquisition desire to effect the merger of
Acquisition with and into Kenmar upon the terms set forth herein; and
WHEREAS, Kenmar, EMSG and Acquisition have entered into a Merger
Agreement dated as of March 1, 1996 (the "Merger Agreement") setting forth
certain representations, warranties, covenants and agreements in connection with
the transactions therein and herein contemplated; and
WHEREAS, the boards of directors of Kenmar, EMSG and Acquisition by
resolution duly approved the Merger Agreement and this Plan of Merger and
directed that the Merger Agreement and this Plan of Merger be submitted to the
shareholders of Kenmar, EMSG and Acquisition for approval and adoption.
NOW, THEREFORE, the parties hereto do hereby approve and adopt this
Plan of Merger for the purpose of setting forth the terms and conditions of the
merger referred to above and the mode of carrying the same into effect.
ARTICLE I
THE MERGER
1.1 Merger. Acquisition shall be merged with and into Kenmar (the
"Merger") pursuant to Article 11 of the North Carolina Business Corporation Act,
as amended (the "NCBCA").
1.2 Effective Time. The Merger shall be effected by the filing of
articles of merger with the Secretary of State of the State of North Carolina in
accordance with the provisions of Article 11 of the NCBCA. The Merger shall
become effective at the time set forth in the articles of merger, which shall be
filed contemporaneously with the closing conducted pursuant to Section 1.3 of
the Merger Agreement. The time and date when the Merger shall become effective
is herein referred to as the "Effective Time".
1.3 Effect of the Merger. At the Effective Time, the separate corporate
existence of Acquisition shall cease, and Kenmar, as the Surviving Corporation,
shall continue its corporate existence under the laws of the State of North
Carolina and shall thereupon and thereafter possess all of the rights,
privileges, immunities, powers and franchises of each of Kenmar and Acquisition;
all of the property, real, personal and mixed, and every other asset of each of
Kenmar and Acquisition shall vest in the Surviving Corporation without further
act or deed; the Surviving Corporation shall assume and be liable for all the
liabilities and obligations of each of Kenmar and Acquisition; and all other
effects of the Merger specified in Section 55-11-06 of the NCBCA shall result
therefrom.
<PAGE>
ARTICLE II
CONVERSION AND ISSUANCE OF SHARES
2.1 Conversion of Shares.
(a) Each share of Common Stock of Kenmar issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive the number of shares of unregistered EMSG Common Stock
determined according to the exchange ratio defined in Section 2.1(b) below upon
surrender of the certificate representing such share.
(b) For purposes of exchanging shares of Kenmar's Common Stock
for EMSG Common Stock, each share of Kenmar's Common Stock shall be converted
into the right to receive Forty-One (41) shares of unregistered Common Stock of
EMSG (the "Exchange Ratio"). The Exchange Ratio shall be a number that upon
consummation of the Merger (and taking into account the Reverse Stock Split, as
defined in Section 6.1 of the Merger Agreement) will result in the Kenmar
stockholders owning an aggregate number of shares of EMSG Common Stock equal to
fifty percent (50%) of the issued and outstanding shares of EMSG's Common Stock
as of the Effective Time. Any fractional share remaining after calculation of
the total number of shares of EMSG Common Stock issuable to each holder of
shares of Kenmar's Common Stock shall be eliminated.
(c) Each option to purchase shares of Common Stock of Kenmar
granted and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and pursuant to the written agreements referred to in Section
5.2(l) of the Merger Agreement, be cancelled and replaced as of the Effective
Time with a substitute corresponding option to purchase shares of EMSG Common
Stock as provided in such Section 5.2(l).
(d) Each share of Common Stock of Acquisition issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and become exchangeable for one fully-paid and nonassessable share of
Common Stock of the Surviving Corporation. From and after the Effective Time,
each outstanding certificate which theretofore represented shares of Acquisition
Common Stock shall be deemed for all purposes to evidence ownership of and to
represent the number of shares of Surviving Corporation Common Stock into which
such shares of Acquisition Common Stock shall have been converted.
2.2 Payment for Shares. Upon surrender to EMSG of each certificate
representing shares of Kenmar's Common Stock issued and outstanding immediately
prior to the Effective Time, such certificate shall forthwith be cancelled and
the holder thereof shall be entitled to receive in exchange therefor the shares
of EMSG Common Stock due such holder in accordance with Section 2.1 above. Until
surrendered in accordance with the provisions hereof, each such certificate
shall represent for all purposes the right to receive EMSG Common Stock on the
basis provided in this Article II.
ARTICLE III
ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS
3.1 Articles of Incorporation and Bylaws. The Articles of Incorporation
and Bylaws of the Surviving Corporation shall be identical to the Articles of
Incorporation and Bylaws of Kenmar in effect immediately prior to the Effective
Time until thereafter amended as provided by law.
<PAGE>
3.2 Directors and Officers. The directors of the Surviving Corporation
shall be Kenneth H. Marks, Alan G. Finkel and Gene R. Smith, who shall hold
office until their respective successors shall have been elected and qualified
as provided in the bylaws of the Surviving Corporation or by law. The officers
of the Surviving Corporation shall be as listed below, each holding office until
his or her respective successor has been duly elected and qualified as provided
in the bylaws of the Surviving Corporation or by law:
Kenneth H. Marks Chief Executive Officer
Gene R. Smith President and Chief Operating Officer
ARTICLE IV
SUBMISSION TO SHAREHOLDERS; TERMINATION AND AMENDMENT
4.1 Approval by Shareholders. This Plan of Merger shall be submitted to
the shareholders of each of Kenmar, EMSG and Acquisition for their approval and
shall have no force or effect unless approved by the shareholders of each of
Kenmar, EMSG and Acquisition in the manner provided by the NCBCA.
4.2 Termination. This Plan of Merger shall terminate automatically,
whether before or after approval of the shareholders of Kenmar, EMSG or
Acquisition, if the Merger Agreement shall be terminated pursuant to Section 8.1
thereof.
4.3 Amendment. This Plan of Merger may be amended by the parties
hereto, by action taken by their respective boards of directors, at any time
before or after approval hereof by the respective shareholders of Kenmar, EMSG
or Acquisition, but, after any such approval, no amendment shall be made which
shall reduce the amount or change the form of the consideration to be received
by the shareholders of Kenmar without the further approval of such shareholders.
This Plan of Merger may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto.
ARTICLE V
MISCELLANEOUS
5.1 Headings. The article and section captions used herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Plan of Merger.
5.2 Publicity. Except as otherwise required by law, none of the parties
hereto shall issue any press release or make any other public statement, in each
case relating to, connected with or arising out of this Plan of Merger or the
matters contained herein, without obtaining the prior approval of Kenmar to the
contents and the manner of presentation and publication thereof.
5.3 Counterparts. This Plan of Merger may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF, Kenmar, EMSG, and Acquisition have caused their
respective corporate names to be hereunder subscribed by their respective
officers thereunto duly authorized, all as of the day and year first above
written.
KENMAR BUSINESS GROUPS, INC.
ATTEST: By:
Name:
Title:
By:
Name:
Title:
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
ATTEST: By:
Name:
Title:
By:
Name:
Title:
J.A INDUSTRIES OF NORTH CAROLINA, INC.
ATTEST: By:
Name:
Title:
By:
Name:
Title:
<PAGE>
EXHIBIT B
NUMBER OF OPTION SHARES PER STOCKHOLDER
<PAGE>
Exhibit B
Number of Option Shares per Stockholder
Issued % Options
Stockholder Shares Ownership Shares
Andrew T. Brown 750 1.1% 8,560
Catherine M. Prince 200 0.3% 2,283
Christian B. Johnson 200 0.3% 2,283
Craig Macnab 6,396 9.7% 72,998
David J. Thurlow 100 0.2% 1,141
David M. Welsh 500 0.8% 5,707
Deborah R. Michael 100 0.2% 1,141
Deirdre Macnab 700 1.1% 7,989
Dennis Taylor 250 0.4% 2,853
Donald I.N. McKenzie 100 0.2% 1,141
Dorothy Ellison 250 0.4% 2,853
Erma H. Schuster 60 0.1% 685
Eugene M. Tate 20 0.0% 228
F.I. Nebhut, Jr. 500 0.8% 5,707
Francis F. Putnam 500 0.8% 5,707
Fritz Ackermann 750 1.1% 8,560
Harold S. Workman 350 0.5% 3,995
Henry White (PEG) 250 0.4% 2,853
Joe B. Putnam, Jr. 500 0.8% 5,707
John H. Putnam 1,000 1.5% 11,413
Joseph B. Stroup 750 1.1% 8,560
Kay V. Marks 250 0.4% 2,853
Kenneth E. Mayhew, Jr. 6,900 10.5% 78,750
Kenneth H. Marks 40,095 61.0% 457,608
Kenneth L. Marks 1,750 2.7% 19,973
Lee K. Simon 703 1.1% 8,023
Mabel Ann Steckenrider 111 0.2% 1,267
Margaret Ann Huffstetier 156 0.2% 1,780
Marsha Prince 100 0.2% 1,141
MLN Research 100 0.2% 1,141
Peter A. Cesaro 100 0.2% 1,141
Ralph S. Pickett 100 0.2% 1,141
Richard C. Bisbee, Sr. 750 1.1% 8,560
Richard D. Adelman 100 0.2% 1,141
Robert Scott Nieboer 200 0.3% 2,283
Sue Kruger 23 0.0% 263
Wayne C. Craft 50 0.1% 571
-------------------------------------------
65,714 100.0% 750,000
<PAGE>
EXHIBIT C
FORM OF OPTION AGREEMENT
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT (the "Agreement") is made and dated as of
___________________, 1996, by and among KENMAR BUSINESS GROUPS, INC., a North
Carolina corporation ("Kenmar"), Electronic Manufacturing Services Group, Inc.,
a Delaware corporation ("EMSG"), J.A. Industries of North Carolina, Inc., a
North Carolina Corporation ("Acquisition"), and the Representative (as defined
below).
WITNESSETH:
WHEREAS, Kenmar, EMSG (which has changed its name from "J.A.
Industries, Inc.") and Acquisition entered into a Merger Agreement dated as of
March 1, 1996 (the "Merger Agreement") providing for the merger of Acquisition
with and into Kenmar;
WHEREAS, pursuant to the Merger Agreement, EMSG and Acquisition have
made certain representations, warranties and covenants for the benefit of Kenmar
and the Stockholders (as defined in the Merger Agreement) as provided therein;
WHEREAS, pursuant to the Merger Agreement, Kenmar, EMSG, and
Acquisition have agreed that EMSG's and Acquisition's representations and
warranties pursuant to the Merger Agreement shall survive the consummation of
the transactions contemplated by the Merger Agreement;
WHEREAS, Section 1.2 of the Merger Agreement provides that EMSG shall
grant the Representative an option to purchase Seven Hundred Fifty Thousand
(750,000) shares of EMSG's Common Stock for One Dollar ($1.00) upon the
occurrence of any breach of any representation, warranty, covenant or other
obligation of EMSG or Acquisition contained in the Merger Agreement;
WHEREAS, Section 1.2 of the Merger Agreement provides that upon
exercise of such option, the Representative shall distribute such shares to the
Stockholders pursuant to the terms of this Agreement; and
WHEREAS, the Representative is willing to act in the capacity of
Representative hereunder subject to, and upon the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises, covenants and
agreements set forth in this Agreement and of other good and valuable
consideration, the receipt and legal sufficiency of which they hereby
acknowledge, and intending to be legally bound hereby, and as an inducement for
the execution and delivery of the Merger Agreement, Kenmar, EMSG, Acquisition,
and the Representative hereby agree as follows:
1. Grant of Option. EMSG hereby grants to the Representative on behalf
of the Stockholders, an irrevocable option (the "Option") to purchase Seven
Hundred Fifty Thousand (750,000) shares of EMSG's Common Stock (the "Option
Shares") at the purchase price set forth below.
2. Exercise of Option. The Option may be exercised by the
Representative upon the occurrence of any breach of any representation,
warranty, covenant, or other obligation of EMSG or Acquisition under the Merger
Agreement, as more fully described in this Section 2.
(a) Notice; Closing. If at any time the Representative shall
elect, in its judgment, to assert that EMSG or Acquisition has breached any
representation, warranty or covenant made by either of such parties in the
Merger Agreement and, as a result thereof, to exercise the Option, the
Representative shall
<PAGE>
give EMSG notice in writing of such breach and of the exercise of the Option
(the "Notice"). Such notice shall specify a date, which date shall not be less
than twenty (20) days from the date such notice is given, for the closing of the
purchase of the Option Shares (the "Option Closing"). Such Option Closing shall
take place at 10:00 A.M. local time, on the date specified in such notice at the
offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500
First Union Capital Center, Raleigh, North Carolina, or at such other place and
time as the parties may mutually agree. At the Option Closing, EMSG will deliver
to the Representative certificates representing the Option Shares. The
certificates shall be issued in the names of the Stockholders, and in the number
of Option Shares to be issued in respect of each Stockholder as set forth in
Exhibit A hereto.
(b) Disputed Assertion of Breach. If, within twenty (20) days
after the Notice is given by the Representative to EMSG under Section 2(a)
above, EMSG shall notify the Representative, in writing, that EMSG disputes and
denies the asserted breach, then EMSG and the Representative shall use their
respective reasonable best efforts to effect a settlement and compromise of such
dispute prior to the date set forth in the Notice for the Option Closing (or
prior to such later date upon which the parties may, but are not obligated to,
agree). Any such settlement and compromise shall be set forth in writing by EMSG
and the Representative, and the Option may be exercised, if at all, in whole or
in part in accordance with such settlement and compromise.
(c) Arbitration to Resolve Disputed Assertion of Breach. If
EMSG and the Representative are unable to settle and compromise any disputed
assertion of a breach, the Option Closing shall take place on the date set forth
in the Notice (or on such later date upon which the parties may, but are not
obligated to, agree). The dispute shall thereafter be submitted by EMSG to
binding arbitration pursuant to Section 8 of this Agreement. The Representative
shall hold the Option Shares, and shall not distribute them to the Stockholders
or to EMSG, pending the determination of the arbitrator or arbitrators, as the
case may be. If the arbitrator(s) determine that a breach of any representation,
warranty, covenant or other obligation of EMSG or Acquisition contained in the
Merger Agreement has occurred, then promptly after such determination, the
Representative shall distribute the Option Shares to the Stockholders as
provided in Section 6 of this Agreement. If the arbitrator(s) determine that no
breach of any representation, warranty, covenant or other obligation of EMSG or
Acquisition contained in the Merger Agreement has occurred, then the
Representative shall return the Option Shares to EMSG.
3. Purchase Price. At the Option Closing, the Representative shall
purchase the Option Shares from EMSG by delivering as consideration therefor a
total cash payment of One Dollar ($1.00) for all of the Option Shares.
4. Designation of Representative. Kenmar, on behalf of itself and the
Stockholders, hereby irrevocably constitutes and appoints Kenneth H. Marks as
Kenmar's and the Stockholders' true and lawful agent and attorney-in-fact (the
"Representative") with respect to all matters arising in connection with this
Agreement, including but not limited to the power and authority on behalf of
such Stockholders (other than in his own right) to do any one or all of the
following:
(a) enter into this Agreement and accept the grant of the
Option;
(b) exercise the Option, or elect not to exercise the Option
after it becomes exercisable, in the Representative's reasonable judgment;
(c) settle or compromise any disputed assertion of a breach,
as set forth in Section 2(b) of this Agreement;
2
<PAGE>
(d) give any written notices or consents and seek any
declaratory judgments, damages or other appropriate relief from a court or other
tribunal that the Representative may consider necessary or appropriate;
(e) make, execute and deliver such amendments of and
supplements to this Agreement or any other agreements, instruments or documents
relating hereto that the Representative may consider necessary or appropriate
and not materially adverse to the Stockholders' interests hereunder, such
authority to be conclusively evidenced by the execution and delivery thereof;
and otherwise
(f) take all actions and do all things, including but not
limited to the execution and delivery of all documents necessary or proper,
required, contemplated or deemed advisable by the Representative, and generally
to act for and in the name of each such Stockholder with respect to this
Agreement.
For purposes of this Agreement, the term "Representative" shall include
any of Kenneth H. Marks' successors, heirs, beneficiaries and assigns.
5. Rights and Liability of the Representative.
(a) The Representative may resign as Representative hereunder
at any time without liability upon giving notice to EMSG. In the event that the
Representative shall resign or otherwise cease to act as the Representative,
EMSG shall provide written notice of such resignation to the Stockholders, and
the Stockholders may proceed to select a successor Representative to act
hereunder.
(b) The Representative shall have no liability with respect to
any acts or omissions under this Agreement, except with respect to the
Representative's gross negligence or willful misconduct. The Representative may
act in reliance upon the advice of counsel in reference to any matter in
connection with this Agreement and shall not incur any liability for any action
taken in good faith in accordance with such advice. EMSG and Kenmar shall
jointly and severally indemnify the Representative from and against any and all
damages, losses, demands, claims, costs, liabilities, judgments, deficiencies
and expenses (including reasonable attorneys' fees) incurred in connection with
the Representative's acts or omissions under this Agreement or by virtue of
serving in his capacity as the Representative, except to the extent resulting
from the Representative's gross negligence or willful misconduct.
6. Distribution of Option Shares. Except as set forth in Section 2(c)
above, as soon as reasonably practicable after the Option Closing, the
Representative shall distribute the Option Shares to the Stockholders.
7. Adjustments. If at any time the outstanding shares of EMSG Common
Stock are changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment or if a stock dividend thereon is declared,
then the number of shares of EMSG Common Stock subject to the Option shall be
appropriately adjusted (the purchase price for the Option Shares shall remain
fixed at One Dollar ($1.00) and no adjustment thereof shall be made).
8. Arbitration. Any unresolved dispute under this Agreement with
respect to any matter shall be submitted to and settled by binding arbitration
in accordance with the Commercial Rules, existing at the date thereof, of the
American Arbitration Association. The dispute shall be submitted to one
arbitrator agreed to by EMSG and the Representative or, if EMSG and the
Representative cannot agree on one arbitrator, by three arbitrators selected in
accordance with said Rules, and shall be heard in Raleigh, North Carolina. Each
3
<PAGE>
arbitrator must be experienced in the subject matter in dispute. The costs and
expenses of the arbitration (including without limitation attorneys' fees) shall
be paid by EMSG, in the event EMSG is the non-prevailing party in such
arbitration, and Kenmar, in the event the Representative is the non-prevailing
party in such arbitration.
9. Successors and Assigns. This Agreement shall be binding on Kenmar,
EMSG, Acquisition, and the Representative and their respective successors and
assigns, whether so expressed or not. The parties hereto intend and agree that
the Stockholders shall be third party beneficiaries of this Agreement.
10. Waiver of Consent. No failure or delay on the part of any party
hereto in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the parties hereunder are cumulative
and not exclusive of any rights or remedies which they would otherwise have.
Without limiting the generality of the foregoing, the parties agree that the
rights of Kenmar and the Representative (as representative of the Stockholders)
under this Agreement shall be in addition to, and shall in no way limit,
Kenmar's rights against EMSG for breach by EMSG or Acquisition of any
representation, warranty, covenant or other obligation of EMSG or Acquisition
under the Merger Agreement or otherwise under applicable law. No modification or
waiver of any provision of this Agreement, nor consent to any departure by any
party therefrom, shall in any event be effective unless the same shall be in
writing, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on any
party in any case shall entitle such party to any other or further notice or
demand in similar or other circumstances.
11. Captions. The Article and Section captions used herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12. Notices. Any notice or other communication required or
permitted hereunder shall be sufficiently given if delivered in person or sent
by telex, telecopy or by registered or certified mail or by recognized overnight
courier, postage prepaid, addressed as follows:
If to EMSG or Acquisition, to:
Electronic Manufacturing Services Group, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
Attention: Kenneth H. Marks
with a copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
Post Office Box 2611
Raleigh, North Carolina 27602-2611
Attention: Gerald F. Roach, Esq.
4
<PAGE>
if to Kenmar or the Representative, to:
Kenneth H. Marks
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
with copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
Post Office Box 2611
Raleigh, North Carolina 27602-2611
Attention: Gerald F. Roach, Esq.
and such notice or communication shall be deemed to have been given as of the
date so delivered, sent by telecopier, telex or mailed.
13. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
14. Governing Law. This Agreement shall be governed by the laws of the
State of North Carolina (regardless of the laws that might be applicable under
principles of conflicts of law) as to all matters, including but not limited to
matters of validity, construction, effect and performance.
15. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
16. Capitalized Terms. Any capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
IN WITNESS WHEREOF, Kenmar, EMSG, and Acquisition have caused their
corporate names to be hereunto subscribed by their respective officers thereunto
duly authorized, and the Representative has executed this Agreement, all as of
the day and year first above written.
KENMAR BUSINESS GROUPS, INC.
By:
Name:
Title:
[Additional signatures appear on next page.]
5
<PAGE>
ELECTRONIC MANUFACTURING SERVICES
GROUP, INC.
By:
Name:
Title:
J.A. INDUSTRIES OF NORTH CAROLINA, INC.
By:
Name:
Title:
REPRESENTATIVE:
Kenneth L. Marks
6
<PAGE>
EXHIBIT A
to
OPTION AGREEMENT
7
<PAGE>
Issued % Options
Stockholder Shares Ownership Shares
Andrew T. Brown 750 1.1% 8,560
Catherine M. Prince 200 0.3% 2,283
Christian B. Johnson 200 0.3% 2,283
Craig Macnab 6,396 9.7% 72,998
David J. Thurlow 100 0.2% 1,141
David M. Welsh 500 0.8% 5,707
Deborah R. Michael 100 0.2% 1,141
Deirdre Macnab 700 1.1% 7,989
Dennis Taylor 250 0.4% 2,853
Donald I.N. McKenzie 100 0.2% 1,141
Dorothy Ellison 250 0.4% 2,853
Erma H. Schuster 60 0.1% 685
Eugene M. Tate 20 0.0% 228
F.I. Nebhut, Jr. 500 0.8% 5,707
Francis F. Putnam 500 0.8% 5,707
Fritz Ackermann 750 1.1% 8,560
Harold S. Workman 350 0.5% 3,995
Henry White (PEG) 250 0.4% 2,853
Joe B. Putnam, Jr. 500 0.8% 5,707
John H. Putnam 1,000 1.5% 11,413
Joseph B. Stroup 750 1.1% 8,560
Kay V. Marks 250 0.4% 2,853
Kenneth E. Mayhew, Jr. 6,900 10.5% 78,750
Kenneth H. Marks 40,095 61.0% 457,608
Kenneth L. Marks 1,750 2.7% 19,973
Lee K. Simon 703 1.1% 8,023
Mabel Ann Steckenrider 111 0.2% 1,267
Margaret Ann Huffstetier 156 0.2% 1,780
Marsha Prince 100 0.2% 1,141
MLN Research 100 0.2% 1,141
Peter A. Cesaro 100 0.2% 1,141
Ralph S. Pickett 100 0.2% 1,141
Richard C. Bisbee, Sr. 750 1.1% 8,560
Richard D. Adelman 100 0.2% 1,141
Robert Scott Nieboer 200 0.3% 2,283
Sue Kruger 23 0.0% 263
Wayne C. Craft 50 0.1% 571
-------------------------------------------
65,714 100.0% 750,000
<PAGE>
EXHIBIT D
FORM OF LEGAL OPINION OF STEVEN A. SANDERS, P.C.
<PAGE>
[Letterhead of Steven A. Sanders, P.C.]
_____________, 1996
(212) 344-0500
Kenmar Business Groups, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
Re: Electronic Manufacturing Services Group, Inc. and
J.A. Industries of North Carolina, Inc.
Gentlemen:
This firm is counsel to Electronic Manufacturing Services Group, Inc.,
a Delaware corporation (which has changed its name from "J.A. Industries, Inc.")
("EMSG") and J.A. Industries of North Carolina, Inc., a North Carolina
corporation ("Acquisition") in connection with the transactions contemplated by
the Merger Agreement dated as of March 1, 1996 among Kenmar Business Groups,
Inc., a North Carolina corporation ("Kenmar"), EMSG, and Acquisition (the
"Merger Agreement"). We are rendering this opinion pursuant to Section 5.2(c) of
the Merger Agreement. All capitalized terms used but not otherwise defined
herein shall have the respective meanings ascribed to them in the Merger
Agreement.
In connection with the preparation of our opinions expressed below, we
have made such investigations and examined originals or copies, certified or
otherwise identified to our satisfaction, of the Merger Agreement, each of the
various other documents referred to therein and such corporate records of EMSG
and Acquisition, certificates of public officials and other documents,
agreements and instruments as we have deemed necessary or appropriate.
<PAGE>
Kenmar Business Groups, Inc.
_____________, 1996
Page 2
For purposes of these opinions, we have assumed, without any
independent investigation or verification of any kind, (i) the due promulgation
and validity of all statutes, regulations, administrative procedures,
determinations, permits and orders; (ii) the authenticity and completeness of
all documents submitted to us as originals, (iii) the conformity to authentic
original documents and completeness of all documents submitted to us as
certified, conformed or photostatic copies, (iv) that there have been no
modifications, waivers or amendments to any of the agreements or other documents
reviewed by us and (v) that the certificates of public officials dated earlier
than the date hereof (but not earlier than ________________, 1996) remain
accurate from such earlier date through and including the date hereof.
Based upon and subject to the foregoing, and subject to the additional
qualifications and limitations set forth below, we express the following
opinions:
1. Each of EMSG and Acquisition has the full legal right, power and
authority to enter into and deliver the Merger Agreement and the other
Transaction Document, to perform its obligations thereunder and to consummate
the transactions contemplated thereby.
2. The Merger Consideration is constituted entirely of duly authorized
and validly issued Common Stock of EMSG. The Merger Consideration has been
issued pursuant to a valid exemption from registration under applicable federal
and state securities laws. All shares constituting the Merger Consideration are
fully paid and non-assessable, and free and clear of all liens, encumbrances,
restrictions and claims of every kind, with the exception of the legend
appearing on each stock certificate issued as part of the Merger Consideration
and the legal basis for such restriction.
3. The Option Shares issuable upon exercise of the Option have been
duly and validly authorized and reserved, and when issued in accordance with the
terms of the Option Agreement, will be validly issued, fully paid and
nonassessable.
4. EMSG is a corporation duly organized and validly existing and in
good standing under the laws of the State of Delaware. It has the power to own
its property and to carry on its business as now being conducted. Further, it
has the power and authority to enter into and deliver the Merger Agreement, the
Plan of Merger, and the Other Transaction Documents, and to perform its
obligations thereunder and consummate the transactions contemplated thereby. The
execution, delivery, and performance of the Merger Agreement, the Plan of
Merger, and the other Transaction Documents by EMSG, and its consummation of the
transactions contemplated thereby, have been duly and validly authorized by all
corporate, shareholder and other action required of EMSG by applicable law, its
Certificate of
<PAGE>
Kenmar Business Groups, Inc.
_____________, 1996
Page 3
Incorporation, or Bylaws. EMSG is not required to be qualified to transact
business in any other state in order to consummate this transaction.
5. Acquisition is a corporation duly organized and validly existing and
in good standing under the laws of the State of North Carolina. It has the power
to own its property and to carry on its business as now being conducted.
Further, it has the power and authority to enter into and deliver the Merger
Agreement, the Plan of Merger, and the Other Transaction Documents, and to
perform its obligations thereunder and consummate the transactions contemplated
thereby. The execution, delivery, and performance of the Merger Agreement, the
Plan of Merger, and the other Transaction Documents by Acquisition, and its
consummation of the transactions contemplated thereby, have been duly and
validly authorized by all corporate, shareholder and other action required of
Acquisition by applicable law, its Articles of Incorporation, or Bylaws.
Acquisition is not required to be qualified to transact business in any other
state in order to consummate this transaction.
6. The Merger Agreement, the Plan of Merger and the other Transaction
Documents have been duly executed and delivered by each of EMSG and Acquisition
(to the extent each is a party thereto), enforceable against them in accordance
with their terms.
7. EMSG has an authorized capitalization consisting of Twenty Million
(20,000,000) shares of common stock, $.0025 par value per share, of which
___________________________________ (____________) are issued and outstanding,
and Two Million (2,000,000) shares of preferred stock, $______ par value per
share, of which Zero (0) are issued and outstanding. Acquisition has an
authorized capitalization consisting of _________________________ (____________)
shares of common stock, $_____ par value per share, of which
____________________ (_________) are issued and outstanding. All of the
aforementioned outstanding shares have been duly authorized and validly issued,
are fully paid and nonassessable, and all shares issued to date by EMSG have
been issued in full compliance with all applicable state and federal securities
laws. There are no outstanding options, warrants, rights (preemptive or
otherwise), calls, commitments, conversion rights, rights of exchange, plans or
other agreements of any character providing for the purchase, issuance, or sale
of any shares or the capital stock of EMSG or Acquisition other than as
contemplated by the Merger Agreement.
8. Neither EMSG nor Acquisition owns, directly or indirectly, any
capital stock or other equity or ownership or proprietary interest in any
corporation, partnership, association, trust, joint venture.
<PAGE>
Kenmar Business Groups, Inc.
_____________, 1996
Page 4
9. Except as set forth in Schedule 2.23 to the Merger Agreement,
neither EMSG nor Acquisition is subject to, bound by or a party to, any charter,
bylaw, mortgage, lien, lease, license, permit, agreement, contract, instrument,
law, rule, ordinance, regulation, order, judgment or decree, or any other
restriction of any kind or character which materially affects the business
practices, operations or conditions of EMSG or Acquisition or any of their
assets or property, or which would be violated by, prevent or impair materially
(whether by acceleration of any liability, creation of any lien or encumbrance
or otherwise), or require any approval, consent, notice or assumption in
connection with consummation of the transactions contemplated by the Merger
Agreement, the Plan of Merger, and the other Transaction Documents, compliance
by EMSG or Acquisition with the terms, conditions and provisions thereof or
continued operation of EMSG's or Acquisition's business after the Closing Date
on substantially the same basis as theretofore operated or which would restrict
the ability of EMSG or Acquisition to acquire any property or conduct business
in any area.
10. No authorizations, consents or approvals of or filings with any
Delaware, North Carolina or federal governmental agencies or authorities are
required in connection with the execution, delivery or performance of the Merger
Agreement or any other agreement or other document attached as an Exhibit
thereto by EMSG or Acquisition.
11. There are no actions, suits, proceedings at law or in equity,
arbitrations or administrative proceedings pending or threatened against either
EMSG or Acquisition. There are no judgments, orders or decrees against either
EMSG or Acquisition.
12. Each of EMSG and Acquisition is and has been in substantial
compliance with all applicable laws, regulations, orders, judgments and decrees.
13. No facts have come to our attention to cause us to believe that the
Merger Agreement or any schedule, exhibit or certificate attached to the Merger
Agreement or delivered in accordance with the terms thereof contains any untrue
statement of a material fact or omits any statement of a material fact necessary
in order to make the statements therein not misleading.
14. To the best knowledge of the undersigned, neither EMSG's Board of
Directors nor its shareholders, and neither Acquisition's Board of Directors nor
its shareholders, have taken any material action except as described in or
contemplated by the Merger Agreement or the Transaction Documents, including
without limitation, the issuance of any securities.
<PAGE>
Kenmar Business Groups, Inc.
_____________, 1996
Page 5
* * *
The foregoing opinions are subject to the following assumptions,
qualifications and limitations:
(A) We have assumed that the parties (other than EMSG and
Acquisition) to the Merger Agreement and the other Transaction Documents have
the requisite power and authority to enter into the Merger Agreement and such
other Transaction Documents; that the Merger Agreement and such other
Transaction Documents have been duly authorized, executed and delivered by each
such party; and that the Merger Agreement and such other Transaction Documents
to which each such party is a party constitute the legal, valid and binding
obligations of each such party, enforceable against each such party in
accordance with their respective terms.
(B) The foregoing opinions are subject to the effects of (i)
bankruptcy, insolvency, reorganization, receivership, moratorium and other
similar laws now or hereafter in effect relating to or affecting creditors'
rights or remedies generally, (ii) general principles of equity, whether applied
by a court of law or equity, and (iii) applicable laws and court decisions, now
or hereafter in effect, that may limit or restrict the enforceability or
availability of certain terms, provisions, rights or remedies contained in the
Merger Agreement or the other Transaction Documents, but which, in our opinion,
should not make such documents inadequate for the practical realization of the
material benefits intended to be afforded to the parties thereby.
These opinions are provided solely for your benefit in connection with
the transactions contemplated by the Merger Agreement and may not be used or
relied upon by, or published or communicated to, any other person without our
prior written consent.
We bring to your attention the fact that our legal opinions are an
expression of professional judgment and are not a guarantee of a result.
Our opinions are as of the date hereof, and we do not undertake to
advise you of matters which might come to our attention subsequent to the date
hereof which may affect our legal opinions expressed herein.
Sincerely yours,
<PAGE>
EXHIBIT E
FORM OF MARKS EMPLOYMENT AGREEMENT
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement ("Agreement") is made and effective this
[Closing] day of [Closing], 1996, by and between Electronic Manufacturing
Services Group, Inc., a Delaware Corporation ("Company") and Kenneth H.
Marks, ("Executive").
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment.
Company hereby agrees to employ Executive as its President and Chief Executive
Officer and Executive hereby accepts such employment in accordance with the
terms of this Agreement and the terms of employment applicable to regular
employees of the Company. In the event of any conflict or ambiguity between
the terms of this Agreement and the terms of employment applicable to regular
employees, the terms of this Agreement shall control.
2. Duties of Executive.
The duties of Executive shall include the performance of all of the duties
typical of the office held by Executive as described in the Company's bylaws
and such other projects as may be assigned by the Company's board of directors
provided, however, that the responsibilities assigned shall be of a character
and dignity appropriate to a senior executive in a similar business and
provided that such assignments are reasonably consistent with Executive's
education, experience, and background. Executive shall devote substantially
all of his normal business time and attention to the affairs of the Company
and the promotion of its interest. Executive's principal office shall be in
Raleigh, North Carolina.
3. Compensation.
Executive will be paid compensation during this Agreement as follows:
A. A base salary of $125,000 USD per year, payable in installments according
to the Company's regular payroll schedule. The base salary shall be increased
at the end of each year of employment by 5% or at the discretion of the
Company's board of directors.
B. Executive shall be entitled to a yearly bonus equal to eight (8%) percent
of the net after tax profit of the Company. Such bonus will be due and payable
within ninety (90) days of the Company's fiscal year end or sooner at the
discretion of the Company's board of directors. Payment may be made, at
Executive's sole discretion, in a combination of one or more of the following
ways: (1) cash payment, (2) forgiveness of liabilities owed the Company by
Executive, and/or (3) transfer of ownership, and any cash value therein, of
life insurance policie(s) that cover the Executive's life. Executive will be
entitled to a draw against an anticipated bonus in an amount up to 70% of the
anticipated bonus based on unaudited financial statements with the balance
being paid as described in the time above.
<PAGE>
C. The Company will grant Executive stock options in the amount of 350,000
shares of common stock of the Company. Such stock options shall have five
year term and shall be issued pursuant to a qualified Incentive Stock Option
Plan under Section 422 of the Internal Revenue Code of 1986 as amended through
August 15, 1993. Provisions of such plan shall be attached to and become part
of this Agreement.
Such Stock Option Plan and Option agreements covering the options which are the
subject of this section of this Agreement shall include the right of Executive
to exercise the option, on the date of the option or any date thereafter prior
to the option termination date, all of the shares exercisable under the term
of such option. Further, the Company agrees that Executive may finance the
acquisition of option shares through the issuance of a note to the Company.
Such note shall have a term of at least five (5) years, with interest only
payments required until the principal amount of such note is paid, with
interest at the applicable mid-term Federal rate determined under Section 127(d)
of the Internal Revenue Code at the time of interest payment. Collateral for
such note and the only recourse for such note shall be the shares being
financed. The Company agrees to release to Executive shares collateralizing the
loan provided the principal amount of the loan is reduced by payment to the
Company of an amount equal to the number of shares released times the strike
price of the option. In the event the total value of the shares serving as
collateral exceeds the principal amount of the note at any time during the term
of the note, the number of shares serving as collateral shall be reduced to
that the value of the remaining shares equal the value of the principal balance
of subject note providing that the released shares are under the joint control
of the Company and Executive. Upon the sale of any such shares the proceeds
will be divided so that the first payment will be applied to reduce principal
amount of the note by the value of the option price times the number of
shares sold and secondly any remaining funds to be paid to Executive. In the
event Executive exercises such option with a note as described herein,
Executive may, at his sole discretion, satisfy payment for any interest or
principal amount due to the Company, by his cancellation of any amounts owed
him by the Company. Such amounts may include due but unpaid remuneration,
expenses, or any other amount that may be due but unpaid to Executive on the
date payment of such interest and/or principal is due. Common shares issued
under the Incentive Stock Option Plan attached hereto shall have no restriction
on resale other than those imposed by the Securities Act of the SEC, the State
of Delaware, and the State of North Carolina Blue Sky laws. Such shares issued
pursuant to this plan shall contain a provision authorizing and requiring the
Company to register, at its expense, such shares in order that these shares may
be traded on any exchange which currently, or thereafter, permit the stock of
the Company to be traded, within three months following receipt of such stock
or as a "piggyback" registration to any registration of securities undertaken
by the Company for its common stock, whichever occurs earliest.
In the event of termination under the terms of this Agreement, options
exercisable at the date of termination shall be exercisable by Executive for a
period of ninety days (90) after the date of termination, regardless of the
reason of termination. Further, in the event of termination, such shares
exercisable at the date of termination may be financed by Executive as
described in the above paragraph.
D. As additional consideration for assuming the responsibilities herein,
Executive may accept one of the following two alternatives as payment for such
consideration:
i. The Company shall make to Executive upon signing of this Agreement
a zero (0) percent interest unsecured loan payable in full one (1) year
from the date of signing of this Agreement in the amount of $100,000
USD as additional consideration for assuming the responsibilities herein.
The loan will have twenty five (25) renewal periods, renewable at
Executives sole discretion, at the identical terms described herein.
Such loan may be paid at maturity or paid early without penalty by
Executive in cash or with the Company's common stock based on the value
of such stock on the day in which the loan is paid. For tax purposes,
the rate used for imputed interest will be at the lowest allowable rate
as defined by the Internal Revenue Code for such year in which such
interest is deemed to have been paid. In the event of termination of
this Agreement for any reason or cause by either party, the loan
described herein may be forgiven in its entirety at the sole discretion
of Executive at anytime after the date of termination.
or
ii. The Company shall pay to Executive upon signing of this Agreement a
single, non-refundable gross payment of $100,000 USD. Ordinary payroll
taxes are to be deducted and paid on behalf of Executive as in the
ordinary course of business.
E. As additional consideration for assuming the responsibilities outlined and
as consideration for continued guarantee of certain liabilities of the Company
or its subsidiaries that may exist at the time of signing of this Agreement,
the Company agrees to indemnify Executive for any and all personal guarantees
made be Executive for the Company or any of its subsidiaries. Such
indemnification includes prepayment, as directed by Executive, of any
reasonable fees or expenses necessary to defend Executive for the Company's
breach (or alleged breach) of its obligation(s). Further, the Company agrees
to make its best efforts to relieve Executive of any and all personal
guarantees made by the Executive on behalf of the Company. The Company agrees
that such indemnification will survive any termination or resignation of
Executive regardless of cause.
