<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996
REGISTRATION NO. 333-00756
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3291 13-3754366
(State or other (Primary standard (I.R.S. employer
jurisdiction industrial identification
of incorporation) classification code number)
number)
</TABLE>
BETHANY CROSSING OFFICE CENTER
82 Bethany Road, Hazlet, New Jersey 07730
(908) 888-3828
(Address and telephone number of principal executive offices and principal place
of business)
------------------------
HARVEY GOLDMAN
Chairman, Chief Executive Officer and President
Conversion Technologies International, Inc.
Bethany Crossing Office Center, 82 Bethany Road
Hazlet, New Jersey 07730
(908) 888-3828
(Name, address and telephone number of agent for service)
COPIES TO:
<TABLE>
<S> <C>
JULIE M. ALLEN, ESQ. SHELDON MISHER, ESQ.
O'Sullivan Graev & Karabell, LLP ALISON S. NEWMAN, ESQ.
30 Rockefeller Plaza Bachner, Tally, Polevoy & Misher
LLP
New York, New York 10112 380 Madison Avenue
(212) 408-2400 New York, New York 10017
(212) 687-7000
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / / ____________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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- --------------------------------------------------------------------------------
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.00025 par
value......................... 3,527,050(2) $ 4.40 $15,519,020 $ 5,352
Class A Warrants............... 3,527,050(2) .05 176,353 100
Class B Warrants............... 3,527,050(2) .05 176,353 100
units, each consisting of one
share of Common Stock, $.00025
par value, and one Class B
Warrant (3)................... 3,527,050(2) 5.85 20,633,243 7,115
Common Stock, $.00025 par value
(4)........................... 7,054,100 7.80 55,021,980 18,974
Underwriter's Option (5)....... 306,700 0.001 307 100
Common Stock, $.00025 par value
(6)........................... 306,700 6.16 1,889,272 652
Class A Warrants (6)........... 306,700 .07 21,469 100
Class B Warrants (6)........... 306,700 .07 21,469 100
units, each consisting of one
share of Common Stock, $.00025
par value, and one Class B
Warrant (6)................... 306,700 5.85 1,794,195 619
Common Stock, $.00025 par value
(6)........................... 613,400 7.80 4,784,520 1,650
Class A Warrants (7)........... 1,112,500 -- -- --
units, each consisting of one
share of Common Stock, $.00025
par value, and one Class B
Warrant (8)................... 1,112,500 5.85 6,508,125 2,245
Common Stock, $.00025 par value
(9)........................... 1,112,500 7.80 8,677,500 2,993
Total.......................... $115,223,806 $ 40,100(10)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 460,050 shares or Warrants subject to the Underwriter's
over-allotment option.
(3) Issuable upon exercise of the Class A Warrants.
(4) Issuable upon exercise of the Class B Warrants.
(5) To be issued to the Underwriter.
(6) Issuable upon exercise of the Underwriter's Option and/or the Warrants
issuable thereunder.
(7) Registered for resale by selling securityholders.
(8) Issuable upon exercise of the Class A Warrants registered for resale by the
selling securityholders.
(9) Issuable upon exercise of the Class B Warrants underlying the Class A
Warrants registered for resale by the selling securityholders.
(10) $37,208 of the registration fee was paid upon the filing of this
Registration Statement on January 30, 1996. The balance of the registration
fee has been paid in connection with the filing of Amendment No. 3.
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there are
also being registered such additional shares and warrants as may become issuable
pursuant to anti-dilution provisions upon exercise of the Warrants and the
Underwriter's Option.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 3,527,050
shares ("Shares") of Common Stock, $.00025 par value ("Common Stock"), of
Conversion Technologies International, Inc., a Delaware corporation (the
"Company"), 3,527,050 redeemable Class A Warrants ("Class A Warrants") and
3,527,050 redeemable Class B Warrants ("Class B Warrants"), for sale by the
Company in an underwritten public offering, including Shares, Class A Warrants
and Class B Warrants to be issued to cover over-allotments, if any, and (ii) an
additional 1,112,500 Class A Warrants (the "Selling Securityholder Warrants"),
for sale by the holders thereof (the "Selling Securityholders"), 1,112,500 Class
B Warrants (the "Selling Securityholder Class B Warrants") underlying the
Selling Securityholder Warrants and 2,225,000 shares of Common Stock (the
"Selling Securityholder Stock") underlying the Selling Securityholder Warrants
and the Selling Securityholder Class B Warrants, all for resale from time to
time by the Selling Securityholders subject to the contractual restriction that
the Selling Securityholders may not sell the Selling Securityholder Warrants for
specified periods after the closing of the underwritten offering. The Selling
Securityholder Warrants, the Selling Securityholder Class B Warrants and the
Selling Securityholder Stock are sometimes collectively referred to herein as
the "Selling Securityholder Securities."
The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the Selling
Securityholder Securities, including alternative front and back cover pages and
sections entitled "Concurrent Public Offering," "Plan of Distribution" and
"Selling Securityholders" to be used in lieu of the sections entitled
"Concurrent Offering" and "Underwriting" in the Prospectus relating to the
underwritten offering. Certain sections of the Prospectus for the underwritten
offering will not be used in the Prospectus relating to the Selling
Securityholder Securities, such as "Use of Proceeds" and "Dilution."
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED MAY 10, 1996
PROSPECTUS
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
3,067,000 SHARES OF COMMON STOCK,
3,067,000 REDEEMABLE CLASS A WARRANTS AND 3,067,000 REDEEMABLE CLASS B WARRANTS
Conversion Technologies International, Inc. (the "Company") hereby offers
3,067,000 shares (the "Shares") of Common Stock, $.00025 par value ("Common
Stock"), 3,067,000 Redeemable Class A Warrants (collectively, "Class A
Warrants") and 3,067,000 Redeemable Class B Warrants (collectively, "Class B
Warrants"). The Shares, the Class A Warrants and the Class B Warrants may only
be purchased as a group, consisting of an equal number of each security, but are
transferable separately immediately upon issuance. Each Class A Warrant entitles
the holder to purchase one share of Common Stock and one Class B Warrant at an
exercise price of $5.85, subject to adjustment, at any time until the fifth
anniversary of the date of this Prospectus. Each Class B Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $7.80,
subject to adjustment, at any time until the fifth anniversary of the date of
this Prospectus. Commencing one year from the date hereof, the Class A Warrants
and Class B Warrants (collectively, the "Warrants") are subject to redemption by
the Company at a redemption price of $.05 per Warrant on 30 days' written
notice, provided that the closing bid price of the Common Stock averages in
excess of $8.20 and $10.95 per share, respectively, for any 30 consecutive
trading days ending within 15 days of the notice of redemption. See "Description
of Securities."
The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 1,112,500 Class A Warrants (the "Selling Securityholder
Warrants"), the Common Stock and Class B Warrants underlying the Selling
Securityholder Warrants, and the Common Stock issuable upon exercise of such
Class B Warrants. See "Concurrent Offering." The Selling Securityholder Warrants
and the securities underlying such Warrants are sometimes collectively referred
to as the "Selling Securityholder Securities." The Selling Securityholder
Warrants are issuable on the closing of the Offering to the Selling
Securityholders upon the automatic conversion of warrants (the "Bridge
Warrants") acquired by them in the Company's private placement in December 1995
(the "Bridge Financing"). The Selling Securityholders have agreed with the
Company not to sell any of the Selling Securityholder Warrants for at least 90
days after the closing of the Offering and, for the period expiring 270 days
after such closing, have agreed to certain resale restrictions. See "Concurrent
Offering." Sales of the Selling Securityholder Warrants or the underlying
securities, or the potential of such sales, may have an adverse effect on the
market price of the securities offered hereby. Unless the context otherwise
requires, all references herein to the Warrants shall include the Selling
Securityholder Warrants.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock or Warrants, and there can be no assurance that such a market
will develop. The Company has applied for quotation of the Common Stock, the
Class A Warrants and the Class B Warrants on the Nasdaq SmallCap Market
("Nasdaq") under the symbols CTIX, CTIXW and CTIXZ, respectively. The initial
public offering price of the Shares and the Warrants and the exercise prices and
other terms of the Warrants have been determined by negotiation between the
Company and D. H. Blair Investment Banking Corp. (the "Underwriter"). See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. It is anticipated that the initial public offering price
will be $4.40 per Share, $0.05 per Class A Warrant and $.05 per Class B Warrant.
Pursuant to Schedule E of the By-Laws of the National Association of Securities
Dealers, Inc. (the "NASD"), the Shares and the Warrants are being offered at a
price no greater than the maximum recommended by RAS Securities Corp., a
qualified independent underwriter, for the reason set forth in "Underwriting."
FOR INFORMATION CONCERNING A SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
RELATING TO THE UNDERWRITER, SEE "RISK FACTORS" AND "UNDERWRITING."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, WHICH MAY RESULT
IN THE LOSS OF AN INVESTOR'S ENTIRE INVESTMENT, AND IMMEDIATE DILUTION. SEE
"RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share............................................. $4.40 $.297 $4.103
Per Class A Warrant................................... $0.05 $.0033 $.0467
Per Class B Warrant................................... $0.05 $.0033 $.0467
Total (3)............................................. $13,801,500 $931,141 $12,870,359
</TABLE>
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $414,045 ($476,152
if the over-allotment option is exercised in full); and (ii) an option,
exercisable over a period of three years commencing two years from the date
of this Prospectus, to purchase up to 306,700 shares of Common Stock and/or
306,700 Class A Warrants and/or 306,700 Class B Warrants (the "Underwriter's
Option"). The Company has also agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $1,067,045 ($1,129,152 if the
over-allotment option is exercised in full) payable by the Company,
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter a 30-day option to purchase up to
an additional 460,050 Shares and/or 460,050 Class A Warrants and/or 460,050
Class B Warrants on the same terms and conditions as set forth above, solely
to cover over-allotments, if any. If the over-allotment option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $15,871,725, $1,070,812 and $14,800,913,
respectively. See "Underwriting."
--------------------------
The Shares, the Class A Warrants and the Class B Warrants are being offered
on a "firm commitment" basis by the Underwriter when, as and if delivered to and
accepted by the Underwriter, subject to its right to reject orders in whole or
in part and subject to certain other conditions. It is expected that the
delivery of the certificates representing the Shares, the Class A Warrants and
the Class B Warrants will be made against payment at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York on or about
, 1996.
--------------------------
<PAGE>
D.H. BLAIR INVESTMENT BANKING CORP.