4. Benefits.
A. Vacation. Executive will be entitled to at least three (3) weeks paid
vacation each calendar year in addition to the Company's ordinary paid holidays.
Company will notify Executive on or about the beginning of each calendar year
with respect to the holiday schedule for the coming year. Vacation will be
scheduled in advance subject to requirements of the Company. Such vacation must
be taken during the calendar year and cannot be carried forward into the next
year.
B. Sick Leave. Executive shall be entitled to sick leave and emergency leave
according to the regular policies and procedures of the Company. Additional
sick or emergency leave over and above paid leave provided by the Company, if
any, shall be unpaid and shall be granted at the discretion of the Company's
board of directors.
<PAGE>
C. Expense Reimbursement. Executive shall be entitled to reimbursement for all
reasonable expenses, including travel and entertainment, incurred by Executive
in the performance of Executive duties. Executive will maintain records and
written receipts as required by the Company policy and reasonably requested by
the Company's board of directors to substantiate such expenses.
D. Employment Date. For the purpose of benefits related issues, including but
not limited to insurance, options, etc..., Executive's date of employment is
September 18, 1984.
E. Other Benefits. Executive is entitled to certain other benefits as listed:
(1) a car leased and maintained by the Company, (2) a country club membership
and dues, (3) keyman life insurance, (4) medical health insurance for
Executive and his immediate family, and (5) long term disability insurance
commensurate with Executive's salary and bonus.
5. Term and Termination.
A. The term of this Agreement shall commence on [Closing], 1996 and it shall
continue in effect for a period of five (5) years until [Closing], 2001. This
Agreement shall be extended for an additional year on [Closing] of each year
unless either party gives to the other written notice of termination. This
Agreement and Executive's employment may be terminated at the Company's
discretion, provided that the Company shall pay Executive an amount equal to
payment at Executive's base salary rate for the remaining period of the
Agreement to a maximum of three years (3) plus any bonus to which Executive may
be entitled, payable in full by certified check on the date of termination.
B. This Agreement may be terminated by Executive at Executive's discretion by
providing at least ninety (90) days prior written notice to the Company. In the
event of termination by Executive pursuant to this subsection, Company may
immediately relieve Executive of all duties and immediately terminate this
Agreement, provided that the Company shall pay Executive at the then applicable
base salary rate to the termination date included in Executive's original
termination notice. Such payment shall be made by certified check on the date
of notice of termination.
C. The Company may terminate this Agreement in the event of repeated and
demonstrable failure on the part of Executive to perform the material duties of
Executive's position (as described in paragraph 2) in a competent manner and
failure of the Executive to substantially remedy such failure within ninety (90
days) of receiving specific written notice of such failure from the Company. In
addition, the Company may terminate this Agreement if Executive is convicted of
a felony during the term of this Agreement. In the event of termination as
described in this section 5.C., the Executive shall be given ninety (90) days
written notice and be entitled to payment through the notice period at the then
base salary rate plus any bonuses or expenses due, payable by the Company in
full by certified check on the date of written notice of termination.
<PAGE>
D. In the event that Executive shall fail, because of illness or injury, to
render services under this Agreement for six (6) consecutive calendar months
or for shorter periods aggregating one hundred thirty (130) or more business
days in any twelve (12) month period, the compensation provided for in section
3 and his employment by the Company may be terminated as of six (6) months after
the end of such six (6) month or one hundred thirty (130) day period. The
Company shall offset against Executive's payment of salary any payments received
by him as a result of such illness or injury pursuant to any federal or state
program or any salary continuation or similar program established by the Company
except payments intended as reimbursement for past or anticipated medical and
other expenses.
E. In the event of the death of Executive, the Company shall pay to Executive's
legal representative two (2) years salary at the then base salary rate, payable
as would have been paid to the Executive if he were alive. In addition,
Executive's immediate family and dependents shall have the same rights as
Executive would have had during the two (2) year payout period, including the
rights to demand registration of restricted securities, the right to exercise
stock options, and the right to Executive's benefits as listed in Section 4
above.
F. In the event that the Company becomes a party to any merger or acquisition
in which it is not the surviving company, or if the Company sells all or
substantially all of its assets, or if there should occur a change in control
of the Company by virtue of a change or changes in ownership of its outstanding
voting securities that would deminish Executive's voting rights and/or
position as is at the time of signing of this Agreement, without his prior
written consent of such change in voting rights and/or position, Executive
(or, in the event of death, his legal representative) will be paid an amount
equal to three (3) years of Executives then base annual salary immediately by
certified check on the occurrence of such event as determined by the discretion
of Executive. During the three year period following such event, Executive and
his dependents, beneficiaries and estate, shall continue to be entitled to all
benefit plans Executive was entitled to prior to such event. The employment of
Executive will be considered terminated by the Company per section 5.A. if
Executive voluntarily terminates his employment because of any of the events set
forth in this paragraph and Executive provides not less than thirty (3) days
written notice.
G. In the event that a majority of the Board of Directors of the Company is not
elected to the satisfaction of Executive from the effective date of this
Agreement through a period of three years thereafter, the Company shall pay
Executive an amount equal to three (3) years of the then base annual salary,
payable immediately by certified check on the date of the shareholders' meeting
of which such election of the Board of Directors takes place. At Executives sole
discretion, such payment may be made by the issuance of common stock of the
Company at the then past ten day average trading price at twice the amount that
would be paid in cash. In the event that Executive decides to accept payment by
the issuance of the Company's common stock, Executive may request, and the
Company will use its best efforts to immediately have such stock registered so
that it may be traded without restriction. In either case of payment as
described in this paragraph, shall not to be construed as Executive's giving or
accepting termination of this Agreement. Further, the Company and Executive
agree that this Agreement will not be and cannot be terminated for any reason
other than the sole discretion of the Executive, during a period in which a
majority of the Company's Board of Directors is not elected to the satisfaction
of Executive from the effective date of this Agreement through a period of three
(3) years.
H. Executive is irrevocably authorized to make payment from Company accounts, or
to authorize the appropriate individuals within the Company, its successor,
assigns, subsidiaries or divisions, to make payment from Company accounts to
Executive as provided under the terms of this Agreement, and any such action by
Executive shall not be deemed as a breach of any responsibility that he may
have as an officer or director of the Company. Termination of this Agreement by
the Company for any reason with respect to any paragraph within this Agreement
in which the Company may give notice of termination shall not have any force or
effect until Executive has acknowledged in writing the receipt of any monies due
him. Payment of monies due per sections 5.F and/or 5.G are not mutually
exclusive and payment of monies due per either section is in addition to any
monies that may otherwise be due because of termination of this Agreement. All
references herein made to payment by certified check may be effected by other
means (such as wire transfer, electronic transfer of funds, etc...) acceptable
to Executive.
6. Notices.
Any notice required by this Agreement or given in connection with it, shall be
in writing and shall be given to the appropriate party by personal delivery or
by certified mail, postage prepaid, or recognized overnight delivery services:
If to the Company:
Electronic Manufacturing Services Group, Inca.
6638 Old Wake Forest Road
Raleigh, NCR 27604
If to Executive:
Kenneth H. Marks
9508 Kimball Drive
Raleigh, NCR 27615
7. Final Agreement.
This Agreement terminates and supersedes all prior understanding or agreements
on the subject matter hereof. This Agreement may be modified only by a further
writing that is duly executed by both parties.
<PAGE>
8. Governing Law.
This Agreement shall be construed and enforced in accordance with the laws of
the State of North Carolina.
9. Headings.
Headings used in this Agreement are provided for convenience only and shall be
be used to construe meaning or intent.
10. No Assignment.
Neither this Agreement nor any interest in this Agreement other than
specifically stated above may be assigned by Executive or the Company without
the prior written approval of the both parties, with exeception of Executives
representative or estate.
11. Misc.
It is agreed that Executive, at his sole discretion, may make payment to the
Company for any moneys due the Company by Executive with the Company's common
stock based on the trading price of such stock on the day payment is made.
Failure of Executive to waive, approve or endorse any action as may be required
herein does not constitute a waiver by Executive of any rights he may have
regardless of the time that may pass.
12. Severability.
If any term of this Agreement is held by a court of competent jurisdiction to be
invalid or unforeseeable, then this Agreement, including all of the remaining
terms, will remain in full force and effect as if such invalid or unenforceable
term had never been included.
IN WITNESS WHEREOF, the parties hereto, having duly been authorized, have
executed his Agreement as of the date first above written.
Electronic Manufacturing Services Group, Inc. Witness
___________________________________________ _______________________________
President
Executive Witness
___________________________________________ _______________________________
Kenneth H. Marks
<PAGE>
EXHIBIT F
FORM OF AGREEMENT REGARDING SUBSTITUTE OPTION AGREEMENT
<PAGE>
[FOOTNOTES AND PARENTHETICAL INFORMATION ARE FOR INFORMATIONAL PURPOSES ONLY AND
WILL NOT CONSTITUTE PART OF THE ACTUAL OPTION AGREEMENTS]
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made this ____ day of
______________________________, 1996, by and between Electronic Manufacturing
Services Group, Inc., a corporation formed under the laws of the State of
Delaware ("EMSG"), and _________________, a citizen and resident of the State of
_______________, (the "Optionee").
WITNESSETH:
WHEREAS, the Optionee has an option to purchase shares of the common
stock of Kenmar Business Groups, Inc. ("Kenmar") pursuant to Kenmar's
Nonqualified Stock Option Plan (the "Kenmar Option"); and
WHEREAS, pursuant to the terms of the Merger Agreement by and among
EMSG (which has changed its name from "J.A. Industries, Inc."), J.A. Industries
of North Carolina, Inc., a North Carolina corporation ("Acquisition"), and
Kenmar dated as of March 1, 1996 (the "Merger Agreement"), the Kenmar Option
will be cancelled and replaced with a substitute corresponding option to
purchase shares of the $.0025 par value common stock of EMSG pursuant to the
provisions of the "J.A. Industries, Inc. 1993 Employee Stock Option Plan" (the
"Plan") effective as of the consummation of the merger contemplated by the
Merger Agreement (the "Merger").
NOW, THEREFORE, in consideration of the premises contained herein and
in the Plan, it is agreed as follows:
(1) Cancellation of Kenmar Option and Grant of EMSG Option. Effective
as of the consummation of the Merger:
(a) The Kenmar Option is cancelled in all respects, and
(b) subject to the terms and conditions contained herein
and in the Plan, EMSG hereby grants the Optionee the
right, privilege and option (the "Option") to
purchase ___________________ (____)1 shares of the
$.0025 par value common stock of EMSG at a price of
__________________ Dollars ($____)2 per share.
(2) Term and Vesting of Option. The term of the Option commences on
the date hereof and, unless sooner terminated as set forth below or in the Plan,
terminates on ____________________ [SUPPLY THE DATE DETERMINED PURSUANT TO
SECTION 5 OF THE KENMAR OPTION AGREEMENT] (which date shall be no more than ten
(10) years from the date the Option is granted) (the "Term") and, subject to the
terms and provisions hereof and the Plan, the Option shall be fully vested and
immediately
- ---------------------------
1 The number of shares shall be determined by multiplying the number of
shares of Kenmar stock subject to the Kenmar Option by the Exchange Ratio, as
defined in the Merger Agreement (41 shares of JAI stock for each share of Kenmar
stock). Fractional shares shall be eliminated.
2 The price per share shall be determined by dividing the exercise price per
share of the Kenmar common stock under the Kenmar Option by the Exchange Ratio.
<PAGE>
exercisable. Subject to the foregoing, the Option may be exercised in whole or
in part with respect to all or any portion of the shares to which it relates.
(3) Method of Exercise. The Option shall be exercised by the
transmittal of written notice thereof to EMSG at its principal place of
business. The notice shall include the Optionee's designation of the number of
shares to be purchased and the Optionee's check in payment of the purchase
price. Upon receipt of such notice and negotiation of said check, EMSG shall
deliver to the Optionee a certificate representing the shares purchased,
provided that if any law or regulation requires EMSG to take any action with
respect to the shares specified in such notice before the issuance thereof, the
date of delivery of the shares shall be extended for the necessary period.
(4) Plan; Restrictions. In all respects this Agreement and the Option
granted herein shall be subject to the terms and provisions of the Plan which is
attached hereto as Schedule A and incorporated herein by reference. Accordingly,
the rights of the Optionee under this Agreement and the shares of common stock
of EMSG which the Optionee may purchase hereunder are subject to certain
restrictions as set forth in the Plan.
(5) Rights Prior to Exercise of Option. The Optionee shall have no
rights as a stockholder with respect to the shares of stock subject to the
Option until the exercise of his rights hereunder and the issuance and delivery
to Optionee of a certificate or certificates evidencing such shares.
(6) Assignment. The Option shall not be transferable other than by
will or the laws of descent and distribution, and the Option may be exercised,
during the lifetime of the Optionee, only by the Optionee. More particularly,
(but without limiting the generality of the foregoing), the Option, may not be
assigned, transferred (except as provided above), pledged or hypothecated in any
way, shall not be assignable by operation of law and shall not be subject to
execution, attachment or similar processes. Any attempted assignment, transfer,
pledge, hypothecation or other disposition of the Option contrary to the
provisions hereof, and the levy of any execution, attachment or similar process
upon the Option shall be null and void and without effect.
(7) Applicable Laws. The validity, construction, interpretation and
enforceability of this Agreement and the capacity of the parties shall be
determined and governed by the laws of the State of North Carolina.
(8) Severability. The provisions of this Agreement are severable and
if any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provision to the extent enforceable in any jurisdiction, shall
nevertheless be binding and enforceable.
(9) Waiver. The waiver by EMSG of a breach of any provision of this
Agreement by Optionee shall not operate or be construed as a waiver of any
subsequent breach by Optionee.
(10) Binding Effect. The provisions of this Agreement shall be binding
upon the parties hereto, their successors and assigns, including, without
limitation, the estate of the Optionee and the executors, administrators or
trustees of such estate and any receiver, trustee in bankruptcy or
representative of the creditors of the Optionee.
(11) Construction. This Agreement is subject to and shall be construed
in accordance with the Plan, the terms of which are explicitly made applicable
hereto. Unless otherwise defined herein, capitalized
2
<PAGE>
terms in this Agreement shall have the same definitions as set forth in the
Plan. In the event of any conflict between the provisions hereof and those of
the Plan, the provisions of the Plan shall govern.
THIS STOCK OPTION AGREEMENT is hereby confirmed and executed as of this
_____ day of ________________, 1996.
ELECTRONIC MANUFACTURING SERVICES
GROUP, INC.
ATTEST:
___________________________________ By: ____________________________________
Secretary Title: ____________________________________
[Corporate Seal]
OPTIONEE:
_______________________________________(SEAL)
Name:
3
<PAGE>
SCHEDULE A
(J.A. Industries, Inc. 1993 Employee Stock Option Plan)
4
<PAGE>
J.A. INDUSTRIES, INC. 1993 EMPLOYEE STOCK OPTION PLAN
1. Purposes.
The J.A. INDUSTRIES, INC. 1993 EMPLOYEE STOCK OPTION PLAN (the "Plan") is
intended to provide the employees of J.A. Industries, Inc. (the "Company") with
an added incentive to continue their services to the Company and to induce them
to exert their maximum efforts toward the Company's success. By thus
encouraging employees and promoting their continued association with the
Company, the Plan may be expected to benefit the Company and its Shareholders.
The Plan allows the Company to grant Incentive Stock Options ("ISOs") (as
defined in Section 422A(b) of the Internal Revenue Code of 1986, as amended
[the "Code"]), Non-Qualified Stock Options ("NQSOs") not intended to
qualify under Section 422A(b) of the Code, Stock Appreciation Rights ("SARs")
and Stock Depreciation Rights ("SDRs") (collectively the "Options").
2. Shares Subject to the Plan.
The total number of shares of Common Stock of the Company, $.0025 par
value per share (the "Common Shares"), that may be subject to Options granted
under the Plan shall be 250,000 in the aggregate, subject to adjustment as
provided in Paragraph 8 of the Plan; however, the grant of any NQSO to an
employee together with a tandem SAR or SDR shall only require one Common Share
available subject to the Plan to satisfy such joint Option. The Company shall at
all times while the Plan is in force reserve such number of Common Shares as
will be sufficient to satisfy the requirement of outstanding Options granted
under the Plan. In the event any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall
cease for any reason to be exercisable in whole or in part, the unpurchased
shares subject thereto shall again be available for granting of Options under
the Plan.
3. Eligibility.
Options may be granted to employees, which term as used in the Plan
includes officers and directors of the Company or of a "subsidiary" or "parent"
of the Company, as the quoted terms are defined within Section 425 of the Code.
Options may be granted from time to time under the Plan to one or employees of
the Company, including employees who have previously been granted Options under
the Plan.
4. Administration of the Plan.
The Plan shall be administered by the Board of Directors of the Company as
such Board of Directors may be composed from time to time or by a Stock Option
Committee (the "Committee") comprised of three disinterested persons (the
term "disinterested" having the meaning ascribed to it by Rule 16b-3 of
the Securities Exchange Act of 1934 [the "1934 Act"]) appointed by such Board
of Directors of the Company. As and to the extent
<PAGE>
authorized by the Board of Directors of the Company, the Committee may
exercise the power and authority vested in the Board of Directors under the
Plan. Within the limits of the express provisions of the Plan, the Board of
Directors shall have the authority, in its discretion, to determine the
individuals to whom, and the time or times at which, Options shall be granted,
the character of such Options (whether ISO, NQSO and/or SAR or SDR in tandem
with a NQSO) and the number of Common Shares to be subject to each Option,
and to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the term and provisions of
Option agreements that may be entered into in connection with Options (which
need not be identical), subject to the limitation that agreements granting
ISOs must be consistent with requirements for the ISOs being qualified as
"incentive stock options" as provided in Section 422A of the Code, and
to make all other determinations and take all other actions necessary
or advisable for the administration of the Plan. In making such determinations,
the Board of Directors may take into account the nature of the services
rendered by such individuals, their present and potential contributions
to the Company's success, and such other factors as the Board of Directors,
in its discretion, shall deem relevant. The Board of Directors' determinations
on the matters referred to in this paragraph shall be conclusive.
5. Terms of Options.
The Board or the Committee may grant either ISOs or NQSOs or SARs and/or
SDRs in tandem with NQSOs. An ISO or an NQSO enables the optionee to purchase
from the Company, at any time during a specified exercise period, a specified
number of Common Shares at a specified price (the "Option Price"). The
optionee, if granted an SAR in tandem with an NQSO, may receive from the
Company, in lieu of exercising his option to purchase shares pursuant to his
NQSO, at one of the certain specified times during the exercise period of
the NQSO as set by the Board or the Committee, the excess of the fair market
value upon such exercise (as determined in accordance with subparagraph
(b) of this Paragraph 5) of one Common Share over the Option Price per share
specified upon grant of the NQSO/SAR multiplied by the number of Common
Shares covered by the SAR so exercised. The optionee, if granted an SDR in
tandem with an NQSO, may receive from the Company at such date after the
optionee's exercise of the NQSO with which the SDR is in tandem and the SDR
itself, which date shall be determined by the Board or the Committee in its
sole discretion, the excess of the fair market value of one Common Share upon
the optionee's exercise of the NQSO with which the SDR is in tandem over the
greater of the (i) fair market value on the date six months and one day after
the exercise of such NQSO and (ii) the option price paid on the exercise
thereof, multiplied by the number of Common Shares covered by the NQSO/SDR
so exercised. The character and terms of each Option granted under the Plan
shall be determined by the Board of Directors consistent with the provisions
of the Plan, including the following:
A-2
<PAGE>
(a) An Option granted under the Plan must be granted within 10 years
from the date the Plan is adopted, or the date the Plan is approved by the
Shareholders of the Company, whichever is earlier.
(b) The Option Price of the Common Shares subject to each ISO shall
not be less than the fair market value of such Common Shares at the time such
ISO is granted. Such fair market value shall be determined by the Board of
Directors and, if the Common Shares are listed on a national securities
exchange or traded on the over-the-counter market, the fair market value
shall be the closing price on such exchange, or the mean of the closing bid and
asked prices of the Common Shares on the over-the-counter market, as reported
by the National Association of Securities Dealers Automated Quotation System
or the National Quotation Bureau, Inc., as the case may be, on the day on
which the Option is granted or, if there is no closing price or bid or asked
price on that day, the closing price or mean of the closing bid and asked
prices on the most recent day preceding the day on which the Option is granted
for which such prices are available. If an ISO is granted to any individual
who, immediately before the ISO is to be granted, owns (directly or through
attribution) more than 10% of the total combined voting power of all classes
of capital stock of the Company or a subsidiary or parent of the Company, the
Option Price of the Common Shares subject to such ISO shall not be less than
110% of the fair market value per share of the Common Shares at the time such
ISO is granted.
(c) The Option Price of the Common Shares subject to an NQSO or an SAR
or SDR in tandem with an NQSO granted pursuant to the Plan shall be determined
by the Board of Directors or the Committee, in its sole discretion.
(d) In no event shall any Option granted under the Plan have an
expiration date later than 10 years from the date of its grant, and all Options
granted under the Plan shall be subject to earlier termination as expressly
provided in Paragraph 6 hereof. If an ISO is granted to an individual who,
immediately before the ISO is granted, owns (directly or through attribution)
more than 10% of the total combined voting power of all classes of capital
stock of the Company or of a subsidiary or parent of the Company, such ISO
shall by its terms expire and shall be exercisable after the expiration of
five (5) years from the date of its grant.
(e) An SAR may be exercised at any time after six months of the date
of the grant thereof during the exercise period of the NQSO with which it is
granted in tandem and prior to the exercise of such NQSO, but only within the
specified 10 day period referred to in subsection (e)(3) of Rule 16b-3 of the
1934 Act (generally, the 10 days immediately following the publication of the
Company's quarterly financial information). The exercise of an SAR granted in
tandem with an NQSO shall be deemed to cancel such number of shares subject to
the unexercised Option as were prior to the expiration date of the NQSO granted
in tandem with the SDR and after six months from the exercise of the NQSO
granted in tandem with the SDR. The Board or the Committee has discretion to
determine
A-3
<PAGE>
and impose conditions on SDRs such as setting the time of payment at the date
six months and one day following the date of exercise, the date of the sale
of the Common Shares received upon the exercise of the NQSO which was granted
in tandem with the SDR, or some other date (but not later than the expiration
date of the option), and reducing the amount of the distribution to take into
account appreciation in the fair market value of the aforementioned Common
Shares prior to the payment of the distribution. The Board or the Committee
also has the discretion to alter the terms of the SDRs if necessary to comply
with Federal or state securities law. Amounts to be paid by the Company in
connection with an SAR or SDR may, in the Board's or the Committee's discretion,
be made in cash, Common Shares or a combination thereof. An NQSO granted in
tandem with an SAR or SDR may not be exercised within six months of the grant
thereof.
(f) Unless otherwise provided in any Option agreement under the Plan, an
Option granted under the Plan shall become exercisable, in whole at any time or
in part from time to time, but in no case may an Option (i) be exercised as to
less than one hundred (100) Common Shares at any one time, or the remaining
Common Shares covered by the Option if less than one hundred (100), and (ii)
become fully exercisable more than five years from the date of its grant nor
shall less than 20% of the Option become exercisable in any of the first five
years of the Option.
(g) An Option granted under the Plan shall be exercised by the
delivery by the holder thereof to the Company at its principal office
(to the attention of the Secretary) of written notice of the number of
full Common Shares with respect to which the Option is being exercised,
accompanied by payment in full, in cash or by certified check payable to
the order of the Company, of the Option Price of such Common Shares, or,
at the discretion of the Committee or the Board, by the delivery of
Common Shares having a fair market value equal to the Option Price
(provided, in order to qualify as an ISO, more than two years shall have
passed since the date of grant and one year from the date of exercise),
or at the option of the Committee or the Board, by a combination of cash
and such shares (subject to the restriction above) held by the employee
that have a fair market value together with such cash that shall equal
the Option Price, and at the discretion of the Committee or Board by
having the Company withhold from the Common Shares to be issued upon
exercise of the Option that number of shares having a fair market value
equal to the tax withholding amount due, or in the event an employee is
granted an NQSO is tandem with an SAR and/or SDR and desires to exercise
such SAR or SDR, such written notice shall so state such intention.
(h) The holder of an Option shall have none of the rights of a
Shareholder with respect to the Common Shares covered by such holder's Option
until such Common Shares shall be issued to such holder upon the exercise
of the Option.
(i) An ISO granted under the Plan shall not be transferable otherwise
than by will or the laws of descent and distribution, and any ISO granted
under the Plan may be
A-4
<PAGE>
exercised during the lifetime of the holder thereof only by the holder. No
Option granted under the Plan shall be subject to execution, attachment or
other process.
(j) The aggregate fair market value, determined as of the time any ISO is
granted and in the manner provided for by subparagraph (b) of this Paragraph 5,
of the Common Shares with respect to which ISOs granted under the Plan are
exercisable for the first time during any calendar year and under Incentive
Stock Options qualifying as such in accordance with Section 422A of the Code
granted under any other Incentive Stock Option plan maintained by the Company or
its parent or subsidiary corporations, shall not exceed $100,000.
6. Death or Termination of Employment.
(a) If the employment of a holder of an ISO under the Plan shall be
terminated voluntarily by the employee or for cause, such holder's ISO shall
expire within thirty (30) days after such termination. If such employment
shall terminate for any reason other than death, voluntary termination by
the employee or for cause, then such ISO may be exercised at any time within
three (3) months after such termination, subject to the provisions of
subparagraph (f) of this Paragraph 6. For the purposes of this subparagraph
(a), the retirement of an individual either pursuant to a pension or
retirement plan adopted by the Company or at the normal retirement date
prescribed from time to time by the Company shall be deemed to be a
termination of such individual's employment other than voluntarily by the
employee or for cause.
(b) If the holder of an ISO under the Plan dies (i) while employed by
the Company or a subsidiary or parent corporation or (ii) within three
(3) months after the termination of such holder's employment other than
voluntarily by the employee or for cause, such ISO may, subject to the
provisions of subparagraph (f) of this Paragraph 6, be exercised by a legatee
or legatees of such Option under such individual's last will or by such
individual's personal representatives or distributees at any time within
one year after the individual's death.
(c) If the employment of a holder of an NQSO or SAR or SDR under the
Plan shall be terminated voluntarily the employee or for cause, then such
holder's NQSO, SAR or SDR shall expire within thirty (30) days after such
termination. If such employment shall terminate for any reason other than
death, voluntary termination by the employee or for cause, then such
NQSO, SAR or SDR may be exercised at any time within three (3) months after
the date of such termination, subject to the provisions of subparagraph (f)
of this Paragraph 6. For the purposes of this subparagraph (c), the
retirement of an individual either pursuant to a pension or retirement plan
adopted by the Company or at the normal retirement date prescribed from
time to time by the Company shall be deemed to be a voluntary termination
of such individual's employment by the employee.
A-5
<PAGE>
(d) If the holder of an NQSO, SAR or SDR under the Plan dies (i) while
employed by the Company or a subsidiary or parent corporation or (ii) within
three (3) months after the termination of his employment either voluntarily
or for cause, such NQSO, SAR or SDR may, subject to the provisions of
subparagraph (f) of this Paragraph 6, be exercised by a legatee or legatees
of such NQSO, SAR or SDR under such individual's last will or by such
individual's personal representatives or distributees at any time within
one year after the individual's death.
(e) If the holder of an Option under the Plan becomes disabled within
the definition of section 104(d) of the Code while employed by the Company
or a subsidiary or parent corporation, such Option may, subject to the
provisions of subparagraph (f) of this Paragraph 6, be exercised at any time
within one year after such holder's termination of employment due to the
disability.
(f) An Option may not be exercised pursuant to this Paragraph 6 except to
the extent that the holder was entitled to exercise the Option at the time
of termination of employment or death, and in any event may not be exercised
after the original expiration date of the Option.
7. Leave of Absence.
For the purposes of the Plan, an individual who is on military or sick leave
or other bona fide leave of absence (such as temporary employment by the
Government) shall be considered as remaining in the employ of the Company
or of a subsidiary or parent corporation for ninety (90) days or such longer
period as such individual's right to reemployment is guaranteed either
by statute or by contract.
8. Adjustment Upon Changes in Capitalization.
(a) In the event that the outstanding Common Shares are hereafter changed
by reason of recapitalization, reclassification, stock split-up, combination
or exchange of Common Shares or the like, or by the issuance of dividends
payable in Common Shares, an appropriate adjustment shall be made by the
Board of Directors in the aggregate number of Common Shares available
under the Plan and in the number of Common Shares and price per Common
Share subject to outstanding Options. In the event of the proposed
dissolution, liquidation, merger or sale of substantially all of the assets
of the Company, all outstanding Options under the Plan will automatically
terminate, unless otherwise provided by the Board of Directors. The
Board of Directors or the Committee may in its discretion make provision
for accelerating the exercisability of Options under the Plan in such
circumstances.
(b) Any adjustment in the number of Common Shares shall apply
proportionately to only the unexercised portion of the Options granted
hereunder. If fractions of Common
A-6
<PAGE>
Shares would result from any such adjustment, the adjustment shall be revised to
the next lower whole number of Common Shares.
9. Further Conditions of Exercise.
(a) Unless the Common Shares issuable upon the exercise of an Option
under the Plan have been registered with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, prior to
the exercise of the Option, the notice of exercise shall be accompanied
by a representation or agreement of the individual exercising the Option
to the Company to the effect that such Common Shares are being acquired
for investment and not with a view to the resale or distribution thereof
or such other documentation as may be required by the Company, unless in
the opinion of counsel to the Company such representation, agreement or
documentation is not necessary to comply with said Act.
(b) The Company shall not be obligated to deliver any Common Shares
until they have been listed on each securities exchange on which the
Common Shares may then be listed or until there has been qualification
under or compliance with such state or federal laws, rules or regulations
as the Company may deem applicable. The Company shall use reasonable
efforts to obtain such listing, qualification and compliance.
(c) The Board or Committee may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding of any taxes
that the Company is required by any law or regulation of any governmental
authority, whether federal, state or local, domestic or foreign, to withhold
in connection with the exercise of any Option, including, but not limited
to (i) the withholding of payment of all or any portion of such Option
and/or SAR and/or SDR until the holder reimburses the Company for the
amount the Company is required to withhold with respect to such taxes, or
(ii) the cancelling of any number of Common Shares issuable upon exercise
of such Option and/or SAR and/or SDR in an amount sufficient to reimburse
the Company for the amount it is required to so withhold, or (iii) the
selling of any property contingently credited by the Company for the
purpose of exercising such Option, in order to withhold or reimburse the
Company for the amount it is required to so withhold.
10. Termination, Modification and Amendment.
The Plan (but not Options previously granted under the Plan) shall
terminate ten (10) years from the earliest of the date of its adoption
by the Board of Directors, or the date the Plan is approved by the
Shareholders of the Company, or such date of termination, as hereinafter
provided, and no Option shall be granted after termination of the Plan.
A-7
<PAGE>
The Plan may from time to time be terminated, modified or amended by the
affirmative vote of the holders of a majority of the outstanding shares of
capital stock of the Company entitled to vote thereon.
The Board of Directors of the Company may at any time, prior to ten
(10) years from the earlier of the date of the adoption of the Plan by such
Board of Directors or the date the Plan is approved by the Shareholders,
terminate the Plan or from time to time make such modifications or
amendments of the Plan as it may deem advisable; provided, however, that
the Board of Directors shall not, without approval by the affirmative vote
of the holders of a majority of the outstanding shares of capital stock
of the Company entitled to vote thereon, increase (except as provided
by Paragraph 8) the maximum number of Common Shares as to which Options may
be granted under the Plan, materially change the standards of eligibility
under the Plan or materially increase the benefits which may accrue to
participants under the Plan. Any amendment to the Plan which, in the
opinion of counsel to the Company, will be deemed to result in the
adoption of a new Plan, will not be effective until approved by the
affirmative vote of the holders of a majority of the outstanding shares
of capital stock of the Company entitled to vote thereon.
No termination, modification or amendment of the Plan may adversely affect
the rights under any outstanding Option without the consent of the individual
to whom such Option shall have been previously granted.
11. Effective Date of the Plan.
The Plan shall become effective upon adoption by the Board of Directors of
the Company. The Plan shall be subject to approval by the affirmative vote
of the holders of a majority of the outstanding shares of capital stock of
the Company entitled to vote thereon within one year before or after adoption
of the Plan by the Board of Directors.
12. Not a Contract of Employment.
Nothing contained in the Plan or in any option agreement executed pursuant
hereto shall be deemed to confer upon any individual to whom an Option is or
may be granted hereunder any right to remain in the employ of the Company
or of a subsidiary or parent of the Company or in any way limit the right
of the Company, or of any parent or subsidiary thereof, to terminate the
employment of any employee.
13. Other Compensation Plans.
The adoption of the Plan shall not affect any other stock option plan,
incentive plan or any other compensation plan in effect for the employees
of the Company, nor shall the Plan preclude the Company from establishing
any other form of stock option plan, incentive plan or any other compensation
plan for employees of the Company.
A-8
<PAGE>
AMENDMENT
At a special meeting of Shareholders held March 31, 1995, Shareholders
approved an amendment to the 1993 Employee Stock Option Plan pursuant to
which the number of shares covered by the plan were increased from 250,000
to 1,000,000 shares.
<PAGE>
EXHIBIT G
FORM OF GUARANTY AGREEMENT
<PAGE>
NORTH CAROLINA
GUARANTY AGREEMENT
WAKE COUNTY
ELECTRONIC MANUFACTURING SERVICES GROUP, INC., a Delaware corporation
(hereinafter "Guarantor"), in consideration of the extension of credit by LEE K.
SIMON of Wilmington, North Carolina, DANIEL DAVID CAMERON, JR. of Durham, North
Carolina, and JOSEPH T. HUNT of Knightdale, North Carolina (hereinafter
"Holders") to KENMAR BUSINESS GROUPS, INC., a North Carolina corporation
(hereinafter "Obligor"), evidenced by three (3) promissory notes executed in
connection with that certain Agreement on Transfer of Corporate Ownership of
October 15, 1992 (hereinafter the "Notes") and other good and valuable
consideration, the receipt of which is hereby acknowledged, Guarantor does
hereby covenant and agree with Holders, their successors, heirs, executors,
administrators, and assigns, as follows:
1. Guarantor fully and unconditionally guarantees to Holders and their
assigns, jointly and severally, the prompt and punctual payment of any and all
installments of principal and interest and other amounts that may be or become
due to Holders under the Notes and that each and all of the obligations, duties,
and covenants in the Notes to be performed by Obligor will be fully performed.
In addition, Guarantor will pay all damages or loss, including attorneys' fees,
that may arise in consequence of a default or failure by Obligor or its
successors to perform each and every obligation under the Notes.
2. Guarantor shall make full payment or cause full performance to be
made within fifteen (15) days after notice from
<PAGE>
Holders to Guarantor of any such default or failure to pay by Obligor. Said
fifteen-day period shall commence to run within forty-eight (48) hours of the
time that Holders mail to Guarantor, certified or registered mail, return
receipt requested, any such notice or a copy of any such notice as may be sent
by Holders to Obligor. It is expressly understood, stipulated, and agreed upon,
that this guaranty is a guaranty of payment and not a guaranty of collection.
3. That at the option of Holders, Guarantor may be joined in any action or
proceeding commenced by Holders against Obligor in connection with and based
upon the Notes and that recovery may be had against Guarantor in any such action
or proceeding, or in any independent action or proceeding against Guarantor
without any requirement that Holders or their respective heirs, executors,
administrators, successors, or assigns, jointly or severally, first assert,
prosecute, or exhaust any remedy or claim against Obligor, or its successors or
any other security.
4. That the interest of Holders under this Guaranty Agreement may be
assigned by Holders, their successors and assigns by way of security or
otherwise, without notice to Guarantor and without reducing or changing the
obligations of Guarantor hereunder.
5. This Guaranty Agreement shall inure to the benefit of the heirs, legal
representatives, successors, and assigns of the Holders and shall be binding
upon and enforceable against the Guarantor and its successors and assigns.
-2-
<PAGE>
6. Guarantor expressly waives: (a) notice of acceptance of this guaranty
and of all extensions of credit to Obligor; (b) presentment and demand for
payment of any of the debts of Obligor; and (c) protest and notice of dishonor
or of default to any party with respect to any of the debts of Obligor or with
respect to any security therefor.
IN WITNESS WHEREOF, this Guaranty Agreement has been executed and sealed
this ____ day of ___________________, 1996.
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
ATTEST: By:
Name:
Title:
By:
Name:
Title:
[CORPORATE SEAL]
-3-
<PAGE>
EXHIBIT H
FORM OF LEGAL OPINION OF SMITH, ANDERSON,
BLOUNT, DORSETT, MITCHELL & JERNIGAN, L.L.P.
<PAGE>
[Letterhead of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan]
___________________, 1996
(919) 821-1220
Electronic Manufacturing Services Group, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
Re: Kenmar Business Groups, Inc.
Gentlemen:
We have acted as counsel to Kenmar Business Groups, Inc., a North
Carolina corporation ("Kenmar") in connection with the transactions contemplated
by the Merger Agreement (the "Merger Agreement") dated as of March 1, 1996 among
Kenmar, Electronic Manufacturing Services Group, Inc., a Delaware corporation
(which has changed its name from "J.A. Industries, Inc.") ("EMSG") and J.A.
Industries of North Carolina, Inc., a North Carolina corporation
("Acquisition"). We are rendering this opinion pursuant to Section 5.3(c) of the
Merger Agreement. All capitalized terms used but not otherwise defined herein
shall have the respective meanings ascribed to them in the Merger Agreement.
In connection with the preparation of our opinions expressed below, we
have made such investigations and examined originals or copies, certified or
otherwise identified to our satisfaction, of the Merger Agreement, each of the
various other documents referred to therein and such corporate records of
Kenmar, certificates of public officials and other documents, agreements and
instruments as we have deemed necessary or appropriate.
For purposes of these opinions, we have assumed, without any
independent investigation or verification of any kind, (i) the due promulgation
and validity of all statutes, regulations, administrative procedures,
determinations, permits and orders; (ii) the authenticity and completeness of
all documents submitted to us as originals, (iii) the conformity to authentic
original documents and completeness of all documents submitted to us as
certified, conformed or photostatic copies, (iv) that there have been no
modifications, waivers or amendments to any of the agreements or other documents
reviewed by us and (v) that the certificates of public officials dated earlier
than the date hereof (but not earlier than ________________, 1996) remain
accurate from such earlier date through and including the date hereof.
<PAGE>
Electronic Manufacturing Services Group, Inc.
_________________, 1996
Page 2
As to questions of fact material to this opinion, we have relied upon
the representations and warranties made in the Merger Agreement and the other
documents referred to therein or delivered pursuant thereto and upon
certificates and other documents of officers or representatives of Kenmar and of
public officials and have made such other inquiries and investigations as we
have deemed necessary or appropriate.