---------------
The date of this Prospectus is , 1996
<PAGE>
Photograph of molten ALUMAGLASS brand manufactured abrasive pouring from the
Company's melter at its Dunkirk facility.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS AND HOLDERS OF WARRANTS WITH
ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT
AUDITORS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
DESCRIPTION OF PHOTOGRAPHS
Inside gatefold:
Photographs depicting the ALUMAGLASS manufacturing process, including a
photograph of each of the following: (i) raw materials, including industrial
waste, virgin materials and recycled CRT glass; (ii) the raw materials
qualifying, processing and storage area of the Dunkirk facility; (iii) the
batching area of the Dunkirk facility; (iv) the melter at the Dunkirk
facility; (v) molten glass pouring from the melter; (vi) the drying area at
the Dunkirk facility; (vii) the abrasives finishing area at the Dunkirk
facility; and (viii) finished ALUMAGLASS.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS (I) REFLECTS A 0.12179999-FOR-ONE REVERSE STOCK
SPLIT EFFECTED IN DECEMBER 1995; (II) ASSUMES NO EXERCISE OF (A) THE
UNDERWRITER'S OVER-ALLOTMENT OPTION, (B) THE WARRANTS, (C) THE SELLING
SECURITYHOLDER WARRANTS, (D) THE UNDERWRITER'S OPTION, (E) OPTIONS GRANTED OR
AVAILABLE FOR GRANT UNDER THE COMPANY'S STOCK OPTION PLANS OR (F) OTHER
OUTSTANDING WARRANTS ISSUED TO CERTAIN STOCKHOLDERS OF OR CONSULTANTS TO THE
COMPANY; (III) GIVES EFFECT TO THE CONVERSION, ON THE CLOSING OF THE OFFERING,
OF (X) THE BRIDGE WARRANTS INTO THE SELLING SECURITYHOLDER WARRANTS AND (Y) ALL
OUTSTANDING SHARES OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK, $.001
PAR VALUE ("SERIES A PREFERRED STOCK"), INTO COMMON STOCK; AND (IV) GIVES EFFECT
TO THE AMENDMENT AND RESTATEMENT OF ALL OUTSTANDING WARRANTS AS OF THE DATE OF
THIS PROSPECTUS. SEE "CAPITALIZATION," "MANAGEMENT -- STOCK OPTION PLANS,"
"CERTAIN TRANSACTIONS" AND "DESCRIPTION OF SECURITIES."
THE COMPANY
The Company is an early-stage specialty materials company currently engaged
in (i) developing, manufacturing and marketing industrial abrasives produced in
a patented process utilizing industrial wastes as raw materials, together with
certain virgin materials, and (ii) recycling cathode ray tube ("CRT") glass used
in televisions for sale to the original manufacturers of such glass and others.
Substantially all of the Company's revenues to date have been derived from its
CRT glass recycling operations and, although the Company plans to continue its
CRT glass recycling operations, the Company's primary focus is on the
development, manufacture and marketing of its abrasives. The Company also
utilizes its manufacturing equipment to convert certain types of CRT glass and
certain other manufacturing by-products and industrial wastes into manufacturing
raw materials for use by the Company in its production of abrasives and for sale
to other manufacturers.
The Company's initial abrasives product is its ALUMAGLASS brand of
manufactured abrasives. ALUMAGLASS can be used as a loose grain abrasive applied
with blasting equipment or as an ingredient in products such as polishing agents
and non-skid flooring. Blasting of loose grain abrasives is used in numerous
industries throughout the world for various cleaning, stripping and other
surface treatment or surface preparations applications such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning and
preparations of surface substrates. The Company believes, based on its
applications testing, that ALUMAGLASS may provide performance advantages and
cost savings in comparison to competitive products such as aluminum oxide, steel
grit, glass beads, plastic media and other abrasives in many applications.
Potential purchasers of ALUMAGLASS include military and defense agencies,
entities engaged in the electronics, aerospace, automotive, glass products and
construction industries and entities engaged in surface finishing, coating
removal and maintenance of manufacturing and processing equipment, buildings,
highways, bridges and commercial vehicles and vessels. ALUMAGLASS is also
marketed as an aggregate for direct incorporation into products such as non-skid
flooring and as an additive for direct incorporation into products such as
plasters, tiles and other construction materials.
ALUMAGLASS is manufactured from an alumino-silicate glass which the Company
produces in a glass melting furnace customized for the Company's patented
process. The Company's technology enables it to produce such glass utilizing as
raw materials primarily waste products from the aluminum and other industries,
including the electronics industry with which the Company has established a
relationship through its CRT glass recycling. In many cases, the Company is
either paid to take these waste materials or receives them at little or no cost.
The Company believes that its ability to procure raw materials utilizing
recycling and recovery techniques will enable it to offer its products at a cost
savings to comparable products for many applications.
The Company's strategy is to focus its efforts on the sale and marketing of
its ALUMAGLASS product line and, if warranted by market demand for its abrasives
products, the Company may use a substantial portion of the proceeds of the
Offering to increase its manufacturing capacity by building a second melter at
3
<PAGE>
its facility in Dunkirk, New York. The Company may also seek opportunities
within the United States and abroad to construct and operate additional
abrasives manufacturing facilities, which may include CRT glass recycling
operations, either independently or through joint ventures or other
collaborative arrangements with strategic partners. At the same time, the
Company plans to continue its CRT glass recycling business, which it believes is
important to its strategic positioning as a waste conversion company as well as
its ability to continue to obtain raw materials for its manufactured products.
The Company also intends to utilize certain of its manufacturing equipment to
convert manufacturing by-products and other industrial wastes into raw materials
for use by the Company in the production of its abrasives or for sale to others.
The Company also intends to continue its research and development efforts to
identify and test additional applications for its ALUMAGLASS abrasives, to
pursue the development of processes to manufacture other products, such as
specialty glass and glass ceramics, utilizing industrial waste as raw materials
and to identify synergistic products, services or technologies that could be
available to the Company through acquisition, corporate teaming or other
opportunities.
The Company has experienced significant operating losses since its
inception. At March 31, 1996, the Company had an accumulated deficit of
approximately $(15,164,000), a working capital deficit of approximately
$(7,366,000) and a negative net worth of approximately $(4,771,000). The Company
incurred an operating loss of approximately $(11,909,000) for the fiscal year
ended June 30, 1995, and has incurred an operating loss of approximately
$(1,938,000) for the nine months ended March 31, 1996. The Company expects that
it will continue to incur losses until such time, if ever, as revenues are
sufficient to fund its continuing operations. There can be no assurance that the
Company will ever generate sufficient revenues to achieve profitability. The
Company has received a report from its independent auditors that includes an
explanatory paragraph indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. For a discussion of these
and other risks associated with an investment in the Shares and Warrants, see
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company's operations are conducted through its wholly-owned subsidiary,
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"). The Company
acquired Dunkirk in August 1994 pursuant to a merger (the "Merger") in which
holders of Dunkirk's common stock received shares of the Company's Common Stock
in exchange for their shares of Dunkirk common stock. Dunkirk was incorporated
in Delaware in July 1990 and was in the development stage at the time of the
Merger. The Company was incorporated under the laws of the State of Delaware in
June 1993 for the purpose of acquiring Dunkirk and conducted no business
activities prior to the Merger. All references to the Company in this Prospectus
include the Company and Dunkirk, unless the context otherwise requires.
The Company owns and operates a 230,000 square foot manufacturing facility
in Dunkirk, New York. Its executive offices are located at Bethany Crossing
Office Center, 82 Bethany Road, Hazlet, New Jersey 07730, and its telephone
number is (908) 888-3828.
ALUMAGLASS-TM- is a trademark of the Company.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............................. 3,067,000 shares of Common Stock, 3,067,000 Class A
Warrants and 3,067,000 Class B Warrants. Each Class
A Warrant entitles the holder to purchase one share
of Common Stock and one Class B Warrant at an
exercise price of $5.85, subject to adjustment, at
any time until the fifth anniversary of the date of
this Prospectus. Each Class B Warrant entitles the
holder to purchase one share of Common Stock at an
exercise price of $7.80, subject to adjustment, at
any time until the fifth anniversary of the date of
this Prospectus. The Warrants are subject to
redemption in certain circumstances. See
"Description of Securities."
Securities Offered Concurrently by Selling
Securityholders................................ 1,112,500 Class A Warrants; 1,112,500 Class B
Warrants issuable upon exercise of such Class A
Warrants; and 2,225,000 shares of Common Stock
issuable upon exercise of such Class A Warrants and
such Class B Warrants. See "Concurrent Offering."
Common Stock Outstanding Before Offering........ 1,925,150 shares (1)(3)
Common Stock Outstanding After Offering......... 4,992,150 shares (2)(3)
Use of Proceeds................................. To repay $2,225,000 principal amount of 10%
promissory notes (the "Bridge Notes") issued in the
Bridge Financing, plus accrued interest thereon of
approximately $93,000; to repay approximately
$1,236,500 of other indebtedness; to repay accounts
payable more than 30 days past due of approximately
$1,650,000; for capital expenditures; for marketing
and promotional efforts; for research and
development; for project development; and for
working capital. See "Use of Proceeds."
Proposed Nasdaq Symbols:
Common Stock.................................. CTIX
Class A Warrants.............................. CTIXW
Class B Warrants.............................. CTIXZ
Risk Factors.................................... The Offering involves a high degree of risk and
immediate dilution. See "Risk Factors" and
"Dilution."
</TABLE>
- --------------------------
(1) Includes 1,023,054 shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock on the closing of the Offering. Excludes (i)
2,225,000 shares of Common Stock issuable upon exercise of the Bridge
Warrants and the Class B Warrants underlying such Warrants and (ii) 449,697
shares of Common Stock issuable upon exercise of outstanding options and
warrants at exercise prices ranging from $4.40 to $5.28 per share. See
"Capitalization -- Bridge Financing" and "Management."
(2) Excludes (i) 1,840,200 shares of Common Stock issuable upon exercise of the
Underwriter's over-allotment option and the Warrants issuable upon exercise
of such option; (ii) 1,226,800 shares of Common Stock issuable upon exercise
of the Underwriter's Option and the Warrants underlying such option; (iii)
9,201,000 shares of Common Stock issuable upon exercise of the Warrants
offered hereby; (iv) 2,225,000 shares of Common Stock issuable upon exercise
of the Selling Securityholder Warrants and the Class B Warrants underlying
such warrants; and (v) 449,697 shares of Common Stock issuable upon exercise
of outstanding options and warrants at exercise prices ranging from $4.40 to
$5.28 per share. See "Capitalization," "Management" and "Underwriting."
(3) Includes 740,559 shares (the "Escrow Shares") of Common Stock which have
been deposited into escrow by the holders thereof. Does not include
outstanding options to purchase 71,923 shares of Common Stock (the "Escrow
Options"), which have been deposited into escrow by the holders thereof. The
Escrow Shares and the Escrow Options (collectively, the "Escrow Securities")
are subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the market
price of the Company's Common Stock does not achieve certain levels. The
Company will record a noncash charge to earnings, for financial reporting
purposes, as compensation expense relating to the value of any Escrow
Securities released to the Company's officers, directors, employees or
consultants. See "Risk Factors -- Charge to Income in the Event of Release
of Escrow Securities," "Capitalization" and "Principal Stockholders --
Escrow Securities."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR COMPANY ----------------------------------------------------------------
-------------------------- PERIOD FROM
TWO MONTHS MARCH 1, 1994 NINE MONTHS ENDED
ENDED (DATE OPERATIONS MARCH 31,
YEAR ENDED AUGUST 31, COMMENCED) YEAR ENDED -------------------------
JUNE 30, 1994 1994 TO JUNE 30, 1994 JUNE 30, 1995 (1) 1995 1996
------------- ---------- ---------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................... $ -- $ 62,452 $ -- $ 1,173,264 $ 724,536 $ 2,076,894
Cost of goods sold.......... -- (379,661) -- (2,788,599) (2,397,917) (2,025,851)
------------- ---------- ---------------- ----------------- ------------ -----------
Gross profit (loss)......... -- (317,209) -- (1,615,335) (1,673,381) 51,043
Selling, general and
administrative............. 721,441 297,792 358,336 2,529,263 1,822,913 1,213,315
Process development costs
(2)........................ 765,981 82,427 -- 1,531,955 899,670 776,113
Write-off of in-process
technologies (3)........... -- -- -- 6,232,459 6,232,459 --
------------- ---------- ---------------- ----------------- ------------ -----------
Loss from operations........ (1,487,422) (697,428) (358,336) (11,909,012) (10,628,423) (1,938,385)
Interest expense, net....... (26,084) (40,999) (13,079) (345,690) (182,589) (681,123)
Other income................ -- -- -- -- -- 81,811
------------- ---------- ---------------- ----------------- ------------ -----------
Net loss.................... $(1,513,506) $(738,427) $(371,415) $(12,254,702) $(10,811,012) $(2,537,697)
------------- ---------- ---------------- ----------------- ------------ -----------
------------- ---------- ---------------- ----------------- ------------ -----------
Pro forma net loss per
common share (4)........... $ (19.88) $ (16.68) $ (2.14)
Pro forma weighted average
number of common shares
outstanding (4)............ 18,679 734,754 1,185,387
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED (5)
------------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ (7,366,111) $ 3,930,866
Total assets.......................... 15,321,099 23,486,446
Total liabilities..................... 20,091,997 16,920,691
Accumulated deficit................... (15,163,814) (15,630,015)
Stockholders' equity (deficiency)..... (4,770,898) 6,565,755
</TABLE>
- ------------------------------
(1) Includes the historical results of operations of Dunkirk from August 31,
1994 (the effective date of the Merger for accounting purposes). If Dunkirk
had been acquired July 1, 1994, the Company's consolidated revenue, net
loss and pro forma net loss per common share would have been $1,235,716,
$(12,974,814) and $(17.24), respectively. See "Unaudited Pro Forma
Consolidated Financial Data."
(2) Represents research and development costs associated with the Company's CRT
glass processing and ALUMAGLASS product line since the date of the Merger.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) Represents a one-time, non-cash charge to operations relating to a
write-off of purchased research and development technologies in conjunction
with the Merger that had not reached technological feasibility and, in the
opinion of management, had no alternative use. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) Excludes 740,559 Escrow Shares. See "Principal Stockholders -- Escrow
Securities." See Note 3 of Notes to Consolidated Financial Statements for
an explanation of the determination of the pro forma weighted average
number of common shares used in computing the pro forma net loss per common
share.
(5) Adjusted to give effect to (i) the sale of the Shares and the Warrants
offered hereby at an initial offering price of $4.40 per Share and $0.05
per Warrant, (ii) the receipt of the net proceeds therefrom and the use of
a portion of the net proceeds to repay the Bridge Notes (including
interest), (iii) the corresponding charge relating to the Bridge Financing
and debt discount through the date of repayment of approximately $466,000
(excluding an aggregate of approximately $69,000 of interest expense
related to the Bridge Notes, which was recorded in the fiscal quarters
ended December 31, 1995 and March 31, 1996) and (iv) the repayment of
approximately $1,036,500 of other indebtedness outstanding prior to the
Offering. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment in
the Shares and the Warrants offered hereby involves a high degree of risk. In
addition to the other information contained in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating
whether to purchase the Shares and the Warrants offered hereby.
ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIT; NEGATIVE NET WORTH; HISTORY OF
OPERATING LOSSES; EXPECTATION OF FUTURE LOSSES. The Company has experienced
significant operating losses since its inception. At March 31, 1996, the Company
had an accumulated deficit of approximately $(15,164,000), a working capital
deficit of approximately $(7,366,000) and a negative net worth of approximately
$(4,771,000). The Company incurred an operating loss of approximately
$(11,909,000) for the fiscal year ended June 30, 1995, and has incurred an
operating loss of approximately $(1,938,000) for the nine months ended March 31,
1996. Such losses have resulted principally from limited revenues from
operations and costs associated with the development of the Company's
technologies, general and administrative expenses and a one-time, non-cash
charge to operations relating to the write-off of purchased research and
development technologies in conjunction with the Merger that had not reached
technological feasibility and, in the opinion of management, had no alternative
use. The Company has experienced decreased revenues and incurred increased
losses to date and expects that it will continue to incur losses until such
time, if ever, as revenues from product sales are sufficient to fund its
continuing operations. The Company's profitability will depend on its ability to
commercialize its abrasives products. There can be no assurance that the Company
will ever generate sufficient revenues to achieve profitability. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
GOING CONCERN EXPLANATORY PARAGRAPH IN INDEPENDENT AUDITORS' REPORT. The
Company has received a report from its independent auditors that includes an
explanatory paragraph indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. Among the factors cited
by the auditors as raising substantial doubt as to the Company's ability to
continue as a going concern is that the Company has generated only minimal
revenues, has incurred significant losses since inception, has a working capital
and stockholders' deficiency and is dependent upon additional financing. See
Report of Independent Auditors.
CAPITAL INTENSIVE BUSINESS; NEED FOR ADDITIONAL FINANCING. The Company's
business is capital intensive. The Company believes that the net proceeds from
the Offering, together with cash generated from operations, will enable it to
fund its operations for at least 12 months following completion of the Offering.
If the Company is not profitable prior to such time, the Company will require
additional financing. The Company has no commitments for any future financing
and there can be no assurance that the Company will be able to obtain additional
financing in the future from either debt or equity financings, bank loans or
other sources on acceptable terms or at all. If available, any additional equity
financings may be dilutive to the Company's stockholders and any debt financings
may contain restrictive covenants and additional debt service requirements,
which could adversely affect the Company's operating results. If the Company is
unable to obtain necessary financing, it will be required to significantly
curtail its activities or cease operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL INDEBTEDNESS; DEBT SERVICE REQUIREMENTS; USE OF PROCEEDS TO PAY
OUTSTANDING INDEBTEDNESS AND PAST DUE ACCOUNTS PAYABLE; CONSEQUENCES OF
DEFAULT. At March 31, 1996, Dunkirk had outstanding an aggregate of
approximately $12,300,000 of indebtedness (excluding capital lease obligations),
substantially all of which is secured by the assets of Dunkirk and guaranteed by
the Company. Accordingly, the Company is subject to all of the risks associated
with substantial indebtedness, including the risk that cash flow may not be
sufficient to make required payments of principal and interest on indebtedness.
The Company will require substantial cash flow to meet its debt service
requirements relating to its outstanding indebtedness, which aggregate
approximately $1,647,000 (excluding capital lease obligations and indebtedness
to be repaid from the net proceeds of the Offering) for the 12-month period
following the closing of the Offering. The Company expects to use a portion of
the proceeds of the Offering to meet its debt service requirements if funds from
operations are insufficient to do so. To the extent that all of Dunkirk's assets
continue to be pledged, such assets will not be available to secure additional
indebtedness, which may adversely affect the
7
<PAGE>
Company's ability to borrow in the future. A substantial portion of the proceeds
of the Offering will be used to repay indebtedness, including approximately
$2,318,000 of Bridge Notes and $1,348,500 of other indebtedness (which includes
approximately $112,000 of deferred principal and interest which the Company
intends to pay out of working capital proceeds). Further, at March 31, 1996, the
Company had approximately $2,600,000 of accounts payable, approximately
$1,650,000 of which are more than 30 days past due and which will be paid with
the proceeds of the Offering and the remainder of which are expected to be paid
with funds from operations. However, in the event that the Company has
insufficient cash to fund its operations and meet its debt service requirements,
the Company may use the $2,200,000 of proceeds allocated to build its second
melter at the Dunkirk facility for working capital. In such event, the Company
may be required to obtain additional financing in order to build such second
melter. The Company currently has no commitments or arrangements to obtain any
such financing and there can be no assurance that the Company can obtain such
financing on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 4 and Note
10 of Notes to Consolidated Financial Statements for a discussion of the
payments due under the Company's indebtedness.
In addition, a portion of the Company's indebtedness is subject to various
covenants. In the event of a default in payment of outstanding indebtedness, or
in the event of a default arising out of a violation of any covenants, the
Company and/or Dunkirk may lose all or a portion of its assets and the Company
and/or Dunkirk may be forced to materially reduce its business activities or
cease its operations. Certain of the instruments governing the Company's
indebtedness also contain default provisions relating to insolvency and the
inability to pay debts as they become due. Although the Company may be deemed
insolvent, the Company has not received any notice that a creditor has enforced
or intends to enforce any rights relating to any possible default or that any
action will be taken against the Company.
LIMITED OPERATING HISTORY; NEW BUSINESS; LIMITED PRODUCT SALES. The Company
has a limited operating history and substantially all of its revenues have been
derived from recycling CRT glass. The Company has only generated minimal
revenues from ALUMAGLASS sales. The construction of the Company's first melter
to produce its ALUMAGLASS abrasives was completed in February 1995, and limited
production of its ALUMAGLASS abrasives commenced in the spring of 1995. Although
the Company recently commenced limited commercial sales of its ALUMAGLASS
abrasives, there can be no assurance that the Company will be able to
manufacture and market successfully its ALUMAGLASS abrasives. The Company
intends to use a substantial portion of the proceeds of the Offering to expand
its abrasives business. While attempting to commercialize its products, the
Company will be subject to risks inherent in a new business. Such risks include
unanticipated problems relating to environmental regulatory compliance,
manufacturing, the competitive environment in which the Company operates and
marketing problems, and additional costs and expenses may exceed current
estimates. There can be no assurance that, even after the expenditure of
substantial funds and efforts, the Company will ever achieve or maintain a
substantial level of sales of its products. The failure to successfully
manufacture or market ALUMAGLASS will have a material adverse effect on the
Company's financial condition and results of operations. See "-- Uncertain
Market Acceptance of Abrasives" and "-- Equipment Failure, Limited Engineering,
Design and Construction Experience; Limited Manufacturing Experience."
UNCERTAIN MARKET ACCEPTANCE OF ABRASIVES. To date, the Company has had only
minimal sales of its ALUMAGLASS abrasives. There can be no assurance that
significant sales will occur or that the Company's abrasives will obtain broad
market acceptance. The decision by a potential customer to utilize the Company's
abrasives is, among other things, technical in nature, requiring the customer to
make an evaluation as to whether changes in its capital equipment or operating
procedures will be required in order to realize the performance benefits of the
Company's products. See "Business -- Market Overview -- Abrasives." There can be
no assurance that potential customers will choose to change their equipment or
established procedures or be willing to incur any necessary costs to make such
changes or that the benefits derived from utilizing ALUMAGLASS will outweigh the
costs incurred to make such changes. Further, there can be no assurance that all
customers will experience the performance and cost advantages demonstrated in
the Company's ALUMAGLASS applications testing. For example, ALUMAGLASS may be
too hard for certain applications, such as removal of coatings from certain
plastic or vinyl substrates, in relation to plastic
8
<PAGE>
abrasives or too soft for other applications, such as etching titanium, in
comparison to aluminum oxide. In addition, in order to receive the full
performance and cost benefits of ALUMAGLASS, users must use effective abrasives
reclamation systems and appropriate blasting pressures. If the Company is not
successful in marketing its abrasives, its ability to generate revenues will be
limited to its CRT glass recycling operations, waste conversion services and
other future products and services that may be developed or otherwise obtained
by the Company. The Company believes that there are a limited number of
potential CRT glass recycling customers and that its CRT glass recycling
operations have limited growth potential. In addition, there can be no assurance
that the Company's waste conversion services will be successfully marketed or
that future products and services will be developed or obtained. See "-- Limited
Number of CRT Customers" and "Business."
EQUIPMENT FAILURE; LIMITED ENGINEERING, DESIGN AND CONSTRUCTION EXPERIENCE;
LIMITED MANUFACTURING EXPERIENCE. The Company has completed construction of and
operated since spring 1995 one 25-ton-per-day melter. From time to time, the
Company has experienced mechanical or technical difficulties with such melter,
which has required repairs and maintenance that have interrupted the Company's
ability to manufacture its abrasives. Any such mechanical or technical
difficulties with such melter in the future could result in an interruption in
the Company's ability to manufacture its abrasives. See "Business --
Manufacturing, Recycling and Conversion Processes -- Melting Process." The
failure of the Company to effect prompt repairs and otherwise keep its melter
operating at targeted capacities could have a material adverse effect on the
business, financial condition and results of operations of the Company. If
warranted by sufficient demand for its ALUMAGLASS abrasives, the Company
anticipates that it will construct a second melter and has allocated a
substantial portion of the proceeds of the Offering to do so. The Company may
experience problems associated with the engineering, construction, scale-up and
operation of such melter and any additional melters, including, without
limitation, cost overruns, start-up delays and technical or mechanical problems.