Based upon and subject to the foregoing, and subject to the additional
qualifications and limitations set forth below, we express the following
opinions:
1. Kenmar is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of North Carolina. Kenmar has
all requisite power and authority to enter into and deliver the Merger Agreement
and the other Transaction Documents, perform its obligations thereunder and
consummate the transactions contemplated thereby. Kenmar's execution, delivery
and performance of the Merger Agreement and the other Transaction Documents and
Kenmar's consummation of the transactions contemplated thereby have been duly
and validly authorized by all corporate, shareholder and other action required
of Kenmar by applicable law, its Articles of Incorporation or Bylaws.
2. To our actual knowledge without independent investigation, Kenmar is not
subject to any charter, bylaw, mortgage, lien, lease, agreement, instrument,
order, law, rule, regulation, judgment or decree, or any other restriction of
any kind or character which would be violated by, prevent or impair materially
(whether by acceleration of any liability, creation of any lien or encumbrance
or otherwise) consummation of the transactions contemplated by the Merger
Agreement, except for (i) that certain Shareholders' Agreement, dated September
1, 1985, by and between Kenmar and the shareholders of Kenmar party thereto (as
amended), and (ii) that certain Agreement on Transfer of Corporate Ownership,
dated October 15, 1992, by and between Lee K. Simon ("Simon"), Daniel David
Cameron, Jr. ("Cameron"), Joseph T. Hunt, Jr. ("Hunt"), and Kenmar, as modified
by that certain Modification and Release Agreement, dated as of January 19,
1996, by and among Kenmar, J.A. Industries, Inc., Simon, Cameron, and Hunt.
The foregoing opinions are subject to the following assumptions,
qualifications and limitations:
(A) We have assumed that the parties (other than Kenmar) to the Merger
Agreement and the other Transaction Documents have the requisite power and
authority to enter into the Merger Agreement and such other Transaction
Documents; that the Merger Agreement and such other Transaction Documents have
been duly authorized, executed and delivered by each such party; and that the
<PAGE>
Electronic Manufacturing Services Group, Inc.
_______________________, 1996
Page 3
Merger Agreement and such other Transaction Documents to which each
such party is a party constitute the legal, valid and binding obligations of
each such party, enforceable against each such party in accordance with their
respective terms.
(B) The foregoing opinions are subject to the effects of (i)
bankruptcy, insolvency, reorganization, receivership, moratorium and other
similar laws now or hereafter in effect relating to or affecting creditors'
rights or remedies generally, (ii) general principles of equity, whether applied
by a court of law or equity, and (iii) applicable laws and court decisions, now
or hereafter in effect, that may limit or restrict the enforceability or
availability of certain terms, provisions, rights or remedies contained in the
Merger Agreement or the other Transaction Documents, but which, in our opinion,
should not make such documents inadequate for the practical realization of the
material benefits intended to be afforded to the parties thereby.
(C) We are members of the Bar of the State of North Carolina
only and express no opinion as to the laws of any jurisdiction other than the
State of North Carolina and the federal laws of the United States of America.
These opinions are provided solely for your benefit in connection with
the transactions contemplated by the Merger Agreement and may not be used or
relied upon by, or published or communicated to, any other person without our
prior written consent.
We bring to your attention the fact that our legal opinions are an
expression of professional judgment and are not a guarantee of a result.
Our opinions are as of the date hereof, and we do not undertake to
advise you of matters which might come to our attention subsequent to the date
hereof which may affect our legal opinions expressed herein.
Sincerely yours,
SMITH, ANDERSON, BLOUNT, DORSETT,
MITCHELL & JERNIGAN, L.L.P.
By:
Gerald F. Roach
<PAGE>
EXHIBIT I
FORM OF GMCP AGREEMENT
<PAGE>
February , 1996
Electronic Manufacturing Services Group, Inc.
Mr. Kenneth Marks
6638 Old Wake Forest Road
Raleigh, NC
27604
Dear Mr. Marks
This letter confirms the engagement agreement (the "Agreement") between
G.M. Capital Partners, Ltd. ("GMC") and Electronic Manufacturing Services
Group, Inc., a Delaware Corporation, (hereinafter "EMSG" or the "Company")
pursuant to which GMC will furnish management consulting, financial
advisory and investor relations services to EMSG. GMC will assist EMSG
in the capacity as detailed below.
1. RESPONSIBILITY OF GMC
A. Subject to the terms and conditions hereof, GMC services will include,
among other things, a due diligence overview of the Company including reviewing
EMSG's current financial position and projections relating to EMSG's capital
requirements, analyzing the proforma effects of the financing on such
projections, and rendering advice on methods of structuring such
financing ("Financing").
B. GMC shall use its best efforts to obtain Financing for EMSG; however,
it is expressly acknowledged and agreed by the parties hereto that GMC's
obligations do not insure the successful negotiation of or obtaining of any
type of Financing for EMSG. GMC is not a registered broker dealer.
C. GMC shall use its best efforts to attract suitable entities who are in
the business of or interested in making equity or debt investments in companies
such as EMSG. GMC shall assist the Company in proposing an equity or debt
investment in EMSG to prospective investors, presenting its analysis in
support of the investment, and structuring and negotiating the financial
terms of the investment.
D. GMC shall assist EMSG in the coordination of the parties involved in
connection with a Financing and attend to the numerous technical details
required in arranging and finalizing any transaction. These tasks often
present substantive issues or other difficulties and constitute the most
time-consuming aspects of a Financing, requiring an anticipation of problems
and experienced coordination of attorneys and other parties, as appropriate.
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<PAGE>
2. INFORMATION
A. GMC will perform services for the Company in all areas generally
considered to be management consulting, financial advisory and investor
relations, including but not limited to the preparation and dissemination
of financial publicity, annual and interim reports for stockholders and the
financial community, preparation and dissemination of information concerning
the Company's operations, and consultation with respect to financial
negotiations with investment banking firms, lenders and private investors.
B. Information to be released by GMC will be disseminated to general,
financial and trade media, the investment banking community, banks and
statistical organizations, all as deemed necessary or appropriate by GMC
and the Company; provided, however, that GMC shall not release or otherwise
make public any information regarding or relating to EMSG without the prior
written consent of EMSG.
C. All information to be disseminated through GMC will be based upon written
material furnished by the Company and will be released only after receipt by
GMC of final approval from the Company. The Company recognizes that GMC may
have, either at the present time or in the future, obligations imposed upon
it by the federal securities laws to verify independently certain of the
information contained in release being made through it. Accordingly, the
Company agrees that GMC shall have the right to make such reasonable inquiries
as it shall deem necessary or appropriate of officers and employees of the
Company and its counsel and auditors with respect to information being
released by GMC. The Company recognizes that the accuracy and completeness
of all information contained in release ultimately rests with the Company
and agrees to indemnify and hold GMC harmless from and against any loss
and expense arising out of a claim that any information released by GMC
is inaccurate or incomplete, so long as such information is identical to
that approved in writing by EMSG, and the release thereof was approved
in writing by EMSG.
D. You acknowledge and understand that GMC, in order to perform its services
effectively under this agreement, and to satisfy such obligation as may be
imposed upon it by the federal securities laws, requires the prompt receipt
of all material information with respect to the Company, its operations
and its prospects. Accordingly, you agree to furnish promptly to GMC copies
of all reports and other filings with the Securities and Exchange Commission,
all material communications with Stockholders and all reports received from
your auditors. Furthermore, you recognize the necessity of promptly notifying
GMC of all material developments concerning the Company, its business and
prospects and to supply GMC with sufficient information necessary for GMC
to make a determination as to its compliance with its own procedures as well
as any legal requirements. The term "prompt" above means reasonably timely
with respect to the release of information.
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<PAGE>
3. COMPENSATION TO GMC
In consideration of our services as set forth above, GMC shall be entitled
to receive, and EMSG agrees to pay to GMC the following:
A. GMC will receive an initial payment of $5,000 to paid with the execution
of this Agreement.
B. GMC will receive a success fee ("Success Fee") in the form of a cash
payment in the amount of ten percent (10%) of the gross proceeds of any
private Financing it arranges, including any form of equity, convertible
debt, debt with warrants, debt with equity incentives to the lender, or any
other form of equity, debt or guarantees obtained by or invested in EMSG
payable upon closing and receipt of funds by EMSG or any entity described
in Paragraph 6, whichever is earlier. In the event EMSG does a public
financing arranged by GMC or sells more than five (5%) percent of EMSG to any
party arranged by GMC, GMC will be entitled to a cash payment in the total
amount of three (3%) percent of the gross proceeds of the investment. In the
event that GMC arranges a public financing through a registered broker-dealer,
then GMC will be entitled to a cash payment in the total amount of three (3%)
percent of the gross proceeds of the financing and not to the ten percent
cash payment as described as the Success Fee.
C. EMSG shall have sole discretion in determining what constitutes an
acceptable Financing as contemplated by this Agreement. GMC shall earn the
Success Fee only upon the closing and receipt of funds from a Financing as
described in 3.B, above, and not merely for presenting a financing option
or prospective investor which in EMSG's sole discretion is unacceptable.
D. GMC will be retained as Financial Advisor, Management Consultant and
Investors Relations firm for the Company at a fee of $5,000 per month.
Excluding the initial payment, monthly payments will commence on the ,
1996, and will be payable on the 1st of each month for twelve (12) consecutive
months.
4. EXPENSE REIMBURSEMENT
EMSG agrees to reimburse GMC all amounts due and owing GMC, under the terms
of this Agreement, no later than thirty (30) days after receiving an invoice
for all customary or reasonable out-of-pocket expenses, including but not
limited to, the cost of telephone calls, travel, facsimile transmission,
translation, interpretation, paper duplication, due diligence reports,
postage and delivery services, or fees of counsel incurred in connection
with the performance by GMC of its duties as contemplated by this Agreement.
All out-of-town travel, counsel, or third party consultant fees, and other
significant expenses (Over $250) must be approved by EMSG in advance. EMSG
will make arrangements directly with and be responsible for cost of accountants,
appraisers, counsel and other experts and for the costs of printing and
circulating a business plan, memorandum or other documents prepared in
connection with performing appropriate due diligence of this Financing. If
we must file a lawsuit to collect any outstanding fees, out-of-pocket expenses,
or other expenses due from EMSG, EMSG agrees to pay reasonable costs
and attorney's fees for such action.
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<PAGE>
5. ASSIGNMENT AND TRANSFER OF OBLIGATION
In the event that EMSG contributes, pledges, guarantees or otherwise conveys
any of its assets (including without limitation the assets of its
subsidiaries or affiliates) to, or incurs any liabilities on behalf of, or
grants the authority to operate its business(es) or affiliated business(es)
to a new entity, whether a corporation, partnership, sole proprietorship,
or national person ("New Entity") for the purpose of obtaining Financing
as contemplated by this Agreement, then GMC will be compensated by EMSG
for whatever funds were received by the New Facility on the same basis as if
the funds were invested directly in EMSG, so long as such transaction was
arranged by GMC. The parties further agree that all EMSG's rights and
obligations under the Agreement will be equally binding upon New Entity
and that EMSG will not enter into or create any agreement, undertaking or
legal obligation with a New Entity without requiring said New Entity to
accept and satisfy EMSG's right and obligations under this Agreement as
if they were their own.
6. TWO YEAR PROVISION
If, within two (2) years from the termination of this Agreement, EMSG or its
officers consummate any Financing with any party to whom EMSG or its officers
were first introduced by GMC or who was contacted by GMC in connection with
its services for EMSG hereunder, or who received information prepared by GMC
in connection with the Financing, then EMSG shall pay to GMC the agreed upon
compensation.
7. TERMINATION
This Agreement shall terminate twelve (12) months from the above written
date of this Agreement unless extended in writing and signed by both
parties. GMC shall be paid by EMSG all fees earned through Termination
Date together with reimbursement of all expenses due hereunder. All such
fees and reimbursement due GMC shall be paid on or before the Termination
Date.
Notwithstanding anything expressed or implied herein to the contrary, the
terms and provisions of Section 2, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 14,
and 15 shall survive the termination of this Agreement.
8. INDEMNIFICATION
EMSG agrees to indemnify and hold harmless GMC against any and all losses,
claims, damages, liabilities or costs (and all actions in respect thereof
and any reasonable legal or other expenses in giving testimony or
furnishing documents in response to a subpoena or otherwise), including
the costs of investigating, preparing or defending any such action or claim
(collectively "Losses"), as and when incurred, caused by, relating to, based
upon, or arising out of: (a) any Financing (as defined in or contemplated
by this engagement letter agreement, as it may be amended from time to time
(the "Agreement")); or (b) GMC's acting for EMSG; provided, however such
indemnity agreement shall not apply to any such loss, claim, damage, liability
or cost to the
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<PAGE>
extent it is found to have resulted from the gross negligence or willful
misconduct of GMC or the violation of any laws by GMC.
GMC shall indemnify and hold harmless EMSG against any Losses, as and when
incurred, caused by, relating to, based upon, or arising out of the
negligent acts or omissions or willful misconduct of GMC, or the violation
of any laws by GMC, in connection with GMC's performance under this
Agreement.
If any action proceeding, or investigation is commenced or claim is made
as to which either party proposes to demand indemnification, it will notify
the other party with reasonable promptness. The indemnifying party reserves
the right to assume the defense of the indemnified party with counsel of its
choosing, which counsel shall be reasonably acceptable to the indemnified
party. The indemnifying party shall not be liable for any settlement of any
claim against the indemnified party made without its written consent. The
indemnified party may not settle any claim without the prior written consent
of the indemnifying party.
No person found liable for fraudulent misrepresentation shall be entitled
to contribution from any person who is not also found liable for such
fraudulent misrepresentation.
9. ENTIRE AGREEMENT
The Parties agree that the Agreement embodies the entire agreement and
understanding of the Parties and that no understanding or agreements,
verbal or otherwise, exists between the Parties excepts set forth in the
Agreement. Any modification to the Agreement must be reduced to writing,
signed by both Parties, and attached to the Agreement to be effective.
10. SEVERABILITY
Should any section or any part of any section of the Agreement be rendered
void, invalid, or unenforceable by any court of law for any reason such
determination shall not render void, invalid, or unenforceable any other
section or any part of any section in the Agreement.
11. SURVIVAL OF REPRESENTATIONS
Each Party, for itself, and its successors, heirs, executors, administrators,
representatives, insures, agents, and assigns, covenants and agrees that all
representations made hereunder and obligations created hereunder shall apply
to their successors and assigns provided however, that GMC shall not assign
this Agreement to a third party without the prior written consent of a duly
authorized representative of EMSG which consent shall not be unreasonable
withheld.
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<PAGE>
12. NOTICES
Any required notices under this Agreement shall be made by overnight courier
or certified mail, postage prepaid and return receipt requested as follows:
If to GMC:
G.M. Capital Partners, Ltd.
Hirzel House, Smith Street
St. Peters Port, Guernsey
Channel Islands, GY1 2NG
With copies to:
Mr. J.A. Michie
North American Business Agent
G.M. Capital Partners, Ltd.
P.O. Box 231
Port Coquitlam, B.C.
V3C 3V7 Canada
If to EMSG:
Mr. Kenneth Marks
6638 Old Wake Forest Road
Raleigh, NC
27604
13. CHOICE OF LAW
The validity and interpretation of this Agreement shall be governed by the laws
of the State of North Carolina, without giving effect to the State of North
Carolina's choice of law principle and all actions arising under this Agreement
or arising out of the operative facts represented by services performed
pursuant to this Agreement shall be resolved in the courts of the State of North
Carolina.
14. HEADINGS
The headings are for informational purposes only and shall not constitute a part
of this Agreement.
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<PAGE>
15. NO WAIVER OF BREACH
Waiver of any one breach of the provisions of this Agreement shall not be deemed
a waiver of any other breach of the same or any other provision of this
Agreement.
AGREED AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual understanding
by signing and returning the copy of this Agreement provided for that purpose.
Electronic Manufacturing Services Group, Inc. G.M. Capital Partners, Ltd
Kenneth Marks, President J.A. Michie
North America Business Agent
- --------------------------------------------- ----------------------------
Date:________________________________________ Date:_______________________
<PAGE>
Amendment No. 1
to Merger Agreement
[FOOTNOTES AND PARENTHETICAL INFORMATION ARE FOR INFORMATIONAL PURPOSES
ONLY AND WILL NOT CONSTITUTE PART OF THE ACTUAL OPTION AGREEMENTS]
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made this ____ day of ___________________,
1996, by and between Electronic Manufacturing Services Group, Inc., a
corporation formed under the laws of the State of Delaware ("EMSG"), and
________________, a citizen and resident of the State of __________________,
(the "Optionee").
WITNESSETH:
WHEREAS, the Optionee has an option to purchase shares of the common stock
of Kenmar Business Groups, Inc. ("Kenmar") pursuant to Kenmar's Nonqualified
Stock Option Plan (the "Kenmar Option"); and
WHEREAS, pursuant to the terms of the Merger Agreement by and among EMSG
(which has changed its name from "J.A. Industries, Inc."), J.A. Industries of
North Carolina, Inc., a North Carolina corporation ("Acquisition"), and Kenmar
dated as of March 1, 1996 (the "Merger Agreement"), the Kenmar Option will be
cancelled and replaced with a substitute corresponding option to purchase
shares of the $.0025 par value common stock of EMSG pursuant to the provisions
of the "J.A. Industries, Inc. 1993 Employee Stock Option Plan" (the "Plan")
effective as of the consummation of the merger contemplated by the Merger
Agreement (the "Merger").
NOW, THEREFORE, in consideration of the premises contained herein and in
the Plan, it is agreed as follows:
(1) Cancellation of Kenmar Option and Grant of EMSG Option. Effective
as of the consummation of the Merger:
(a) The Kenmar Option is cancelled in all respects, and
(b) subject to the terms and conditions contained herein and
in the Plan, EMSG hereby grants the Optionee the right,
privilege and option (the "Option") to purchase
___________________ (______)1 shares of the $.0025 par
value common stock of EMSG at a price of _________________
Dollars ($______)2 per share.
(2) Term and Vesting of Option. The term of the Option commences
on the date hereof and, unless sooner terminated as set forth below or in the
Plan, terminates on _____________________ [SUPPLY THE DATE DETERMINED PURSUANT
TO SECTION 5 OF THE KENMAR OPTION AGREEMENT] (which date shall be no more
than ten (10) years from the date the Option is granted) (the "Term") and,
subject to the terms and provisions hereof and the Plan, the Option shall
be fully vested and immediately
___________________
1 The number of shares shall be determined by multiplying the number
of shares of Kenmar stock subject to the Kenmar Option by the Exchange
Ratio, as defined in the Merger Agreement (41 shares of JAI stock for each
share of Kenmar stock). Fractional shares shall be eliminated.
2 The price per share shall be determined by dividing the exercise
price per share of the Kenmar common stock under the Kenmar Option by the
Exchange Ratio.
<PAGE>
exercisable. Subject to the foregoing, the Option may be exercised in whole or
in part with respect to all or any portion of the shares to which it relates.
(3) Method of Exercise. The Option shall be exercised by the
transmittal of written notice thereof to EMSG at its principal place of
business. The notice shall include the Optionee's designation of the
number of shares to be purchased and the Optionee's check in payment of
the purchase price. Upon receipt of such notice and negotiation of said
check. EMSG shall deliver to the Optionee a certificate representing the
shares purchased, provided that if any law or regulation requires EMSG to take
any action with respect to the shares specified in such notice before the
issuance thereof, the date of delivery of the shares shall be extended for the
necessary period.
(4) Plan; Restrictions. In all respects this Agreement and the Option
granted herein shall be subject to the terms and provisions of the Plan which
is attached hereto as Schedule A and incorporated herein by reference.
Accordingly, the rights of the Optionee under this Agreement and the shares of
common stock of EMSG which the Optionee may purchase hereunder are subject to
certain restrictions as set forth in the Plan. In addition, the Optionee's
right and ability of sell shares of EMSG common stock that the Optionee may
purchase pursuant to the Option shall be restricted as follows: (i) during
the ninety (90)-day period immediately following the Effective Time (as defined
in the Merger Agreement), the Optionee shall not sell any shares of EMSG common
stock purchased pursuant to the Option; and (ii) during any three month period,
the Optionee shall not sell more than one-eighth (1/8) of the total number of
shares purchasable pursuant to the Option.
(5) Rights Prior to Exercise of Option. The Optionee shall have no rights
as a stockholder with respect to the shares of stock subject to the Option
until the exercise of his rights hereunder and the issuance and delivery to
Optionee of a certificate or certificates evidencing such shares.
(6) Assignment. The Option shall not be transferable other than by will
or the laws of descent and distribution, and the Option may be exercised,
during the lifetime of the Optionee, only by the Optionee. More particularly,
(but without limiting the generality of the foregoing), the Option, may not
be assigned, transferred (except as provided above), pledged or hypothecated
in any way, shall not be assignable by operation of law and shall not be
subject to execution, attachment or similar processes. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, and the levy of any execution, attachment or similar
process upon the Option shall be null and void and without effect.
(7) Applicable Laws. The validity, construction, interpretation and
enforceability of this Agreement and the capacity of the parties shall be
determined and governed by the laws of the State of North Carolina.
(8) Severability. The provisions of this Agreement are severable and if
any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provision to the extent enforceable in any jurisdiction, shall
nevertheless be binding and enforceable.
(9) Waiver. The waiver by EMSG of a breach of any provision of this
Agreement by Optionee shall not operate or be construed as a waiver of any
subsequent breach by Optionee.
(10) Binding Effect. The provisions of this Agreement shall be binding
upon the parties hereto, their successors and assigns, including, without
limitation, the estate of the Optionee and the executors,
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<PAGE>
administrators or trustees of such estate and any receivers, trustee in
bankruptcy or representative of the creditors of the Optionee.
(11) Construction. This Agreement is subject to and shall be construed
in accordance with the Plan, the terms of which are explicitly made applicable
hereto. Unless otherwise defined herein, capitalized terms in this Agreement
shall have the same definitions as set forth in the Plan. In the event of
any conflict between the provisions hereof and those of the Plan, the
provisions of the Plan shall govern.
THIS STOCK OPTION AGREEMENT is hereby confirmed and executed as of this
______ day of ____________________, 1996.
ELECTRONIC MANUFACTURING SERVICES
GROUP, INC.
ATTEST:
______________________________ By: ____________________________
Secretary Title: ____________________________
[Corporate Seal}
OPTIONEE:
________________________________(SEAL)
Name:
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<PAGE>
EXHIBIT C
FORM OF OPTION AGREEMENT
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT (the "Agreement") is made and dated as of
___________________, 1996, by and among KENMAR BUSINESS GROUPS, INC., a North
Carolina corporation ("Kenmar"), Electronic Manufacturing Services Group, Inc.,
a Delaware corporation ("EMSG"), J.A. Industries of North Carolina, Inc., a
North Carolina Corporation ("Acquisition"), and the Representative (as defined
below).
WITNESSETH:
WHEREAS, Kenmar, EMSG (which has changed its name from "J.A.
Industries, Inc.") and Acquisition entered into a Merger Agreement dated as of
March 1, 1996 (the "Merger Agreement") providing for the merger of Acquisition
with and into Kenmar;
WHEREAS, pursuant to the Merger Agreement, EMSG and Acquisition have
made certain representations, warranties and covenants for the benefit of Kenmar
and the Stockholders (as defined in the Merger Agreement) as provided therein;
WHEREAS, pursuant to the Merger Agreement, Kenmar, EMSG, and
Acquisition have agreed that EMSG's and Acquisition's representations and
warranties pursuant to the Merger Agreement shall survive the consummation of
the transactions contemplated by the Merger Agreement;
WHEREAS, Section 1.2 of the Merger Agreement provides that EMSG shall
grant the Representative an option to purchase Seven Hundred Fifty Thousand
(750,000) shares of EMSG's Common Stock for One Dollar ($1.00) upon the
occurrence of any breach of any representation, warranty, covenant or other
obligation of EMSG or Acquisition contained in the Merger Agreement;
WHEREAS, Section 1.2 of the Merger Agreement provides that upon
exercise of such option, the Representative shall distribute such shares to the
Stockholders pursuant to the terms of this Agreement; and
WHEREAS, the Representative is willing to act in the capacity of
Representative hereunder subject to, and upon the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises, covenants and
agreements set forth in this Agreement and of other good and valuable
consideration, the receipt and legal sufficiency of which they hereby
acknowledge, and intending to be legally bound hereby, and as an inducement for
the execution and delivery of the Merger Agreement, Kenmar, EMSG, Acquisition,
and the Representative hereby agree as follows:
1. Grant of Option. EMSG hereby grants to the Representative on behalf
of the Stockholders, an irrevocable option (the "Option") to purchase Seven
Hundred Fifty Thousand (750,000) shares of EMSG's Common Stock (the "Option
Shares") at the purchase price set forth below.
2. Exercise of Option. The Option may be exercised by the
Representative upon the occurrence of any breach of any representation,
warranty, covenant, or other obligation of EMSG or Acquisition under the Merger
Agreement, as more fully described in this Section 2.
(a) Notice; Closing. If at any time the Representative shall
elect, in its judgment, to assert that EMSG or Acquisition has breached any
representation, warranty or covenant made by either of such parties in the
Merger Agreement and, as a result thereof, to exercise the Option, the
Representative shall
<PAGE>
give EMSG notice in writing of such breach and of the exercise of the Option
(the "Notice"). Such notice shall specify a date, which date shall not be less
than twenty (20) days from the date such notice is given, for the closing of the
purchase of the Option Shares (the "Option Closing"). Such Option Closing shall
take place at 10:00 A.M. local time, on the date specified in such notice at the
offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500
First Union Capital Center, Raleigh, North Carolina, or at such other place and
time as the parties may mutually agree. At the Option Closing, EMSG will deliver
to the Representative certificates representing the Option Shares. The
certificates shall be issued in the names of the Stockholders, and in the number
of Option Shares to be issued in respect of each Stockholder as set forth in
Exhibit A hereto.
(b) Disputed Assertion of Breach. If, within twenty (20) days
after the Notice is given by the Representative to EMSG under Section 2(a)
above, EMSG shall notify the Representative, in writing, that EMSG disputes and
denies the asserted breach, then EMSG and the Representative shall use their
respective reasonable best efforts to effect a settlement and compromise of such
dispute prior to the date set forth in the Notice for the Option Closing (or
prior to such later date upon which the parties may, but are not obligated to,
agree). Any such settlement and compromise shall be set forth in writing by EMSG
and the Representative, and the Option may be exercised, if at all, in whole or
in part in accordance with such settlement and compromise.
(c) Arbitration to Resolve Disputed Assertion of Breach. If
EMSG and the Representative are unable to settle and compromise any disputed
assertion of a breach, the Option Closing shall take place on the date set forth
in the Notice (or on such later date upon which the parties may, but are not
obligated to, agree). The dispute shall thereafter be submitted by EMSG to
binding arbitration pursuant to Section 8 of this Agreement. The Representative
shall hold the Option Shares, and shall not distribute them to the Stockholders
or to EMSG, pending the determination of the arbitrator or arbitrators, as the
case may be. If the arbitrator(s) determine that a breach of any representation,
warranty, covenant or other obligation of EMSG or Acquisition contained in the
Merger Agreement has occurred, then promptly after such determination, the
Representative shall distribute the Option Shares to the Stockholders as
provided in Section 6 of this Agreement. If the arbitrator(s) determine that no
breach of any representation, warranty, covenant or other obligation of EMSG or
Acquisition contained in the Merger Agreement has occurred, then the
Representative shall return the Option Shares to EMSG.
3. Purchase Price. At the Option Closing, the Representative shall
purchase the Option Shares from EMSG by delivering as consideration therefor a
total cash payment of One Dollar ($1.00) for all of the Option Shares.
4. Designation of Representative. Kenmar, on behalf of itself and the
Stockholders, hereby irrevocably constitutes and appoints Kenneth H. Marks as
Kenmar's and the Stockholders' true and lawful agent and attorney-in-fact (the
"Representative") with respect to all matters arising in connection with this
Agreement, including but not limited to the power and authority on behalf of
such Stockholders (other than in his own right) to do any one or all of the
following:
(a) enter into this Agreement and accept the grant of the
Option;
(b) exercise the Option, or elect not to exercise the Option
after it becomes exercisable, in the Representative's reasonable judgment;
(c) settle or compromise any disputed assertion of a breach,
as set forth in Section 2(b) of this Agreement;
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<PAGE>
(d) give any written notices or consents and seek any
declaratory judgments, damages or other appropriate relief from a court or other
tribunal that the Representative may consider necessary or appropriate;
(e) make, execute and deliver such amendments of and
supplements to this Agreement or any other agreements, instruments or documents
relating hereto that the Representative may consider necessary or appropriate
and not materially adverse to the Stockholders' interests hereunder, such
authority to be conclusively evidenced by the execution and delivery thereof;
and otherwise
(f) take all actions and do all things, including but not
limited to the execution and delivery of all documents necessary or proper,
required, contemplated or deemed advisable by the Representative, and generally
to act for and in the name of each such Stockholder with respect to this
Agreement.
For purposes of this Agreement, the term "Representative" shall include
any of Kenneth H. Marks' successors, heirs, beneficiaries and assigns.
5. Rights and Liability of the Representative.
(a) The Representative may resign as Representative hereunder
at any time without liability upon giving notice to EMSG. In the event that the
Representative shall resign or otherwise cease to act as the Representative,
EMSG shall provide written notice of such resignation to the Stockholders, and
the Stockholders may proceed to select a successor Representative to act
hereunder.
(b) The Representative shall have no liability with respect to
any acts or omissions under this Agreement, except with respect to the
Representative's gross negligence or willful misconduct. The Representative may
act in reliance upon the advice of counsel in reference to any matter in
connection with this Agreement and shall not incur any liability for any action
taken in good faith in accordance with such advice. EMSG and Kenmar shall
jointly and severally indemnify the Representative from and against any and all
damages, losses, demands, claims, costs, liabilities, judgments, deficiencies
and expenses (including reasonable attorneys' fees) incurred in connection with
the Representative's acts or omissions under this Agreement or by virtue of
serving in his capacity as the Representative, except to the extent resulting
from the Representative's gross negligence or willful misconduct.
6. Distribution of Option Shares. Except as set forth in Section 2(c)
above, as soon as reasonably practicable after the Option Closing, the
Representative shall distribute the Option Shares to the Stockholders.
7. Adjustments. If at any time the outstanding shares of EMSG Common
Stock are changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment or if a stock dividend thereon is declared,
then the number of shares of EMSG Common Stock subject to the Option shall be
appropriately adjusted (the purchase price for the Option Shares shall remain
fixed at One Dollar ($1.00) and no adjustment thereof shall be made).
8. Arbitration. Any unresolved dispute under this Agreement with
respect to any matter shall be submitted to and settled by binding arbitration
in accordance with the Commercial Rules, existing at the date thereof, of the
American Arbitration Association. The dispute shall be submitted to one
arbitrator agreed to by EMSG and the Representative or, if EMSG and the
Representative cannot agree on one arbitrator, by three arbitrators selected in
accordance with said Rules, and shall be heard in Raleigh, North Carolina. Each
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<PAGE>
arbitrator must be experienced in the subject matter in dispute. The costs and
expenses of the arbitration (including without limitation attorneys' fees) shall
be paid by EMSG, in the event EMSG is the non-prevailing party in such
arbitration, and Kenmar, in the event the Representative is the non-prevailing
party in such arbitration.
9. Successors and Assigns. This Agreement shall be binding on Kenmar,
EMSG, Acquisition, and the Representative and their respective successors and
assigns, whether so expressed or not. The parties hereto intend and agree that
the Stockholders shall be third party beneficiaries of this Agreement.
10. Waiver of Consent. No failure or delay on the part of any party
hereto in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the parties hereunder are cumulative
and not exclusive of any rights or remedies which they would otherwise have.
Without limiting the generality of the foregoing, the parties agree that the
rights of Kenmar and the Representative (as representative of the Stockholders)
under this Agreement shall be in addition to, and shall in no way limit,
Kenmar's rights against EMSG for breach by EMSG or Acquisition of any
representation, warranty, covenant or other obligation of EMSG or Acquisition
under the Merger Agreement or otherwise under applicable law. No modification or
waiver of any provision of this Agreement, nor consent to any departure by any
party therefrom, shall in any event be effective unless the same shall be in
writing, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on any
party in any case shall entitle such party to any other or further notice or
demand in similar or other circumstances.
11. Captions. The Article and Section captions used herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12. Notices. Any notice or other communication required or
permitted hereunder shall be sufficiently given if delivered in person or sent
by telex, telecopy or by registered or certified mail or by recognized overnight
courier, postage prepaid, addressed as follows:
If to EMSG or Acquisition, to:
Electronic Manufacturing Services Group, Inc.
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
Attention: Kenneth H. Marks
with a copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
Post Office Box 2611
Raleigh, North Carolina 27602-2611
Attention: Gerald F. Roach, Esq.
4
<PAGE>
if to Kenmar or the Representative, to:
Kenneth H. Marks
6638 Old Wake Forest Road
Raleigh, North Carolina 27604
with copy to:
Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
Post Office Box 2611
Raleigh, North Carolina 27602-2611
Attention: Gerald F. Roach, Esq.
and such notice or communication shall be deemed to have been given as of the
date so delivered, sent by telecopier, telex or mailed.
13. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
14. Governing Law. This Agreement shall be governed by the laws of the
State of North Carolina (regardless of the laws that might be applicable under
principles of conflicts of law) as to all matters, including but not limited to
matters of validity, construction, effect and performance.
15. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
16. Capitalized Terms. Any capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
IN WITNESS WHEREOF, Kenmar, EMSG, and Acquisition have caused their
corporate names to be hereunto subscribed by their respective officers thereunto
duly authorized, and the Representative has executed this Agreement, all as of
the day and year first above written.
KENMAR BUSINESS GROUPS, INC.
By:
Name:
Title:
[Additional signatures appear on next page.]
5
<PAGE>
ELECTRONIC MANUFACTURING SERVICES
GROUP, INC.
By:
Name:
Title:
J.A. INDUSTRIES OF NORTH CAROLINA, INC.
By:
Name:
Title:
REPRESENTATIVE:
Kenneth L. Marks
6
<PAGE>
EXHIBIT D
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
J.A. INDUSTRIES, INC.
The undersigned corporation, in order to amend its Certificate of
Incorporation, hereby certifies as follows:
FIRST: The name of the corporation is:
J.A. INDUSTRIES, INC.
SECOND: The corporation hereby amends its Certificate of Incorporation
as follows:
(a) Paragraph FIRST of the Certificate of Incorporation, relating to the
corporate title of the corporation, is hereby amended to read as follows:
FIRST: The name of the corporation is
ELECTRONIC MANUFACTURING SERVICES GROUP, INC.
(b) Paragraph Fourth of the Certificate of Incorporation, relating to
authorized shares, is hereby amended to add the following paragraph:
"At the effective time of this amendment of the Certificate of Incorporation
and without further action on the part of the corporation or the holders of
its stock, each share of Common Stock of the corporation outstanding or held
in the treasury immediately prior thereto shall be changed and converted
into 0.25 fully paid and nonassessable shares of Common Stock of the
Corporation, and at such time each holder of record of Common Stock shall,
without further action, be and become the holder of 0.25 share of Common
Stock for each share of Common Stock held of record immediately prior thereto.
<PAGE>
In lieu of any fractional shares to which the holder of Common Stock would
otherwise be entitled, the corporation shall pay cash equal to such fraction
multiplied by the fair market value of one share of Common Stock as
determined by the Board of Directors of the corporation."
THIRD: The amendment effected herein was authorized by the affirmative vote
of the holders of a majority of the outstanding shares entitled to vote
thereon at a meeting of shareholders pursuant to Sections 222 and 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, we hereunto sign our names and affirm that the statements
made herein are true under the penalties of perjury, this day of
1996.
J.A. INDUSTRIES, INC.
/s/ KENNETH L. MARKS
Kenneth L. Marks
<PAGE>
Exhibit E
<PAGE>
J.A. INDUSTRIES, INC./KENMAR BUSINESS GROUPS, INC.
INDEX TO FINANCIAL STATEMENTS
J.A.- Pro Forma Consoldiated Financial
Statements-Unaudited
Balance Sheet as of August 31, 1995 F-1
Statement of Operations for the year
ended August 31, 1995 F-2
Statement of Operations for the six
months ended February 29, 1996 F-3
J.A.- Financial Statements
Report of Independent Auditors F-4
Balance Sheets as of June 30, 1995 and 1994 F-5/6
Statements of Operations for the years
ended June 30, 1995 and 1994 F-7
Statements of Stockholder Equity for the
years ended June 30, 1995 and 1994 F-8
Statements of Cash Flows for the years
ended June 30, 1995 and 1994 F-9
Notes to Financial Statements F-10-F-20
J.A.- Financial Statements (Unaudited)
Balance Sheets as of December 31, 1995
and 1996 F-21/22
Statements of Operations for six months
ended December 31, 1995 and 1994 F-23/24
Statement of Changes in Financial Position
for six months ended December 31, 1995
and 1994 F-25
Statement of Changes in Stockholder's Equity
for six months ended December 31, 1995 and
June 30, 1995 F-26
Notes to Financial Statements F-27-F-31
Kenmar - Financial Statements (Audited)
Report of Independent Auditors F-32
Balance Sheets as of August 31, 1995 and 1994 F-33
Statements of Income (Loss) years ended
August 31, 1995 and 1994 F-34
Statement of Stockholder's Deficit years
ended August 31, 1995 and 1994 F-35
<PAGE>
Statement of Cash Flows years ended August
31, 1995 and 1994 F-36/37
Notes to Financial Statements F-38-F-48
Kenmar - Financial Statements (Unaudited)
Balance Sheets as of February 29, 1996 and 1995 F-49/50
Statements of Income, six months ended February
29, 1996 and 1995 F-51
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
August 31, 1995
The following represents the unaudited pro forma condensed consolidated balance
sheet for August 31, 1995, assuming the following transactions were consummated
on August 31, 1995:
(1) Record disposal of Hutronix, Inc.
(2) Issuance of stock through private placements to meet conditions of
the Agreement
(3) Record debt reduction on Kenmar Business Group, Inc.
(4) Merger of Kenmar Business Group, Inc. for issuance of approximately
2,700,000 shares of common stock of J.A. Industries, Inc.
<TABLE>
<CAPTION>
J.A.