To date, the Company has engaged in only limited manufacturing and there can be
no assurance that the Company's efforts to expand its manufacturing capabilities
will not exceed estimated costs or take longer than expected, or that other
unanticipated problems will not arise that would materially adversely affect the
Company's business and prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
LIMITED SALES AND MARKETING EXPERIENCE. The Company has had limited
experience in selling and marketing its abrasives and its recycling and
conversion services. Furthermore, the Company has assembled only a small sales
and marketing organization. There can be no assurance that the Company will be
able to recruit, train or retain qualified personnel to sell and market its
products and services or that it will develop a successful sales and marketing
strategy. In addition, for certain applications of its abrasives, the Company
will be dependent on its distributors for primary marketing efforts or may seek
to enter into joint venture, licensing or other collaborative arrangements to
sell and market its products. Such arrangements may result in the lack of
control by the Company over the sales and marketing of its products or result in
lower revenues to the Company than if it marketed its products directly. There
can be no assurance that any sales and marketing or other efforts undertaken by
the Company or on behalf of the Company by others will be successful. See
"Business -- Sales and Marketing."
LIMITED NUMBER OF CRT CUSTOMERS. To date, substantially all of the
Company's revenues have been derived from recycling CRT glass for a limited
number of customers. Certain of the Company's contracts with its CRT customers
contain minimum Company purchase requirements and, in certain cases, minimum
customer purchase obligations. For the fiscal year ended June 30, 1995 and the
nine months ended March 31, 1996, three of the Company's CRT glass recycling
customers, Techneglas, Inc., Thomson Consumer Electronics, Inc. and Toshiba
Display Devices, Inc., each accounted for more than 10% of the Company's
revenues and, in the aggregate, accounted for approximately 90% of the Company's
revenues. The loss of any one of these customers could have a material adverse
effect on the Company's financial condition and results of operations. In
addition, even assuming that the Company's existing customers continue to
utilize the Company's CRT glass recycling services, the Company believes that
there are a limited number of potential customers for the Company's CRT glass
recycling operations and that its CRT glass recycling operations have limited
growth potential. The Company currently obtains only waste CRT glass generated
from manufacturers of televisions located in the United States, and there are a
limited number of such
9
<PAGE>
manufacturers. In addition, such manufacturers typically seek more than one
outlet for their CRT glass, in order to avoid dependence on any one source. In
some cases, manufacturers ship their waste CRT glass to smelters or landfills.
Further, transportation costs limit the sources from which the Company can
obtain CRT glass on a cost-effective basis. Accordingly, the Company believes
that its ability to generate revenues from CRT glass recycling is limited and
that the Company will be dependent on revenues from its ALUMAGLASS abrasives,
waste conversion services and other future products and services for future
growth. See "-- Uncertain Market Acceptance of Abrasives."
UNCERTAIN INDUSTRIAL WASTE SUPPLY. The Company utilizes manufacturing
by-products and industrial wastes as raw materials for the production of its
ALUMAGLASS abrasives. In addition, the Company will seek to generate revenue in
the future from converting manufacturing by-products and industrial wastes into
other finished products or into raw materials to be sold to other manufacturers.
However, there can be no assurance that producers of such by-products and wastes
will view the Company's processes as a commercially and environmentally
acceptable means of disposing of such by-products and wastes or will not find a
less expensive means of disposing of such by-products and wastes. As a result,
the Company may be forced to incur higher costs to procure raw materials for its
manufacturing processes and may experience difficulty in obtaining wastes for
its conversion services. See "Business -- Products and Services."
RISKS INHERENT IN INTERNATIONAL OPERATIONS. The Company intends to market
its products and services internationally and plans to seek opportunities
overseas to construct and operate additional abrasives manufacturing facilities,
which may include CRT glass recycling operations, either independently or
through joint ventures or other collaborative arrangements with strategic
partners. To the extent that the Company operates its business overseas and/or
sells its products in foreign markets, it will be subject to all of the risks
inherent in international operations and transactions, including the burdens of
complying with a wide variety of foreign laws and regulations, exposure to
fluctuations in currency exchange rates and tariff regulations, potential
economic instability and export license requirements. In addition, international
environmental regulations and enforcement of such regulations vary by country
and are subject to changes which may adversely affect the Company's operations.
See "Business."
COMPETITION. The Company's manufactured abrasives will compete with product
offerings of other companies, principally aluminum oxide, glass beads, plastic
abrasives, garnet and steel grit and, with respect to certain applications,
sand, slags, crushed glass or water blasting techniques. Many of the companies
offering such products are large corporations with substantially greater
technical and financial resources and sales and marketing experience than the
Company. The Company's ability to effectively compete may be adversely affected
by the ability of these competitors to offer their products at lower prices than
the prices of the Company's products and to devote greater resources to the
development and sales and marketing of their products than are available to the
Company. With respect to its industrial CRT glass recycling operations, the
Company competes with several other companies who accept waste CRT glass for
recycling or other purposes, each of which may deal with customers of the
Company and satisfy their recycling, beneficial use or disposal needs. In the
market for the conversion of manufacturing by-products and industrial wastes
into glass and ceramic manufacturing raw materials, the Company will be
competing in the hazardous and non-hazardous waste and industrial by-products
treatment and disposal markets, which are served by several large companies and
numerous small companies. Any of such competitors or any other potential
competitor may develop technologies superior to those of the Company. There are
several established corporations which offer proprietary high temperature waste
vitrification services which may compete with the services and products offered
or proposed to be offered by the Company. No assurance can be given that the
Company will be able to compete effectively. See "Business -- Competition."
CHARGES ARISING FROM DEBT ISSUANCE COSTS. Upon completion of the Offering
and repayment of the Bridge Notes, a non-recurring charge representing the
unamortized debt discount and debt issuance costs incurred in connection with
the Bridge Financing will be recorded as an extraordinary loss in the quarter in
which the Offering is completed. The aggregate debt discount, debt issuance
costs and interest associated with the Bridge Notes are approximately $535,000
(an aggregate of approximately $69,000 of interest was recorded in the fiscal
quarters ended December 31, 1995 and March 31, 1996). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
10
<PAGE>
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend, in part, on its ability to maintain protection for its products and
manufacturing processes under United States and foreign patent laws, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. The Company has two patents and two patent applications pending.
There can be no assurance that any patent applications will result in issued
patents, that any issued patents will afford adequate protection to the Company
or not be challenged, invalidated, infringed or circumvented or that any rights
thereunder will afford competitive advantages to the Company. Furthermore, there
can be no assurance that others have not independently developed, or will not
independently develop, similar products and technologies or otherwise duplicate
any of the Company's products and technologies.
There can be no assurance that the validity of any patent issued to the
Company would be upheld if challenged by others in litigation or that the
Company's activities would not infringe patents owned by others. The Company
could incur substantial costs in defending itself in suits brought against it,
or in suits in which the Company seeks to enforce its patent rights against
others. Should the Company's products or technologies be found to infringe
patents issued to third parties, the Company would be required to cease the
manufacture, use and sale of the Company's products and the Company could be
required to pay substantial damages. In addition, the Company may be required to
obtain licenses to patents or other proprietary rights of third parties in
connection with the development and use of its products and technologies. No
assurance can be given that any such licenses required would be made available
on terms acceptable to the Company, or at all.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its university
research partners, employees, consultants, advisors and others. There can be no
assurance that such parties will maintain the confidentiality of such trade
secrets or proprietary information, or that the trade secret or proprietary
information of the Company will not otherwise become known or be independently
developed by competitors in a manner that would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."
DEPENDENCE ON ENVIRONMENTAL REGULATION. Federal, state and local
environmental legislation and regulations mandate stringent waste management and
operations practices, which require substantial capital expenditures and often
impose strict liabilities for non-compliance. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
technology and services being developed or offered by the Company. The level of
enforcement activities by federal, state and local environmental protection and
related agencies, and changes in regulations and waste generator compliance
activities, will also affect demand. To the extent that the burdens of complying
with such laws and regulations may be eased as a result of, among other things,
political factors, or that suppliers of manufacturing by-products and other
industrial wastes find alternative means to comply with applicable regulatory
requirements, the Company's ability to procure such by-products and wastes and
the demand for the Company's services could be adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Any changes in these regulations which increase
compliance standards may require the Company to change or improve its
manufacturing process. To the extent the Company conducts its business overseas,
international environmental regulations will be applicable. Such regulations
vary by country and are subject to changes which may adversely affect the
Company's operations. See "Business -- Environmental Matters."
REGULATORY STATUS OF OPERATIONS. The Company and its customers operate in a
highly regulated environment, and the Dunkirk facility is and any future
facilities may be required to have various federal, state and/ or local
government permits and authorizations, registrations and/or exemptions. Any of
these permits or approvals may be subject to denial, revocation or modification
under various circumstances. Failure to comply with the conditions of such
permits, approvals, registrations, authorizations or exemptions may adversely
affect the installation or operation of the Company's manufacturing facilities
and may subject the Company to federal, state or locally-imposed penalties. The
Company's ability to satisfy the permitting requirements for a particular
facility does not assure that permitting requirements for other facilities will
be satisfied. In addition, if new environmental legislation is enacted or
current regulations are amended or are
11
<PAGE>
interpreted or enforced differently, the Company or its customers may be
required to obtain additional operating permits, registrations, certifications,
exemptions or approvals. There can be no assurance that the Company or its
customers will meet all of the applicable regulatory requirements.
POTENTIAL ENVIRONMENTAL LIABILITY. The Company's business exposes it to the
risk that harmful substances may be released or escape into the environment from
its facilities, processes or equipment, resulting in potential liability for the
clean-up or remediation of the release and/or potential personal injury
associated with the release. Liability for investigation and/or clean-up and
corrective action costs exists under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), and the New York
State Environmental Conservation Law. Additionally, the Company is potentially
subject to regulatory liability for the generation, transportation, treatment,
storage or disposal of hazardous waste if it does not act in accordance with the
requirements of federal or state hazardous waste regulations or facility
specific regulatory determinations, authorizations or exemptions. The Company is
also potentially subject to regulatory liability for releases into the air or
water under the Clean Air Act of 1970, as amended, and the Federal Water
Pollution Control Act of 1972, as amended (hereinafter the "Clean Water Act"),
and analogous state laws and regulations and various other applicable federal or
state laws and regulations if it does not comply with those requirements.
The Company may also be exposed to certain environmental risks resulting
from the actions of its CRT glass suppliers and other suppliers of industrial
wastes. Although the Company maintains general liability insurance, this
insurance is subject to coverage limits and generally excludes coverage for
losses or liabilities related to environmental damage or pollution. Although the
Company conducts and plans to conduct its operations prudently with respect to
environmental regulations and plans to structure its relationships with
customers and contractors in a manner so as to minimize its exposure to
environmental liabilities, the Company's business, financial condition and
results of operations could be materially adversely affected by an environmental
claim that is not covered or only partially covered by insurance or other
available remedy.