Industries, Kenmar
Inc. and Business
Subsidiaries Group, Inc. Pro forma Pro forma
June 30, August 31, Merger Consolidated
ASSETS 1995 1995 Adjustments Amounts
---- ---------- ----------- -------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 45,274 $1,632,630 (1) $ (44,821) $2,313,083
(2) 680,000
Other current assets 431,319 710,880 (1) (431,246) 710,953
---------- ---------- ----------
Total Current Assets 476,593 2,343,510 3,024,036
---------- ---------- ----------
Real Estate Held for Sale 488,750 (1) (488,750) -
Property and Equipment, Net 53,330 590,307 (1) (53,330) 590,307
Other Assets 2,050 135,898 137,948
---------- ---------- ----------
$1,020,723 $3,069,715 $3,752,291
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 626,752 $ 57,562 (1) (626,752) 57,562
Accounts payable 165,625 2,206,535 (1) (110,116) 487,263
- - (2) (50,000) -
- - (3) (1,724,781) -
Accrued expenses 250,803 425,956 (1) (225,803) 450,956
---------- ---------- ----------
Total Current Liabilities 1,043,180 2,690,053 995,781
---------- ---------- ----------
Long-term debt 18,046 636,193 (1) (18,046) 636,193
Preferred stock - 729,844 - 729,844
---------- ---------- ----------
18,046 1,366,037 1,366,037
---------- ---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 18,879 64,714 (2) 8,579 34,294
- - (4) (57,878) -
Additional paid-in capital 4,993,915 99,667 (2) 942,804 6,668,289
- - (4) 631,903 -
Accumulated deficit (4,904,793) (1,150,756)(1) (73,196) (5,163,606)
- - (2) (185,617) -
- - (3) 1,724,781 -
- - (4) (574,025) -
Stock subscription receivable (144,000) - - (144,000)
Cumulative translation adjustment (4,504) - - (4,504)
---------- ---------- ----------
(40,503) (986,375) 1,390,473
---------- ---------- ----------
Total Liabilities and Stockholders'
Equity $1,020,723 $3,069,715 $3,752,291
========== ========== ==========
</TABLE>
J.A. Industries, Inc.'s balance sheet was prepared using the Company's
June 30, 1995 year end. Kenmar Business Group, Inc.'s balance sheet was
prepared using their August 31, 1995 balance sheet. J.A. Industries,
Inc. did not enter into any significant transactions subsequent to their
June 30, 1995 fiscal year end that would materially distort the
financial position of the pro forma combined company as of August 31,
1995.
F-1
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED OPERATING STATEMENT
For The Year Ended August 31, 1995
The following represents the unaudited pro forma condensed consolidated
operating statement for August 31, 1995, assuming the following transactions
were consummated on August 31, 1994:
(1) Record disposal of Hutronix, Inc.
(2) Issuance of stock through private placements to meet conditions of the
Agreement
(3) Record debt reduction on Kenmar Business Group, Inc.
(4) Merger of Kenmar Business Group, Inc. for issuance of approximately
2,700,000 shares of common stock of J.A. Industries, Inc.
<TABLE>
<CAPTION>
Kenmar
J.A. Business
Industries, Group, Inc.
Inc. For The For The
Year Ended Year Ended. Pro forma Pro forma
June 30, August 31, Merger Consolidated
1995 (a,b) 1995 (b) Adjustments Amounts
---- ---- ----------- -------
<S> <C> <C> <C> <C>
Revenue $ - $15,565,662 $15,565,662
Cost of Sales - 13,883,090 13,883,090
---------- ----------- -----------
Gross Profit - 1,682,572 1,682,572
General, Selling and
Administrative 767,768 1,233,587 (2) $ 185,617 2,186,972
---------- ----------- -----------
Operating Income (Loss) (767,768) 448,985 (504,400)
Other Income (Expense) (59,484) (267,487)(1) (73,196) 1,324,614
(3) 1,724,781
---------- ----------- -----------
Income (Loss) before Income Taxes (827,252) 181,498 820,214
Income Taxes - - -
---------- ----------- -----------
Net Income (827,252) 181,498 820,214
Accretion of Preferred Stock - (54,006) (54,006)
Undeclared Dividends on
Preferred Stock - (49,630) (49,630)
---------- ----------- -----------
Net Income (Loss) Applicable
to Common Shareholders $ (827,252) $ 77,862 $ 716,578
========== =========== ===========
Net Income (Loss) per Share $ (.12) $ 1.26 $ .16
========== =========== ===========
Weighted Average Shares Outstanding 6,724,440 61,999 4,415,473
========== =========== ===========
</TABLE>
(a) Assumes the disposal of the operating subsidiaries of J.A. Industries, Inc.
(b) J.A. Industries, Inc.'s income statement was prepared using the
Company's June 30, 1995 year end. Kenmar Business Group, Inc.'s income
statement was prepared using their August 31, 1995 year end. J.A.
Industries, Inc. did not enter into any significant transactions
subsequent to their June 30, 1995 fiscal year end that would materially
distort the operating results of the pro forma combined company for the
year ended August 31, 1995.
F-2
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED OPERATING STATEMENT
For The Six Month Period Ending February 29, 1996
The following represents the unaudited pro forma condensed consolidated
operating statement for February 29, 1996, assuming the following transactions
were consummated on August 31, 1995:
(1) Record disposal of Hutronix, Inc.
(2) Issuance of stock through private placements to meet conditions of the
Agreement
(3) Record debt reduction on Kenmar Business Group, Inc.
(4) Merger of Kenmar Business Group, Inc. for issuance of approximately
2,700,000 shares of common stock of J.A. Industries, Inc.
<TABLE>
<CAPTION>
J.A. Industries Kenmar
Inc. and Business
Subsidiaries Group, Inc.
For The For The
Eight Month Six Month
Period Ended Period Ended Pro forma Pro forma
February 29, February 29, Merger Consolidated
1996 1996 Adjustments Amounts
---- ---------- ----------- -------
<S> <C> <C> <C> <C>
Revenue $ - $1,354,383 $1,354,383
Cost of Sales - 1,373,793 1,373,793
---------- ---------- ----------
Gross Profit (Loss) - (19,410) (19,410)
General, Selling and
Administrative 610,586 397,350 1,007,936
---------- ---------- ----------
Operating Income (Loss) (610,586) (416,760) (1,027,346)
Other Income (Expense) - 1,707,710 1,707,710
---------- ---------- ----------
Income (Loss) before Income Taxes (610,586) 1,290,950 680,364
Income Taxes - - -
---------- ---------- ----------
Net Income (610,586) 1,290,950 680,364
Accretion of Preferred Stock - (29,285) (29,285)
Undeclared Dividends on
Preferred Stock - (12,408) (12,408)
---------- ---------- ----------
Net Income (Loss) Applicable
to Common Shareholders $ (610,586) $1,249,257 $ 638,671
========== ========== ==========
Net Income (Loss) per Share $ (0.08) $ 19.30 $ 0.13
========== ========== ==========
Weighted Average Shares Outstanding 7,696,310 64,714 4,925,009
========== ========== ==========
</TABLE>
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
J.A. Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,714,526, and a cash flow
deficit from operations of $133,297 during the year ended June 30, 1995, and as
of that date had a working capital deficiency of $566,587, and a net capital
deficiency of $40,503. Additionally, as of the date of the auditors' report, the
Company has sold subsidiaries which accounted for all of the operating
activities of the consolidated corporation. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(Signature of Semple & Cooper, P.L.C. appears here)
Certified Public Accountants
Phoenix, Arizona
November 20, 1995 (except for Note 18 as to which the date is May 12, 1996).
F-4
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 45,274 $ 6,679
Accounts receivable (Notes 1 and 9)
- trade 246,180 485,943
- other 73 18,363
Inventory (Notes 1, 4 and 9) 170,261 454,982
Prepaid expenses 14,805 27,338
---------- ----------
Total Current Assets 476,593 993,305
---------- ----------
Real Estate Held for Sale (Notes 6 and 9) 488,750 875,000
Property and Equipment, Net
(Notes 1, 5 and 9) 53,330 598,533
Investments (Note 7) - 22,075
Intangible Assets, Net (Notes 1 and 8) 2,050 127,532
---------- ----------
544,130 1,623,140
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable - current portion (Note 9) $ 590,986 $ 922,436
Loans payable - related parties (Note 10) 35,766 -
Accounts payable 165,625 776,474
Accrued expenses 250,753 -
Income taxes payable (Notes 1 and 12) 50 50
---------- ----------
Total Current Liabilities 1,043,180 1,698,960
---------- ----------
Notes Payable - Long-Term Portion (Note 9) 18,046 117,563
Loans Payable - Related Parties (Note 10) - 132,364
---------- ----------
18,046 249,927
---------- ----------
Commitments and Contingencies: (Note 11) - -
Stockholders' Equity (Deficit):
Common stock (Note 14) 18,879 16,234
Additional paid-in capital 4,993,915 3,849,152
Accumulated deficit (4,904,793) (3,190,267)
---------- ----------
108,001 675,119
Stock subscriptions receivable (144,000) -
Cumulative translation adjustment
(Note 1) (4,504) (7,561)
---------- ----------
(40,503) 667,558
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales $ 4,330,211 $ 4,042,940
Cost of Sales 3,618,347 3,674,688
----------- -----------
Gross Profit 711,864 368,252
----------- -----------
Selling and Marketing Expense - 134,163
General and Administrative Expense 1,593,838 1,256,765
Impairment of real estate held
for sale (Note 6) 386,250 444,941
Impairment of goodwill (Note 8) 115,890 -
----------- -----------
2,095,978 1,835,869
----------- -----------
Loss from Operations (1,384,114) (1,467,617)
----------- -----------
Other Income (Expense):
Interest income 952 373
Interest expense (72,868) (93,989)
Gain on foreign exchange translation - 7,960
Loss on sale of assets (Note 5) (59,726) -
Loss on sale of subsidiary (Note 3) (198,770) -
----------- -----------
(330,412) (85,656)
----------- -----------
Loss before Income Taxes (1,714,526) (1,553,273)
Income Tax Benefit - 65,973
----------- -----------
(1,714,526) (1,487,300)
Pre-acquisition Earnings of Hutronix, Inc. - (10,005)
----------- -----------
Net Loss $(1,714,526) $(1,497,305)
=========== ===========
Net Loss per Share $ (.25) $ (.28)
=========== ===========
Weighted Average Shares Outstanding 6,724,440 5,389,500
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Equity
Adjustment
Additional from Foreign Stock
Common Stock Paid-in Accumulated Currency Subscription
Shares Amount Capital Deficit Translation Receivable
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 4,107,129 $ 10,268 $ 1,800,027 $(1,692,962) $ - $ -
Issued for cash 993,950 2,485 1,005,578 - - -
Issued for equipment 600,000 1,500 52,148 - - -
Issued for shares of
Hutronix, Inc. 717,699 1,794 895,330 - - -
Issued for legal services 25,000 62 7,944 - - -
Issued to repay debt 50,000 125 88,125 - - -
Aggregate adjustment
resulting from translation
of financial statement
into U.S. dollars - - - - (7,561) -
Net loss for the year ended
June 30, 1994 - - - (1,497,305) - -
--------- ---------- ----------- ----------- ----------- -----------
Balance, June 30, 1994 6,493,778 16,234 3,849,152 (3,190,267) (7,561) -
Issued for cash 631,383 1,578 494,672 - - -
Issued for consulting fees 1,032,292 2,581 637,517 - - (144,000)
Issued to repay debt 50,000 125 51,982 - - -
Issued as compensation 12,600 32 12,569 - - -
Reverse equipment
purchase (600,000) (1,500) (52,148) - - -
Shares cancelled (68,450) (171) 171 - - -
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars - - - - 3,057 -
Net loss for the year
ended June 30, 1995 - - - (1,714,526) - -
--------- ---------- ----------- ----------- ----------- -----------
7,551,603 $ 18,879 $ 4,993,915 $(4,904,793) $ (4,504) $ (144,000)
========= ========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-8
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash Used by Operating Activities:
Net loss $(1,714,526) $(1,497,305)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 110,623 113,549
Loss on sale of fixed assets 59,726 -
Issuance of stock for services
and debt repayment 514,759 -
Impairment on real estate held
for sale 386,250 444,941
Impairment of goodwill 115,890 -
Loss on sale of subsidiary 198,770 -
Changes in Assets and Liabilities:
Accounts receivable
- trade 239,763 (350,711)
- other 18,290 -
Inventory 284,721 (324,732)
Prepaid expenses 12,533 (10,147)
Accounts payable (610,849) 662,081
Accrued expenses 250,753 -
Income taxes payable - 50
Equipment loans - 119,048
Purchase agreement - (133,287)
----------- -----------
Cash used by operations (133,297) (976,513)
----------- -----------
Investing Activities:
Proceeds from sale of fixed assets 244 -
Purchase of property and equipment (4,578) (1,713,705)
Disposal of license agreement - 50,000
Acquisition of intangible assets - (140,409)
Disposal (acquisition) of investment 21,875 (21,875)
----------- -----------
Cash provided (used) by investing activities 17,541 (1,825,989)
----------- -----------
Financing Activities:
Issuance of common stock 496,250 2,055,091
Loans from related parties 35,766 13,065
Proceeds from debt 72,288 753,722
Repayment of debt (423,079) -
Repayment of debt from related parties (22,370) -
----------- -----------
Cash provided by financing activities 158,855 2,821,878
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (4,504) (7,561)
----------- -----------
Net Change in Cash and Cash Equivalents 38,595 11,815
Cash and Cash Equivalents at Beginning of Year 6,679 (5,136)
----------- -----------
Cash and Cash Equivalents at End of Year $ 45,274 $ 6,679
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-9
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
J.A. Industries, Inc. is a Corporation organized under the laws of the
State of Delaware. The principal purpose of the Corporation is to act as
the holding company of its subsidiaries. Subsequent to the balance sheet
date, the Company disposed of its only remaining operating subsidiary
through a reversal of the acquisition (Note 3).
Pervasiveness 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.
Principles of Consolidation:
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation, and the
following wholly-owned subsidiaries:
J.A. Industries (Canada) Inc., a Canadian
corporation
Granite Marketing Corp., a Cayman Island
corporation
Hutronix, Inc., an Arizona corporation
QDS, de Mexico, S.A. de C.V., a Mexican
corporation and the 96% owned subsidiary
Hutronix de Mexico, S.A. de C.V., (a
subsidiary of Hutronix, Inc., which has
been inactive since August 17, 1982)
All significant intercompany balances and transactions have been
eliminated in consolidation.
As further described in Note 3, J.A. Industries (Canada) Inc. was sold
during the year ended June 30, 1995, and Hutronix, Inc. and QDS, de
Mexico, S.A. de C.V. were disposed of subsequent to the balance sheet
date through a reversal of the acquisition (Note 3).
F-10
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Cash and Cash Equivalents:
Cash and cash equivalents are considered to be all highly liquid
investments with an initial maturity of three (3) months or less.
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectable accounts receivable. At June 30, 1994, an allowance has
been provided for potentially uncollectible accounts receivable in the
amount of $30,803. At June 30, 1995, no allowance has been provided for
as management believes all accounts receivable to be collectible.
Inventory:
Raw materials are valued at the lower of cost or replacement cost. Work
in process and finished goods are valued at the lower of cost or net
realizable value. Cost for all inventory is determined on the first-in,
first-out method which, for work in process and finished goods, includes
the cost of material, direct labor and applied manufacturing overhead.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets, ranging from five to seven years. Maintenance and repairs that
neither materially add to the value of the property nor appreciably
prolong its life are charged to expense as incurred. Betterments or
renewals are capitalized when incurred.
Long-Lived and Intangible Assets:
Long-lived assets include office and manufacturing equipment and real
estate. Intangible assets include goodwill, incorporation costs, and
patent development costs, and are being amortized on the straight-line
method over their estimated useful lives as disclosed in Note 8.
Goodwill represents the excess of the cost of acquiring Hutronix, Inc.
over the fair value of the net assets at the date of acquisition. The
carrying value of the assets will be periodically reviewed by the
Company and impairments, if any, will be recognized when expected future
operating cash flows derived from the assets are less than their
carrying value.
F-11
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
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, in addition to the use of net operating losses. 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.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange
prevailing at the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of
the Corporation's foreign operations are deferred and
included as a separate component of stockholders' equity.
Loss per Share:
The loss per share calculation is based on the weighted average number
of shares outstanding during the year. Fully diluted loss per share has
not been presented because the effect of exercising the options
outstanding would be anti-dilutive.
F-12
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Business Combinations:
In 1994, the Company purchased all of the outstanding shares of
Hutronix, Inc. for common share consideration. The acquisition was
accounted for by the purchase method. The results of operations are
included in the accounts from the effective date of acquisition,
September 15, 1993.
Details of the purchase are as follows:
Fair market value of assets acquired:
Working capital deficiency $ (42,739)
Fixed assets 1,462,099
Other liabilities (69,814)
Long-term debt (581,189)
Goodwill 128,767
----------
$ 897,124
==========
Consideration given:
Common shares issued $ 897,124
==========
As further described in Note 3, the acquisition of Hutronix, Inc. and
QDS, de Mexico, S.A. de C.V. was reversed subsequent to the year ended
June 30, 1995.
3. Sale of Subsidiaries:
During the year ended June 30, 1995 and subsequent to year end, the
Company disposed of one operating subsidiary and entered into a plan to
reverse the purchase of another operating subsidiary. These two
subsidiaries comprised principally all of the operating activity of the
consolidated entity. The disposals are as follows:
J.A. Industries (Canada) Inc.:
On June 30, 1995, the Company sold all of the common stock of J.A.
Industries (Canada) Inc. for $73. The transaction resulted in a loss of
$198,770, which has been included in loss on sale of subsidiary for the
year ended June 30, 1995.
F-13
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Sale of Subsidiaries: (Continued)
Hutronix, Inc.:
On November 21, 1995, the Company entered into an agreement to reverse
the acquisition of Hutronix, Inc. and its Mexican manufacturing
subsidiary, QDS, de Mexico, S.A. de C.V. The Company returned all of the
common shares of Hutronix, Inc. in exchange for cancellation of a
buy/sell agreement for 262,500 common shares of J.A. Industries, Inc.
with the former principal stockholder of Hutronix, Inc. The Company
realized a loss on the subsequent disposition of Hutronix, Inc. of
approximately $70,000, which has not been included in the accompanying
consolidated statement of operations for the year ended June 30, 1995.
4. Inventory:
As of June 30, 1995 and 1994, inventory consists of the following:
1995 1994
---- ----
Raw materials $ 352,223 $ 532,435
Less: reserve for obsolescence (210,000) (190,000)
---------- ----------
142,223 342,435
Work in process 25,170 91,962
Finished goods 2,868 20,585
---------- ----------
$ 170,261 $ 454,982
========== ==========
5. Property and Equipment:
As of June 30, 1995 and 1994, property and equipment consist of the
following:
1995 1994
---- ----
Forklift $ - $ 10,049
Vehicles 13,121 14,046
Office equipment 46,382 53,834
Computers 152,361 147,778
Manufacturing equipment 277,230 576,051
Assets not-in-service - 232,520
---------- ----------
489,094 1,034,278
Less: accumulated depreciation (435,764) (435,745)
---------- ----------
$ 53,330 $ 598,533
========== ==========
F-14
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Property and Equipment: (Continued)
Assets not-in-service represents manufacturing equipment and production
molds purchased but not yet on location or in use.
These assets were purchased by way of an agreement with 488190 Alberta
Ltd. dated December 3, 1993. Consideration given in exchange for the
equipment was:
600,000 shares of J.A. Industries, Inc.;
$100,000 relocation fee payable upon relocation; and
$ 78,872 assumption of debt and chattel mortgage against the
equipment.
This transaction has been recorded as follows:
Shares issued $ 53,648
Debt assumed 78,872
Relocation fee 100,000
----------
Fair market value of the equipment $ 232,520
==========
Subsequent to June 30, 1995, the Company entered into an agreement to
reverse the equipment purchase agreement. The equipment was returned to
488190 Alberta Ltd., which returned the 600,000 common shares of J.A.
Industries, Inc. A loss on disposal of fixed assets of $59,823 was
recorded, which is made up of payments made by J.A. Industries, Inc.
against the chattel mortgage and expenses incurred in moving the
equipment.
6. Real Estate Held for Sale:
In January, 1994, Hutronix, Inc. ceased all manufacturing operations at
its Douglas, Arizona facility. As of June 30, 1995 and 1994, the Company
recorded real estate held for sale in the amounts of $488,750 and
$875,000, respectively. The Company recognized impairment losses for
June 30, 1995 and 1994 in the amounts of $386,250 and $444,941,
respectively. The losses represented management's best estimate of the
net realizable value of the property.
F-15
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investments:
On March 30, 1994, Granite Marketing Corp. entered into a licensing
agreement with Queensland Industries, Inc. Under the agreement,
Queensland Industries, Inc. was granted a license of certain patents to
manufacture, promote, market, sell and distribute industrial electrical
products. The license provides for an exclusive territory, including
Asia, Japan, Australia, Zimbabwe, Nambia, South Africa, and all nations
who are currently members of the European Economic Community. The
purchase price for the license was $10,000,000, with $2,500,000 payable
upon signing of the agreement and four (4) equal payments of $1,875,000
due 120, 210, 300 and 390 days from signing.
Wincanton Corporation, 100% stockholder of Queensland Industries, Inc.,
has agreed to guarantee the payment obligations of Queensland
Industries, Inc.
At June 30, 1994, the sale of this license was recorded at a nominal
$50,000. At June 30, 1994, the investment was recorded at $22,075. The
first two (2) installments were paid in the form of 875,000 shares of
Wincanton Corporation, which have been recorded at $0.0249 each, which
represents the net asset value per share of Wincanton Corporation at
June 30, 1994.
During 1995, Wincanton Corporation paid Granite Marketing Corp. $50,000
to cancel the licensing agreement. In addition, Granite Marketing Corp.
returned the 875,000 shares of Wincanton Corporation.
8. Intangible Assets:
Intangible assets at June 30, 1995 and 1994 are comprised of the
following:
1995 1994
---- ----
Goodwill amortized over ten years
(Note 2) $ - $ 128,767
Incorporation costs amortized over
five years 3,000 3,000
Patent pending amortized over five
years from final patent - 8,642
---------- ----------
3,000 140,409
Amortization (950) (12,877)
---------- ----------
$ 2,050 $ 127,532
========== ==========
During the year ended June 30, 1995, the Company recognized an
impairment of the valuation of goodwill in the amount of $115,890.
F-16
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable:
As of June 30, 1995 and 1994, notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona, due in quarterly installments
of $12,821, plus interest at 65% of prime (7.25% as of June 30, 1994),
due May, 2005; secured by a deed of trust on the real estate held for
sale, an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance and the assignment of a life insurance
policy owned by a related party, on the president of Hutronix, Inc. At
June 30, 1994, the Company was not in compliance with certain
restrictive covenants
contained in this note. $ 546,125 $ 576,908
Note payable to a vendor, due in monthly installments of $594, plus
interest at 8.5%, due September, 1994; secured by
equipment. - 1,883
Note payable to a supplier, due in
quarterly installments of $8,361 plus
interest at 6%; unsecured, due
March 15, 1995. - 25,084
Note payable to an employee in monthly installments of $2,500, plus
interest at 7%, due July, 1994; secured by the common stock of QDS, de
Mexico, S.A.
de C.V. - 5,000
Unsecured promissory note payable to a lender. The principal of $36,155
(CDN $50,000) plus accrued interest at 24% per annum is payable on
demand. The lender has stated that it is not her intention to demand
repayment of
the note before June 30, 1995. - 47,636
</TABLE>
F-17
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unsecured note payable to the Province
of British Columbia, Canada, due in
monthly payments of $1,808 (CDN $2,500)
plus interest at 6% per annum. The
principal balance is due July 1, 1995. - 91,619
Revolving line of credit for $250,000 with a bank. Credit line is
payable at $5,000 per month until October, 1994 when all principal and
accrued interest is due in full. The credit line accrues interest at
prime plus two percent; collateralized by accounts receivable,
inventory, property, plant and equipment,
and 2,025 shares of common stock. - 172,821
Equipment loan for the "assets not-in-
service" described in Note 5. Note was
due on demand with no stated interest
rate. - 119,048
8% note payable to ITT Cannon, monthly
installments of $1,500, including
principal and interest, due June, 1997;
unsecured. 33,907 -
8% note payable to Molloy, Jones & Donahue, P.C., monthly installments
of $1,381, including principal and interest,
due February, 1996; unsecured. 10,725 -
10% note payable to KPMG Peat Marwick,
L.L.P., due on demand; unsecured. 18,275 -
---------- ----------
609,032 1,039,999
Less: current portion (590,986) (922,436)
---------- ----------
$ 18,046 $ 117,563
========== ==========
</TABLE>
F-18
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
A schedule of future minimum principal payments due on the notes
payable, is as follows:
Year Ended
June 30, Amount
1996 $ 590,986
1997 18,046
----------
$ 609,032
==========
10. Related Party Transactions:
Loans Payable - Related Parties:
As of June 30, 1995 and 1994, loans payable - related parties consist of
the following:
1995 1994
---- ----
Loan payable to Alexander Michie,
balance due on demand with no
stated interest rate. $ 15,000 $ -
Loan payable to 391566 B.C., Ltd.,
balance due on demand with no stated
interest rate. 20,766 -
Loan payable to Alexander Michie.
The loan is unsecured and has no
terms of repayment. The loan has
a stated interest rate of prime
plus 2%. - 132,364
---------- ----------
35,766 132,364
Less: current portion (35,766) -
---------- ----------
$ - $ 132,364
========== ==========
F-19
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Related Party Transactions: (Continued)
Other Transactions:
The Company paid $25,200 in 1994 to a related party to maintain a life
insurance policy on the life of the president of Hutronix, Inc. Included
in accounts payable at June 30, 1994 is $10,346 due to the related
party.
The Company also paid a combined $46,800 to its president (a former
stockholder) under a salary and management fee commitment in the year
ended June 30, 1994. The commitment requires the Company to pay $6,000
per month and expires December 31, 1995.
Repayment of the mortgage from the Province of British Columbia has been
guaranteed by A. Michie, a stockholder.
11. Commitments and Contingencies:
Under the terms of various agreements, the Company has guaranteed
payment of $18,275 in accounting fees and the $546,125 mortgage on the
Douglas, Arizona plant owned by Hutronix, Inc. The reversal of the
Hutronix, Inc. purchase in November, 1995 included an indemnification on
the above guarantees. Should the other party fail to perform, additional
obligations could be asserted against the Company. The Company has been
unable to estimate any liability for potential payments as a guarantor
on the debt.
12. Income Taxes:
As of June 30, 1995, the components of the deferred income tax asset,
are as follows:
Deferred Tax Asset
Net operating loss carryforwards $ 498,000
Less: valuation allowance (498,000)
----------
Net deferred tax asset $ -
==========
F-20
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes: (Continued)
The valuation allowance for the deferred tax asset as of June 30, 1994
is $368,371. The net change in the total valuation allowance for the
year ended June 30, 1995 was an increase of $129,629.
At June 30, 1995, the Company has net operating loss carryforwards for
federal purposes, as follows:
Expiring June 30, Amount
2009 $ 540,000
2010 2,780,000
----------
$3,320,000
==========
For the years ended June 30, 1995 and 1994, the Company reported
provisions for income taxes in the amount of $50. The provisions relate
to state income taxes.
13. Significant Customers and Vendors:
Four (4) customers comprised approximately 91.1% of total sales for the
year ended June 30, 1995, and 54% of total accounts receivable at June
30, 1995.
Three (3) customers comprised approximately 68% of total sales for the
year ended June 30, 1994, and 70% of total accounts receivable at June
30, 1994.
Five (5) vendors provided approximately 44% of total raw materials
purchased during the year ended June 30, 1995.
Four (4) vendors provided approximately 52% of total raw materials
purchased during the year ended June 30, 1994.
14. Common Stock:
Common stock is comprised of $.0025 par value, 20,000,000 shares
authorized, 7,551,603 and 6,493,778 shares issued and outstanding as of
June 30, 1995 and 1994, respectively.
15. Management's Plan to Address Going Concern Considerations:
The management of the Company is in the process of attempting to secure
additional capital sources to acquire additional companies to fit their
corporate mission.
F-21
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Stock Option Plan:
Under its employee stock option plan, which authorizes the issuance of
up to 1,000,000 common shares with a par value of $0.0025 each, the
Company has issued and outstanding options to purchase 98,600 shares at
$2.00 each, and 520,000 shares at $1.10 each. These options expire on
December 31, 1999.
17. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended June 30, 1995, the Company recognized investing
and financing activities that affected assets, liabilities and equity,
but did not result in cash receipts or payments. These non-cash
activities are as follows:
The Company reversed an equipment purchase agreement
with C.C. Plastics. The Company recognized a loss of
$59,823 on the transaction due to payments on the debt
obligation, which were subsequently voided for return of
the equipment.
The Company issued 1,032,292 shares, with an average
price of $.62 per share, for payment of consulting
services. Additionally, the Company issued 12,600
shares, valued at $1 per share, to employees for
performance bonuses.
The Company issued 50,000 shares at $1.04 per share,
for payment of a debt obligation.
During the year ended June 30, 1994, the Company recognized investing and
financing activities that affected assets, liabilities and equity, but did not
result in cash receipts or payments. These non-cash activities are as follows:
The Company issued 600,000 shares to C.C. Plastic to
purchase equipment.
The Company issued 717,699 shares to acquire all of the
outstanding common stock of Hutronix, Inc.
The Company issued 25,000 shares as payment for legal
fees.
The Company issued 50,000 shares for payment of a debt
obligation.
F-22
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Statement of Cash Flows: (Continued)
Non-Cash Investing and Financing Activities: (Continued)
Cash paid for interest for the year ended June 30, 1994
was $155. For the year ended June 30, 1995, the Company
did not pay any income taxes.
18. Restatement of the Consolidated Financial Statements:
Management relied upon the advice of the American Institute of Certified
Public Accountants in the original preparation of the accompanying
consolidated financial statements. Their advice was to give retroactive
effect to the disposal of Hutronix, Inc., which was formally disposed of
under contract in November, 1995. Upon submission and review of the
United States Securities and Exchange Commission, it was their position
that retroactive treatment would not apply. As such, the consolidated
financial statements have been restated.
In addition, management had proposed a prior period adjustment for
approximately $65,000 of expenses paid by a third party on the Company's
behalf, which were expenses for the year ended June 30, 1994. Management
was unable to obtain the prior accountant's concurrence with the
adjustment, and determined that, due to immateriality, they would forego
the prior period adjustment.
As a consequence of restoring the balance sheet of Hutronix, Inc. as of
June 30, 1995, the Company recorded an impairment allowance for one
hundred percent of the remaining goodwill of approximately $128,000. In
addition, the original financial statements reported a misallocation on
the net loss on disposal of J.A. Industries (Canada), Inc. and Hutronix,
Inc. Both companies were disposed of at losses of approximately $200,000
and $70,000, respectively.
A summary of the changes and their effects, is as follows:
Net loss, as originally reported $(1,590,820)
Deferral of loss on disposition of Hutronix, Inc. 69,946
Impairment of goodwill of Hutronix, Inc. (128,000)
Reversal of prior period adjustment (65,652)
-----------
Restated net loss $(1,714,526)
===========
F-23
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial
statements give effect to the reverse acquisition by J.A. Industries,
Inc. of Kenmar Business Group, Inc., pursuant to the Agreement and Plan
of Merger between the parties, and is based on the estimates and
assumptions set forth herein and in the notes to such statements. This
pro forma information has been prepared utilizing the historical
financial statements and notes thereto, which are incorporated by
reference herein. The pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had
the purchase been effected on the dates indicated or of the results
which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the merger of Kenmar Business Group, Inc.. The pro forma
entries are described in the accompanying notes to the unaudited pro
forma condensed consolidated financial statements. The pro forma
unaudited condensed consolidated balance sheet assumes the merger took
place on the date of the balance sheet. The pro forma unaudited
condensed consolidated statements of operations assume the acquisition
took place on the first day of the period presented.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions that management deems
appropriate. The unaudited pro forma combined financial data presented
herein are not necessarily indicative of the results the Company would
have obtained had such events occurred at the beginning of the period,
as assumed, or of the future results of the Company. The pro forma
combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
Merger:
On March 1, 1996, J.A. Industries, Inc. entered into an Agreement and
Plan of Merger with Kenmar Business Group, Inc. Under the Agreement,
J.A. Industries, Inc. will issue a private placement of stock, the
proceeds of which will be used to pay outstanding liabilities of J.A.
Industries, Inc., provide at least $200,000 of cash, and a book value
of $200,000. J.A. Industries, Inc. will then perform a 1 for 4 reverse
stock split, and issue common stock of an amount equal to the
post-split number of shares outstanding to provide Kenmar Business
Group, Inc. a fifty percent ownership interest.
F-24
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Current
Cash $ --- $ 5,538
Accounts receivable
Trade --- 569,292
Other --- 59,437
Inventory (note 3) --- 453,274
Prepaid expenses and deposits --- 21,892
---------------- ----------------
--- 1,109,433
Real estate held for resale --- 875,000
Property and equipment (note 4) --- 514,836
Investments --- 22,075
Intangible assets (note 5) --- 120,978
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Liabilities
Current
Bank indebtedness $ 68 $ 105,000
Accounts payable 138,167 928,358
Due to shareholders --- 51,426
Share subscription deposits 123,383 ---
Equipment loans --- 119,048
Current portion of long-term debt (note 7) --- 155,270
---------------- ----------------
261,619 1,359,102
Loans from shareholders (note 6) 21,064 136,691
Long-term debt (note 7) - 551,264
---------------- ----------------
282,683 2,047,057
---------------- ----------------
Share Capital and Deficit
Capital stock:
Authorized:
20,000,000 common shares with a par value of $0.0025 per share
Issued:
7,906,603 shares (1994 - 6,817,034) 19,792 17,043
Additional paid-in capital 5,445,253 3,948,343
Accumulated deficit (5,611,973) (3,381,265)
Cumulative translation adjustment (4,504) 11,144
Treasury stock, at cost (131,250) ---
---------------- ----------------
(282,683) 595,265
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 2,417,585
Cost of sales --- 1,977,458
---------------- ----------------
Gross profit --- 440,127
Selling and marketing expenses --- 97,254
General and administrative expenses 745,565 479,497
---------------- ----------------
Loss from operations (745,565) (136,624)
Other income (expense) (74,591) (54,374)
---------------- ----------------
Consolidated net loss $ (820,156) $ (190,998)
---------------- ----------------
Loss per share $ 0.09 $ 0.03
---------------- ----------------
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the three months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 1,237,956
Cost of sales --- 963,690
---------------- ----------------
Gross profit --- 274,266
Selling and marketing expenses --- 71,820
General and administrative expenses 81,921 239,877
---------------- ----------------
Loss from operations (81,921) (37,431)
Other income (expense) (74,591) (48,676)
---------------- ----------------
Consolidated net loss $ (156,512) $ (86,107)
---------------- ----------------
Loss per share $ 0.01 $ 0.01
---------------- ----------------
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statement of Changes in Financial Position
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period $ (820,156) $ (190,998)
Items not affecting cash:
Amortization --- 80,543
Issuance of stock for services 476,251 ---
Loss on sale of subsidiary 74,591 ---
Changes in non-cash working capital 163,395 85,991
---------------- ----------------
(105,918) (24,464)
---------------- ----------------
Financing activities
Issue of common shares 120,000 100,000
Loan from shareholders (14,703) 4,327
Long-term debt --- (41,596)
---------------- ----------------
105,297 62,731
---------------- ----------------
----------------
Investing activities
Purchase of property and equipment --- (4,578)
Proceeds on sale of subsidiary 100 ---
---------------- ----------------
100 (4,578)
---------------- ----------------
Increase (decrease) in cash position (521) 33,689
Effect of currency translation on cash flow --- 32,991
Cash position beginning of period 453 (166,142)
---------------- ----------------
Cash position end of period $ (68) $ (99,462)
---------------- ----------------
Represented by:
Cash $ --- $ 5,538
Bank indebtedness (68) (105,000)
---------------- ----------------
$ (68) $ (99,462)
---------------- ----------------
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
For the six months ended December 31, 1995
and the year ended June 30, 1995
Capital Stock Additional Foreign Stock
Paid In Operating Currency Subscription Treasury
Shares Amount Capital Deficit Translation Receivable Stock
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 6,493,778 $ 16,234 $ 3,849,152 $ (3,255,919)$ (7,561)$ --- $ ---
Issued for cash 581,383 1,453 494,797 --- --- --- ---
Issued for consulting fees 582,292 1,456 524,642 --- --- (30,000) ---
Issued and unpaid 500,000 1,250 428,750 --- --- (430,000) ---
Issued to repay debt 50,000 125 51,982 --- --- --- ---
Issued as compensation 12,600 32 12,569 --- --- --- ---
Reverse equipment purchase (600,000) (1,500) (52,148) --- --- --- ---
Reverse Hutronix, Inc. acquisition --- --- --- --- --- --- (131,250)
Shares cancelled (68,450) (171) 171 --- --- --- ---
Aggregate adjustment resulting
from translation of financial
statements into U.S. dollars --- --- --- --- 3,057 --- ---
Net loss for the year ended
June 30, 1995 --- --- --- (2,155,220) --- --- ---
----------------------------------------------------------------------------------------------
Balance June 30, 1995 7,551,603 18,879 5,309,915 (5,411,139) (4,504) (460,000) (131,250)
Issued for cash 300,000 750 119,250 --- --- --- ---
Issued for consulting fees 55,000 163 16,088 --- --- --- ---
Services rendered as consideration
for shares --- --- --- --- --- 460,000 ---
Net loss for the six months ended
December 31, 1995 --- --- --- (820,156) --- --- ---
----------------------------------------------------------------------------------------------
Balance December 31, 1995 7,906,603 $ 19,792 $ 5,445,253 $ (6,231,295)$ (4,504)$ --- $ (131,250)
----------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation and the following
wholly owned subsidiaries:
J.A. Industries (Canada), Inc., a Canadian corporation.
Granite Marketing Corp., a Cayman Island corporation.
Hutronix, Inc. an Arizona corporation.
QDS, de Mexico, S.A. de C.V. a Mexican corporation.
and the 96% owned subsidiary, Hutronix de Mexico, S.A. de C.V. which
has been inactive since August 17, 1982.
All significant inter-company balances and transactions have been
eliminated on consolidation.
J.A. Industries (Canada), Inc. was disposed of during the year ended
June 30, 1995. Hutronix, Inc. and QDS de Mexico were disposed of
during the year ended June 30, 1996 subject to shareholder approval.
Translation of Foreign Currencies
Account balances and transactions denominated in foreign currencies have
been translated into U.S. funds as follows:
Assets and liabilities at the rates of exchange prevailing at the
balance sheet date; Revenue and expenses at average exchange rates for
the period in which the transaction occurred; Exchange gains and
losses arising from foreign currency transactions are included in the
determination of net earnings for the period.
2. Sale of Subsidiary
On November 23, 1995, the Company sold all of the common shares of
Hutronix, Inc. and on and on August 15, 1995 the Company sold all of the
common share of Granite Marketing Corporation for $100. The two
transaction resulted in a loss of $74,591, which has been included in
other expense for the period ended December 31, 1995. Granite Marketing
Corp. was inactive during the period.