In addition, although the Company does not utilize any underground storage
tanks, there are several empty tanks at the Dunkirk facility that were used by
the former owner of the property to store various materials. An investigation by
an environmental engineering firm has disclosed modest soil contamination
confined to the immediate vicinity of two tank locations and remediation may be
required. Based on estimates from qualified environmental services and
engineering firms, total remediation and tank closure costs are expected to
range from approximately $28,000, if no remediation is required, to
approximately $64,000 if soil and groundwater remediation is required. See
"Business -- Environmental Matters."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL. The Company is highly dependent
upon the efforts of its senior management and scientific staff. The Company is
also dependent upon its other management personnel, as well as certain
scientific advisors and consultants from Alfred University and other academic
institutions and organizations. The loss of the services of one or more of these
individuals could have a material adverse effect upon the Company. The Company's
future success will depend in large part upon its ability to attract and retain
additional highly skilled scientific, managerial, manufacturing and marketing
personnel. The Company faces competition for hiring such personnel from other
companies, research and academic institutions, government agencies and other
organizations. There can be no assurance that the Company will continue to be
successful in attracting and retaining such personnel. See "Management."
POSSIBLE ADVERSE EFFECTS OF ELECTION OF UNION. In February 1996, a majority
of the employees of Dunkirk elected the United Steelworkers of America (the
"Union") to act as their bargaining representative pursuant to the National
Labor Relations Act (the "NLRA"). Dunkirk is obligated under the NLRA to bargain
with the Union in good faith. The outcome of such bargaining cannot be
determined. There can be no assurance that the election of the Union or the
outcome of the bargaining process will not result in higher labor costs, work
stoppages or strikes or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
POTENTIAL CONFLICTS OF INTEREST ARISING FROM CERTAIN RELATED-PARTY
TRANSACTIONS. The Company has entered into consulting agreements with certain
directors, principal stockholders and affiliates of certain
12
<PAGE>
directors and principal stockholders of the Company, pursuant to which, among
other things, certain of such persons received warrants and pursuant to which
certain of such persons will be entitled to receive success fees upon the
completion of certain project development activities. Such agreements may result
in conflicts of interest for the directors and principal stockholders who are,
or whose affiliates are, parties to such consulting agreements. The Company,
however, does not believe that the existence of such agreements will interfere
with the ability of the Company's directors to discharge their fiduciary duties
to the Company's stockholders. See "Certain Transactions -- Consulting
Agreements."
IMMEDIATE DILUTION. Assuming a public offering price of $4.40 per Share,
$.05 per Class A Warrant and $.05 per Class B Warrant, and the Company's receipt
of the estimated net proceeds therefrom and the use of a portion of the net
proceeds to repay the Bridge Notes and other indebtedness, the purchasers of
Shares and Warrants in the Offering will experience immediate dilution of
approximately $3.29 or 73.1% in the per share net tangible book value of their
Common Stock ($3.05 or 67.8% if the Underwriter's over-allotment option is
exercised in full). Additional dilution to public investors, if any, may result
to the extent that the Warrants, the Underwriter's Option and/or outstanding
options and warrants are exercised at a time when the net tangible book value
per share of Common Stock exceeds the exercise price of any such securities. See
"Dilution."
CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SECURITIES. The Escrow
Securities will be released from escrow if the Company attains certain earnings
levels over the next two to four years or if the Common Stock trades at certain
levels over the next three years. The position of the Securities and Exchange
Commission (the "Commission") with respect to such escrow arrangements provides
that in the event any shares or options are released from escrow to the
stockholders of the Company who are officers, directors, employees or
consultants of the Company, a compensation expense will be recorded for
financial reporting purposes. Accordingly, the Company will, in the event of the
release of any Escrow Securities to the Company's officers, directors, employees
or consultants, recognize during the period in which the earnings thresholds are
met or such stock levels achieved, a noncash charge to earnings equal to the
fair value of such shares on the date of their release, which would have the
effect of increasing the Company's loss or reducing or eliminating earnings, if
any, at such time. The recognition of such compensation expense may have a
depressive effect on the market price of the Company's securities. See
"Principal Stockholders -- Escrow Securities." Notwithstanding the foregoing
discussion, there can be no assurance that the Escrow Securities will be
released from escrow.
POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK. The Company's Restated
Certificate of Incorporation authorizes the issuance of shares of "blank check"
preferred stock, which will have such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Common Stock. The preferred stock could be utilized to discourage, delay or
prevent a change in control of the Company. Although the Company has no present
intention to issue any shares of preferred stock, there can be no assurance that
the Company will not do so in the future. See "Description of Securities --
Preferred Stock."
NO DIVIDENDS. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. As a holding company, the Company holds no significant
tangible assets other than its investments in and advances and loans to Dunkirk.
The Company's ability to make cash dividend payments to holders of the Common
Stock is dependent upon the receipt of sufficient funds from Dunkirk. In
addition, the terms of Dunkirk's $8 million Solid Waste Disposal Facility Bonds
("IDA Bonds") issued through the Chautauqua County Industrial Development Agency
prohibit Dunkirk from paying dividends to the Company under certain
circumstances during any fiscal year in excess of 50% of Dunkirk's net income
for such fiscal year. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
NO PUBLIC MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF MARKET PRICE;
ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial
13
<PAGE>
public offering price of the Shares and the Warrants and the exercise prices and
other terms of the Warrants have been determined by negotiation between the
Company and the Underwriter pursuant to Schedule E of the By-laws of the NASD
and are not necessarily related to the Company's asset value, net worth, results
of operations or any other criteria of value and may not be indicative of the
prices that may prevail in the public market. The market prices of the Common
Stock and the Warrants could also be subject to significant fluctuations in
response to variations in government regulations relating to the Company's
operations, general trends in the industry and other factors, including extreme
price and volume fluctuations which have been experienced by the securities
markets from time to time. See "Underwriting."
OUTSTANDING WARRANTS AND OPTIONS; EXERCISE OF REGISTRATION RIGHTS. Upon
completion of the Offering, the Company will have outstanding (i) 3,067,000
Class A Warrants to purchase an aggregate of 3,067,000 shares of Common Stock
and 3,067,000 Class B Warrants; (ii) 3,067,000 Class B Warrants to purchase
3,067,000 shares of Common Stock; (iii) the Selling Securityholder Warrants to
purchase 1,112,500 shares of Common Stock and 1,112,500 Class B Warrants; (iv)
the Underwriter's Option to purchase an aggregate of 1,226,800 shares of Common
Stock, assuming exercise of the underlying Warrants; (v) options to purchase an
aggregate of 80,493 shares of Common Stock granted under the Conversion
Technologies International, Inc. 1994 Employee Stock Option Plan and the
Conversion Technologies International, Inc. 1994 Stock Option Plan for
Non-Employee Directors; (vi) non-qualified options to purchase 50,000 shares of
Common Stock issued to the President and Chief Executive Officer of the Company;
and (vii) warrants to purchase an aggregate of 319,204 shares of Common Stock
issued prior to the Offering. Holders of outstanding options to purchase 71,923
shares of Common Stock have placed such options into escrow. See "Principal
Stockholders -- Escrow Securities." The Company has reserved an aggregate of
510,400 shares of Common Stock for issuance under its stock option plans as of
the date of this Prospectus. Holders of such warrants and options are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by such warrants and
options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected. The holders of the Underwriter's Option, the holders of
1,326,166 shares of Common Stock outstanding upon consummation of the Offering
and the holders of warrants to purchase 293,365 shares of Common Stock have
certain demand and "piggy-back" registration rights with respect to their
securities. The exercise of such rights could involve substantial expense to the
Company. See "Management -- Stock Option Plans," "Principal Stockholders,"
"Description of Securities" and "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if, with respect to the Class A Warrants, the closing bid price of the
Common Stock shall have averaged in excess of $8.20 per share and, with respect
to the Class B Warrants, $10.95 per share, in each instance for 30 consecutive
trading days ending within 15 days of the notice. Redemption of the Warrants
could force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants or (iii) to accept the nominal redemption price which,
at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. See "Description of
Securities -- Redeemable Warrants."
CURRENT PROSPECTUS REQUIRED TO EXERCISE WARRANTS. Holders of Warrants will
be able to exercise the Warrants only if (i) a current prospectus under the
Securities Act relating to the securities underlying the Warrants is then in
effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the state in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities -- Redeemable Warrants."
14
<PAGE>
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO THE
INVESTIGATION OF D.H. BLAIR INVESTMENT BANKING CORP. AND D.H. BLAIR & CO., INC.
BY THE SECURITIES AND EXCHANGE COMMISSION. The Commission is conducting an
investigation concerning various business activities of the Underwriter and D.H.
Blair & Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the securities offered hereby. The investigation appears to
be broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the federal securities laws and compliance with the
federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. intends to make a market in the
securities following the Offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could adversely affect the liquidity
or price of such securities. See "Underwriting."
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends to
make a market in the Company's securities. Rule 10b-6 under the Securities Act
of 1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from engaging
in any market-making activities with regard to the Company's securities for the
period from nine business days (or such other applicable period as Rule 10b-6
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Selling Securityholder Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least two
and possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Underwriter or Blair & Co. is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. Any temporary cessation of such market-making activities
could have an adverse effect on the market price of the Company's securities.
See "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ. While the Company's Common
Stock, Class A Warrants and Class B Warrants meet the current Nasdaq listing
requirements and are expected to be initially included on Nasdaq, there can be
no assurance that the Company will meet the criteria for continued listing.
Continued inclusion on Nasdaq generally requires that (i) the Company maintain
at least $2,000,000 in total assets and $1,000,000 in capital and surplus, (ii)
the minimum bid price of the Common Stock be $1.00 per share, (iii) there be at
least 100,000 shares in the public float valued at $200,000 or more, (iv) the
Common Stock have at least two active market makers and (v) the Common Stock be
held by at least 300 holders. If the Company is unable to satisfy Nasdaq's
maintenance requirements, its securities may be delisted from Nasdaq. In such
event, trading, if any, in the Common Stock and Warrants would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board" and it could be more difficult to obtain
quotations of the market price of the Company's securities. Consequently, the
liquidity of the Company's securities could be impaired, not only in the number
of securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts' and the news media's
coverage of the Company and lower prices for the Company's securities than might
otherwise be attained.
RISKS OF PENNY STOCK. If the Company's securities were deleted from Nasdaq
(see "Risk Factors -- Possible Delisting of Securities from Nasdaq"), they could
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). For transactions covered by
such rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently,
15
<PAGE>
such rule may adversely affect the ability of broker-dealers to sell the
Company's securities and may adversely affect the ability of purchasers in the
Offering to sell in the secondary market any of the securities acquired.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to the
Concurrent Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Offering, 1,112,500 Selling
Securityholder Warrants and the underlying securities have been registered for
resale concurrently with the Offering, subject to a contractual restriction that
the Selling Securityholders not sell any of the Selling Securityholder Warrants
for at least 90 days from the closing of the Offering and, during the period
from 91 to 270 days after the closing of the Offering, only sell specified
percentages of such Selling Securityholder Warrants. Upon the sale of the Shares
and the Warrants offered hereby, the Company will have outstanding 4,992,150
shares of Common Stock, 3,067,000 Class A Warrants and 3,067,000 Class B
Warrants (5,452,200 shares of Common Stock, 3,527,050 Class A Warrants and
3,527,050 Class B Warrants if the Underwriter's over-allotment option is
exercised in full). The shares of Common Stock, the Class A Warrants and the
Class B Warrants sold in the Offering will be freely tradeable without
restriction under the Securities Act, unless acquired by "affiliates" of the
Company as that term is defined in the Securities Act. The remaining 1,925,150
outstanding shares of Common Stock are "restricted securities" within the
meaning of Rule 144 under the Securities Act and will become eligible for sale
under Rule 144 commencing in August 1996. The holders of approximately 1,891,440
shares (or approximately 98% of the shares of Common Stock outstanding prior to
the Offering (after giving effect to the conversion of the Series A Preferred
Stock into Common Stock)), and the holders of all options and warrants to
purchase shares of Common Stock have agreed not to sell or otherwise dispose of
any securities of the Company for a period of 13 months from the date of this
Prospectus without the prior written consent of the Underwriter. The Underwriter
and the holders of 1,326,166 shares of Common Stock outstanding upon
consummation of the Offering have registration rights covering their securities.
Sales of Common Stock, or the possibility of such sales, in the public market
may adversely affect the market price of the securities offered hereby. See
"Concurrent Offering," "Description of Securities" and "Shares Eligible for
Future Sale."
BROAD DISCRETION AS TO USE OF PROCEEDS. Of the net proceeds of the
Offering, approximately $3,498,500 or approximately 30% has been allocated to
working capital and other general corporate purposes (and not otherwise
allocated for a specific purpose) and will be used for such purposes as
management may determine in its sole discretion without the need for stockholder
approval with respect to any such allocation. In addition, if the Company does
not build a second melter for the production of ALUMAGLASS, an additional amount
of approximately $2,200,000 currently allocated to capital expenditures for such
melter would become available for working capital and other general corporate
purposes. See "Use of Proceeds."
16
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does not
expect to declare or pay any cash or other dividends in the foreseeable future.
As a holding company, the Company holds no significant tangible assets other
than its investments in and advances and loans to Dunkirk. The Company's ability
to make cash dividend payments to holders of the Common Stock is dependent upon
the receipt of sufficient funds from Dunkirk. In addition, the terms of the IDA
Bonds prohibit Dunkirk from paying dividends to the Company under certain
circumstances during any fiscal year in excess of 50% of Dunkirk's net income
for such fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares and the Warrants
offered hereby, after deducting underwriting discounts and commissions and other
estimated expenses of the Offering, are estimated to be approximately
$11,803,000 (approximately $13,672,000 if the Underwriter's over-allotment
option is exercised in full). The Company expects the net proceeds to be
utilized approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENTAGE
OF NET OF NET
APPLICATION PROCEEDS PROCEEDS
- ------------------------------------------------------------------------ -------------- ------------
<S> <C> <C>
Repayment of Bridge Notes (1)........................................... $ 2,318,000 19.64%
Repayment of Other Indebtedness (2)..................................... 1,236,500 10.48
Repayment of Past Due Accounts Payable (3).............................. 1,650,000 13.98
Capital Expenditures (4)................................................ 2,550,000 21.61
Marketing and Promotional Efforts (5)................................... 150,000 1.27
Research and Development (6)............................................ 200,000 1.69
Project Development (7)................................................. 200,000 1.69
Working Capital (8)..................................................... 3,498,500 29.64
-------------- ------
Total............................................................... $ 11,803,000 100.00%
-------------- ------
-------------- ------
</TABLE>
- ------------------------
(l) Represents $2,225,000 principal amount plus accrued interest at the rate of
10% per annum (estimated at approximately $93,000 through May 10, 1996) of
Bridge Notes issued in the Bridge Financing in December 1995. Certain
stockholders of the Company purchased an aggregate of $650,000 principal
amount of Bridge Notes and two investment funds in which Lindsay Rosenwald
is the sole stockholder and President of the general partner and investment
manager, respectively, purchased an aggregate of $200,000 principal amount
of Bridge Notes. See "Certain Transactions." The Bridge Notes will mature on
the completion of the Offering. The proceeds of the Bridge Financing were
and are being used primarily for working capital purposes. See
"Capitalization" and "Certain Transactions."
(2) Includes (i) $252,500 principal amount borrowed under a working capital bank
line of credit with Key Bank of New York ("Key Bank"), which bears interest
at the prime rate plus 2.5% per annum (10.75% as of March 31, 1996) and
which the Company has agreed to repay in 12 monthly installments commencing
March 15, 1996 or in full upon the closing of the Offering, (ii) a $124,000
demand note issued to Key Bank in February 1995, which note bears interest
at the prime rate plus 1% (9.25% as of March 31, 1996), the proceeds of
which were used for working capital purposes, (iii) $460,000 of interest due
following the closing of the Offering on the IDA Bonds, which amount has
been paid from the Company's debt service reserve funds under the IDA Bonds
and which must be replenished in accordance with the terms of waivers
obtained from the holder of the IDA Bonds and the trustee under the
applicable indenture, and (iv) $400,000 aggregate principal amount of notes
due on the closing of the Offering issued by the Company to certain
directors, officers and securityholders in March and May, 1996 to fund
working capital, which bear interest at 10% per annum. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
"Certain Transactions."
(3) Includes, at March 31, 1996, approximately $420,000 past due more than 30
but less than 60 days, approximately $190,000 past due more than 60 but less
than 90 days and approximately $1,040,000 past due more than 90 days. The
Company has approximately an additional $950,000 of accounts payable
17
<PAGE>
which are less than 30 days past due which the Company intends to pay out of
funds from operations. In the event such funds are insufficient, the Company
will be required to use a portion of the proceeds allocated to working
capital to pay such accounts payable.
(4) Includes $2,200,000 for construction of a second melter at the Dunkirk
facility, which will have the capacity to produce up to 75 tons of
ALUMAGLASS per day, and $350,000 for a capital expansion program relating to
the post-melting abrasives finishing (crushing, sorting and packaging) area
at such facility. The Company does not intend to build the second melter
until such time as the Company's current melter is running at near full
capacity. In the event that prior thereto the Company's funds from
operations are insufficient to meet its cash requirements, including debt
service obligations, the Company may use the proceeds allocated to build the
second melter to fund its working capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Includes estimated costs for product applications testing program, customer
product sampling program, technical assistance program, telemarketing,
direct mail and trade journal advertising, sales training, other activities
related to the Company's distribution network and other marketing support.
(6) Includes estimated costs associated with the Company's research and
development efforts related to identifying additional applications for its
ALUMAGLASS product line, identifying synergistic products or technologies
that may be available to the Company through corporate partnering or other
opportunities, research and development in connection with its planned
specialty glass and glass ceramic products and improvements to existing
manufacturing processes. Pursuant to its agreement with Alfred University,
the Company will pay Alfred University approximately $164,000 in 1996 for
certain research and development services. See "Business -- Research and
Development."
(7) Includes $125,000 that the Company has the option to invest to purchase a
50% interest in a new company to be jointly owned by the Company and VANGKOE
Industries, Ltd. ("VANGKOE"), which is intended to apply color coatings to
materials purchased from the Company and sold by VANGKOE. See "Business --
Sales and Marketing." Also includes estimated costs associated with locating
potential sites for new abrasive manufacturing facilities, negotiations with
potential strategic partners, researching local regulatory requirements and
locating and negotiating with local vendors of raw materials and potential
customers.
(8) Includes (i) accrued legal and accounting expenses not related to the
Offering, estimated to be approximately $356,000, (ii) $55,000 for the
repurchase by the Company of 2,455 shares of Common Stock from a former
consultant pursuant to a settlement agreement, which amount is due and
payable on the earlier of May 24, 1996 and the closing of the Offering, and
(iii) approximately $112,000 of principal and interest due as of April 30,
1996 to Key Bank and Sullivan Graphics, Inc., which will be repaid following
the closing of the Offering in accordance with the terms of waivers obtained
from such parties. The Company may also utilize proceeds allocated to
working capital to pay its approximately $950,000 of accounts payable, at
March 31, 1996, that are less than 30 days past due, to the extent not paid
from funds from operations. Further, an additional $2,200,000 may be
available for working capital if prior to the construction of the second
melter at the Dunkirk facility, the Company is required to utilize such
funds to meet its working capital requirements. In addition, the Company
expects to use a substantial portion of the proceeds of the Offering
allocated to working capital to fund the debt service obligations described
below. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The foregoing represents the Company's current estimate of its allocation of
the net proceeds of the Offering. This estimate is based on certain assumptions,
including that competitive, regulatory and market conditions remain stable and
that demand for the Company's abrasives is sufficient to warrant the
construction of a second melter at the Dunkirk facility.
The Company anticipates that the net proceeds from the Offering and
anticipated revenues from CRT glass recycling, sales of ALUMAGLASS and
mechanical conversion services should be sufficient to bring the Company's
payables current, to construct a second melter at the Company's Dunkirk facility
and to fund the Company's operations for at least 12 months following the
closing of the Offering. The Company's fixed expenses for such period include
approximately $484,000 in aggregate annual base compensation for the current
executive officers of the Company and debt service obligations relating to the
Company's outstanding indebtedness, which are estimated to aggregate
approximately $1,647,000 (excluding capital lease obligations and indebtedness
to be repaid from the net proceeds of the Offering) for the 12-month period
18
<PAGE>
following the closing of the Offering. In the event that in management's
estimation there are not adequate revenues to justify construction of the second
melter at the Dunkirk facility within the 12-month period following the closing
of the Offering, an additional $2,200,000 of the net proceeds currently
allocated for construction of such melter will be available for working capital
and other general corporate purposes. See "Risk Factors -- Capital Intensive
Business; Need for Additional Financing" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The amounts actually expended for each purpose set forth in "Use of
Proceeds" may vary significantly in the event any of these assumptions prove
inaccurate. The Company reserves the right to change its use of proceeds as
unanticipated events may cause the Company to redirect its priorities and
reallocate the proceeds accordingly. A portion of the proceeds may also be used
to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. Although the Company evaluates
potential acquisitions of businesses, products and technologies from time to
time, there are no present understandings, commitments or agreements with
respect to any such acquisitions.
Pending utilization, the net proceeds of the Offering will be invested in
short-term, interest-bearing investments.
Any additional proceeds received upon exercise of the Underwriter's
over-allotment option, the Warrants, the Selling Securityholder Warrants or the
Underwriter's Option will be added to working capital.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1996; (ii) the pro forma capitalization as of March 31, 1996 to
reflect the conversion of the Series A Preferred Stock into Common Stock upon
the closing of the Offering and the issuance of an aggregate of $200,000 of
promissory notes in May 1996; and (iii) the pro forma capitalization as adjusted
to reflect the sale of the Shares and the Warrants offered hereby and the
application of the net proceeds therefrom to repay the Bridge Notes and related
interest and certain other indebtedness outstanding prior to the Offering. See
"Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Notes payable.................................................... $ 576,500 $ 776,500 $ --
Bridge Notes, net of discount (1)................................ 2,158,250 2,158,250 --
Current portion of long-term debt................................ 488,282 488,282 488,282
Long-term debt, less current portion............................. 11,396,116 11,396,116 11,396,116
Stockholders' Equity (2):
Preferred Stock, $.001 par value:
15,000,000 shares authorized; 2,958,000 shares of Series A
Preferred Stock outstanding actual; no shares issued and
outstanding pro forma and as adjusted....................... 2,958 -- --
Common Stock, $.00025 par value:
25,000,000 shares authorized; 902,096 shares issued and
outstanding actual; 1,925,150 shares issued and outstanding
pro forma; 4,992,150 shares issued and outstanding as
adjusted (3)................................................ 226 481 1,248
Additional paid-in capital....................................... 10,389,732 10,392,435 22,194,522
Accumulated deficit (4).......................................... (15,163,814) (15,163,814) (15,630,015)
-------------- -------------- --------------
Total stockholders' equity (deficiency).................... (4,770,898) (4,770,898) 6,565,755
-------------- -------------- --------------
Total capitalization..................................... $ 9,848,250 $ 10,048,250 $ 18,450,153
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(1) The Bridge Notes are payable on the closing of the Offering. See "Use of
Proceeds." The Bridge Notes are recorded net of a $66,750 discount
attributable to the fair value of the Bridge Warrants.