F-27
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
3. Inventory
Inventory consists of: 1995 1994
Raw materials $ --- $ 531,321
Less: Reserve for obsolescence --- 190,000
----------------- -----------------
--- 341,321
Work-in-process --- 104,604
Finished goods --- 7,349
----------------- -----------------
$ --- $ 453,274
----------------- -----------------
4. Property and equipment
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost amortization 1995 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Land $ --- $ --- $ --- $ ---
Building --- --- --- ---
Forklift --- --- --- 7,410
Vehicles --- --- --- 81
Office equipment --- --- --- 46,264
Computer equipment --- --- --- 27,957
Manufacturing equipment --- --- --- 199,669
Leasehold improvements --- --- --- 935
Assets not-in-service --- --- --- 232,520
----------------- ----------------- ----------------- -----------------
$ --- $ --- $ --- $ 514,836
----------------- ----------------- ----------------- -----------------
</TABLE>
F-28
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
5. Intangible assets
Intangible assets comprise the following: 1995 1994
Goodwill $ --- $ 128,767
Incorporation costs --- 3,000
Patent costs --- 8,895
------------- -----------------
--- 140,662
Amortization --- 16,096
------------- -----------------
$ --- $ 124,566
------------- -----------------
6. Loans from shareholders
<TABLE>
<CAPTION>
Loans from shareholders comprise the following: 1995 1994
<S> <C> <C>
Loan payable to Alexander Michie, balance due on demand with
no stated interest rate. $ 20,000 $ ---
Loan payable to 391566 B.C. Ltd., balance due on demand with no
stated interest rate. 1,064 ---
Loan payable to Alexander Michie. The loan is unsecured and
has no terms of repayment. The loan has a stated interest rate
of prime plus 2%. --- 138,146
----------------- -----------------
$ 21,064 $ 138,146
----------------- -----------------
</TABLE>
F-29
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
7. Long-term debt
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona due in quarterly instalments of
$12,821, plus interest at 65% of prime (9.0% as of March 31, 1995), due
May 2005; secured by a deed of trust on the real estate held for sale, an
irrevocable letter of credit from a bank in the amount of the outstanding
note payable balance and the assignment of a life insurance policy owned
by a related party on the president of Hutronix, Inc. At March 31, 1995
the company was not in compliance with certain restrictive
covenants contained in this note. $ - $ 564,087
Note payable to a supplier due in quarterly instalments of
$8,361 plus interest at 6% unsecured, due March 15, 1995 --- 8,086
Promissory note payable to a lender. The principal of $36,155 (CDN
$50,000) plus accrued interest at 24% per annum is payable on demand. The
lender has stated that it is not her intention to
demand repayment of the note before March 31, 1996. --- 51,283
Mortgage payable, on manufacturing equipment, to the Province of British
Columbia, Canada due in monthly payments of $1,787 (CDN $2,500) plus
interest at 6% per annum. The principal balance
is due July 1, 1995. --- 83,078
----------------- -----------------
0 706,534
Less: Current portion --- 155,270
----------------- -----------------
$ 0 $ 551,264
----------------- -----------------
</TABLE>
8 Income tax
The Company has losses for income tax purposes which may be carried
forward and applied to reduce future income taxes. The deferred tax
benefit related to these losses has not been recorded in the accounts as
there is not virtual certainty of realization.
All of the income attributable to Granite Marketing Corp. (a Cayman Island
corporation) is reported as non-taxable.
F-30
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
9 Commitments and Contingencies
Under the terms of various agreements, the Company has guaranteed payment
of $18,275 in accounting fees and the $546,125 mortgage on the Douglas,
Arizona plant owned by Hutronix, Inc. The reversal of the Hutronix, Inc.
purchase included an idemnification on the above guarantees. Should the
other party fail to perform, the obligations could be asserted against the
Company.
10 Subsequent event
On January 26, 1996 the shareholders ratified the sale of Hutronix, Inc.
and QDS, de Mexico, S.A. de C.V.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kenman Business Groups, Inc.:
We have audited the accompanying consolidated balance sheets of Kenmar Business
Groups, Inc. as of August 31, 1995 and 1994, and the related consolidated
statements of income (loss), stockholders' deficit, and cash flows for the years
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 audits in accordance with generally accepted auditing
standards. Those standards required 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 1995 and 1994 financial statements referred to above present
fairly, in all material respects, the financial position of Kenmar Business
Groups, Inc. as of August 31, 1995 and 1994, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in note 1, the Company adopted Statement of Financial Accounting
Standards No. 121. "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of" on September 1, 1994.
October 20, 1995
F-32
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
August 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
<S> <C> <C>
Current assets
Cash and cash equivalents $1,632,620 74,478
Accounts receivable-trade, net of allowance
for doubtful accounts of $5,500 and $80,000
in 1995 and 1994, respectively (note 7) 273,062 2,139,121
Accounts receivable-other (note 15) 19,132 10,007
Inventories (notes 4 and 7) 331,540 1,377,292
Recoverable income taxes - 103,208
Prepaid expenses and other current assets 87,146 11,481
Total current assets 2,343,510 3,715,587
Property and equipment, net (notes 5, 8 and 9) 590,307 1,023,614
Other assets:
Deposits and other assets 38,398 163,220
Cost in excess of net assets of acquired business,
net of accumulated amortization of $220,537 and
45,537 in 1995 and 1994, eruptively (note 6) 97,500 272,500
Total other assets 135,898 435,720
Liabilities and Stockholders' Deficit $3,069,715 5,174,921
========== =========
Current liabilities:
Line of credit (note 7) - 1,396,953
Current maturities of long-term debt (note 8) 22,359 293,242
Current obligations under capital leases (note 9) 35,203 40,313
Accounts payable, trade 2,206,535 2,954,433
Other accrued liabilities 425,956 154,708
Total current liabilities 2,690,053 4,839,649
Long-term debt, less current maturities (notes 8 and 15) 560,021 657,034
Long--term obligations under capital leases (note 9) 76,172 122,784
Class A cumulative preferred stock, $50 par value;
with a preference in liquidation over the holders
of common stock of $50 plus accrued dividends;
authorized 30,000 shares, 9,926 shares in 1995
and 1994 issued and outstanding (note 11) 729,844 166,208
Stockholders' deficit (notes 12 and 15):
Preferred stock, undersignated; authorized
70,000 shares; no shares issued - -
Common Stock, $1 par value; authorized 100,000
shares, 64,714 and 58,197 shares issued and
outstanding in 1995 and 1994, respectively 64,714 58,197
Additional paid-in capital 99,667 203,303
Retained deficit (1,150,756) (1,332,254)
Commitments (notes 9 and 10) (986,375) (1,070,754)
$3,069,715 5,174,921
========== ==========
</TABLE>
See Notes to consolidated financial statements.
F-33
<PAGE>
KENMAR BUSINESS GROUPS, INC
Consolidated Statements of Income (Loss)
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Sales $15,565,662 22,927,597
Cost of goods sold 13,883,090 22,685,168
Gross profit 1,682,572 242,429
General, selling and administrative expenses 1,233,587 1,466,289
Operating income (loss) 448,985 (1,223,860)
Other income (expenses):
Interest income 6,321 7,669
Miscellaneous income - 10,868
Interest expenses (273,808) (252,332)
Other expenses, net (267,487) (233,795)
Income (loss) become income taxes 181,498 (1,457,655)
Income tax benefit (note 13) - 98,768
Net income 181,498 (1,358,887)
Accretion of preferred stock (54,006) (24,188)
Undeclared dividends on preferred stock (49,630) (48,645)
Net income (loss) applicable to common shareholders $ 77,862 (1,431,720)
Weighted average number of shares 61,999 56,988
Net income (loss) per common share and common share
equivalent (note 16) $ 1.26 (25.12)
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statements of Stockholders' Deficit
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Retained stockholders'
Shares Amount capital earnings deficit
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1993 56,586 $56,586 186,704 59,543 302,833
Dividends paid - - - (32,910) (32,910)
Issuance of common stock for cash, net
of $16,862 issuance costs 1,611 1,611 56,522 - 58,133
Accretion of preferred stock - - (24,188) - (24,188)
Undeclared dividends on preferred stock - - (15,735) - (15,735)
Net loss - - - (1,358,887) (1,358,887)
Balance at August 31, 1994 58,197 58,197 203,303 (1,332,254) (1,070,754)
Issuance of common stock of cash 6,517 6,517 - - 6,517
Accretion of preferred stock - - (54,006) - (54,006)
Undeclared dividends on preferred stock - - (49,630) - (49,630)
Net income - - - 181,498 181,498
Balance at August 31, 1995 64,714 $64,714 99,667 (1,150,756) (986,375)
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statements of Cash Flows
Years ended August 31 and 1995, 1994
<TABLE>
<CAPTION>
1995 1994
Cash flow from operating activities:
<S> <C> <C>
Net income (loss) $ 181,498 (1,358,887)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 422,787 236,925
Loss on disposal of property and equipment 30,657 5,932
Writedown of property and equipment 179,076 -
Provision (credit) for deferred income taxes - 2,200
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,866,059 (357,332)
Decrease (increase) in inventories 1,045,752 1,002,133
Decrease (increase) in recoverable income taxes 103,208 (102,208)
Decrease (increase) in prepaid expenses
and other current assets (75,665) 14,888
Increase in accounts receivable, other (9,125) (6,255)
Decrease (increase) in deposits and other assets 124,822 (19,223)
Increase (decrease) in accounts payable, trade (747,898) 376,532
Increase (decrease) in income taxes payable - (63,626)
Increase in other accrued liabilities 271,248 85,759
Net cash provided by (used in) operating
activities 3,392,419 (184,162)
Cash flow from investing activities:
Capital expenditures (24,213) (333,451)
Net cash used in investing activities (24,213) (333,451)
Cash flow from financing activities:
Proceeds from issuance of preferred stock - 57,500
Proceeds from issuance of common stock 6,517 58,133
Net borrowings (repayment) on line of credit (1,396,953) 251,518
Proceeds from issuance of note payable 350,122 -
Principle payments on note payable (350,122) -
Proceeds from issuance of long-term debt - 250,000
Principal payments on long-term debt (367,896) (118,937)
Principal payments on capital lease obligations (51,722) (21,322)
Dividends paid - (32,910)
Net cash provided by (used in) financing
activities (1,810,054) 443,983
Net increase (decrease) in cash and
cash equivalents 1,558,152 (73,631)
Cash and cash equivalents:
Beginning of year 74,478 148,109
End of year $ 1,632,630 74,478
(Continued)
</TABLE>
F-36
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Consolidated Statement of Cash Flows, Continued
Years ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
Supplement disclosure of cash information:
<S> <C> <C>
Cash paid during year for:
Interest $ 352,765 237,069
Income taxes $ - 73,255
Supplemental schedule of non-cash investing and financing
activities:
During 1994 the Company entered into capital lease
obligations totalling $114,911. The Company did not
enter into any capital leases in 1995.
During 1994, the Company entered into a financing agreement
to purchase a new software system. Total financed amount
was $49,320.
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements
August 31, 1995 and 1994
(1) Description of Business
Kenmar Business Groups, Inc.'s (the "Company") principal business
activity is the manufacture of electronic products and assemblies for
original equipment manufactures (OEM) located in the southeastern United
States. The Company provides products and services to OEM's in the
telecommunications, industrial controls, instrumentation, medical
devices, and computer industries.
(2) Concentration of Credit Risk and Major Customer
The Company manufactured more than fifty different products and repaired
and refurbished over one hundred different products for its largest
customer, which is comprised of five different operating locations and
two subsidiaries. Accounts receivable from this customer accounted for
approximately 19% and 75% of total receivables at August 31, 1995 and
1994, respectively. The Company's sales to this customer during 1995
comprised 81% of the Company's total sales. During the fourth quarter of
1995, the Company ceased doing business with this customer. (See note
17). Accordingly, the Company has taken various steps to restructure the
business to be commensurate with the reduction in volume. The Company
may have to take additional measures in the future as a result of the
decrease in volume.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and Test Services, Inc. ("TSI") which was inactive in the years
ended August 31, 1995 and 1994. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts on deposit with
banks and all highly liquid investments with a maturity of 90 days or
less when purchased.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. A provision is made for obsolete and
slow moving inventory.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of the minimum lease payments at
the inception of the lease. Depreciation is calculated using the
half-year convention, straight-line method over the estimated useful
lives of the respective assets which range from 3 to 7 years. Equipment
held under capital leases are amortized on a straight-line basis over
the lesser of the lease term or estimated useful life of the asset.
Maintenance and repairs are charged to expenses as incurred. The cost
and related accumulated depreciation of the assets are removed from the
accounts upon disposition and any resulting gain or loss is reflected in
operations.
F-38
<PAGE>
(3) Summary of Significant Accounting Policies, Continued
Accounts Receivable
The Company performs ongoing credit evaluations of its trade receivables
and generally does not require collateral. An allowance is provided for
estimated uncollectible accounts.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers.
Cost in Excess of Net Assets of Acquired Business
The excess cost of net assets of acquired business relates principally
to the value assigned to customer relationships and is being amortized
by the straight-line method over a period of 20 years.
The Company evaluates, when circumstances warrant, the recoverability of
the cost in excess of net assets of acquired businesses by comparing the
sum of the undiscounted projected future cash flows attributable to each
customer to the carrying value of the related asset. Projected cash
flows are estimated for a period approximating the remaining lives of
the Company's long-lived assets.
As a result of such evaluation the Company took an writedown of $160,000
during the year ended August 31, 1995.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Statement 109 requires a change from the deferred method
of accounting for income taxes of APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities
are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company has adopted Statement of Financial Accounting Standards No.
109 (SFAS No. 109), "Accounting for Income Taxes", effective September
1, 1993. As of September 1, 1993, there is no impact as a result of
adopting SFAS No. 109 and as such no cumulative effect adjustment was
required for the adoption of SFAS No. 109. Due to the Company's
operating loss carryforwards, management has determined that a valuation
allowance equal to the amount of net deferred tax assets is required.
Earnings Per Share
Earnings per share are based upon the weighted average number of common
and common equivalent shares outstanding during the period.
F-39
<PAGE>
(3) Summary of Significant Accounting Policies, Continued
Impairment of Long-Lived Assets
During the year ended August 31, 1995, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". Statement 121 requires the Company to determine whether recognition
of an impairment loss is required and, if so, to measure the impairment.
If the sum of the expected future cash flows, undiscounted and without
interest costs, is less than the asset's carrying amount, an impairment
loss is recognized. Any impairment loss recognized upon adoption for
assets to be held and used is recorded in continuing operations.
(4) Inventories
Inventories consist of:
1995 1994
Raw materials $193,649 997,549
Work-in-progress 111,330 249,620
Finished goods 26,561 130,123
$331,540 1,337,292
(5) Property and Equipment
Property and equipment consist of the following:
1995 1994
Leasehold improvements $ 164,912 233,816
Machinery and equipment 672,538 737,578
Computer hardware and software 343,578 408,000
Furniture and fixtures 92,015 91,469
Vehicles 9,182 37,053
Total $1,282,225 1,507,916
Less accumulated depreciation and
amortization 691,918 484,320
Property and equipment, net $ 590,307 1,023,614
Depreciation expense was $247,787 and $203,888 in 1995 and 1994,
respectively.
The Company reviewed its leasehold improvements, machinery and equipment
and computes hardware and software for impairment as a result of the
Company ceasing to do business with its major customer (see notes 2 and
17). The Company estimated future cash flows and compared it with the
net asset value of the related assets. This analysis resulted in a
writedown of approximately $180,000 which is included as part of cost of
goods sold in the income statement.
F-40
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(6) Acquisition
On October 15, 1992 the Company purchased all of the outstanding stock
of TSI, a manufacturer of electronic printed circuit board assemblies
for original equipment manufacturers, for a purchase price of
approximately $750,000 consisting of $7,500 cash and three subordinated
promissory notes totaling $742,500. The promissory notes are being paid
in equal monthly installments over ten years and bear a fixed interest
rate of 8%.
The acquisition has been accounted for using the purchase method of
accounting. The following table presents the allocation of the purchase
price to the fair value of the assets acquired and liabilities assumed:
Assets acquired $966,145
Liabilities assumed 216,145
--------
Purchase price $750,000
========
As a result of the TSI acquisition, the principal stockholder and chief
executive of TSI entered into a ten year non-compete agreement in return
for a monthly payment of $3,000 for ten years ending October 15, 2002.
Cash payments under the agreement were $72,000 and $36,000 and in 1995
and 1994, respectively. Cash payments in 1995 relate to years ended
August 31, 1995 and 1996.
(7) Line of Credit
In March 1994, the Company negotiated a $4,000,000 revolving line of
credit with a commercial lender which allowed it to borrow up to 80%
of eligible receivables and was secured by a first lien on all the
Company's receivables and inventory. Borrowings under this line bear
interest at prime plus 2.5% (minimum 7.5%) in addition to an annual
facility fee and other costs. The Company paid off the line of credit
in the fourth quarter of its fiscal year ended August 31, 1995. The
Company has not requested a renewal of the line of credit.
F-41
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(8) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Subordinated promissory notes payable in monthly
installments of $9,009, including interest at 8%,
through October 2002 $524,855 646,674
Bank debt collateralized by a first lien on all the
Company's plant, equipment, furniture and
fixtures payable in monthly installments of
$7,950, including interest at prime + 1%. This
loan was paid off prior to August 31, 1995. - 217,932
Uncollateralized note payable to stockholder
repayable with interest at 8% in 59 monthly
installments of $610 and a balloon payment
of $30,083 on October 15, 1997 39,482 43,468
Notes payable secured by equipment repayable
in monthly installments of $2,435 including
interest at 16.85% through April 1996 18,043 42,202
582,380 950,276
Less current maturities 22,359 293,242
$560,021 657,034
</TABLE>
Principal maturities of debt at August 31, 1995 are as follows:
Year ending August 31,
1996 $ 22,359
1997 73,269
1998 104,776
1999 80,451
2000 87,130
Thereafter 214,395
Total long-term debt $582,380
F-42
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(9) Obligation Under Capital Leases
The Company leases equipment under capital leases which expire on
various dates through 1998. Included in property and equipment are the
following amounts applicable to these leases:
1995 1994
---- ----
Machinery and equipment $200,066 200,066
Vehicles - 27,871
-------- -------
200,066 227,937
Less accumulated amortization 59,043 44,397
-------- -------
$141,023 183,540
======== =======
The following is a schedule by years of future minimum lease payments
under capital leases as of August 31, 1995:
Year ending August 31
1996 $ 48,272
1997 49,701
1998 29,431
-------
Total minimum lease payments 127,404
Less amounts representing interest 16,029
-------
Present value of future minimum
lease payments 111,375
Less current maturities 35,203
-------
$ 76,172
=======
(10) Commitments
The Company leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various
dates through 1998. During the years ended August 31, 1995 and 1994,
the Company incurred rental expenses of $214,505 and $271,448,
respectively, under these leases.
Future minimum lease payments under the terms of the above leases are
as follows:
1996 $38,422
1997 2,952
1998 2,460
F-43
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(11) Preferred Stock
The aggregate number of authorized shares of preferred stock is 100,000.
Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors.
The Company issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred Stock") in 1994. During 1993, the
Company issued 716 shares of $50 par value Class A cumulative preferred
stock including upon receipt of the issue price, the 200 shares
subscribed at August 31, 1992. Each share of Class A preferred stock
may be called or put at any time after five years from the date of
issuance at a rate of one and one-half times the issue price.
Redemption requirements of Class A cumulative preferred stock at
August 31, 1995 are as follows:
1997 $150,000
1998 447,000
1999 68,700
2000 86,250
--------
$751,950
========
The Class A preferred stock is entitled to a 10% cumulative dividend
payable quarterly, subject to the provisions of North Carolina law.
Cumulative unpaid dividends are $73,008 and $23,378 as of August 31,
1995 and 1994, respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price ($50 per share) plus
cumulative dividends in arrears. Cash dividends of $-0- and $32,910 were
paid in 1995 and 1994, respectively.
(12) Stock Option Plan
The Company adopted a non-qualified stock option plan in 1992 to attract
and retain employees, officers, directors and advisors.
As of August 31, 1995 there were 4,178 options outstanding of which
3,878 were vested. Options run for 10 years from the grant date and
entitle the holder to convert each option into one share of common stock
at $45 per share. No options have been exercised as of August 31, 1995.
F-44
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes
As discussed in note 3, the Company adopted Statement 109 as of
September 1, 1993. There is no cumulative effect of this change in
accounting for income taxes as reported in the statement of earnings
for the year ended August 31, 1994. Prior years' financial statements
have not been restated.
Components of income tax benefit are as follows:
1995 1994
----- -----
Taxes currently payable:
Federal and State $ - (98,768)
Deferred:
Federal and State - -
------ -------
$ - (98,768)
====== =======
Deferred income tax expense (benefit) results from timing differences
in the recognition of income and expense for tax and financial
statement purposes. Such timing differences relate primarily to
differences in financial statement and tax depreciation expense,
amounts accrued and expensed for financial statement purposes but not
deductible for taxes until paid, and tax uniform capitalization rules
for inventory.
The components of net deferred tax assets and the net deferred tax
liabilities as of August 31, 1995 and 1994 are as follows:
1995 1994
----- -----
Deferred tax assets:
Net operating loss carryforward $ 72,566 232,918
Inventories, principally due to additional
costs inventoried for tax purposes,
pursuant to the Tax Reform Act of 1986
and inventory reserves 83,470 122,815
Amortization of customer lists 16,575 10,725
Accounts receivable, principally due to
allowance for doubtful accounts 2,145 31,200
Other accruals 29,962 21,756
Property, plant and equipment, principally
due to differences in depreciation and
FAS 121 writedowns 125,311 -
--------- -------
Total gross deferred tax assets 330,029 419,414
Valuation allowance (330,029) (408,864)
--------- -------
Net deferred tax assets $ - 10,550
========= =======
Deferred tax liabilities:
Property, plant and equipment, principally
due to differences in depreciation $ - 10,550
--------- -------
Total gross deferred tax liabilities $ - 10,550
========= =======
F-45
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, Continued
The actual income tax expense (benefit) for 1995 and 1994 differs from
the "expected" amount (computed by applying the statutory federal
income tax rate of 34% to the earnings before income taxes and
cumulative effect of a change in accounting principle) and is
principally due to loss carryforwards, nondeductible travel and
entertainment expenses, state income taxes net of federal tax benefit,
non-deductible officer's life insurance and changes in the amount of
the valuation allowance.
At August 31, 1995, the Company has a net operating loss carryforward
of approximately $187,000 and a net economic loss carryforward for state
income taxes of approximately $984,000, expiring in various amounts
through 2010.
(14) Employee Benefit Plans
The Company has a 401(k) defined contribution plan (the "Plan")
covering substantially all full-time employees who meet certain age
and length of service requirements. Participants are eligible to
contribute up to 15% of their annual compensation, not to exceed legal
limits. The Company does not make contributions to the Plan.
Participants vest immediately in their contributions.
(15) Related Party Transaction
During October 1992, a member of the Board of Directors granted a ten
year unsecured loan to the Company in the amount of $445,500. As of
August 31, 1995 and 1994, the outstanding principal balance was
approximately $315,000 and $388,000, respectively. Such amount is
included in long term debt.
During October 1992, the Company entered into a non-compete agreement
with a former member of the Board of Directors (see note 6).
During 1995, a Director, in conjunction with an unrelated party entered
into an Agreement to lend the Company $350,122 on a 120 day Note,
collarteralized by all the Company's plant, equipment, furniture and
fittings. The proceeds of the loan was used to repay approximately
$105,000 of bank debt and for operational purposes. The loan carried
an interest rate of 12%. Under the Agreement, the lenders purchased
6,380 shares of common stock, at a price of $1 per share (representing
approximately 10% of the present outstanding common stock).
At August 31, 1995, accounts receivable - other included a note
receivable from an officer of the Company of $10,866 with an interest
rate of 8%.
F-46
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Notes to Consolidated Financial Statements, Continued
(16) Net Income Per Common Share
At August 31, 1995, there were 4,178 stock options outstanding.
The net income per common share and common equivalent share are
calculated by deducting dividends applicable to preferred shares
from net income and dividing the result by the weighted average
number of shares of common share and common share equivalents
outstanding during each of the years. Presentation of fully diluted
earnings per share is not required because the effect is anti-dilutive.
(17) Subsequent Events
On September 18, 1995, the Company signed an agreement with its
largest customer (see note 2). The provisions of the agreement
relieved the Company of trade accounts payable to the customer
and other suppliers of $1,121,151. The agreement provided the
customer relief of trade payables to the Company of $52,957 and
required the customer to pay cash to the Company in the amount of
$250,000. This agreement also provided for the release of both
parties from any claims that might arise from past business relations
or transactions.
Subsequent to the year end the Company entered into negotiations with
its major suppliers. These negotiations have resulted in the suppliers
forgiving approximately $440,000 of the accounts payable balance at
August 31, 1995 in return for payment of 25% of the balance due with
a further 25% due in four quarterly installments beginning
January 1, 1996.
F-47
<PAGE>
KENMAR BUSINESS GROUP, INC.
Consolidated Balance Sheets
February 29, 1996 and February 28, 1995
UNAUDITED
February 29, February 28,
1996 1995
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 744,533 $ 45,346
Accounts receivable - trade, net of
allowance for doubtful accounts of
$5,500 in 1996 and $65,807 in 1995.
Also net of allowance for returns of
$22,410 in 1995. 513,478 2,165,026
Accounts receivable - other 15,865 3,609
Inventories 317,531 1,256,409
Prepaid expenses and other current assets 110,085 51,296
--------- ---------
Total current assets 1,719,492 3,521,686
--------- ---------
Property and equipment - net 496,337 908,665
--------- ---------
Other assets:
Deposits and other assets 72,998 352,382
Cost in excess of net assets of acquired
business net of accumulated amortization
of $212,250 in 1996 and $35,000 in 1995 87,750 265,000
--------- ---------
Total other assets 160,748 617,382
--------- ---------
Total assets 2,376,577 5,047,733
--------- ---------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit - 1,911,547
Current maturities of long-term debt 4,317 132,003
Current obligations under capital leases 35,203 35,203
Accounts payable, trade 621,852 2,397,521
Other accrued liabilities 94,833 57,182
--------- ---------
Total current liabilities 756,205 4,533,456
--------- ---------
Long-term debt, less current maturities 541,236 627,614
--------- ---------
Long-term obligations under capital leases 57,750 94,283
--------- ---------
Class A preferred stock, including accretion
and accrued dividends 759,129 626,206
--------- ---------
KENMAR BUSINESS GROUPS, INC.
Consolidated Balance Sheets
F-48
<PAGE>
February 29, 1996 and February 28, 1995
UNAUDITED
February 29, February 28,
1996 1995
Stockholders' equity (deficit)
Common stock, $1 par value; authorized 100,000
shares in 1996 and 1995 issued and outstanding 64,714 64,714
Additional paid-in capital 213,941 243,226
Retained earnings (deficit) (16,398) (1,141,766)
Total stockholders' equity (deficit) 262,257 (833,826)
Total liabilities and stockholders'
equity (deficit) 2,376,577 5,047,733
F-49
<PAGE>
KENMAR BUSINESS GROUPS, INC.
Statements of Income
Six-month periods ended February 29, 1996 and February 28, 1995
UNAUDITED
Six Months Ending
February 29, February 28,
1996 1995
Sales $1,354,383 $8,266,268
Cost of Goods Sold 1,373,793 7,449,976
Gross profit (19,410) 816,292
General, selling and administrative expenses 397,350 446,525
Operating income (loss) (416,760) 369,767
Other income (expense)
Interest income 30,443 2,610
Miscellaneous income 1,724,781 -
Interest expense (29,214) (141,968)
Miscellaneous expense (18,300) -
Other income (expense) 1,707,710 (139,358)
Income (loss) before income taxes 1,290,950 230,409
Income tax benefit (expense) - -
Net income 1,209,950 230,409
Accretion of preferred stocks (29,285) (27,003)
Undeclared dividend on preferred stock (12,408) (24,323)
Net income applicable to common
stockholders $1,249,258 $ 179,084
Weighted average number of shares 64,714 60,369
Net income per common share and common
equivalent $ 19.30 $ 2.97
F-50
<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period from ..........
to ................
Commission File Number: 0-23528
J.A. INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 13-3421337
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
34A-2755 Lougheed Highway, Suite 522, Port Coquitlam, B.C. V3B 5W9 Canada
(Address of principal executive offices)
Issuer's telephone number: 604-941-3413
Securities registered under Section 12(b) of the Exchange Act: None
Not applicable Not applicable
Title of each class Name of Exchange in which registered
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.0025
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: X No: Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB: [X]
State issuer's revenue for its most recent fiscal year: $
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $3,443,826
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The list of documents
should be clearly described for identification purposes.
Transitional Small business Disclosure Format (check one):
Yes.......; No..x.....
<PAGE>
J.A. INDUSTRIES, INC.
Table of Contents
PART I Page
Item 6. Management's Discussion and Analysis or 1
Plan of Operation
Item 7. Financial Statements 11
Item 10. Executive Compensation 33
Signature Page 35
<PAGE>
Item 6.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
J.A. Industries, Inc.
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes appearing subsequently under the caption "Financial
Statements".
Overview
In July of 1992, the existing management took over the direction of J
A. Industries, Inc. It was the intention of the management to enhance the value
of its shares on behalf of its shareholders by acquiring cash flow entities
which were, firstly, synergistic with existing subsidiaries and secondly were
companies with consistent growth potential.
The first acquisition was Torik, Inc. in September, 1992, which at that
time was just breaking even on its sales of $300,000 per month. Subsequent to
the Torik acquisition, the Company had entered into litigation and lost the case
to the former management of Torik returning all shares back to the Torik
management. The Company was booking that acquisition at the cost of $200 which
has been written off.
The second acquisition of the assets of Pacific Rim Polytech, took
place in February, 1993 by the Company's wholly owned subsidiary J.A. Industries
(Canada) Inc. ("J.A. Canada"). J.A. Canada immediately started the manufacturing
of underground junction boxes and cable tray. In June, 1995 the Company sold
J.A. Canada to a non-affiliate British Columbia Corporation.
The Company also entered into two licensing agreements and
manufacturing agreements for the manufacture and distribution of electronic
ballasts of which both licenses are inactive.
In September of 1993, the Company acquired Hutronix, Inc., of Tucson,
Az ("Hutronix"). Subsequent to the year ended, 1996, the Company returned the
shares of Hutronix to Baboquivari Cattle Company ("BCC") to settle outstanding
liabilities with BCC.
In December of 1993, the Company acquired the assets of Capital City
Plastic ("CCP"). CCP had been inactive since May of 1993. As CCP was unable to
deliver the equipment as detailed in the purchase agreement, the Company
cancelled the purchase agreement.
In May, 1994 the Company signed an option agreement to acquire 100% of
Link
1
<PAGE>
Technologies (Canada) Ltd. ("Link"). The Company was to pay $500,000 USD plus
issue 500,000 shares of common stock to acquire 100% of Link. The Company was
also to provide $1,500,000 USD in working capital for Link. Subsequent to this
agreement the option has expired and no further agreement has been reached.
On March 30, 1994 Granite Marketing Corporation. ("Granite"), then a
wholly owned subsidiary of the Company, entered into an agreement with
Queensland Industries, Inc. ("Queensland") whereby Queensland purchased from
Granite an exclusive license to manufacture, promote, market, sell and
distribute the products of J.A. Canada relating to polyurethane underground
junction boxes. Queensland is a wholly owned subsidiary of Wincanton,
Corporation ("Wincanton"), a publicly traded Washington State Corporation.
Subsequent to this agreement, the Company rescinded the licensing agreement in
exchange for a $50,000 USD payment by Queensland Industries to Granite. Granite
is currently inactive. Subsequent to the year end, Granite was sold to an
unrelated third party in exchange for assumption of Granite's liabilities.
On June 28, 1995 the Company signed a letter of intent to merge with
privately held MiNT Corporation ("Mint") through a stock for stock exchange. The
share exchange would have resulted in a change of control of J.A. Industries to
the majority shareholders of Mint. Mint is in the business of providing high
quality contract manufacturing of electronic and electromechanical printed
circuit board assemblies. Subsequent to this letter of intent and subsequent to
the year ended June 30, 1995, the shareholders of Mint elected not to proceed
with the acquisition.
Subsequent to the year ended June 30, 1995, the Company entered into an
Agreement and Plan of Merger with Kenmar of Raleigh, NC. Kenmar founded in 1984,
is a provider of high quality electronic manufacturing services. It is located
in the Research Triangle area of North Carolina. Kenmar has a broad array of
technical capabilities to bring products to the market from concept to final
production. Kenmar's manufacturing team has experience in producing electronic
and electro-mechanical subassemblies and products for use in the
telecommunication, industrial control, computer, medical and instrumentation
industries. Kenmar has both Surface Mount Technology and Pin Thru-Hole
capabilities as well as cable, harnesses and interconnect assembly lines.
Pursuant to the terms of the agreement, current shareholders of Kenmar
will receive common stock of J.A. Industries such that Kenmar shareholders will
own approximately 50% of the outstanding shares of J.A. Industries, Inc. on
closing. Upon completion of the Merger, current management of Kenmar would
assume management of the Company. The merger is subject to shareholder's
approval of both companies. Another condition of the Merger is the settlement of
a dispute with a former stockholder, Karl Ronstadt and Hutronix, Inc. Subsequent
to the year ended June 30, 1995, the Company did resolve its outstanding dispute
with Baboquivari Cattle Company as described above (see "Hutronix").
Prior to the Merger, the Company must reduce its liabilities and
contingent liabilities to
2
<PAGE>
zero and have working capital of a minimum of two hundred thousand ($200,000)
dollars. To this end, the Company has disposed of, settled or is in the process
of settling all outstanding liabilities. The Company has reached agreements and
has signed releases for potential contingent liability claims arising or
potentially arising from several of the Company's former agreements.
The Company intends to fund its capital requirements through a private
placement to meet the terms of the agreement. To date the funds necessary to
complete the Merger are being held in escrow pending shareholder approval of the
merger and will be released to the Company upon such approval . If Shareholder's
approval is not obtained to complete the Merger, then the funds in escrow would
not be released to the Company.
Management believes that the trend towards outsourcing in the
electronic manufacturing industry is expanding. To this end, management still
believes that its strategy to acquire synergistic businesses in the contract
manufacturing industry is a sound plan. The planned Merger between the Company
and Kenmar is the first step in trying to re-establish that plan.
Seasonal factors do not influence the Company's sales.
Liquidity and Capital Resources
During fiscal 1994 the Company principally provided for its cash needs
through equity financing from a Regulation D Rule 504 offering. Most
acquisitions were completed with a combination of shares and cash. The
day-to-day operations were funded from cash flow provided by the operating
entities and an infusion of working capital from the parent Company. The
subsidiary J.A. Industries (Canada) Inc. lost money in 1995, and it was sold to
a non-affiliate in June, 1995. The agreement called for the buyer to assume all
of the liabilities of J.A. Canada. Hutronix, Inc. also lost money for the year
ending June 30, 1995. Subsequent to the year end, Hutronix was returned to
Baboquivari Cattle Company (former shareholder of Hutronix, "BCC") for release
of all liabilities owed by the Company to BCC and BCC's assumption of all
liabilities associated with Hutronix.
Subsequent to the year ended June 30, 1995, the Company had disposed of
all of its operating assets and there is currently not an adequacy of cash flow
from operations to cover capital resources and liquidity requirements. In the
year ending June 30, 1994 the Company had revenues of $4,042,940 to allow the
Company to manage its day to day operations. The Company's financial results
were prepared assuming it would continue as a going concern. However, the report
of its auditor raised substantial doubts about the Company's ability to continue
as a going concern. For the year ending June 30, 1995, the Company's audited
report reflected the subsequent disposition of all operations. Revenue of
$4,330,211 from operations for the period ended June 30, 1995, though, was used
to fund the day to day operations of the subsidiaries. Currently, the Company
has no cash flow and its ability to maintain operations is severely impaired. If
the Company cannot raise additional capital it is unlikely the Company would be
able to operate and it may be forced to seek protection under Chapter 11 of the
3
<PAGE>
Bankruptcy Act.
During the period commencing September, 1992 and ending June 30, 1995,
the Company raised $1,185,000 through two Regulation D Rule 504 offerings and
$496,250 through private placements of the Company's common stock. It is the
Company's goal in the fiscal year ending June 30, 1996 to find a suitable
acquisition candidate. Management anticipates that the Company will do further
equity financing. Management believes that from these sources the Company will
adequately fund the operations of the Company and allow it to maintain its
aggressive acquisition strategy. To date, no commitments for such capital have
been received and the likelihood of such financing cannot be guaranteed.
To address the accountant's report of a "going concern" uncertainty, it
is anticipated that the Company will continue to look for new opportunities in
the contract manufacturing area. On March 1, 1996 the Company entered into an
agreement to merge with Kenmar to fulfill the Company's business strategy. As
part of the Merger, the Company must eliminate all outstanding liabilities and
have working capital of $200,000. At the date of this report, the Company has
approximately $133,000 in liabilities it must satisfy to complete the Merger. As
of May 15, 1996, the Company has raised the required funds to complete the
Merger through a private placement of its common stock. The funds are in escrow
with the Company's legal counsel and will be released to the Company upon it
shareholder's approval of the Merger. In the event the Company does not receive
shareholder approval, the funds would not be released from escrow and the
Company would not be able to meet its financial requirements pursuant to the
Merger Agreement.
In the event that the conditions of the Merger are satisfied and the
Merger is completed it is anticipated that cash flow from ongoing operations
will satisfy the day to day needs of the Company. Furthermore, as of February
29, 1996, Kenmar had approximately $744,500 in cash or cash equivalents
(unaudited). It is anticipated that the merged company will use these funds to
maintain and grow the existing business that it has. It is also the Company's
goal to try and arrange an equity financing in the amount of $3 million dollars
to expand its business. No commitment for such financing has been arranged and
the likelihood of its completion cannot be guaranteed. In the event the merged
company could not raise any additional capital, it is anticipated that current
rates of growth of the merged company would satisfy its working capital
requirements.
Future cash needs of the merged entity would include funds to implement
the Company's acquisition strategy and to sustain the Company through a period
of restructuring and growth.
Notes Payable and Long term debt
Hutronix, Inc. a former subsidiary has a note payable to Bank One
executed through the Industrial Development Authority of the City of Douglas due
in quarterly instalments of $12,821, plus interest at 65% of prime (7.25% as of
June 30, 1994), due may 2005; secured by a deed of
4
<PAGE>
trust on the real estate held for sale and an irrevocable letter of credit from
a bank in the amount of the outstanding note payable balance guaranteed by the
Company. At June 30, 1995 the amount outstanding was $546,125. The subsequent
agreement between BCC and the Company calls for BCC and Hutronix to indemnify
the Company against any liability under this bond. As the solvency of Hutronix,
Inc. is uncertain, the ability for Hutronix, Inc. to indemnify the Company is
unlikely. Furthermore, on November 21, 1995 an agreement was reached between
Baboquivari Cattle Company, Karl and Marilyn Ronstadt, Hutronix, Inc. and the
Company whereby the parties exchanged mutual releases relieving the Company of
any liabilities that it had or might have in the future with the parties. On
March 4, 1996 the liability under the guarantee to Bank One was satisfied.