(2) Authorized amounts give effect to the filing of the Company's Restated
Certificate of Incorporation in December 1995.
(3) Includes 740,559 Escrow Shares. See "Principal Stockholders -- Escrow
Securities." Excludes (i) 1,840,200 shares of Common Stock issuable upon
exercise of the Underwriter's over-allotment option and the Warrants
underlying such option; (ii) 1,226,800 shares of Common Stock issuable upon
exercise of the Underwriter's Option and the Warrants underlying such
option; (iii) 9,201,000 shares of Common Stock issuable upon exercise of the
Warrants offered hereby; (iv) 2,225,000 shares of Common Stock issuable upon
exercise of the Selling Securityholder Warrants and the Class B Warrants
underlying such warrants; and (v) outstanding options and warrants to
purchase 449,697 shares of Common Stock at exercise prices ranging from
$4.40 to $5.28 per share. See "Management" and "Underwriting."
(4) As adjusted gives effect to the recognition of approximately $466,000 of
expense upon the repayment of the Bridge Notes (includes $66,750 of debt
discount). This amount excludes an aggregate of approximately $69,000 of
interest expense related to the Bridge Notes, which was recorded in the
fiscal quarters ended December 31, 1995 and March 31, 1996. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
See Note 7 of Notes to Consolidated Financial Statements for a description
of the Company's capital lease obligations as of June 30, 1995.
20
<PAGE>
DILUTION
Dilution represents the difference between the initial public offering price
paid by the purchasers in the Offering and the net tangible book value per share
immediately after completion of the Offering. Net tangible book value per share
represents the amount of the Company's total tangible assets minus the amount of
its liabilities, divided by the number of shares of Common Stock outstanding,
including the 1,023,054 shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock upon the closing of the Offering. At March 31,
1996, the Company had a negative net tangible book value of $(6,071,444) or
$(3.15) per common share. After giving retroactive effect to the sale of the
Shares and the Warrants offered hereby and the Company's receipt of the
estimated net proceeds therefrom and the use of a portion of the net proceeds to
repay the Bridge Notes (including related interest) and approximately $1,236,500
of other indebtedness, the net tangible book value of the Company, as adjusted,
at March 31, 1996 would have been $6,060,783 or $1.21 per common share. This
would result in an immediate dilution to the public investors of $3.29 per share
(or 73.1%) and the aggregate increase in the net tangible book value to present
stockholders would be $4.36 per share.
The following table illustrates the information with respect to dilution to
new investors on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per Share, including Warrants........ $ 4.50
Negative net tangible book value per share before
Offering................................................ $ (3.15)
Increase per share attributable to new investors......... 4.36
---------
Net tangible book value per share after Offering........... 1.21
---------
Dilution to new investors (1).............................. $ 3.29
---------
---------
</TABLE>
- ------------------------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $1.45 per share, resulting
in dilution to new investors in the Offering of $3.05 per share (or 67.8%).
The following table summarizes, as of March 31, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing stockholders and by new
investors purchasing Shares and Warrants in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT (1) PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (2)........................... 1,925,150 38.6% $ 11,817,169 46.1% $ 6.14
New Investors....................................... 3,067,000 61.4 13,801,500 53.9 $ 4.50
---------- ----- ------------- -----
Total........................................... 4,992,150 100.0% $ 25,618,669 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Prior to deduction of costs of issuance.
(2) Includes Common Stock issued upon conversion of Series A Preferred Stock at
the closing of the Offering and 740,559 Escrow Shares. See "Principal
Stockholders -- Escrow Securities."
The foregoing tables do not give effect to the exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. As of the closing of the Offering,
excluding the Warrants offered hereby and the Selling Securityholder Warrants,
the Company will have outstanding options and warrants to purchase an aggregate
of 449,697 shares of Common Stock at exercise prices ranging from $4.40 to $5.28
per share. See "Capitalization," "Management," "Certain Transactions" and
"Description of Securities."
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations data
reflect the following transactions as if they had occurred as of July 1, 1994:
(i) the acquisition of Dunkirk pursuant to the Merger, (ii) the conversion of
$269,928 of indebtedness of Dunkirk issued to certain officers of Dunkirk and
third parties prior to the Merger into 13,281 shares of Common Stock of the
Company and (iii) the conversion of $600,000 principal amount of promissory
notes, plus interest, of the Company issued in April 1994 into 45,304 shares of
Common Stock of the Company upon consummation of the Merger. The unaudited pro
forma consolidated financial data should be read in conjunction with the
Company's consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. The pro forma information is not
necessarily indicative of the results that would have been reported had such
events actually occurred on the dates specified, nor is it indicative of the
Company's future results. In the opinion of management, all adjustments
necessary to present fairly this pro forma information have been made.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
-----------------------------------------------------------
UNAUDITED UNAUDITED
PRO FORMA PRO FORMA
COMPANY DUNKIRK (1) ADJUSTMENTS AS ADJUSTED
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue............................................. $ 1,173,264 $ 62,452 $ -- $ 1,235,716
Cost of goods sold.................................. (2,788,599) (379,661) -- (3,168,260)
-------------- ----------- -------------- --------------
Gross loss.......................................... (1,615,335) (317,209) -- (1,932,544)
Selling, general and administrative................. 2,529,263 297,792 (12,598)(2) 2,814,457
Process development costs (4)....................... 1,531,955 82,427 -- 1,614,382
Write-off of in-process technologies (5)............ 6,232,459 -- -- 6,232,459
-------------- ----------- -------------- --------------
Loss from operations................................ (11,909,012) (697,428) (12,598) (12,593,842)
Interest expense, net............................... 345,690 40,999 (5,717)(3) 380,972
-------------- ----------- -------------- --------------
Net loss............................................ $ (12,254,702) $(738,427) $ (18,315) $ (12,974,814)
-------------- ----------- -------------- --------------
-------------- ----------- -------------- --------------
Pro forma net loss per common share................. $ (16.68) $ (17.24)
-------------- --------------
-------------- --------------
Pro forma weighted average number of common shares
outstanding (6).................................... 734,754 752,762
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Includes the historical results of operations of Dunkirk for the period from
July 1, 1994 to August 31, 1994, the effective date of the Merger for
accounting purposes. The Company's historical consolidated financial
information includes the results of operations of Dunkirk since September 1,
1994.
(2) Represents the July and August 1994 amortization of the deferred finance
charges related to the Company's $600,000 principal amount of promissory
notes issued in April 1994 which were converted into Common Stock as part of
the Merger.
(3) Represents the reduction in interest expense related to the debt of the
Company and Dunkirk which was converted into Common Stock as part of the
acquisition of Dunkirk.
(4) Represents research and development costs associated with the Company's CRT
glass processing and ALUMAGLASS product line. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(5) Represents a one-time, non-cash charge to operations relating to the
write-off of purchased research and development technologies in conjunction
with the Merger that had not reached technological feasibility and, in the
opinion of management, had no alternative use. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(6) Excludes 740,559 Escrow Shares. See "Principal Stockholders -- Escrow
Securities." See Note 3 of Notes to Consolidated Financial Statements for
the explanation of the determination of the pro forma weighted average
number of common shares used in computing the pro forma net loss per common
share.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the period from March 1, 1994
(date operations commenced) to June 30, 1994 and the year ended June 30, 1995
are derived from the audited consolidated financial statements of the Company
appearing elsewhere in this Prospectus. The selected financial data for the year
ended June 30, 1994 and the two months ended August 31, 1994 are derived from
the audited financial statements of Dunkirk ("Predecessor Company") appearing
elsewhere in this Prospectus. The financial data for the nine-month periods
ended March 31, 1995 and 1996 are derived from the Company's unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of its financial
position and the results of operations for these periods. Operating results for
the nine months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending June 30, 1996.
The selected financial data should be read in conjunction with the financial
statements of the Company and Dunkirk (including the related notes thereto) and
the other financial information appearing elsewhere in this Prospectus and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
COMPANY
----------------------------------------------------------------
PREDECESSOR COMPANY PERIOD FROM
------------------------------- MARCH 1, 1994 NINE MONTHS ENDED MARCH
TWO MONTHS (DATE OPERATIONS 31,
YEAR ENDED ENDED AUGUST COMMENCED) TO YEAR ENDED JUNE -------------------------
JUNE 30, 1994 31, 1994 JUNE 30, 1994 30, 1995 (1) 1995 1996
------------- --------------- ---------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ -- $ 62,452 $ -- $ 1,173,264 $ 724,536 $ 2,076,894
Cost of goods sold............ -- (379,661) -- (2,788,599) (2,397,917) (2,025,851)
------------- --------------- ---------------- ----------------- ------------ -----------
Gross profit (loss)........... -- (317,209) -- (1,615,335) (1,673,381) 51,043
Selling, general and
administrative............... 721,441 297,792 358,336 2,529,263 1,822,913 1,213,315
Process development costs
(2).......................... 765,981 82,427 -- 1,531,955 899,670 776,113
Write-off of in-process
technologies (3)............. -- -- -- 6,232,459 6,232,459 --
------------- --------------- ---------------- ----------------- ------------ -----------
Loss from operations.......... (1,487,422) (697,428) (358,336) (11,909,012) (10,628,423) (1,938,385)
Interest expense, net......... (26,084) (40,999) (13,079) (345,690) (182,589) (681,123)
Other income -- -- -- -- -- 81,811
------------- --------------- ---------------- ----------------- ------------ -----------
Net loss...................... $(1,513,506) $(738,427) $(371,415) $(12,254,702) $(10,811,012) $(2,537,697)
------------- --------------- ---------------- ----------------- ------------ -----------
------------- --------------- ---------------- ----------------- ------------ -----------
Pro forma net loss per common
share (4).................... $ (19.88) $ (16.68) $ (2.14)
Pro forma weighted average
number of common shares
outstanding (4).............. 18,679 734,754 1,185,387
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1996
---------------
<S> <C>
BALANCE SHEET DATA:
Working capital deficit........................... $ (7,366,111)
Total assets...................................... 15,321,099
Total liabilities................................. 20,091,997
Accumulated deficit............................... (15,163,814)
Stockholders' deficiency.......................... (4,770,898)
</TABLE>
- ------------------------------
(1) Includes the historical results of operations of Dunkirk from August 31,
1994 (the effective date of the Merger for accounting purposes). If Dunkirk
had been acquired July 1, 1994, the Company's consolidated revenue, net
loss and pro forma net loss per common share would have been $1,235,716,
$(12,974,814) and $(17.24), respectively.
(2) Represents research and development costs associated with the Company's CRT
glass processing and ALUMAGLASS product line. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Represents a charge to operations relating to the one-time, non-cash
write-off in conjunction with the Merger of purchased research and
development technologies that had not reached technological feasibility
and, in the opinion of management, had no alternative use. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Excludes 740,559 Escrow Shares. See "Principal Stockholders -- Escrow
Securities." See Note 3 of Notes to Consolidated Financial Statements for
an explanation of the determination of the pro forma weighted average
number of common shares used in computing the pro forma net loss per common
share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an early-stage specialty materials company currently engaged
in developing, manufacturing and marketing industrial abrasives and recycling
CRT glass. The Company's initial efforts included developing and seeking patent
protection for its ALUMAGLASS abrasives and establishing its CRT glass recycling
operations. The CRT glass recycling operations commenced prior to the Company's
abrasives operations in order to provide an initial source of revenue and to
provide the Company with materials, such as panel glass and sludges, which could
be used as raw materials in the manufacture of the Company's abrasives products.