On closing of the Merger between Kenmar and the Company, the Company is
obligated to pay a former minority shareholder of Hutronix, Inc. $10,000 and
issue 50,000 shares of restricted common stock in exchange for a release from
all future obligations the minority shareholder may be entitled to. Also, on
closing, the Company is obligated to pay the former landlord of Hutronix, Inc. a
fee for releasing the Company from a Corporate guarantee on the lease of the
building located at 1150 E. Palmdale, Tucson, AZ. The funds for these
transactions are part of the funding needed for the closing of the Merger
agreement. If the Merger is not completed, these liabilities would still be
outstanding.
On June 30, 1995 the Company sold its wholly owned subsidiary, J.A.
Industries (Canada) Inc. to an unrelated third party. The sale relieved the
Company of any long term debt associated with the subsidiary. Furthermore, the
Company obtained releases for all corporate guarantees that it had provided for
the subsidiary subject to certain cash payments as follows. The Company settled
with one creditor by issuing shares of restricted stock in the amount of 136,000
shares to satisfy approximately $34,000 USD of debt. On completion of the Merger
between Kenmar and the Company, the Company will incurred a cost of $5,000 USD
to settle with one creditor that comes from a corporate guarantee of the
Company. The funds for settling this amount will come from the funds necessary
to close the Merger transaction. If the Merger is not completed, then this
liability would still be outstanding with the creditor.
In March, 1996, the Company came to a final agreement with the former
owners of Capital City Plastics whereby Capital City Plastic and John Szaniszlo
will provide the Company with a release from all liabilities and deliver to the
Company 600,000 shares of common stock issued to Capital City Plastics in
exchange for the Company's release from liabilities, $10,000 and the issuance of
50,000 restricted common stock of the Company. The funds necessary to complete
this transaction are part of the funding needs of the Merger. If the necessary
funds were not raised or the Merger was not completed, the Company's position
would be that there are no liabilities outstanding with Capital City Plastic or
John Szaniszlo as they had breached the original agreement between the parties.
On completion of the Merger, for which there can be no guarantee, the
Company will be assuming the following liabilities based on the Kenmar audited
financial statements for the period
5
<PAGE>
ending August 31, 1995 and unaudited financial statements for the six month
period ending February 29, 1996:
Line of credit/loans $ 0
Current maturities of long term debt $ 4,317
Current obligations under capital lease $ 35,203
Accounts payable - trade $ 621,852
Income tax payable $ 0
Other accrued liabilities $ 94,833
=========
Total Current Liabilities $ 756,205
Long Term Debt, less current maturities $ 541,236
Long term obligations under capital lease $ 57,750
=========
Total Liabilities as of February 29, 1996 $1,021,386
Line of Credit: In March, 1994, Kenmar negotiated a $4 million revolving line of
credit with a commercial lender which allowed it to borrow up to 80% of eligible
receivables and was secured by a first lien on all the Company's receivables and
inventory. Borrowing under this line bears interest at prime plus 2.5% (minimum
7.5%) in addition to an annual facility fee and other costs. Kenmar paid off the
line of credit in the fourth quarter of its fiscal year ended August 31, 1995.
Kenmar has not requested a renewal of the line of credit.
Long-term Debt: Long term debt of Kenmar consists of the following:
1995 1994
Subordinated promissory notes payable monthly $524,855 $646,674
instalments of $9,009 including interest at 8%
through October 2002.
Bank debt collateralized by a first lien on all the - $217,932
Company's plant, equipment, furniture and
fixtures payable in monthly instalments of
$7,950, including interest at prime +1%. this
loan was paid off prior to august 31, 1995.
Uncollateralized note payable to stockholder $ 39,482 $ 43,468
repayable with interest at 8% in 59 monthly
installments of 4610 and a balloon payment
of $30,083 on October 15, 1997
6
<PAGE>
Notes payable secured by equipment repayable $ 18,403 $ 42,202
in monthly installments of $2,435 including
interest at 16.85% through April 1996.
(Subsequently, this note was satisfied)
Note payable to stockholder in monthly - -
installments of $2,535 including interest
at 8% through April, 1994, collateralized
by certain equipment.
$582,380 $950,276
Less current maturities $ 22,359 $293,242
$560,021 $657,034
======== ========
Principal maturities of debt Kenmar at August 31, 1995 are as follows:
Year ending August 31
1996 $ 22,359
1997 $ 73,269
1998 $104,776
1999 $ 80,451
2000 $ 87,130
Thereafter $214,395
Total Long-term debt $582,380
========
Obligations Under Capital Leases of Kenmar:
Kenmar leases equipment under capital leases which expire on various
dates through 1998.
1995 1994
Machinery and equipment $200,066 $200,066
Vehicles - $ 27,871
Total $200,006 $227,937
The following is a schedule by years of future minimum lease payments
under capital leases as of august 31, 1995 for Kenmar
Year ending August 31
1996 $ 48,272
1997 $ 49,701
1998 $ 29,431
7
<PAGE>
Total minimum lease payment $127,404
Further Kenmar Commitments:
Kenmar leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1995, 1994 and 1993, Kenmar
incurred rental expenses of $214,505, $271,488 and $230,175 respectively under
these leases. Future minimum lease payments under the terms of the above leases
are as follows:
1996 $38,422
1997 $ 2,952
1998 $ 2,460
Preferred Stock of Kenmar:
The aggregate number of authorized shares of preferred stock is
100,000. Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors of Kenmar.
Kenmar issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred") in 1994. During 1993, the Company issued
716 shares of Class A Preferred including upon receipt of the issue price, 200
shares subscribed at August 31, 1992. Each share of Class A Preferred may be
called or put at any time after five years from the date of issuance at a rate
of one and one-half times the issue price. Redemption requirements of Class A
Preferred stock at August 31, 1995 were as follows:
1997 $150,000
1998 $447,000
1999 $ 68,700
2000 $ 86,250
Total $751,950
========
The Class A Preferred is entitled to a 10% cumulative dividend payable
quarterly, subject to the provisions of North Carolina law. Cumulative unpaid
dividends are $73,008, $23,378, and $7,643 as of August 31, 1995, 1994, and 1993
respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price plus cumulative dividends in
arrears. Cash dividends of $0, $32,910 and $40,031 were paid in 1995, 1994, and
1993, respectively.
8
<PAGE>
Results of Operations
The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
Fiscal Period Year Ended June 30, 1995 Compared to Fiscal Period Year
Ended June 30, 1994. The auditors report for the period ending June 30, 1995
states that as a result of the discontinuation of operations of the Company
there is substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In June, 1995 the Company disposed of one of its wholly owned operating
subsidiaries J.A. Industries (Canada) Inc. Subsequent to the year end the
Company disposed of an inactive subsidiary, Granite Marketing Corporation. In
early March 1995, the Company entered into negotiations with Karl G. Ronstadt
and Baboquivari Cattle Company, former shareholders of Hutronix, Inc. to settle
outstanding issues and potential liabilities. The Company and the former
shareholders could not come to any resolution. On September 23, 1995, the former
shareholder of Hutronix, Inc. exercised his right under a put/call agreement
dated September 23, 1993 and attached to the original purchase agreement of
Hutronix, Inc. dated September 15, 1993. The put option allowed the former
shareholder to put 262,000 shares of the Company to the Company at a price of
$2.25 creating a liability of $589,500. The Company did not have the resources
to pay the liability. On November 21, 1995, subsequent to the year end, the
Company entered into an agreement to reverse the acquisition of Hutronix, Inc.
the only remaining operating subsidiary of the Company to satisfy all
outstanding liabilities between the former shareholder of Hutronix and the
Company. The condition that effected the decision to enter into the agreement to
reverse the Hutronix acquisition occurred prior to the Company's year end.
Although the assets and operations of Hutronix were included in the Company's
June 30, 1995 financial statement, they were subsequently disposed of and it was
so reported in the Company's December 31, 1995 financial statement.
As of June 30, 1995, the Company had revenue of $4,330,211 which was a
7.8% increase over the comparable period ended June 30, 1994. Cost of sales were
$3,618,347 for the period ended June 30, 1995 as compared cost of sales of
$3,674,688 for the corresponding period ending June 30, 1994. The maintaining of
cost of sales at the same level as 1994 but an increase in revenue by 7.8%
generated a gross margin of $711,864 or 16.9% of Sales for the period ended June
30, 1995 compared to gross margin of $368,252 or 9.1% for the period ended June
30, 1994. General and administrative expenses for June 30, 1995 were $1,623,487
which was a 22.8% increase compared to the corresponding period for June 30,
1994 of $1,256,765. The increase is partly reflected by the increase in
management expenses to increase the revenue for the period. Part of the General
and Administrative expenses for 1995 were paid of non-cash items whereby the
Company issued restricted common shares for services rendered or settlement of
debt in the amount of $51,982 compared to the issuance of no shares for the
corresponding
9
<PAGE>
period ending June 30, 1994 for similar reasons. The Company had a total loss
for the year of $1,714,526 or ($0.25)/shares as compared to a total loss of
$1,497,305 or ($0.28)/share for the period ending June 30, 1994.
Subsequent to the year ending June 30, 1995 the Company entered into a
Merger with Kenmar. A condition of the Merger is that the Company is to have no
liabilities and working capital of $200,000. To this end, though the Company has
an inactive status, there are substantial one time charges to eliminate all
liabilities and to settle contract obligations.
For the first quarter period ending September 30, 1995 the Company had
revenue of $532,310. compared to sales of $1,179,629 for the corresponding
period in 1994. The decrease in sales can be attributed to the disposition of
J.A. Industries (Canada) Inc. prior to year end June 30, 1995 as Hutronix, Inc.,
the only remaining operating subsidiary, had an increase in sales of 18% over
the corresponding period ended September 30, 1994. Cost of sales for the 3 month
period ended September 30, 1995 were $455,030 generating a gross profit margin
of $77,280 or 14.5% of sales compared to a cost of sales of $1,013,768
generating a gross profit of $165,861 or 14% of sales for the 3 month period
ended September 30, 1994. Again, the decrease in cost of sales can be attributed
to the disposition of J.A. Industries (Canada) Inc. prior to the year ended June
30, 1995. For the three month period ending September 30, 1995 G&A was $781,384
compared to $239,620 for the corresponding period in 1994. Increased legal and
accounting expenses accounted for approximately $75,000 of the expense. As well,
a large portion of the expense was a one time charge to pay outstanding
liabilities and the termination of outstanding contracts. The preceding items,
except for accounting fees, were mostly settled with the issuance of restricted
common stock of the Company. On September 23, 1995, Baboquivari Cattle Company
exercise its put option under a put/call agreement dated September 23, 1993. The
option obligated the Company to purchase 262,000 shares of the Company's stock
from Baboquivari at a price of $2.25 creating an unfunded liability of $589,500.
Subsequent to the first quarter ended September 30, 1995, the Company entered
into an agreement with Baboquivari Cattle Company to reverse its September 15,
1993 acquisition agreement of Hutronix, Inc. in exchange for the release of all
liabilities from Hutronix, Inc and Baboquivari Cattle Company.
On November 21, 1995 the Company entered into an agreement with
Baboquivari Cattle Company to transfer all title of Hutronix, Inc. to
Baboquivari Cattle Company in exchange for a release of all liabilities. Due to
this disposition of the last operating subsidiary of the Company, the Company
had no revenue for the three month period ending December 31, 1995 compared to
of $1,237,956 for the three month period and $2,417,585 for the six month period
ending December 31, 1994. General and administrative expenses for the period
three month period ended December 31, 1995 were $81,921 compared to the
corresponding three month period in 1994 of $239,877. The Company experienced a
net loss of $83,316 for the three month period ending December 31, 1995 compared
to a loss of $86,107 for the corresponding period in 1994. The net loss from
operations for the six month period ending December 31, 1995 was $746,960
compared to $190,989 for the corresponding period in 1994. The loss in 1995 is
attributed to the reorganization and elimination of ongoing contracts and
liabilities the Company needed to satisfy
10
<PAGE>
to proceed with its Merger with Kenmar. The Company had a shareholder's
deficit of $282,683 for the period ended December 31, 1995 compared to net
equity of $595,265 for the corresponding period in 1994. Accounts payable at
December 31, 1995 were $138,167 compared to $928,358 for the corresponding
period 1994. Due to the discontinuation of operations, the Company's payables
were reduced dramatically. Most of the expense is attributed to legal and
accounting costs due to the restructuring of the Company. Subsequent to the
disposition of Hutronix, the Company was relieved of its obligation to guarantee
the mortgage on the facilities occupied by Hutronix in Douglas, Arizona.
Therefore, long term debt was reduced to zero from $561,842 in the corresponding
prior year period.
For the three month period ending March 31, 1996 the Company had no
operations and therefore no revenue compared to sales of $1,035,397 for the
three month period ended March 31, 1995 and sales of $3,452,982 for the nine
month period ended March 31, 1995. General and Administrative expenses for the
three month period ended March 31, 1996 were $298,405 compared to $262,027 for
the corresponding period in 1995. G&A for the nine month period ended March 31,
1996 was $1,043,970 compared to $741,524 for the corresponding period in 1995.
The G&A costs can be attributed to the restructuring and reorganization the
Company experienced from the disposition and discontinuation of operations and
the Merger agreement the Company entered into with Kenmar Business Groups, Inc.
The Company had a net loss from operations of $1,118,561 for nine month period
ended March 31, 1996 compared to $300,884 for the corresponding nine month
period in 1995. The Company had a Shareholder's deficit of $203,695 at March 31,
1996 compared to Net Equity of $670,141 for the same period 1995. Current
liabilities were significantly reduce due to cessation of operations to 220,276e
for the period ended March 31, 1996 compared to Current Liabilities of $964,465
for the corresponding period ended March 31, 1995.
-11-
<PAGE>
Item 7. Financial Statements
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
J.A. Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J.A. Industries,
Inc. and Subsidiaries as of June 30, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,714,526, and a cash flow
deficit from operations of $133,297 during the year ended June 30, 1995, and as
of that date had a working capital deficiency of $566,587, and a net capital
deficiency of $40,503. Additionally, as of the date of the auditors' report, the
Company has sold subsidiaries which accounted for all of the operating
activities of the consolidated corporation. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(Signature of Semple & Cooper, P.L.C. appears here)
Certified Public Accountants
Phoenix, Arizona
November 20, 1995 (except for Note 18 as to which the date is May 12, 1996).
F-4
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 45,274 $ 6,679
Accounts receivable (Notes 1 and 9)
- trade 246,180 485,943
- other 73 18,363
Inventory (Notes 1, 4 and 9) 170,261 454,982
Prepaid expenses 14,805 27,338
---------- ----------
Total Current Assets 476,593 993,305
---------- ----------
Real Estate Held for Sale (Notes 6 and 9) 488,750 875,000
Property and Equipment, Net
(Notes 1, 5 and 9) 53,330 598,533
Investments (Note 7) - 22,075
Intangible Assets, Net (Notes 1 and 8) 2,050 127,532
---------- ----------
544,130 1,623,140
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current Liabilities:
Notes payable - current portion (Note 9) $ 590,986 $ 922,436
Loans payable - related parties (Note 10) 35,766 -
Accounts payable 165,625 776,474
Accrued expenses 250,753 -
Income taxes payable (Notes 1 and 12) 50 50
---------- ----------
Total Current Liabilities 1,043,180 1,698,960
---------- ----------
Notes Payable - Long-Term Portion (Note 9) 18,046 117,563
Loans Payable - Related Parties (Note 10) - 132,364
---------- ----------
18,046 249,927
---------- ----------
Commitments and Contingencies: (Note 11) - -
Stockholders' Equity (Deficit):
Common stock (Note 14) 18,879 16,234
Additional paid-in capital 4,993,915 3,849,152
Accumulated deficit (4,904,793) (3,190,267)
---------- ----------
108,001 675,119
Stock subscriptions receivable (144,000) -
Cumulative translation adjustment
(Note 1) (4,504) (7,561)
---------- ----------
(40,503) 667,558
---------- ----------
$1,020,723 $2,616,445
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales $ 4,330,211 $ 4,042,940
Cost of Sales 3,618,347 3,674,688
----------- -----------
Gross Profit 711,864 368,252
----------- -----------
Selling and Marketing Expense - 134,163
General and Administrative Expense 1,593,838 1,256,765
Impairment of real estate held
for sale (Note 6) 386,250 444,941
Impairment of goodwill (Note 8) 115,890 -
----------- -----------
2,095,978 1,835,869
----------- -----------
Loss from Operations (1,384,114) (1,467,617)
----------- -----------
Other Income (Expense):
Interest income 952 373
Interest expense (72,868) (93,989)
Gain on foreign exchange translation - 7,960
Loss on sale of assets (Note 5) (59,726) -
Loss on sale of subsidiary (Note 3) (198,770) -
----------- -----------
(330,412) (85,656)
----------- -----------
Loss before Income Taxes (1,714,526) (1,553,273)
Income Tax Benefit - 65,973
----------- -----------
(1,714,526) (1,487,300)
Pre-acquisition Earnings of Hutronix, Inc. - (10,005)
----------- -----------
Net Loss $(1,714,526) $(1,497,305)
=========== ===========
Net Loss per Share $ (.25) $ (.28)
=========== ===========
Weighted Average Shares Outstanding 6,724,440 5,389,500
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Equity
Adjustment
Additional from Foreign Stock
Common Stock Paid-in Accumulated Currency Subscription
Shares Amount Capital Deficit Translation Receivable
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 4,107,129 $ 10,268 $ 1,800,027 $(1,692,962) $ - $ -
Issued for cash 993,950 2,485 1,005,578 - - -
Issued for equipment 600,000 1,500 52,148 - - -
Issued for shares of
Hutronix, Inc. 717,699 1,794 895,330 - - -
Issued for legal services 25,000 62 7,944 - - -
Issued to repay debt 50,000 125 88,125 - - -
Aggregate adjustment
resulting from translation
of financial statement
into U.S. dollars - - - - (7,561) -
Net loss for the year ended
June 30, 1994 - - - (1,497,305) - -
--------- ---------- ----------- ----------- ----------- -----------
Balance, June 30, 1994 6,493,778 16,234 3,849,152 (3,190,267) (7,561) -
Issued for cash 631,383 1,578 494,672 - - -
Issued for consulting fees 1,032,292 2,581 637,517 - - (144,000)
Issued to repay debt 50,000 125 51,982 - - -
Issued as compensation 12,600 32 12,569 - - -
Reverse equipment
purchase (600,000) (1,500) (52,148) - - -
Shares cancelled (68,450) (171) 171 - - -
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars - - - - 3,057 -
Net loss for the year
ended June 30, 1995 - - - (1,714,526) - -
--------- ---------- ----------- ----------- ----------- -----------
7,551,603 $ 18,879 $ 4,993,915 $(4,904,793) $ (4,504) $ (144,000)
========= ========== =========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-8
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash Used by Operating Activities:
Net loss $(1,714,526) $(1,497,305)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 110,623 113,549
Loss on sale of fixed assets 59,726 -
Issuance of stock for services
and debt repayment 514,759 -
Impairment on real estate held
for sale 386,250 444,941
Impairment of goodwill 115,890 -
Loss on sale of subsidiary 198,770 -
Changes in Assets and Liabilities:
Accounts receivable
- trade 239,763 (350,711)
- other 18,290 -
Inventory 284,721 (324,732)
Prepaid expenses 12,533 (10,147)
Accounts payable (610,849) 662,081
Accrued expenses 250,753 -
Income taxes payable - 50
Equipment loans - 119,048
Purchase agreement - (133,287)
----------- -----------
Cash used by operations (133,297) (976,513)
----------- -----------
Investing Activities:
Proceeds from sale of fixed assets 244 -
Purchase of property and equipment (4,578) (1,713,705)
Disposal of license agreement - 50,000
Acquisition of intangible assets - (140,409)
Disposal (acquisition) of investment 21,875 (21,875)
----------- -----------
Cash provided (used) by investing activities 17,541 (1,825,989)
----------- -----------
Financing Activities:
Issuance of common stock 496,250 2,055,091
Loans from related parties 35,766 13,065
Proceeds from debt 72,288 753,722
Repayment of debt (423,079) -
Repayment of debt from related parties (22,370) -
----------- -----------
Cash provided by financing activities 158,855 2,821,878
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (4,504) (7,561)
----------- -----------
Net Change in Cash and Cash Equivalents 38,595 11,815
Cash and Cash Equivalents at Beginning of Year 6,679 (5,136)
----------- -----------
Cash and Cash Equivalents at End of Year $ 45,274 $ 6,679
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-9
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
J.A. Industries, Inc. is a Corporation organized under the laws of the
State of Delaware. The principal purpose of the Corporation is to act as
the holding company of its subsidiaries. Subsequent to the balance sheet
date, the Company disposed of its only remaining operating subsidiary
through a reversal of the acquisition (Note 3).
Pervasiveness 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.
Principles of Consolidation:
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation, and the
following wholly-owned subsidiaries:
J.A. Industries (Canada) Inc., a Canadian
corporation
Granite Marketing Corp., a Cayman Island
corporation
Hutronix, Inc., an Arizona corporation
QDS, de Mexico, S.A. de C.V., a Mexican
corporation and the 96% owned subsidiary
Hutronix de Mexico, S.A. de C.V., (a
subsidiary of Hutronix, Inc., which has
been inactive since August 17, 1982)
All significant intercompany balances and transactions have been
eliminated in consolidation.
As further described in Note 3, J.A. Industries (Canada) Inc. was sold
during the year ended June 30, 1995, and Hutronix, Inc. and QDS, de
Mexico, S.A. de C.V. were disposed of subsequent to the balance sheet
date through a reversal of the acquisition (Note 3).
F-10
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Cash and Cash Equivalents:
Cash and cash equivalents are considered to be all highly liquid
investments with an initial maturity of three (3) months or less.
Accounts Receivable:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectable accounts receivable. At June 30, 1994, an allowance has
been provided for potentially uncollectible accounts receivable in the
amount of $30,803. At June 30, 1995, no allowance has been provided for
as management believes all accounts receivable to be collectible.
Inventory:
Raw materials are valued at the lower of cost or replacement cost. Work
in process and finished goods are valued at the lower of cost or net
realizable value. Cost for all inventory is determined on the first-in,
first-out method which, for work in process and finished goods, includes
the cost of material, direct labor and applied manufacturing overhead.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets, ranging from five to seven years. Maintenance and repairs that
neither materially add to the value of the property nor appreciably
prolong its life are charged to expense as incurred. Betterments or
renewals are capitalized when incurred.
Long-Lived and Intangible Assets:
Long-lived assets include office and manufacturing equipment and real
estate. Intangible assets include goodwill, incorporation costs, and
patent development costs, and are being amortized on the straight-line
method over their estimated useful lives as disclosed in Note 8.
Goodwill represents the excess of the cost of acquiring Hutronix, Inc.
over the fair value of the net assets at the date of acquisition. The
carrying value of the assets will be periodically reviewed by the
Company and impairments, if any, will be recognized when expected future
operating cash flows derived from the assets are less than their
carrying value.
F-11
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
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, in addition to the use of net operating losses. 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.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange
prevailing at the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of
the Corporation's foreign operations are deferred and
included as a separate component of stockholders' equity.
Loss per Share:
The loss per share calculation is based on the weighted average number
of shares outstanding during the year. Fully diluted loss per share has
not been presented because the effect of exercising the options
outstanding would be anti-dilutive.
F-12
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Business Combinations:
In 1994, the Company purchased all of the outstanding shares of
Hutronix, Inc. for common share consideration. The acquisition was
accounted for by the purchase method. The results of operations are
included in the accounts from the effective date of acquisition,
September 15, 1993.
Details of the purchase are as follows:
Fair market value of assets acquired:
Working capital deficiency $ (42,739)
Fixed assets 1,462,099
Other liabilities (69,814)
Long-term debt (581,189)
Goodwill 128,767
----------
$ 897,124
==========
Consideration given:
Common shares issued $ 897,124
==========
As further described in Note 3, the acquisition of Hutronix, Inc. and
QDS, de Mexico, S.A. de C.V. was reversed subsequent to the year ended
June 30, 1995.
3. Sale of Subsidiaries:
During the year ended June 30, 1995 and subsequent to year end, the
Company disposed of one operating subsidiary and entered into a plan to
reverse the purchase of another operating subsidiary. These two
subsidiaries comprised principally all of the operating activity of the
consolidated entity. The disposals are as follows:
J.A. Industries (Canada) Inc.:
On June 30, 1995, the Company sold all of the common stock of J.A.
Industries (Canada) Inc. for $73. The transaction resulted in a loss of
$198,770, which has been included in loss on sale of subsidiary for the
year ended June 30, 1995.
F-13
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Sale of Subsidiaries: (Continued)
Hutronix, Inc.:
On November 21, 1995, the Company entered into an agreement to reverse
the acquisition of Hutronix, Inc. and its Mexican manufacturing
subsidiary, QDS, de Mexico, S.A. de C.V. The Company returned all of the
common shares of Hutronix, Inc. in exchange for cancellation of a
buy/sell agreement for 262,500 common shares of J.A. Industries, Inc.
with the former principal stockholder of Hutronix, Inc. The Company
realized a loss on the subsequent disposition of Hutronix, Inc. of
approximately $70,000, which has not been included in the accompanying
consolidated statement of operations for the year ended June 30, 1995.
4. Inventory:
As of June 30, 1995 and 1994, inventory consists of the following:
1995 1994
---- ----
Raw materials $ 352,223 $ 532,435
Less: reserve for obsolescence (210,000) (190,000)
---------- ----------
142,223 342,435
Work in process 25,170 91,962
Finished goods 2,868 20,585
---------- ----------
$ 170,261 $ 454,982
========== ==========
5. Property and Equipment:
As of June 30, 1995 and 1994, property and equipment consist of the
following:
1995 1994
---- ----
Forklift $ - $ 10,049
Vehicles 13,121 14,046
Office equipment 46,382 53,834
Computers 152,361 147,778
Manufacturing equipment 277,230 576,051
Assets not-in-service - 232,520
---------- ----------
489,094 1,034,278
Less: accumulated depreciation (435,764) (435,745)
---------- ----------
$ 53,330 $ 598,533
========== ==========
F-14
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Property and Equipment: (Continued)
Assets not-in-service represents manufacturing equipment and production
molds purchased but not yet on location or in use.
These assets were purchased by way of an agreement with 488190 Alberta
Ltd. dated December 3, 1993. Consideration given in exchange for the
equipment was:
600,000 shares of J.A. Industries, Inc.;
$100,000 relocation fee payable upon relocation; and
$ 78,872 assumption of debt and chattel mortgage against the
equipment.
This transaction has been recorded as follows:
Shares issued $ 53,648
Debt assumed 78,872
Relocation fee 100,000
----------
Fair market value of the equipment $ 232,520
==========
Subsequent to June 30, 1995, the Company entered into an agreement to
reverse the equipment purchase agreement. The equipment was returned to
488190 Alberta Ltd., which returned the 600,000 common shares of J.A.
Industries, Inc. A loss on disposal of fixed assets of $59,823 was
recorded, which is made up of payments made by J.A. Industries, Inc.
against the chattel mortgage and expenses incurred in moving the
equipment.
6. Real Estate Held for Sale:
In January, 1994, Hutronix, Inc. ceased all manufacturing operations at
its Douglas, Arizona facility. As of June 30, 1995 and 1994, the Company
recorded real estate held for sale in the amounts of $488,750 and
$875,000, respectively. The Company recognized impairment losses for
June 30, 1995 and 1994 in the amounts of $386,250 and $444,941,
respectively. The losses represented management's best estimate of the
net realizable value of the property.
F-15
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investments:
On March 30, 1994, Granite Marketing Corp. entered into a licensing
agreement with Queensland Industries, Inc. Under the agreement,
Queensland Industries, Inc. was granted a license of certain patents to
manufacture, promote, market, sell and distribute industrial electrical
products. The license provides for an exclusive territory, including
Asia, Japan, Australia, Zimbabwe, Nambia, South Africa, and all nations
who are currently members of the European Economic Community. The
purchase price for the license was $10,000,000, with $2,500,000 payable
upon signing of the agreement and four (4) equal payments of $1,875,000
due 120, 210, 300 and 390 days from signing.
Wincanton Corporation, 100% stockholder of Queensland Industries, Inc.,
has agreed to guarantee the payment obligations of Queensland
Industries, Inc.
At June 30, 1994, the sale of this license was recorded at a nominal
$50,000. At June 30, 1994, the investment was recorded at $22,075. The
first two (2) installments were paid in the form of 875,000 shares of
Wincanton Corporation, which have been recorded at $0.0249 each, which
represents the net asset value per share of Wincanton Corporation at
June 30, 1994.
During 1995, Wincanton Corporation paid Granite Marketing Corp. $50,000
to cancel the licensing agreement. In addition, Granite Marketing Corp.
returned the 875,000 shares of Wincanton Corporation.
8. Intangible Assets:
Intangible assets at June 30, 1995 and 1994 are comprised of the
following:
1995 1994
---- ----
Goodwill amortized over ten years
(Note 2) $ - $ 128,767
Incorporation costs amortized over
five years 3,000 3,000
Patent pending amortized over five
years from final patent - 8,642
---------- ----------
3,000 140,409
Amortization (950) (12,877)
---------- ----------
$ 2,050 $ 127,532
========== ==========
During the year ended June 30, 1995, the Company recognized an
impairment of the valuation of goodwill in the amount of $115,890.
F-16
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable:
As of June 30, 1995 and 1994, notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona, due in quarterly installments
of $12,821, plus interest at 65% of prime (7.25% as of June 30, 1994),
due May, 2005; secured by a deed of trust on the real estate held for
sale, an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance and the assignment of a life insurance
policy owned by a related party, on the president of Hutronix, Inc. At
June 30, 1994, the Company was not in compliance with certain
restrictive covenants
contained in this note. $ 546,125 $ 576,908
Note payable to a vendor, due in monthly installments of $594, plus
interest at 8.5%, due September, 1994; secured by
equipment. - 1,883
Note payable to a supplier, due in
quarterly installments of $8,361 plus
interest at 6%; unsecured, due
March 15, 1995. - 25,084
Note payable to an employee in monthly installments of $2,500, plus
interest at 7%, due July, 1994; secured by the common stock of QDS, de
Mexico, S.A.
de C.V. - 5,000
Unsecured promissory note payable to a lender. The principal of $36,155
(CDN $50,000) plus accrued interest at 24% per annum is payable on
demand. The lender has stated that it is not her intention to demand
repayment of
the note before June 30, 1995. - 47,636
</TABLE>
F-17
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unsecured note payable to the Province
of British Columbia, Canada, due in
monthly payments of $1,808 (CDN $2,500)
plus interest at 6% per annum. The
principal balance is due July 1, 1995. - 91,619
Revolving line of credit for $250,000 with a bank. Credit line is
payable at $5,000 per month until October, 1994 when all principal and
accrued interest is due in full. The credit line accrues interest at
prime plus two percent; collateralized by accounts receivable,
inventory, property, plant and equipment,
and 2,025 shares of common stock. - 172,821
Equipment loan for the "assets not-in-
service" described in Note 5. Note was
due on demand with no stated interest
rate. - 119,048
8% note payable to ITT Cannon, monthly
installments of $1,500, including
principal and interest, due June, 1997;
unsecured. 33,907 -
8% note payable to Molloy, Jones & Donahue, P.C., monthly installments
of $1,381, including principal and interest,
due February, 1996; unsecured. 10,725 -
10% note payable to KPMG Peat Marwick,
L.L.P., due on demand; unsecured. 18,275 -
---------- ----------
609,032 1,039,999
Less: current portion (590,986) (922,436)
---------- ----------
$ 18,046 $ 117,563
========== ==========
</TABLE>
F-18
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Notes Payable: (Continued)
A schedule of future minimum principal payments due on the notes
payable, is as follows:
Year Ended
June 30, Amount
1996 $ 590,986
1997 18,046
----------
$ 609,032
==========
10. Related Party Transactions:
Loans Payable - Related Parties:
As of June 30, 1995 and 1994, loans payable - related parties consist of
the following:
1995 1994
---- ----
Loan payable to Alexander Michie,
balance due on demand with no
stated interest rate. $ 15,000 $ -
Loan payable to 391566 B.C., Ltd.,
balance due on demand with no stated
interest rate. 20,766 -
Loan payable to Alexander Michie.
The loan is unsecured and has no
terms of repayment. The loan has
a stated interest rate of prime
plus 2%. - 132,364
---------- ----------
35,766 132,364
Less: current portion (35,766) -
---------- ----------
$ - $ 132,364
========== ==========
F-19
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Related Party Transactions: (Continued)
Other Transactions:
The Company paid $25,200 in 1994 to a related party to maintain a life
insurance policy on the life of the president of Hutronix, Inc. Included
in accounts payable at June 30, 1994 is $10,346 due to the related
party.
The Company also paid a combined $46,800 to its president (a former
stockholder) under a salary and management fee commitment in the year
ended June 30, 1994. The commitment requires the Company to pay $6,000
per month and expires December 31, 1995.
Repayment of the mortgage from the Province of British Columbia has been
guaranteed by A. Michie, a stockholder.
11. Commitments and Contingencies:
Under the terms of various agreements, the Company has guaranteed
payment of $18,275 in accounting fees and the $546,125 mortgage on the
Douglas, Arizona plant owned by Hutronix, Inc. The reversal of the
Hutronix, Inc. purchase in November, 1995 included an indemnification on
the above guarantees. Should the other party fail to perform, additional
obligations could be asserted against the Company. The Company has been
unable to estimate any liability for potential payments as a guarantor
on the debt.
12. Income Taxes:
As of June 30, 1995, the components of the deferred income tax asset,
are as follows:
Deferred Tax Asset
Net operating loss carryforwards $ 498,000
Less: valuation allowance (498,000)
----------
Net deferred tax asset $ -
==========
F-20
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes: (Continued)
The valuation allowance for the deferred tax asset as of June 30, 1994
is $368,371. The net change in the total valuation allowance for the
year ended June 30, 1995 was an increase of $129,629.
At June 30, 1995, the Company has net operating loss carryforwards for
federal purposes, as follows:
Expiring June 30, Amount
2009 $ 540,000
2010 2,780,000
----------
$3,320,000
==========
For the years ended June 30, 1995 and 1994, the Company reported
provisions for income taxes in the amount of $50. The provisions relate
to state income taxes.
13. Significant Customers and Vendors:
Four (4) customers comprised approximately 91.1% of total sales for the
year ended June 30, 1995, and 54% of total accounts receivable at June
30, 1995.
Three (3) customers comprised approximately 68% of total sales for the
year ended June 30, 1994, and 70% of total accounts receivable at June
30, 1994.
Five (5) vendors provided approximately 44% of total raw materials
purchased during the year ended June 30, 1995.
Four (4) vendors provided approximately 52% of total raw materials
purchased during the year ended June 30, 1994.
14. Common Stock:
Common stock is comprised of $.0025 par value, 20,000,000 shares
authorized, 7,551,603 and 6,493,778 shares issued and outstanding as of
June 30, 1995 and 1994, respectively.
15. Management's Plan to Address Going Concern Considerations:
The management of the Company is in the process of attempting to secure
additional capital sources to acquire additional companies to fit their
corporate mission.
F-21
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Stock Option Plan:
Under its employee stock option plan, which authorizes the issuance of
up to 1,000,000 common shares with a par value of $0.0025 each, the
Company has issued and outstanding options to purchase 98,600 shares at
$2.00 each, and 520,000 shares at $1.10 each. These options expire on
December 31, 1999.
17. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended June 30, 1995, the Company recognized investing
and financing activities that affected assets, liabilities and equity,
but did not result in cash receipts or payments. These non-cash
activities are as follows:
The Company reversed an equipment purchase agreement
with C.C. Plastics. The Company recognized a loss of
$59,823 on the transaction due to payments on the debt
obligation, which were subsequently voided for return of
the equipment.
The Company issued 1,032,292 shares, with an average
price of $.62 per share, for payment of consulting
services. Additionally, the Company issued 12,600
shares, valued at $1 per share, to employees for
performance bonuses.
The Company issued 50,000 shares at $1.04 per share,
for payment of a debt obligation.
During the year ended June 30, 1994, the Company recognized investing and
financing activities that affected assets, liabilities and equity, but did not
result in cash receipts or payments. These non-cash activities are as follows:
The Company issued 600,000 shares to C.C. Plastic to
purchase equipment.
The Company issued 717,699 shares to acquire all of the
outstanding common stock of Hutronix, Inc.
The Company issued 25,000 shares as payment for legal
fees.
The Company issued 50,000 shares for payment of a debt
obligation.
F-22
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Statement of Cash Flows: (Continued)
Non-Cash Investing and Financing Activities: (Continued)
Cash paid for interest for the year ended June 30, 1994
was $155. For the year ended June 30, 1995, the Company
did not pay any income taxes.
18. Restatement of the Consolidated Financial Statements:
Management relied upon the advice of the American Institute of Certified
Public Accountants in the original preparation of the accompanying
consolidated financial statements. Their advice was to give retroactive
effect to the disposal of Hutronix, Inc., which was formally disposed of
under contract in November, 1995. Upon submission and review of the
United States Securities and Exchange Commission, it was their position
that retroactive treatment would not apply. As such, the consolidated
financial statements have been restated.
In addition, management had proposed a prior period adjustment for
approximately $65,000 of expenses paid by a third party on the Company's
behalf, which were expenses for the year ended June 30, 1994. Management
was unable to obtain the prior accountant's concurrence with the
adjustment, and determined that, due to immateriality, they would forego
the prior period adjustment.
As a consequence of restoring the balance sheet of Hutronix, Inc. as of
June 30, 1995, the Company recorded an impairment allowance for one
hundred percent of the remaining goodwill of approximately $128,000. In
addition, the original financial statements reported a misallocation on
the net loss on disposal of J.A. Industries (Canada), Inc. and Hutronix,
Inc. Both companies were disposed of at losses of approximately $200,000
and $70,000, respectively.
A summary of the changes and their effects, is as follows:
Net loss, as originally reported $(1,590,820)
Deferral of loss on disposition of Hutronix, Inc. 69,946
Impairment of goodwill of Hutronix, Inc. (128,000)
Reversal of prior period adjustment (65,652)
-----------
Restated net loss $(1,714,526)
===========
F-23
<PAGE>
J.A. INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial
statements give effect to the reverse acquisition by J.A. Industries,
Inc. of Kenmar Business Group, Inc., pursuant to the Agreement and Plan
of Merger between the parties, and is based on the estimates and
assumptions set forth herein and in the notes to such statements. This
pro forma information has been prepared utilizing the historical
financial statements and notes thereto, which are incorporated by
reference herein. The pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had
the purchase been effected on the dates indicated or of the results
which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the merger of Kenmar Business Group, Inc.. The pro forma
entries are described in the accompanying notes to the unaudited pro
forma condensed consolidated financial statements. The pro forma
unaudited condensed consolidated balance sheet assumes the merger took
place on the date of the balance sheet. The pro forma unaudited
condensed consolidated statements of operations assume the acquisition
took place on the first day of the period presented.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions that management deems
appropriate. The unaudited pro forma combined financial data presented
herein are not necessarily indicative of the results the Company would
have obtained had such events occurred at the beginning of the period,
as assumed, or of the future results of the Company. The pro forma
combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
Merger:
On March 1, 1996, J.A. Industries, Inc. entered into an Agreement and
Plan of Merger with Kenmar Business Group, Inc. Under the Agreement,
J.A. Industries, Inc. will issue a private placement of stock, the
proceeds of which will be used to pay outstanding liabilities of J.A.
Industries, Inc., provide at least $200,000 of cash, and a book value
of $200,000. J.A. Industries, Inc. will then perform a 1 for 4 reverse
stock split, and issue common stock of an amount equal to the
post-split number of shares outstanding to provide Kenmar Business
Group, Inc. a fifty percent ownership interest.
F-24
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Current
Cash $ --- $ 5,538
Accounts receivable
Trade --- 569,292
Other --- 59,437
Inventory (note 3) --- 453,274
Prepaid expenses and deposits --- 21,892
---------------- ----------------
--- 1,109,433
Real estate held for resale --- 875,000
Property and equipment (note 4) --- 514,836
Investments --- 22,075
Intangible assets (note 5) --- 120,978
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Liabilities
Current
Bank indebtedness $ 68 $ 105,000
Accounts payable 138,167 928,358
Due to shareholders --- 51,426
Share subscription deposits 123,383 ---
Equipment loans --- 119,048
Current portion of long-term debt (note 7) --- 155,270
---------------- ----------------
261,619 1,359,102
Loans from shareholders (note 6) 21,064 136,691
Long-term debt (note 7) - 551,264
---------------- ----------------
282,683 2,047,057
---------------- ----------------
Share Capital and Deficit
Capital stock:
Authorized:
20,000,000 common shares with a par value of $0.0025 per share
Issued:
7,906,603 shares (1994 - 6,817,034) 19,792 17,043
Additional paid-in capital 5,445,253 3,948,343
Accumulated deficit (5,611,973) (3,381,265)
Cumulative translation adjustment (4,504) 11,144
Treasury stock, at cost (131,250) ---
---------------- ----------------
(282,683) 595,265
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 2,417,585
Cost of sales --- 1,977,458
---------------- ----------------
Gross profit --- 440,127
Selling and marketing expenses --- 97,254
General and administrative expenses 745,565 479,497
---------------- ----------------
Loss from operations (745,565) (136,624)
Other income (expense) (74,591) (54,374)
---------------- ----------------
Consolidated net loss $ (820,156) $ (190,998)
---------------- ----------------
Loss per share $ 0.09 $ 0.03
---------------- ----------------
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the three months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 1,237,956
Cost of sales --- 963,690
---------------- ----------------
Gross profit --- 274,266
Selling and marketing expenses --- 71,820
General and administrative expenses 81,921 239,877
---------------- ----------------
Loss from operations (81,921) (37,431)
Other income (expense) (74,591) (48,676)
---------------- ----------------
Consolidated net loss $ (156,512) $ (86,107)
---------------- ----------------
Loss per share $ 0.01 $ 0.01
---------------- ----------------
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statement of Changes in Financial Position
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period $ (820,156) $ (190,998)
Items not affecting cash:
Amortization --- 80,543
Issuance of stock for services 476,251 ---
Loss on sale of subsidiary 74,591 ---
Changes in non-cash working capital 163,395 85,991
---------------- ----------------
(105,918) (24,464)
---------------- ----------------
Financing activities
Issue of common shares 120,000 100,000
Loan from shareholders (14,703) 4,327
Long-term debt --- (41,596)
---------------- ----------------
105,297 62,731
---------------- ----------------
----------------
Investing activities
Purchase of property and equipment --- (4,578)
Proceeds on sale of subsidiary 100 ---
---------------- ----------------
100 (4,578)
---------------- ----------------
Increase (decrease) in cash position (521) 33,689
Effect of currency translation on cash flow --- 32,991
Cash position beginning of period 453 (166,142)
---------------- ----------------
Cash position end of period $ (68) $ (99,462)
---------------- ----------------
Represented by:
Cash $ --- $ 5,538
Bank indebtedness (68) (105,000)
---------------- ----------------
$ (68) $ (99,462)
---------------- ----------------
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
For the six months ended December 31, 1995
and the year ended June 30, 1995
Capital Stock Additional Foreign Stock
Paid In Operating Currency Subscription Treasury
Shares Amount Capital Deficit Translation Receivable Stock
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 6,493,778 $ 16,234 $ 3,849,152 $ (3,255,919)$ (7,561)$ --- $ ---
Issued for cash 581,383 1,453 494,797 --- --- --- ---
Issued for consulting fees 582,292 1,456 524,642 --- --- (30,000) ---
Issued and unpaid 500,000 1,250 428,750 --- --- (430,000) ---
Issued to repay debt 50,000 125 51,982 --- --- --- ---
Issued as compensation 12,600 32 12,569 --- --- --- ---
Reverse equipment purchase (600,000) (1,500) (52,148) --- --- --- ---
Reverse Hutronix, Inc. acquisition --- --- --- --- --- --- (131,250)
Shares cancelled (68,450) (171) 171 --- --- --- ---
Aggregate adjustment resulting
from translation of financial
statements into U.S. dollars --- --- --- --- 3,057 --- ---
Net loss for the year ended
June 30, 1995 --- --- --- (2,155,220) --- --- ---
----------------------------------------------------------------------------------------------
Balance June 30, 1995 7,551,603 18,879 5,309,915 (5,411,139) (4,504) (460,000) (131,250)
Issued for cash 300,000 750 119,250 --- --- --- ---
Issued for consulting fees 55,000 163 16,088 --- --- --- ---
Services rendered as consideration
for shares --- --- --- --- --- 460,000 ---
Net loss for the six months ended
December 31, 1995 --- --- --- (820,156) --- --- ---
----------------------------------------------------------------------------------------------
Balance December 31, 1995 7,906,603 $ 19,792 $ 5,445,253 $ (6,231,295)$ (4,504)$ --- $ (131,250)
----------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation and the following
wholly owned subsidiaries:
J.A. Industries (Canada), Inc., a Canadian corporation.
Granite Marketing Corp., a Cayman Island corporation.
Hutronix, Inc. an Arizona corporation.
QDS, de Mexico, S.A. de C.V. a Mexican corporation.
and the 96% owned subsidiary, Hutronix de Mexico, S.A. de C.V. which
has been inactive since August 17, 1982.
All significant inter-company balances and transactions have been
eliminated on consolidation.
J.A. Industries (Canada), Inc. was disposed of during the year ended
June 30, 1995. Hutronix, Inc. and QDS de Mexico were disposed of
during the year ended June 30, 1996 subject to shareholder approval.
Translation of Foreign Currencies
Account balances and transactions denominated in foreign currencies have
been translated into U.S. funds as follows:
Assets and liabilities at the rates of exchange prevailing at the
balance sheet date; Revenue and expenses at average exchange rates for
the period in which the transaction occurred; Exchange gains and
losses arising from foreign currency transactions are included in the
determination of net earnings for the period.
2. Sale of Subsidiary
On November 23, 1995, the Company sold all of the common shares of
Hutronix, Inc. and on and on August 15, 1995 the Company sold all of the
common share of Granite Marketing Corporation for $100. The two
transaction resulted in a loss of $74,591, which has been included in
other expense for the period ended December 31, 1995. Granite Marketing
Corp. was inactive during the period.
F-27
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
3. Inventory
Inventory consists of: 1995 1994
Raw materials $ --- $ 531,321
Less: Reserve for obsolescence --- 190,000
----------------- -----------------
--- 341,321
Work-in-process --- 104,604
Finished goods --- 7,349
----------------- -----------------
$ --- $ 453,274
----------------- -----------------
4. Property and equipment
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost amortization 1995 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Land $ --- $ --- $ --- $ ---
Building --- --- --- ---
Forklift --- --- --- 7,410
Vehicles --- --- --- 81
Office equipment --- --- --- 46,264
Computer equipment --- --- --- 27,957
Manufacturing equipment --- --- --- 199,669
Leasehold improvements --- --- --- 935
Assets not-in-service --- --- --- 232,520
----------------- ----------------- ----------------- -----------------
$ --- $ --- $ --- $ 514,836
----------------- ----------------- ----------------- -----------------
</TABLE>
F-28
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
5. Intangible assets
Intangible assets comprise the following: 1995 1994
Goodwill $ --- $ 128,767
Incorporation costs --- 3,000
Patent costs --- 8,895
------------- -----------------
--- 140,662
Amortization --- 16,096
------------- -----------------
$ --- $ 124,566
------------- -----------------
6. Loans from shareholders
<TABLE>
<CAPTION>
Loans from shareholders comprise the following: 1995 1994
<S> <C> <C>
Loan payable to Alexander Michie, balance due on demand with
no stated interest rate. $ 20,000 $ ---
Loan payable to 391566 B.C. Ltd., balance due on demand with no
stated interest rate. 1,064 ---
Loan payable to Alexander Michie. The loan is unsecured and
has no terms of repayment. The loan has a stated interest rate
of prime plus 2%. --- 138,146
----------------- -----------------
$ 21,064 $ 138,146
----------------- -----------------
</TABLE>
F-29
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
7. Long-term debt
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona due in quarterly instalments of
$12,821, plus interest at 65% of prime (9.0% as of March 31, 1995), due
May 2005; secured by a deed of trust on the real estate held for sale, an
irrevocable letter of credit from a bank in the amount of the outstanding
note payable balance and the assignment of a life insurance policy owned
by a related party on the president of Hutronix, Inc. At March 31, 1995
the company was not in compliance with certain restrictive
covenants contained in this note. $ - $ 564,087
Note payable to a supplier due in quarterly instalments of
$8,361 plus interest at 6% unsecured, due March 15, 1995 --- 8,086
Promissory note payable to a lender. The principal of $36,155 (CDN
$50,000) plus accrued interest at 24% per annum is payable on demand. The
lender has stated that it is not her intention to
demand repayment of the note before March 31, 1996. --- 51,283
Mortgage payable, on manufacturing equipment, to the Province of British
Columbia, Canada due in monthly payments of $1,787 (CDN $2,500) plus
interest at 6% per annum. The principal balance
is due July 1, 1995. --- 83,078
----------------- -----------------
0 706,534
Less: Current portion --- 155,270
----------------- -----------------
$ 0 $ 551,264
----------------- -----------------
</TABLE>
8 Income tax
The Company has losses for income tax purposes which may be carried
forward and applied to reduce future income taxes. The deferred tax
benefit related to these losses has not been recorded in the accounts as
there is not virtual certainty of realization.
All of the income attributable to Granite Marketing Corp. (a Cayman Island
corporation) is reported as non-taxable.
F-30
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
9 Commitments and Contingencies
Under the terms of various agreements, the Company has guaranteed payment
of $18,275 in accounting fees and the $546,125 mortgage on the Douglas,
Arizona plant owned by Hutronix, Inc. The reversal of the Hutronix, Inc.
purchase included an idemnification on the above guarantees. Should the
other party fail to perform, the obligations could be asserted against the
Company.
10 Subsequent event
On January 26, 1996 the shareholders ratified the sale of Hutronix, Inc.
and QDS, de Mexico, S.A. de C.V.
F-31
<PAGE>
Item 10. Executive Compensation
The following table shows all the cash compensation paid or to be paid
by the Company or any of its subsidiaries, as well as certain other compensation
paid or accrued, during the fiscal years indicated, to the Chief Executive
Officer for such period in all capacities in which he served. No other Executive
received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restrict All other
Annual ed stock LTIP Compensa-
Name and Principal Bonus/ Compen- Award Options Payouts tion
Position Year Salary ($) sation($) ($) SARs ($) (i)
<S> <C> <C> <C> <C> <C> <C>
Robert Knight 1995 $36,000 0 0 0 0
President 1994 $36,000 0 10,000
1993 $36,000
Alexander Michie 1995 $10,000 0 0 0
former director 1994 $36,000 0 10,000
1993 $36,000
Karl Ronstadt 1995 $62,000 0 0 0
former director 1994 $72,000 0 10,000
1993 $54,000
James Burns 1995 $55,000 0 0 0 0
Chairman of the 1994 0
Board 1993 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) Percent
of total
<TABLE>
<CAPTION>
Options/SARs
Options/ Granted to
SARs Employee Exercise or base Expiration
Name Granted Fiscal Year Price ($/SH) Date
<S> <C> <C> <C> <C>
Robert W. Knight 0 0 N/A N/A
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
Aggregated option/sar exercises and fiscal year-end option/SAR
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-money
-33-
<PAGE>
<TABLE>
<CAPTION>
Options/SAR Options/SAR
Shares at FY-end (#) at FY-end (#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert W. Knight 0 N/A 10,000 0
</TABLE>
The following table sets forth information with respect to the Chief
Executive officer concerning the grants of options and Stock Appreciation Rights
("SAR") during the past fiscal year:
Estimated Future Payout under Non-Stock
Price Based Plans
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other maturation or Threshold Target Maximum
Name Rights (#) Payout ($ or#) $ or #) ($ or #)
<S> <C> <C> <C> <C> <C>
Robert W. Knight 0 0 N/A N/A N/A
</TABLE>
-34-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant) J.A. INDUSTRIES, INC.
By (Signature and Title) per/s:/Robert Knight President
Date May 16, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By (Signature and Title) per/s:/Robert Knight Chairman of the Board
Date May 16, 1996
-35-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-23528
J.A. INDUSTRIES, INC.
(Exact name of small business issuer as specified on its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34A-2755 Lougheed Highway, Suite 522, Port Coquitlam, B.C. V3B 5W9 Canada
(Address of principal executive offices)
Issuer's telephone number, including area code: 604-941-3413
Check whether the issuer (1) filed all reports required to filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, par value $0.0025 per share
Class
7,906,603
Number of shares outstanding
<PAGE>
J.A. INDUSTRIES, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Consolidated Condensed
Balance Sheet September 30, 1995 (unaudited) with comparative
figures September 30, 1994 (unaudited)
Consolidated Condensed Statement of Operations for the three months
ended September 30, 1995 (unaudited) with comparative figures
September 30, 1994 (unaudited)
Consolidated Condensed
Statement of Change in Financial Position for the three months
ended September 30, 1995 (unaudited) with comparative figures
September 30, 1994 (unaudited)
Consolidated Condensed Statement of Changes in Shareholder's Equity for
the three months ended September 30, 1995 (unaudited) with
comparative figures June 30, 1994 yearend (audited)
Notes to Condensed Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Signatures
<PAGE>
J.A. Industries, Inc.
Consolidated Financial Statements
(unaudited)
First Quarter
September 30, 1995
<PAGE>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------
September 30
1995 1994
----------- ----------
Assets
Current
Cash $ 3,260 $ 7,153
Accounts receivable
Trade 250,444 702,634
Other 62,826 --
Inventory (note 2) 250,293 428,605
Prepaid expenses and deposits 22,100 34,209
---------- ----------
588,923 1,172,601
Real estate held for resale 474,778 875,000
Property and equipment (note 3) 46,910 565,877
Investments -- 22,075
Intangible assets (note 4) 2,050 124,566
---------- ----------
$1,112,661 $2,760,119
---------- ----------
-1-
<PAGE>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30
1995 1994
----------- -----------
Liabilities
<S> <C> <C>
Current
Bank indebtedness $ -- $ 145,000
Accounts payable 630,613 970,777
Equipment loans 546,125 119,048
Current portion of long-term debt (note 6) 31,373 170,950
----------- -----------
1,208,111 1,405,775
Loans from shareholders (note 5) 40,767 138,146
Long-term debt (note 6) 12,258 561,842
----------- -----------
1,261,136 2,105,763
----------- -----------
Share Capital and Deficit
Capital stock:
Authorized:
20,000,000 common shares with a par value of $0.0025 per share
Issued:
7,906,603 shares (1994 - 6,717,034) 19,792 16,792
Additional paid-in capital 5,445,253 3,948,594
Accumulated deficit (5,609,016) (3,295,158)
Cumulative translation adjustment (4,504) (15,872)
----------- -----------
(148,476) 654,356
----------- -----------
$ 1,112,661 $ 2,760,119
----------- -----------
-2-
<PAGE>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------
For the three months ended
September 30
1995 1994
----------- -----------
Sales $ 532,310 $ 1,179,629
Cost of sales 455,030 1,013,768
----------- -----------
Gross profit 77,280 165,861
Selling and marketing expenses 183 25,434
General and administrative expenses 781,384 239,620
----------- -----------
Loss from operations (704,287) (99,193)
Other income (expense) 64 (5,698)
----------- -----------
Consolidated net loss $ (704,223) $ (104,891)
----------- -----------
Loss per share $ 0.08 $ 0.02
----------- -----------
-3-
<PAGE>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------
For the three months ended
September 30
1995 1994
----------- ------------
Sales $(1,885,275) $ (58,730)
Cost of sales (1,522,428) (84,083)
----------- -----------
Gross profit (362,847) 25,353
Selling and marketing expenses (97,071) (64,354)
General and administrative expenses 301,887 (217,210)
----------- -----------
Loss from operations (567,663) 306,917
Other income (expense) 54,438 (5,698)
----------- -----------
Consolidated net loss $ (513,225) $ 301,219
----------- -----------
Loss per share $ 0.04 $ 0.03
----------- -----------
-4-
<PAGE>
J.A. Industries, Inc.
Consolidated Statement of Changes in Financial Position
(unaudited)
- --------------------------------------------------------------------------------
For the three months ended
September 30
1995 1994
----------- ----------
Cash provided by (used in)
Operating activities
Net loss for the period $(704,223) $(104,891)
Items not affecting cash:
Amortization 20,392 26,581
Issuance of stock for services 476,251 --
Changes in non-cash working capital 10,587 24,472
--------- ---------
(196,993) (53,838)
--------- ---------
Financing activities
Issue of common shares 120,000 100,000
Loan from shareholders 40,767 5,782
Long-term debt (5,788) (15,338)
--------- ---------
154,979 90,444
--------- ---------
---------
Increase (decrease) in cash position (42,014) 36,606
Effect of currency translation on cash flow -- (8,311)
Cash position beginning of period 45,274 (166,142)
--------- ---------
Cash position end of period $ 3,260 $(137,847)
--------- ---------
Represented by:
Cash $ 3,260 $ 7,153
Bank indebtedness -- (145,000)
--------- ---------
$ 3,260 $(137,847)
--------- ---------
Accounts receivable (313,197) (347,502)
Inventory (559,787)
Prepaid expenses (37,535)
Accounts payable 531,829 792,082
Income taxes payable --
Purchase agreement -- (133,287)
-5-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1995 and 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation and the following wholly
owned subsidiaries:
J.A. Industries (Canada), Inc., a Canadian corporation. Granite
Marketing Corp., a Cayman Island corporation. Hutronix, Inc. an
Arizona corporation. QDS, de Mexico, S.A. de C.V. a Mexican
corporation. and the 96% owned subsidiary, Hutronix de Mexico, S.A.
de C.V. which has been inactive since August 17, 1982.
All significant inter-company balances and transactions have been
eliminated on consolidation.
J.A. Industries (Canada), Inc., Hutronix, Inc., and QDS, de Mexico, de
C.V., were disposed of during the year ended June 30, 1995 subject to
shareholder approval (note 13).
Translation of Foreign Currencies
Account balances and transactions denominated in foreign currencies have
been translated into U.S. funds as follows:
Assets and liabilities at the rates of exchange prevailing at the
balance sheet date; Revenue and expenses at average exchange rates for
the period in which the transaction occurred; Exchange gains and
losses arising from foreign currency transactions are included in the
determination of net earnings for the period.
2. Inventory
Inventory consists of: 1995 1994
Raw materials $163,725 $501,462
Less: Reserve for obsolescence -- 190,000
-------- --------
163,725 311,462
Work-in-process 75,420 95,473
Finished goods 11,148 21,670
-------- --------
$250,293 $428,605
-------- --------
-6-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1995 and 1994
- --------------------------------------------------------------------------------
3. Property and equipment
</TABLE>
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost amortization 1995 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Land $ --- $ --- $ --- $ ---
Building --- --- --- ---
Forklift --- --- --- 7,787
Vehicles 13,121 13,121 --- 84
Office equipment 46,382 46,382 --- 4,118
Computer equipment 152,361 139,361 13,000 18,972
Manufacturing equipment 277,320 243,410 33,910 302,396
Leasehold improvements --- --- --- ---
Assets not-in-service --- --- --- 232,520
----------------- ----------------- ----------------- -----------------
$ 489,184 $ 442,274 $ 46,910 $ 565,877
----------------- ----------------- ----------------- -----------------
</TABLE>
4. Intangible assets
Intangible assets comprise the following: 1995 1994
Goodwill $128,767 $128,767
Incorporation costs 3,000 3,000
Patent costs -- 8,895
-------- --------
131,767 140,662
Amortization 129,717 16,096
-------- --------
$ 2,050 $124,566
-------- --------
5. Loans from shareholders
<TABLE>
<CAPTION>
Loans from shareholders comprise the following: 1995 1994
<S> <C> <C>
Loan payable to Alexander Michie, balance due on demand with
no stated interest rate $ 20,000 $ --
Loan payable to 391566 B.C. Ltd., balance due on demand with no
stated interest rate 20,767 --
Loan payable to Alexander Michie. The loan is unsecured and
has no terms of repayment. The loan has a stated interest rate
of prime plus 2% -- 138,146
-------- ----------------
$ 40,767 $ 138,146
-------- ----------------
-7-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1995 and 1994
- --------------------------------------------------------------------------------
6. Long-term debt
</TABLE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona due in quarterly instalments of
$12,821, plus interest at 65% of prime (9.0% as of March 31, 1995), due
May 2005; secured by a deed of trust on the real estate held for sale, an
irrevocable letter of credit from a bank in the amount of the outstanding
note payable balance and the assignment of a life insurance policy owned
by a related party on the president of Hutronix, Inc. At March 31, 1995
the company was not in compliance with certain restrictive
covenants contained in this note. $ 546,125 $ 576,908
Note payable to a supplier due in quarterly instalments of
$8,361 plus interest at 6% unsecured, due March 15, 1995 --- 16,447
Promissory note payable to a lender. The principal of $36,155 (CDN
$50,000) plus accrued interest at 24% per annum is payable on demand. The
lender has stated that it is not her intention to
demand repayment of the note before March 31, 1996. --- 49,039
Mortgage payable, on manufacturing equipment, to the Province of British
Columbia, Canada due in monthly payments of $1,787 (CDN $2,500) plus
interest at 6% per annum. The principal balance
is due July 1, 1995. --- 90,398
------------- -----------------
546,125 732,792
Less: Current portion --- 170,950
----------------- -----------------
$ 546,125 $ 561,842
----------------- -----------------
</TABLE>
7. Income tax
The Company has losses for income tax purposes which may be carried
forward and applied to reduce future income taxes. The deferred tax
benefit related to these losses has not been recorded in the accounts as
there is not virtual certainty of realization.
All of the income attributable to Granite Marketing Corp. (a Cayman Island
corporation) is reported as non-taxable.
-8-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1995 and 1994
- --------------------------------------------------------------------------------
8. Commitments and Contigencies
Under the terms of various agreements, the Company has guaranteed payment
of $18,275 in accounting fees and the $546,125 mortgage on the Douglas,
Arizona plant owned by Hutronix, Inc. The reversal of the Hutronix, Inc.
purchase included an idemnification on the above guarantees. Should the
other party fail to perform, the obligations could be asserted against the
Company. The amounts have been booked in the Company's accounts.
9. Subsequent event
On January 26, 1996 the shareholders ratified the sale of Hutronix, Inc.
and QDS, de Mexico, S.A. de C.V.
-9-
<PAGE>
<PAGE>
Management's Discussion and Analysis
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes under the caption "Financial Statements".
Overview
In July of 1992, the existing management took over the direction of J
A. Industries, Inc. It was the intention of the management to enhance the value
of its shares on behalf of its shareholders by acquiring cash flow entities
which were, firstly, synergistic with existing subsidiaries and secondly were
companies with consistent growth potential.
The first acquisition was Torik, Inc. in September, 1992, which at that
time was just breaking even on its sales of $300,000 per month. Subsequent to
the Torik acquisition, the Company had entered into litigation and lost the case
to the former management of Torik returning all shares back to the Torik
management. The Company was booking that acquisition at the cost of $200 which
has been written off.
The second acquisition of the assets of Pacific Rim Polytech, took
place in February, 1993 by the Company's wholly owned subsidiary J.A. Industries
(Canada) Inc. ("J.A. Canada"). J.A. Canada immediately started the manufacturing
of underground junction boxes and cable tray. In June, 1995 the Company sold
J.A. Canada to a non-affiliate British Columbia Corporation.
The Company also entered into two licensing agreements and
manufacturing agreements for the manufacture and distribution of electronic
ballasts of which both licenses are inactive.
In September of 1993, the Company acquired Hutronix, Inc., of Tucson,
Az ("Hutronix"). Subsequent to the year ended, 1996, the Company returned the
shares of Hutronix to Baboquivari Cattle Company ("BCC") to settle outstanding
liabilities with BCC.
In December of 1993, the Company acquired the assets of Capital City
Plastic ("CCP"). CCP had been inactive since May of 1993. As CCP was unable to
deliver the equipment as detailed in the purchase agreement, the Company
cancelled the purchase agreement.
In May, 1994 the Company signed an option agreement to acquire 100% of
Link Technologies (Canada) Ltd. ("Link"). The Company was to pay $500,000 USD
plus issue 500,000 shares of common stock to acquire 100% of Link. The Company
was also to provide $1,500,000 USD in working capital for Link. Subsequent to
this agreement the option has expired and no further agreement has been reached.
On March 30, 1994 Granite Marketing Corporation. ("Granite"), then a
wholly owned subsidiary of the Company, entered into an agreement with
Queensland Industries, Inc. ("Queensland") whereby Queensland purchased from
Granite an exclusive license to manufacture,
-10-
<PAGE>
promote, market, sell and distribute the products of J.A. Canada relating to
polyurethane underground junction boxes. Queensland is a wholly owned subsidiary
of Wincanton, Corporation ("Wincanton"), a publicly traded Washington State
Corporation. Subsequent to this agreement, the Company rescinded the licensing
agreement in exchange for a $50,000 USD payment by Queensland Industries to
Granite. Granite is currently inactive. Subsequent to the year end, Granite was
sold to an unrelated third party in exchange for assumption of Granite's
liabilities.
On June 28, 1995 the Company signed a letter of intent to merge with
privately held MiNT Corporation ("Mint") through a stock for stock exchange. The
share exchange would have resulted in a change of control of J.A. Industries to
the majority shareholders of Mint. Mint is in the business of providing high
quality contract manufacturing of electronic and electromechanical printed
circuit board assemblies. Subsequent to this letter of intent and subsequent to
the year ended June 30, 1995, the shareholders of Mint elected not to proceed
with the acquisition.
Subsequent to the year ended June 30, 1995, the Company entered into an
Agreement and Plan of Merger (the "Merger") with Kenmar Business Groups, Inc.
("Kenmar") of Raleigh, NC. Pursuant to the terms of the agreement, current
shareholders of Kenmar will receive common stock of J.A. Industries such that
Kenmar shareholders will own approximately 50% of the outstanding shares of J.A.
Industries, Inc. on closing. The agreement is subject to shareholder's approval
of both companies as well, J.A. Industries, Inc. must finalized its settlement
agreement with a former stockholder, Karl Ronstadt and Hutronix, Inc. subsequent
to the year ended June 30, 1995, the Company did resolve its outstanding dispute
with Baboquivari Cattle Company as described above (see "Hutronix").
Kenmar Business Groups, Inc. ("Kenmar") founded in 1984, is a provider
of high quality electronic manufacturing services. It is located in the Research
Triangle area of North Carolina. Kenmar has a broad array of technical
capabilities to bring products to the market from concept to final production.
Kenmar's manufacturing team has experience in producing electronic and
electro-mechanical subassemblies and products for use in the telecommunication,
industrial control, computer, medical and instrumentation industries. Kenmar has
both Surface Mount Technology and Pin Thru-Hole capabilities as well as cable,
harnesses and interconnect assembly lines.
Management believes that the trend towards outsourcing in the
electronic manufacturing industry is expanding. To this end, management still
believes that its strategy to acquire synergistic businesses in the contract
manufacturing industry is a sound plan. The planned Merger between the Company
and Kenmar is the first step in trying to re-establish that plan. Upon
completion of the Merger, current management of Kenmar will assume management of
the Company.
Prior to the Merger, the Company must reduce its liabilities and
contingent liabilities to zero and have working capital of a minimum of two
hundred thousand ($200,000) dollars. To
-11-
<PAGE>
this end, the Company has disposed of, settled or is in the process of settling
all outstanding liabilities. The Company has reached agreements and has signed
releases for potential contingent liability claims arising or potentially
arising from several of the Company's former agreements.
The Company intends to fund its capital requirements through a private
placement to meet the terms of the agreement. To date the funds necessary to
complete the Merger are in place and will be released to the Company subject to
Shareholder's approval of the Merger. If Shareholder's approval is not obtained
to complete the Merger, then the funds in escrow would not be released to the
Company.
The Company will continue to focus its expansion plans on the
acquisition of other contract manufacturing operations.
Seasonal factors do not influence the Company's sales.
Liquidity and Capital Resources
Subsequent to the 3 months ended September 30, 1995, Hutronix was
returned to Baboquivari Cattle Company (former shareholder of Hutronix, "BCC")
for release of all liabilities owed by the Company to BCC and BCC's assumption
of all liabilities associated with Hutronix. The Company has no cash flow and
its ability to maintain operations is severely impaired. If the Company cannot
raise additional capital it is unlikely the Company would be able to operate and
it may be forced to seek protection under Chapter 11 of the Bankruptcy Act.
It is the Company's goal in the fiscal year ending June 30, 1996 to
find a suitable acquisition candidate. Management anticipated that the Company
will do further equity financing. Management believes that from these sources
the Company will adequately fund the operations of the Company and allow it to
maintain its aggressive acquisition strategy.
To Address the accountant's report of a "going concern" uncertainty, it
is anticipated that the Company will continue to look for new opportunities in
the contract manufacturing area. On March 1, 1996 the Company entered into an
agreement to merge with Kenmar to fulfill the Company's business strategy. As
part of the Merger, the Company must eliminate all outstanding liabilities and
have working capital of $200,000. At the date of this report, the Company has
approximately $133,000 in liabilities it must satisfy to complete the Merger. As
of May 15, 1996 the Company raised the required funds to complete the Merger
through a private placement of its common stock. The funds are in escrow with
the Company's legal counsel and will be released to the Compnay upon
shareholder's approval of the Merger. In the event the Company did not receive
shaeholder's approval, the funds would not be release from escrow and the
Company wold not be able to meet its financial requirements. If the Merger was
not completed, then the Company could be forced to seek protection under Chapter
11 of the Bankruptcy Act.
In the event that the Company does raise the necessary funds to
complete the Merger, and all other conditions of the Merger are satisfied and
the Merger is completed it is anticipated that
-12-
<PAGE>
cash flow from ongoing operations will satisfy the day to day needs of the
Company. Furthermore, as of February 29, 1996, Kenmar had approximately $744,500
in cash or cash equivalents (unaudited). It is anticipated that the merged
company will use these funds to maintain and grow the existing business that it
has. It is also the Company's goal to try and arrange an equity financing in the
amount of $3 million dollars to expand its business. No commitment for such
financing has been arranged and the likelihood of its completion cannot be
guaranteed. In the event the merged company could not raise any additional
capital, it is anticipated that current rates of growth of the merged company
would satisfy its working capital requirements.
Future cash needs of the merged entity would include funds to implement
the Company's acquisition strategy and to sustain the Company through a period
of restructuring and growth.
Notes Payable and Long term debt
Hutronix, Inc. a former subsidiary has a note payable to Bank One
executed through the Industrial Development Authority of the City of Douglas due
in quarterly instalments of $12,821, plus interest at 65% of prime (7.25% as of
June 30, 1994), due may 2005; secured by a deed of trust on the real estate held
for sale and an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance guaranteed by the Company. At June 30, 1995 the
amount outstanding was $576,908. The subsequent agreement between BCC and the
Company calls for BCC and Hutronix to indemnify the Company against any
liability under this bond. As the solvency of Hutronix, Inc. is uncertain, the
ability for Hutronix, Inc. to indemnify the Company is unlikely. On March 4,
1996 the liability under the guarantee to Bank One was satisfied. Furthermore,
on November 21, 1996 an agreement was reached between Baboquivari Cattle
Company, Karl and Marilyn Ronstadt, Hutronix, Inc. and the Company whereby the
parties exchanged mutual releases relieving the Company of any liabilities that
it had or might have in the future with the parties.
On closing of the Merger between Kenmar and the Company, the Company is
obligated to pay a former minority shareholder of Hutronix, Inc. $10,000 and
issue 50,000 shares of restricted common stock in exchange for a release from
all future obligations the minority shareholder may be entitled to. Also, on
closing, the Company is obligated to pay the former landlord of Hutronix, Inc. a
fee for releasing the Company from a Corporate guarantee on the lease of the
building located at 1150 E. Palmdale, Tucson, AZ. The funds for these
transaction are part of the funding needed for the closing of the Merger
agreement. If the funds were not raised or the Merger was not completed, these
liabilities would still be outstanding.
On June 30, 1995 the Company sold its wholly owned subsidiary, J.A.
Industries (Canada) Inc. to an unrelated third party. The sale relieved the
Company of any long term debt associated with the subsidiary. Furthermore, the
Company obtained releases for all corporate guarantees that it had provided for
the subsidiary subject to certain cash payments as follows. The Company settled
with one creditor by issuing shares of restricted stock in the amount of 136,000
shares to satisfy approximately $34,000 USD of debt. On completion of the Merger
between Kenmar and
-13-
<PAGE>
the Company, the Company will incurred a cost of $5,000 USD to settle with one
creditor that comes from a corporate guarantee of the Company. The funds for
settling this amount will come from the funds necessary to close the Merger
transaction. If the funds were not raised and the Merger was not completed, then
this liability would still be outstanding with the creditor.
In March, 1996, the Company came to a final agreement with the former
owners of Capital City Plastics whereby Capital City Plastic and John Szaniszlo
will provide the Company with a release from all liabilities and deliver to the
Company 600,000 shares of common stock issued to Capital City Plastics in
exchange for the Company's release from liabilities, $10,000 and the issuance of
50,000 restricted common stock of the Company. The funds necessary to complete
this transaction are part of the funding needs of the Merger. If the necessary
funds were not raised or the Merger was not completed, the Company's position
would be that there are no liabilities outstanding with Capital City Plastic or
John Szaniszlo as they had breached the original agreement between the parties.
On completion of the Merger, for which there can be no guarantee, the
Company will be assuming the following liabilities based on the Kenmar audited
financial statements for the period ending August 31, 1995 and unaudited
financial statements for the six month period ending February 29, 1996:
Line of credit/loans $ 0
Current maturities of long term debt $ 4,317
Current obligations under capital lease $ 35,203
Accounts payable - trade $ 621,852
Income tax payable $ 0
Other accrued liabilities $ 94,833
=========
Total Current Liabilities $ 756,205
Long Term Debt, less current maturities $ 541,236
Long term obligations under capital lease $ 57,750
=========
Total Liabilities as of February 29, 1996 $1,021,386
Line of Credit: In March, 1994, Kenmar negotiated a $4 million revolving line of
credit with a commercial lender which allowed it to borrow up to 80% of eligible
receivables and was secured by a first lien on all the Company's receivables and
inventory. Borrowing under this line bears interest at prime plus 2.5% (minimum
7.5%) in addition to an annual facility fee and other costs. Kenmar paid off the
line of credit in the fourth quarter of its fiscal year ended August 31, 1995.
Kenmar has not requested a renewal of the line of credit.
-14-
<PAGE>
Long-term Debt: Long term debt of Kenmar consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Subordinated promissory notes payable monthly $524,855 $646,674 $700,675
instalments of $9,009 including interest at 8%
through October 2002.
Bank debt collateralized by a first lien on all the - $217,932 -
Company's plant, equipment, furniture and
fixtures payable in monthly instalments of
$7,950, including interest at prime +1%. this
loan was paid off prior to august 31, 1995.
Uncollateralized note payable to stockholder $ 39,482 $ 43,486 $ 47,149
repayable with interest at 8% in 59 monthly
instalments of 4610 and a balloon payment
of $30,083 on October 15, 1997
Notes payable secured by equipment repayable $ 18,403 $ 42,202 -
in monthly instalments of $2,435 including
interest at 16.85% through April 1996.
(Subsequently, this note was satisfied)
Note payable to stockholder in monthly - - $ 22,069
instalments of $2,535 including interest
at 8% through April, 1994, collateralized
by certain equipment.
$582,380 $950,276 $769,893
Less current maturities $ 22,359 $293,242 $ 79,750
-------- -------- --------
$560,021 $657,034 $690,143
======= ======== ========
</TABLE>
Principal maturities of debt Kenmar at August 31, 1995 are as follows:
Year ending August 31
1996 $ 22,359
1997 $ 73,269
1998 $104,776
1999 $ 80,451
2000 $ 87,130
Thereafter $214,395
--------
Total Long-term debt $582,380
========
-15-
<PAGE>
Obligations Under Capital Leases of Kenmar:
Kenmar leases equipment under capital leases which expire on various
dates through 1998.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Machinery and equipment $200,066 $200,066 $ 62,735
Vehicles - $ 27,871 $ 27,871
-------- -------- --------
Total $200,006 $227,937 $ 90,606
</TABLE>
The following is a schedule by years of future minimum lease payments
under capital leases as of august 31, 1995 for Kenmar
Year ending August 31
1996 $ 48,272
1997 $ 49,701
1998 $ 29,431
--------
Total minimum lease payment $127,404
Further Kenmar Commitments:
Kenmar leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1995, 1994 and 1993, Kenmar
incurred rental expenses of $214,505, $271,488 and $230,175 respectively under
these leases. Future minimum lease payments under the terms of the above leases
are as follows:
1996 $38,422
1997 $ 2,952
1998 $ 2,460
Preferred Stock of Kenmar:
The aggregate number of authorized shares of preferred stock is
100,000. Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors of Kenmar.
Kenmar issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred") in 1994. During 1993, the Company issued
716 shares of Class A Preferred including upon receipt of the issue price, 200
shares subscribed at August 31, 1992. Each share of Class A Preferred may be
called or put at any time after five years from the date of issuance at a rate
of one and one-half times the issue price. Redemption requirements of Class A
Preferred stock at August 31, 1995 were as follows:
-16-
<PAGE>
1997 $150,000
1998 $447,000
1999 $ 68,700
2000 $ 86,250
--------
Total $751,950
========
The Class A Preferred is entitled to a 10% cumulative dividend payable
quarterly, subject to the provisions of North Carolina law. Cumulative unpaid
dividends are $73,008, $23,378, and $7,643 as of August 31, 1995, 1994, and 1993
respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price plus cumulative dividends in
arrears. Cash dividends of $0, $32,910 and $40,031 were paid in 1995, 1994, and
1993, respectively.
Results of Operations
The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
For the 3 month period ended September 30, 1995 compared to the 3 month
period ended September 30, 1994. The auditors report for the period ending June
30, 1995 states that as a result of the discontinuation of operations of the
Company there raises substantial doubt about the Company's ability to continue a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In June, 1995 the Company disposed of one of its wholly owned operating
subsidiaries J.A. Industries (Canada) Inc. In August the Company disposed of an
inactive subsidiary, Granite Marketing Corporation. In early March 1995, the
Company entered into negotiations with Karl G. Ronstadt and Baboquivari Cattle
Company, former shareholders of Hutronix, Inc. to settle outstanding issues and
potential liabilities. The Company and the former shareholders could not come to
any resolution. On September 23, 1995, the former shareholder of Hutronix, Inc.
exercised his right under a put/call agreement dated September 23, 1993 and
attached to the original purchase agreement of Hutronix, Inc. dated September
15, 1993. The put option allowed the former shareholder to put 262,000 shares of
the Company to the Company at a price of $2.25 creating a liability of $589,500.
The Company did not have the resources to pay the liability. On November 21,
1995, subsequent to the year end, the Company entered into an agreement to
reverse the acquisition of Hutronix, Inc. the only remaining operating
subsidiary of the Company to satisfy all outstanding liabilities between the
former shareholder of Hutronix and the Company. The condition that effected the
decision to enter into the agreement to reverse the Hutronix acquisition
occurred prior to the Company's year end. Although the assets and operations of
Hutronix were included in the Company's June 30, 1995 financial statement, they
were subsequently disposed of and it was so reported in the Company's December
31, 1995 financial statement.
-17-
<PAGE>
Subsequent to the period ending September 30, 1995 the Company has
entered into a plan of merger with Kenmar Business Groups Inc. A condition of
the agreement is that the Company is to have no liabilities and working capital
of $200,000. To this end, though the Company has an inactive status, there are
substantial one time charges to eliminate all liabilities and to settle contract
obligations.
For the first quarter period ending September 30, 1995 the Company had
revenue of $532,310. compared to sales of $1,179,629 for the corresponding
period in 1994. The decrease in sales can be attributed to the disposition of
J.A. Industries (Canada) Inc. prior to year end June 30, 1995. Cost of sales for
the 3 month period ended September 30, 1995 were $455,030 generating a gross
profit margin of $77,280 or 14.5% of sales compared to a cost of sales of
$1,013,768 generating a gross profit of $165,861 or 14% of sales for the 3 month
period ended September 30, 1994. Again, the decrease in cost of sales can be
attributed to the disposition of J.A. Industries (Canada) Inc. prior to the year
ended June 30, 1995. For the three month period ending September 30, 1995 G&A
was $781,384 compared to $239,620 for the corresponding period in 1994.
Increased legal and accounting expenses accounted for approximately $75,000 of
the expense. As well, a large portion of the expense was a one time charge to
pay outstanding liabilities and the termination of outstanding contracts. The
preceding items, except for accounting fees, were mostly settled with the
issuance of restricted common stock of the Company. On September 23, 1995,
Baboquivari Cattle Company exercise its put option under a put/call agreement
dated September 23, 1993. The option obligated the Company to purchase 262,000
shares of the Company's stock from Baboquivari at a price of $2.25 creating an
unfunded liability of $589,500. Prior to this period, the auditors of the
Company had treated this item as a non-balance sheet item. Subsequent to the
first quarter ended September 30, 1995, the Company entered into an agreement
with Baboquivari Cattle Company to reverse its September 15, 1993 acquisition
agreement of Hutronix, Inc. in exchange for the release of all liabilities from
Hutronix, Inc and Baboquivari Cattle Company.
On November 21, 1995 the Company entered into an agreement with
Baboquivari Cattle Company to transfer all title of Hutronix, Inc. to
Baboquivari Cattle Company in exchange for a release of all liabilities. Due to
this disposition of the last operating subsidiary of the Company, the Company
had no revenue for the three month period ending December 31, 1995 compared to
of $1,237,956 for the three month period and $2,417,585 for the six month period
ending December 31, 1994. General and administrative expenses for the period
three month period ended December 31, 1995 were $81,921 compared to the
corresponding three month period in 1994 of $239,877. The Company experienced a
net loss of $83,316 for the three month period ending December 31, 1995 compared
to a loss of $86,107 for the corresponding period
-18-
<PAGE>
in 1994. The net loss from operations for the six month
period ending December 31, 1995 was $746,960 compared to $190,989 for the
corresponding period in 1994. The loss in 1995 is attributed to the
reorganization and elimination of ongoing contracts and liabilities the Company
needed to satisfy to proceed with its merger agreement with Kenmar Business
Groups, Inc. The Company had a shareholder's deficit of $282,683 for the period
ended December 31, 1995 compared to net equity of $595,265 for the corresponding
period in 1994. Accounts payable at December 31, 1995 were $138,167 compared to
$928,358 for the corresponding period 1994. Due to the discontinuation of
operations, the Company's payables were reduced dramatically. Most of the
expense is attributed to legal and accounting costs due to the restructuring of
the Company. The disposition of Hutronix relieved the Company of its long term
liability with a guarantee on a building in Douglas, Arizona. Therefore, long
term debt was reduce to zero from $561,842 in the corresponding prior year
period.
For the three month period ending March 31, 1996 the Company had no
operations and therefore no revenue compared to sales of $1,035,397 for the
three month period ended March 31, 1995 and sales of $3,452,982 for the nine
month period ended March 31, 1995. General and Administrative expenses for the
three month period ended March 31, 1996 were $298,405 compared to $262,027 for
the corresponding period in 1995. G&A for the nine month period ended March 31,
1996 was $1,043,970 compared to $741,524 for the corresponding period in 1995.
The G&A costs can be attributed to the restructuring and reorganization the
Company experienced from the disposition and discontinuation of operations and
the merger agreement the Company entered into with Kenmar Business Groups, Inc.
The Company had a net loss from operations of $1,118,561 for nine month period
ended March 31, 1996 compared to $300,884 for the corresponding nine month
period in 1995. The Company had a Shareholder's deficit of $203,695 at March 31,
1996 compared to Net Equity of $670,141 for the same period 1995. Current
liabilities were significantly reduce due to cessation of operations to $220,276
for the period ended March 31, 1996 compared to Current Liabilities of $964,465
for the corresponding period ended March 31, 1995.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
J.A. INDUSTRIES, INC.
per:/s/Robert Knight/
Robert Knight, Chief Executive Officer May 27, 1996
-20-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-23528
J.A. INDUSTRIES, INC.
(Exact name of small business issuer as specified on its charter)
Delaware 13-3421337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34A-2755 Lougheed Highway, Suite 522, Port Coquitlam, B.C. V3B 5Y9 Canada
(Address of principal executive offices)
Issuer's telephone number, including area code: 604-941-3413
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, par value $0.0025 per share
Class
7,906,603
Number of shares outstanding
<PAGE>
J.A. INDUSTRIES, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Consolidated Condensed
Balance Sheet December 31, 1995 (unaudited) with comparative
figures December 31, 1994 (unaudited)
Consolidated Condensed Statement of Operations for the six months ended
December 31, 1995 (unaudited) with comparative figures
December 31, 1994 (unaudited)
Consolidated Condensed Statement of Operations for the three months
ended December 31, 1995 (unaudited) with comparative figures
December 31, 1994 (unaudited)
Consolidated Condensed
Statement of Change in Financial Position for the six months
ended December 31, 1995 (unaudited) with comparative figures
December 31, 1994 (unaudited)
Consolidated Condensed Statement of Changes in Shareholder's Equity for
the six months ended December 31, 1995 (unaudited) with
comparative figures June 30, 1994 (audited)
Notes to Condensed Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Signatures
<PAGE>
J.A. Industries, Inc.
Consolidated Financial Statements
(unaudited)
Second Quarter
December 31, 1995
<PAGE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Current
Cash $ --- $ 5,538
Accounts receivable
Trade --- 569,292
Other --- 59,437
Inventory (note 3) --- 453,274
Prepaid expenses and deposits --- 21,892
---------------- ----------------
--- 1,109,433
Real estate held for resale --- 875,000
Property and equipment (note 4) --- 514,836
Investments --- 22,075
Intangible assets (note 5) --- 120,978
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
-1-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Balance Sheets
(unaudited)
- --------------------------------------------------------------------------------------------------------------
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Liabilities
Current
Bank indebtedness $ 68 $ 105,000
Accounts payable 138,167 928,358
Due to shareholders --- 51,426
Share subscription deposits 123,383 ---
Equipment loans --- 119,048
Current portion of long-term debt (note 7) --- 155,270
---------------- ----------------
261,619 1,359,102
Loans from shareholders (note 6) 21,064 136,691
Long-term debt (note 7) - 551,264
---------------- ----------------
282,683 2,047,057
---------------- ----------------
Share Capital and Deficit
Capital stock:
Authorized:
20,000,000 common shares with a par value of $0.0025 per share
Issued:
7,906,603 shares (1994 - 6,817,034) 19,792 17,043
Additional paid-in capital 5,445,253 3,948,343
Accumulated deficit (5,611,973) (3,381,265)
Cumulative translation adjustment (4,504) 11,144
Treasury stock, at cost (131,250) ---
---------------- ----------------
(282,683) 595,265
---------------- ----------------
$ --- $ 2,642,322
---------------- ----------------
-2-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 2,417,585
Cost of sales --- 1,977,458
---------------- ----------------
Gross profit --- 440,127
Selling and marketing expenses --- 97,254
General and administrative expenses 745,565 479,497
---------------- ----------------
Loss from operations (745,565) (136,624)
Other income (expense) (74,591) (54,374)
---------------- ----------------
Consolidated net loss $ (820,156) $ (190,998)
---------------- ----------------
Loss per share $ 0.09 $ 0.03
---------------- ----------------
-3-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Operations
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the three months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Sales $ --- $ 1,237,956
Cost of sales --- 963,690
---------------- ----------------
Gross profit --- 274,266
Selling and marketing expenses --- 71,820
General and administrative expenses 81,921 239,877
---------------- ----------------
Loss from operations (81,921) (37,431)
Other income (expense) (74,591) (48,676)
---------------- ----------------
Consolidated net loss $ (156,512) $ (86,107)
---------------- ----------------
Loss per share $ 0.01 $ 0.01
---------------- ----------------
-4-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statement of Changes in Financial Position
(unaudited)
- --------------------------------------------------------------------------------------------------------------
For the six months ended
December 31
1995 1994
---------------- ----------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net loss for the period $ (820,156) $ (190,998)
Items not affecting cash:
Amortization --- 80,543
Issuance of stock for services 476,251 ---
Loss on sale of subsidiary 74,591 ---
Changes in non-cash working capital 163,395 85,991
---------------- ----------------
(105,918) (24,464)
---------------- ----------------
Financing activities
Issue of common shares 120,000 100,000
Loan from shareholders (14,703) 4,327
Long-term debt --- (41,596)
---------------- ----------------
105,297 62,731
---------------- ----------------
----------------
Investing activities
Purchase of property and equipment --- (4,578)
Proceeds on sale of subsidiary 100 ---
---------------- ----------------
100 (4,578)
---------------- ----------------
Increase (decrease) in cash position (521) 33,689
Effect of currency translation on cash flow --- 32,991
Cash position beginning of period 453 (166,142)
---------------- ----------------
Cash position end of period $ (68) $ (99,462)
---------------- ----------------
Represented by:
Cash $ --- $ 5,538
Bank indebtedness (68) (105,000)
---------------- ----------------
$ (68) $ (99,462)
---------------- ----------------
-5-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
J.A. Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
For the six months ended December 31, 1995
and the year ended June 30, 1995
Capital Stock Additional Foreign Stock
Paid In Operating Currency Subscription Treasury
Shares Amount Capital Deficit Translation Receivable Stock
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1994 6,493,778 $ 16,234 $ 3,849,152 $ (3,255,919)$ (7,561)$ --- $ ---
Issued for cash 581,383 1,453 494,797 --- --- --- ---
Issued for consulting fees 582,292 1,456 524,642 --- --- (30,000) ---
Issued and unpaid 500,000 1,250 428,750 --- --- (430,000) ---
Issued to repay debt 50,000 125 51,982 --- --- --- ---
Issued as compensation 12,600 32 12,569 --- --- --- ---
Reverse equipment purchase (600,000) (1,500) (52,148) --- --- --- ---
Reverse Hutronix, Inc. acquisition --- --- --- --- --- --- (131,250)
Shares cancelled (68,450) (171) 171 --- --- --- ---
Aggregate adjustment resulting
from translation of financial
statements into U.S. dollars --- --- --- --- 3,057 --- ---
Net loss for the year ended
June 30, 1995 --- --- --- (2,155,220) --- --- ---
----------------------------------------------------------------------------------------------
Balance June 30, 1995 7,551,603 18,879 5,309,915 (5,411,139) (4,504) (460,000) (131,250)
Issued for cash 300,000 750 119,250 --- --- --- ---
Issued for consulting fees 55,000 163 16,088 --- --- --- ---
Services rendered as consideration
for shares --- --- --- --- --- 460,000 ---
Net loss for the six months ended
December 31, 1995 --- --- --- (820,156) --- --- ---
----------------------------------------------------------------------------------------------
Balance December 31, 1995 7,906,603 $ 19,792 $ 5,445,253 $ (6,231,295)$ (4,504)$ --- $ (131,250)
----------------------------------------------------------------------------------------------
-6-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of:
J.A. Industries, Inc., a Delaware corporation and the following
wholly owned subsidiaries:
J.A. Industries (Canada), Inc., a Canadian corporation.
Granite Marketing Corp., a Cayman Island corporation.
Hutronix, Inc. an Arizona corporation.
QDS, de Mexico, S.A. de C.V. a Mexican corporation.
and the 96% owned subsidiary, Hutronix de Mexico, S.A. de C.V. which
has been inactive since August 17, 1982.
All significant inter-company balances and transactions have been
eliminated on consolidation.
J.A. Industries (Canada), Inc. was disposed of during the year ended
June 30, 1995. Hutronix, Inc. and QDS de Mexico were disposed of
during the year ended June 30, 1996 subject to shareholder approval.
Translation of Foreign Currencies
Account balances and transactions denominated in foreign currencies have
been translated into U.S. funds as follows:
Assets and liabilities at the rates of exchange prevailing at the
balance sheet date; Revenue and expenses at average exchange rates for
the period in which the transaction occurred; Exchange gains and
losses arising from foreign currency transactions are included in the
determination of net earnings for the period.
2. Sale of Subsidiary
On November 23, 1995, the Company sold all of the common shares of
Hutronix, Inc. and on and on August 15, 1995 the Company sold all of the
common share of Granite Marketing Corporation for $100. The two
transaction resulted in a loss of $74,591, which has been included in
other expense for the period ended December 31, 1995. Granite Marketing
Corp. was inactive during the period.
-7-
<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
3. Inventory
Inventory consists of: 1995 1994
Raw materials $ --- $ 531,321
Less: Reserve for obsolescence --- 190,000
----------------- -----------------
--- 341,321
Work-in-process --- 104,604
Finished goods --- 7,349
----------------- -----------------
$ --- $ 453,274
----------------- -----------------
4. Property and equipment
</TABLE>
<TABLE>
<CAPTION>
Accumulated Net Book Value
Cost amortization 1995 1994
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Land $ --- $ --- $ --- $ ---
Building --- --- --- ---
Forklift --- --- --- 7,410
Vehicles --- --- --- 81
Office equipment --- --- --- 46,264
Computer equipment --- --- --- 27,957
Manufacturing equipment --- --- --- 199,669
Leasehold improvements --- --- --- 935
Assets not-in-service --- --- --- 232,520
----------------- ----------------- ----------------- -----------------
$ --- $ --- $ --- $ 514,836
----------------- ----------------- ----------------- -----------------
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<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
5. Intangible assets
Intangible assets comprise the following: 1995 1994
Goodwill $ --- $ 128,767
Incorporation costs --- 3,000
Patent costs --- 8,895
------------- -----------------
--- 140,662
Amortization --- 16,096
------------- -----------------
$ --- $ 124,566
------------- -----------------
6. Loans from shareholders
</TABLE>
<TABLE>
<CAPTION>
Loans from shareholders comprise the following: 1995 1994
<S> <C> <C>
Loan payable to Alexander Michie, balance due on demand with
no stated interest rate. $ 20,000 $ ---
Loan payable to 391566 B.C. Ltd., balance due on demand with no
stated interest rate. 1,064 ---
Loan payable to Alexander Michie. The loan is unsecured and
has no terms of repayment. The loan has a stated interest rate
of prime plus 2%. --- 138,146
----------------- -----------------
$ 21,064 $ 138,146
----------------- -----------------
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<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
7. Long-term debt
</TABLE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Note payable to a bank executed through the Industrial Development
Authority of the City of Douglas, Arizona due in quarterly instalments of
$12,821, plus interest at 65% of prime (9.0% as of March 31, 1995), due
May 2005; secured by a deed of trust on the real estate held for sale, an
irrevocable letter of credit from a bank in the amount of the outstanding
note payable balance and the assignment of a life insurance policy owned
by a related party on the president of Hutronix, Inc. At March 31, 1995
the company was not in compliance with certain restrictive
covenants contained in this note. $ - $ 564,087
Note payable to a supplier due in quarterly instalments of
$8,361 plus interest at 6% unsecured, due March 15, 1995 --- 8,086
Promissory note payable to a lender. The principal of $36,155 (CDN
$50,000) plus accrued interest at 24% per annum is payable on demand. The
lender has stated that it is not her intention to
demand repayment of the note before March 31, 1996. --- 51,283
Mortgage payable, on manufacturing equipment, to the Province of British
Columbia, Canada due in monthly payments of $1,787 (CDN $2,500) plus
interest at 6% per annum. The principal balance
is due July 1, 1995. --- 83,078
----------------- -----------------
0 706,534
Less: Current portion --- 155,270
----------------- -----------------
$ 0 $ 551,264
----------------- -----------------
</TABLE>
8 Income tax
The Company has losses for income tax purposes which may be carried
forward and applied to reduce future income taxes. The deferred tax
benefit related to these losses has not been recorded in the accounts as
there is not virtual certainty of realization.
All of the income attributable to Granite Marketing Corp. (a Cayman Island
corporation) is reported as non-taxable.
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<PAGE>
J.A. Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
9 Commitments and Contigencies
Under the terms of various agreements, the Company has guaranteed payment
of $18,275 in accounting fees and the $546,125 mortgage on the Douglas,
Arizona plant owned by Hutronix, Inc. The reversal of the Hutronix, Inc.
purchase included an idemnification on the above guarantees. Should the
other party fail to perform, the obligations could be asserted against the
Company.
10 Subsequent event
On January 26, 1996 the shareholders ratified the sale of Hutronix, Inc.
and QDS, de Mexico, S.A. de C.V.
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<PAGE>
Management's Discussion and Analysis
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes under the caption "Financial Statements".
Overview
In July of 1992, the existing management took over the direction of J
A. Industries, Inc. It was the intention of the management to enhance the value
of its shares on behalf of its shareholders by acquiring cash flow entities
which were, firstly, synergistic with existing subsidiaries and secondly were
companies with consistent growth potential.
The first acquisition was Torik, Inc. in September, 1992, which at that
time was just breaking even on its sales of $300,000 per month. Subsequent to
the Torik acquisition, the Company had entered into litigation and lost the case
to the former management of Torik returning all shares back to the Torik
management. The Company was booking that acquisition at the cost of $200 which
has been written off.
The second acquisition of the assets of Pacific Rim Polytech, took place
in February, 1993 by the Company's wholly owned subsidiary J.A. Industries
(Canada) Inc. ("J.A. Canada"). J.A. Canada immediately started the manufacturing
of underground junction boxes and cable tray. In June, 1995 the Company sold
J.A. Canada to a non-affiliate British Columbia Corporation.
The Company also entered into two licensing agreements and
manufacturing agreements for the manufacture and distribution of electronic
ballasts of which both licenses are inactive.
In September of 1993, the Company acquired Hutronix, Inc., of Tucson,
Az ("Hutronix"). Subsequent to the year ended, 1996, the Company returned the
shares of Hutronix to Baboquivari Cattle Company ("BCC") to settle outstanding
liabilities with BCC.
In December of 1993, the Company acquired the assets of Capital City
Plastic ("CCP"). CCP had been inactive since May of 1993. As CCP was unable to
deliver the equipment as detailed in the purchase agreement, the Company
cancelled the purchase agreement.
In May, 1994 the Company signed an option agreement to acquire 100% of
Link Technologies (Canada) Ltd. ("Link"). The Company was to pay $500,000 USD
plus issue 500,000 shares of common stock to acquire 100% of Link. The Company
was also to provide $1,500,000 USD in working capital for Link. Subsequent to
this agreement the option has expired and no further agreement has been reached.
On March 30, 1994 Granite Marketing Corporation. ("Granite"), then a
wholly owned subsidiary of the Company, entered into an agreement with
Queensland Industries, Inc. ("Queensland") whereby Queensland purchased from
Granite an exclusive license to manufacture,
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<PAGE>
promote, market, sell and distribute the products of J.A. Canada relating to
polyurethane underground junction boxes. Queensland is a wholly owned subsidiary
of Wincanton, Corporation ("Wincanton"), a publicly traded Washington State
Corporation. Subsequent to this agreement, the Company rescinded the licensing
agreement in exchange for a $50,000 USD payment by Queensland Industries to
Granite. Granite is currently inactive. Subsequent to the year end, Granite was
sold to an unrelated third party in exchange for assumption of Granite's
liabilities.
On June 28, 1995 the Company signed a letter of intent to merge with
privately held MiNT Corporation ("Mint") through a stock for stock exchange. The
share exchange would have resulted in a change of control of J.A. Industries to
the majority shareholders of Mint. Mint is in the business of providing high
quality contract manufacturing of electronic and electromechanical printed
circuit board assemblies. Subsequent to this letter of intent and subsequent to
the year ended June 30, 1995, the shareholders of Mint elected not to proceed
with the acquisition.
Subsequent to the year ended June 30, 1995, the Company entered into an
Agreement and Plan of Merger (the "Merger") with Kenmar Business Groups, Inc.
("Kenmar") of Raleigh, NC. Pursuant to the terms of the agreement, current
shareholders of Kenmar will receive common stock of J.A. Industries such that
Kenmar shareholders will own approximately 50% of the outstanding shares of J.A.
Industries, Inc. on closing. The agreement is subject to shareholder's approval
of both companies as well, J.A. Industries, Inc. must finalized its settlement
agreement with a former stockholder, Karl Ronstadt and Hutronix, Inc. subsequent
to the year ended June 30, 1995, the Company did resolve its outstanding dispute
with Baboquivari Cattle Company as described above (see "Hutronix").
Kenmar Business Groups, Inc. ("Kenmar") founded in 1984, is a provider
of high quality electronic manufacturing services. It is located in the Research
Triangle area of North Carolina. Kenmar has a broad array of technical
capabilities to bring products to the market from concept to final production.
Kenmar's manufacturing team has experience in producing electronic and
electro-mechanical subassemblies and products for use in the telecommunication,
industrial control, computer, medical and instrumentation industries. Kenmar has
both Surface Mount Technology and Pin Thru-Hole capabilities as well as cable,
harnesses and interconnect assembly lines.
Management believes that the trend towards outsourcing in the
electronic manufacturing industry is expanding. To this end, management still
believes that its strategy to acquire synergistic businesses in the contract
manufacturing industry is a sound plan. The planned Merger between the Company
and Kenmar is the first step in trying to re-establish that plan. Upon
completion of the Merger, current management of Kenmar will assume management of
the Company.
Prior to the Merger, the Company must reduce its liabilities and
contingent liabilities to zero and have working capital of a minimum of two
hundred thousand ($200,000) dollars. To
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<PAGE>
this end, the Company has disposed of, settled or is in the process of settling
all outstanding liabilities. The Company has reached agreements and has signed
releases for potential contingent liability claims arising or potentially
arising from several of the Company's former agreements.
The Company intends to fund its capital requirements through a private
placement to meet the terms of the agreement. To date the funds necessary to
complete the Merger are in place and will be released to the Company subject to
Shareholder's approval of the Merger. If Shareholder's approval is not obtained
to complete the Merger, then the funds in escrow would not be released to the
Company.
The Company will continue to focus its expansion plans on the
acquisition of other contract manufacturing operations.
Seasonal factors do not influence the Company's sales.
Liquidity and Capital Resources
Subsequent to the 3 months ended September 30, 1995, Hutronix was
returned to Baboquivari Cattle Company (former shareholder of Hutronix, "BCC")
for release of all liabilities owed by the Company to BCC and BCC's assumption
of all liabilities associated with Hutronix. The Company has no cash flow and
its ability to maintain operations is severely impaired. If the Company cannot
raise additional capital it is unlikely the Company would be able to operate and
it may be forced to seek protection under Chapter 11 of the Bankruptcy Act.
It is the Company's goal in the fiscal year ending June 30, 1996 to
find a suitable acquisition candidate. Management anticipated that the Company
will do further equity financing. Management believes that from these sources
the Company will adequately fund the operations of the Company and allow it to
maintain its aggressive acquisition strategy.
To Address the accountant's report of a "going concern" uncertainty, it
is anticipated that the Company will continue to look for new opportunities in
the contract manufacturing area. On March 1, 1996 the Company entered into an
agreement to merge with Kenmar to fulfill the Company's business strategy. As
part of the Merger, the Company must eliminate all outstanding liabilities and
have working capital of $200,000. At the date of this report, the Company has
approximately $133,000 in liabilities it must satisfy to complete the Merger. As
of May 15, 1996 the Company raised the required funds to complete the Merger
through a private placement of its common stock. The funds are in escrow with
the Company's legal counsel and will be released to the Compnay upon
shareholder's approval of the Merger. In the event the Company did not receive
shaeholder's approval, the funds would not be release from escrow and the
Company wold not be able to meet its financial requirements. If the Merger was
not completed, then the Company could be forced to seek protection under Chapter
11 of the Bankruptcy Act.
In the event that the Company does raise the necessary funds to
complete the Merger, and all other conditions of the Merger are satisfied and
the Merger is completed it is anticipated that
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<PAGE>
cash flow from ongoing operations will satisfy the day to day needs of the
Company. Furthermore, as of February 29, 1996, Kenmar had approximately $744,500
in cash or cash equivalents (unaudited). It is anticipated that the merged
company will use these funds to maintain and grow the existing business that it
has. It is also the Company's goal to try and arrange an equity financing in the
amount of $3 million dollars to expand its business. No commitment for such
financing has been arranged and the likelihood of its completion cannot be
guaranteed. In the event the merged company could not raise any additional
capital, it is anticipated that current rates of growth of the merged company
would satisfy its working capital requirements.
Future cash needs of the merged entity would include funds to implement
the Company's acquisition strategy and to sustain the Company through a period
of restructuring and growth.
Notes Payable and Long term debt
Hutronix, Inc. a former subsidiary has a note payable to Bank One
executed through the Industrial Development Authority of the City of Douglas due
in quarterly instalments of $12,821, plus interest at 65% of prime (7.25% as of
June 30, 1994), due may 2005; secured by a deed of trust on the real estate held
for sale and an irrevocable letter of credit from a bank in the amount of the
outstanding note payable balance guaranteed by the Company. At June 30, 1995 the
amount outstanding was $576,908. The subsequent agreement between BCC and the
Company calls for BCC and Hutronix to indemnify the Company against any
liability under this bond. As the solvency of Hutronix, Inc. is uncertain, the
ability for Hutronix, Inc. to indemnify the Company is unlikely. On March 4,
1996 the liability under the guarantee to Bank One was satisfied. Furthermore,
on November 21, 1996 an agreement was reached between Baboquivari Cattle
Company, Karl and Marilyn Ronstadt, Hutronix, Inc. and the Company whereby the
parties exchanged mutual releases relieving the Company of any liabilities that
it had or might have in the future with the parties.
On closing of the Merger between Kenmar and the Company, the Company is
obligated to pay a former minority shareholder of Hutronix, Inc. $10,000 and
issue 50,000 shares of restricted common stock in exchange for a release from
all future obligations the minority shareholder may be entitled to. Also, on
closing, the Company is obligated to pay the former landlord of Hutronix, Inc. a
fee for releasing the Company from a Corporate guarantee on the lease of the
building located at 1150 E. Palmdale, Tucson, AZ. The funds for these
transaction are part of the funding needed for the closing of the Merger
agreement. If the funds were not raised or the Merger was not completed, these
liabilities would still be outstanding.
On June 30, 1995 the Company sold its wholly owned subsidiary, J.A.
Industries (Canada) Inc. to an unrelated third party. The sale relieved the
Company of any long term debt associated with the subsidiary. Furthermore, the
Company obtained releases for all corporate guarantees that it had provided for
the subsidiary subject to certain cash payments as follows. The Company settled
with one creditor by issuing shares of restricted stock in the amount of 136,000
shares to satisfy approximately $34,000 USD of debt. On completion of the Merger
between Kenmar and
-15-
<PAGE>
the Company, the Company will incurred a cost of $5,000 USD to settle with one
creditor that comes from a corporate guarantee of the Company. The funds for
settling this amount will come from the funds necessary to close the Merger
transaction. If the funds were not raised and the Merger was not completed, then
this liability would still be outstanding with the creditor.
In March, 1996, the Company came to a final agreement with the former
owners of Capital City Plastics whereby Capital City Plastic and John Szaniszlo
will provide the Company with a release from all liabilities and deliver to the
Company 600,000 shares of common stock issued to Capital City Plastics in
exchange for the Company's release from liabilities, $10,000 and the issuance of
50,000 restricted common stock of the Company. The funds necessary to complete
this transaction are part of the funding needs of the Merger. If the necessary
funds were not raised or the Merger was not completed, the Company's position
would be that there are no liabilities outstanding with Capital City Plastic or
John Szaniszlo as they had breached the original agreement between the parties.
On completion of the Merger, for which there can be no guarantee, the
Company will be assuming the following liabilities based on the Kenmar audited
financial statements for the period ending August 31, 1995 and unaudited
financial statements for the six month period ending February 29, 1996:
Line of credit/loans $ 0
Current maturities of long term debt $ 4,317
Current obligations under capital lease $ 35,203
Accounts payable - trade $ 621,852
Income tax payable $ 0
Other accrued liabilities $ 94,833
=========
Total Current Liabilities $ 756,205
Long Term Debt, less current maturities $ 541,236
Long term obligations under capital lease $ 57,750
=========
Total Liabilities as of February 29, 1996 $1,021,386
Line of Credit: In March, 1994, Kenmar negotiated a $4 million revolving line of
credit with a commercial lender which allowed it to borrow up to 80% of eligible
receivables and was secured by a first lien on all the Company's receivables and
inventory. Borrowing under this line bears interest at prime plus 2.5% (minimum
7.5%) in addition to an annual facility fee and other costs. Kenmar paid off the
line of credit in the fourth quarter of its fiscal year ended August 31, 1995.
Kenmar has not requested a renewal of the line of credit.
-16-
<PAGE>
Long-term Debt: Long term debt of Kenmar consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Subordinated promissory notes payable monthly $524,855 $646,674 $700,675
instalments of $9,009 including interest at 8%
through October 2002.
Bank debt collateralized by a first lien on all the - $217,932 -
Company's plant, equipment, furniture and
fixtures payable in monthly instalments of
$7,950, including interest at prime +1%. this
loan was paid off prior to august 31, 1995.
Uncollateralized note payable to stockholder $ 39,482 $ 43,486 $ 47,149
repayable with interest at 8% in 59 monthly
instalments of 4610 and a balloon payment
of $30,083 on October 15, 1997
Notes payable secured by equipment repayable $ 18,403 $ 42,202 -
in monthly instalments of $2,435 including
interest at 16.85% through April 1996.
(Subsequently, this note was satisfied)
Note payable to stockholder in monthly - - $ 22,069
instalments of $2,535 including interest
at 8% through April, 1994, collateralized
by certain equipment.
$582,380 $950,276 $769,893
Less current maturities $ 22,359 $293,242 $ 79,750
-------- -------- --------
$560,021 $657,034 $690,143
======= ======== ========
</TABLE>
Principal maturities of debt Kenmar at August 31, 1995 are as follows:
Year ending August 31
1996 $ 22,359
1997 $ 73,269
1998 $104,776
1999 $ 80,451
2000 $ 87,130
Thereafter $214,395
--------
Total Long-term debt $582,380
=======
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<PAGE>
Obligations Under Capital Leases of Kenmar:
Kenmar leases equipment under capital leases which expire on various
dates through 1998.
1995 1994 1993
---- ---- ----
Machinery and equipment $200,066 $200,066 $ 62,735
Vehicles - $ 27,871 $ 27,871
-------- -------- --------
Total $200,006 $227,937 $ 90,606
The following is a schedule by years of future minimum lease payments
under capital leases as of august 31, 1995 for Kenmar
Year ending August 31
1996 $ 48,272
1997 $ 49,701
1998 $ 29,431
--------
Total minimum lease payment $127,404
Further Kenmar Commitments:
Kenmar leases certain office and production space, machinery and
equipment under noncancellable operating leases expiring at various dates
through 1998. During the years ended August 31, 1995, 1994 and 1993, Kenmar
incurred rental expenses of $214,505, $271,488 and $230,175 respectively under
these leases. Future minimum lease payments under the terms of the above leases
are as follows:
1996 $38,422
1997 $ 2,952
1998 $ 2,460
Preferred Stock of Kenmar:
The aggregate number of authorized shares of preferred stock is
100,000. Of the 100,000 shares of preferred stock 30,000 shares have been
designated as Class A cumulative preferred stock. The designation of the
remaining 70,000 shares will be determined by the Board of Directors of Kenmar.
Kenmar issued 1,150 shares of $50 par value Class A cumulative
preferred stock ("Class A Preferred") in 1994. During 1993, the Company issued
716 shares of Class A Preferred including upon receipt of the issue price, 200
shares subscribed at August 31, 1992. Each share of Class A Preferred may be
called or put at any time after five years from the date of issuance at a rate
of one and one-half times the issue price. Redemption requirements of Class A
Preferred stock at August 31, 1995 were as follows:
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<PAGE>
1997 $150,000
1998 $447,000
1999 $ 68,700
2000 $ 86,250
--------
Total $751,950
=======
The Class A Preferred is entitled to a 10% cumulative dividend payable
quarterly, subject to the provisions of North Carolina law. Cumulative unpaid
dividends are $73,008, $23,378, and $7,643 as of August 31, 1995, 1994, and 1993
respectively.
Upon liquidation, the Class A shares have preference over holders of
common stock in an amount equal to the issue price plus cumulative dividends in
arrears. Cash dividends of $0, $32,910 and $40,031 were paid in 1995, 1994, and
1993, respectively.
Results of Operations
The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
For the 6 month period ended December 31, 1995 compared to the 6 month
period ended December 31, 1994. The auditors report for the period ending June
30, 1995 states that as a result of the discontinuation of operations of the
Company there raises substantial doubt about the Company's ability to continue a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In early March 1995, the Company entered into negotiations with Karl G.
Ronstadt and Baboquivari Cattle Company, former shareholders of Hutronix, Inc.
to settle outstanding issues and potential liabilities. The Company and the
former shareholders could not come to any resolution. On September 23, 1995, the
former shareholder of Hutronix, Inc. exercised his right under a put/call
agreement dated September 23, 1993 and attached to the original purchase
agreement of Hutronix, Inc. dated September 15, 1993. The put option allowed the
former shareholder to put 262,000 shares of the Company to the Company at a
price of $2.25 creating a liability of $589,500. The Company did not have the
resources to pay the liability. On November 21, 1995 the Company entered into an
agreement to reverse the acquisition of Hutronix, Inc. the only remaining
operating subsidiary of the Company to satisfy all outstanding liabilities
between the former shareholder of Hutronix and the Company. The condition that
effected the decision to enter into the agreement to reverse the Hutronix
acquisition occurred prior to the Company's year end. Although the assets and
operations of Hutronix were included in the Company's June 30, 1995 financial
statement, they were subsequently disposed of and it was so reported in the
Company's December 31, 1995 financial statement.
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<PAGE>
Subsequent to the period ending December 31, 1995 the Company has
entered into a plan of merger with Kenmar Business Groups Inc. A condition of
the agreement is that the Company is to have no liabilities and working capital
of $200,000. To this end, though the Company has an inactive status, there are
substantial one time charges to eliminate all liabilities and to settle contract
obligations.
On September 23, 1995, Baboquivari Cattle Company exercise its put
option under a put/call agreement dated September 23, 1993. The option obligated
the Company to purchase 262,000 shares of the Company's stock from Baboquivari
at a price of $2.25 creating an unfunded liability of $589,500. Prior to this
period, the auditors of the Company had treated this item as a non-balance sheet
item.
On November 21, 1995 the Company entered into an agreement with
Baboquivari Cattle Company to transfer all title of Hutronix, Inc. to
Baboquivari Cattle Company in exchange for a release of all liabilities. Due to
this disposition of the last operating subsidiary of the Company, the Company
had no revenue for the three month period ending December 31, 1995 compared to
of $1,237,956 for the three month period and $2,417,585 for the six month period
ending December 31, 1994. General and administrative expenses for the period
three month period ended December 31, 1995 were $81,921 compared to the
corresponding three month period in 1994 of $239,877. The Company experienced a
net loss of $83,316 for the three month period ending December 31, 1995 compared
to a loss of $86,107 for the corresponding period in 1994. The net loss from
operations for the six month period ending December 31, 1995 was $745,565
compared to $190,989 for the corresponding period in 1994. The loss in 1995 is
attributed to the reorganization and elimination of ongoing contracts and
liabilities the Company needed to satisfy to proceed with its merger agreement
with Kenmar Business Groups, Inc. The Company had a shareholder's deficit of
$282,683 for the period ended December 31, 1995 compared to net equity of
$595,265 for the corresponding period in 1994. Accounts payable at December 31,
1995 were $138,167 compared to $928,358 for the corresponding period 1994. Due
to the discontinuation of operations, the Company's payables were reduced
dramatically. Most of the expense is attributed to legal and accounting costs
due to the restructuring of the Company. The disposition of Hutronix relieved
the Company of its long term liability with a guarantee on a building in
Douglas, Arizona. Therefore, long term debt was reduce to zero from $561,842 in
the corresponding prior year period.
For the three month period ending March 31, 1996 the Company had no
operations and therefore no revenue compared to sales of $1,035,397 for the
three month period ended March 31, 1995 and sales of $3,452,982 for the nine
month period ended March 31, 1995. General and Administrative expenses for the
three month period ended March 31, 1996 were $298,405
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<PAGE>
compared to $262,027 for the corresponding period in 1995. G&A for the nine
month period ended March 31, 1996 was $1,043,970 compared to $741,524 for the
corresponding period in 1995. The G&A costs can be attributed to the
restructuring and reorganization the Company experienced from the disposition
and discontinuation of operations and the merger agreement the Company entered
into with Kenmar Business Groups, Inc. The Company had a net loss from
operations of $1,118,561 for nine month period ended March 31, 1996 compared to
$300,884 for the corresponding nine month period in 1995. The Company had a
Shareholder's deficit of $203,695 at March 31, 1996 compared to Net Equity of
$670,141 for the same period 1995. Current liabilities were significantly reduce
due to cessation of operations to $220,276 for the period ended March 31, 1996
compared to Current Liabilities of $964,465 for the corresponding period ended
March 31, 1995.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
J.A. INDUSTRIES, INC.
per:/s/Robert Knight
Robert Knight, Chief Executive Officer May 27, 1996
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<PAGE>