Dunkirk began receiving CRT glass for recycling in March 1994 and began shipping
recycled CRT glass to customers in August 1994 and substantially all of the
Company's revenues to date have been derived from CRT glass recycling. The
Company has also derived minimal revenues to date from fees charged to accept
waste materials and from the sale of ALUMAGLASS. Revenue recognition of fees
charged to accept waste materials is deferred until the materials are resold or
used by the Company as a raw material.
Although the Company intends to continue its CRT glass recycling operations,
the Company's primary focus has been and will continue to be on the development,
manufacture and marketing of its abrasives. The Company's melter went into
service in February 1995 and went through a shake-down, stress-test and a final
modification program. Limited production of ALUMAGLASS abrasives commenced in
the spring of 1995. Since March 1995 through the present, the Company has
conducted extensive applications testing for ALUMAGLASS, initiated arrangements
with distributors for product marketing, initiated direct sales efforts for
potential large volume customers and developed marketing and promotional
strategies for the ALUMAGLASS product line. Based on its applications testing,
the Company believes that ALUMAGLASS will provide performance advantages and
cost savings in comparison to aluminum oxide, steel grit, glass beads, plastic
media and other abrasives. Sales of ALUMAGLASS to date have been limited. The
Company has allocated a substantial portion of the proceeds of the Offering to
expand its abrasives business.
Since inception through March 31, 1996, the Company has sustained cumulative
losses of approximately $15,164,000. Such amount includes (i) a one-time,
non-cash charge to operations relating to the write-off in conjunction with the
Merger of approximately $6,232,000 for purchased research and development (in-
process) technologies that had not reached technological feasibility and, in the
opinion of management, had no alternative use, (ii) approximately $2,308,000
expensed as process development costs related to research and development of the
Company's CRT glass processing and ALUMAGLASS abrasives product line and (iii)
other expenses, net of revenue, of approximately $6,624,000. The Company expects
that it will continue to incur losses until such time, if ever, as revenues are
sufficient to fund its continuing operations. See
"-- Results of Operations."
The Company has a limited operating history. There can be no assurance that
the Company will ever achieve or maintain profitability. The Company believes
that the key variables and other factors which could affect the Company's
financial condition and results of operations are market acceptance of its
abrasives and its ability to continue to obtain CRT glass and waste streams as
raw materials for the manufacture of its abrasives on cost-effective terms. The
development of new technologies to limit, recycle or dispose of CRT glass and
waste materials could adversely affect the Company's ability to obtain CRT glass
and other wastes on cost-effective terms or at all. The Company only recently
commenced sales of ALUMAGLASS and there can be no assurance that broad market
acceptance will be achieved. The Company believes, however, that recent trends
toward reusable products and non-hazardous products will increase demand for
ALUMAGLASS because it is reusable and, depending on the application, can be
returned to the Company's melter for use in new abrasives. In addition,
ALUMAGLASS has been formulated to be safe in use and handling. Other factors
important to the success of the Company will be the Company's ability to operate
its melter and other equipment with minimum downtime for repairs and
maintenance. See "Risk Factors."
Following the Offering, the Company estimates that it will need to generate
monthly revenue of approximately $550,000 to achieve break even cash flow from
operations, based on an estimated cash outlay
24
<PAGE>
of approximately $273,000 for cost of goods, approximately $140,000 for selling,
general and administrative expenses and approximately $137,000 for debt service
at that level of revenue. The Company will attempt to achieve this revenue level
principally by increasing sales of ALUMAGLASS both as an abrasive and as an
aggregate and additive for direct incorporation into other materials. The
Company believes that it can achieve $550,000 of monthly revenue at a production
level of approximately 16 tons of ALUMAGLASS per day assuming only a modest
increase in CRT glass recycling revenue from historical levels and modest
revenue from mechanical conversion. The Company has recently commenced limited
sales to distributors of ALUMAGLASS and is in discussions with several potential
large volume customers for ALUMAGLASS. Based on the foregoing, the Company hopes
to achieve positive cash flow within six to nine months following the closing of
the Offering, although there can be no assurance that sales of ALUMAGLASS will
increase, that any large volume customers will purchase ALUMAGLASS or that the
Company will ever generate sufficient revenues to achieve break even cash flow.
In addition, the Company has recently entered into an agreement with VANGKOE
which includes a guaranteed minimum purchase provision commencing in October
1996 (see "Business -- Marketing and Sales"). There can be no assurance that
VANGKOE will meet its minimum purchase obligation or that the Company could
enforce its rights against VANGKOE, a newly-formed entity with nominal assets,
in the event of a breach of such obligation. The Company also believes that it
can realize economies of scale that will reduce costs as a percentage of sales
as its melter is run at consistently higher output levels and as its abrasives
finishing area becomes fully operational. These economies are expected to relate
to energy costs, the elimination of duplicative processes and continued focus on
the Company's batch formulas to produce the lowest possible cost of goods. To
the extent that the Company experiences economies of scale from running its
facilities at or near full capacity and/or to the extent it can reduce operating
costs, required revenue levels may be reduced.
Until such time, if ever, as the Company achieves positive cash flow from
operations, it will utilize the proceeds of the Offering to fund working capital
needs, including its debt service requirements. The Company anticipates that its
negative cash flow from operations will be approximately $150,000 to $250,000
during each of the first two months following the closing of the Offering and
may decrease over the succeeding months as revenues grow and economies of scale
are realized. However, there can be no assurance that the Company's revenues
will ever increase, that economies of scale will ever be realized, or that the
Company will ever achieve break even status. However, in the event that revenues
fail to meet the expected levels required to achieve break even cash flow, the
Company may refrain from constructing a second melter, and an additional
$2,200,000 of the proceeds of this Offering will be available for working
capital. The Company has not identified additional sources of funds at this
time, but it may seek a new working capital credit facility following the
Offering, although it has no commitments to do so at this time. The Company may
also consider other equity or debt financing strategies in the future to satisfy
its working capital requirements, although the Company has no plans or
commitments with respect to such strategies at this time.
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements as a
result of the factors described herein under the caption "Risk Factors" and
elsewhere in this Prospectus.
The Company's workforce recently elected the United Steelworkers of America
to act as its bargaining representative with respect to their terms of
employment with the Company. The Company believes that it currently offers
competitive wages and benefits and does not anticipate that negotiations will
have a material adverse effect on the Company. However, there can be no
assurance that the election of the Union will not result in higher labor costs,
work stoppages or strikes.
The Company has outstanding 740,559 Escrow Shares and 71,923 Escrow Options
which will be released from escrow if the Company attains certain earnings
levels over the next two to four years or if the Common Stock trades at certain
levels over the next three years. The Company will, in the event of the release
of any Escrow Securities to the Company's officers, directors, employees or
consultants, recognize during the period in which the earnings thresholds are
met or such stock levels achieved, a noncash charge to earnings equal to the
fair value of such shares on the date of their release, which would have the
effect of increasing the Company's loss or reducing or eliminating earnings, if
any, at such time. The recognition of
25
<PAGE>
such compensation expense may have a depressive effect on the market price of
the Company's securities. See "Principal Stockholders -- Escrow Securities."
Notwithstanding the foregoing discussion, there can be no assurance that the
Escrow Securities will be released from escrow.
The Company acquired Dunkirk in August 1994 pursuant to the Merger in which
holders of Dunkirk common stock received 257,808 shares of the Company's Common
Stock in complete exchange for their shares of Dunkirk common stock. Also, an
aggregate of $269,928 of indebtedness of Dunkirk was exchanged for 13,281 shares
of the Company's Common Stock in the Merger. The Merger was accounted for as a
purchase. Prior to the Merger, Dunkirk was a development stage company,
principally engaged in developing its technologies and building its facility in
Dunkirk, New York. The Company was formed in June 1993 for the purpose of
acquiring Dunkirk and conducted no business prior to the Merger, other than
activities related to its formation and initial capitalization and the
consummation of the Merger.
RESULTS OF OPERATIONS
NINE-MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO NINE-MONTH PERIOD ENDED
MARCH 31, 1995
The Company's consolidated results of operations for the nine-month period
ended March 31, 1995 include only seven months of the operations of Dunkirk
since the Merger occurred effective August 31, 1994. However, for purposes of
the following presentation, the Company's results of operations for the nine-
month period ended March 31, 1995 include the operations of Dunkirk for both the
seven-month period following the effective date of the Merger and the two-month
period preceding the effective date of the Merger.
The Company had consolidated revenue of approximately $2,077,000 for the
nine-month period ended March 31, 1996, consisting primarily of CRT glass
recycling fees and approximately $134,000 of ALUMAGLASS sales. For the
nine-month period ended March 31, 1995, the Company had consolidated revenue of
approximately $787,000, of which approximately $32,000 was from sales of
ALUMAGLASS and the remainder was CRT glass recycling fees. This increase in
revenue during the nine-month period ended March 31, 1996 primarily reflects
completion of the Company's CRT glass recycling operation and the corresponding
increase in the Company's CRT glass recycling capacity and the commencement of
the Company's sales of ALUMAGLASS. The Company's revenues from its CRT glass
recycling operations for the three-month period ended March 31, 1996 were lower
than for the prior quarter, primarily due to adverse weather conditions, which
affected both incoming and outgoing shipments, and the effects of the
curtailment of certain capital expenditures and wage expenses by the Company. In
order to conserve cash until the closing of the Offering, the Company delayed
replacing certain worn equipment and laid off approximately 10 employees.
Cost of goods sold decreased to approximately $2,026,000 in the nine-month
period ended March 31, 1996 from approximately $2,778,000 for the same
nine-month period of the prior year. This decrease reflects a $539,000 reduction
in the Company's reserve for potential disposal costs of raw materials as a
result of a decrease in the Company's raw materials inventory as compared with a
$985,000 increase in the reserve for the same prior year period during which
inventories were being built up in anticipation of production needs. Excluding
the effect of the change in the Company's reserve for disposal during the
nine-month periods ended March 31, 1995 and 1996, cost of goods sold increased
approximately $722,00 in the nine-month period ended March 31, 1996 over the
same prior year period. This adjusted cost increase reflects higher personnel,
energy, freight and other manufacturing costs associated with the increase in
revenue for the nine-month period ended March 31, 1996.
Selling, general and administrative expenses for the nine-month period ended
March 31, 1996 decreased to approximately $1,213,000 from approximately
$2,121,000 in the same prior year period. This decrease resulted from
substantially lower legal, travel, consulting and other costs and a $99,000
settlement received from a former officer of Dunkirk during the 1996 nine-month
period.
The Company incurred process development costs of approximately $776,000 for
the nine-month period ended March 31, 1996 as compared with process development
costs of approximately $982,000 for the
26
<PAGE>
same prior year period. A decrease in developmental activity directed at the
Company's ALUMAGLASS abrasives product during the three-month period ended March
31, 1996 and the completion of the Company's CRT glass recycling operation
accounted for this entire cost reduction.
During the nine-month period ended March 31, 1995, the Company incurred a
one-time, non-cash charge to operations relating to a write-off of approximately
$6,232,000, which represented purchased research and development technologies in
conjunction with the Merger that had not reached technological feasibility and,
in the opinion of management, had no alternative use.
Net interest expense increased to approximately $681,000 in the nine-month
period ended March 31, 1996 from approximately $224,000 for the same prior year
period, reflecting increased indebtedness of the Company.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
For the fiscal year ended June 30, 1994 ("fiscal 1994"), the Company and
Dunkirk were separate (unconsolidated) companies. Dunkirk was in the development
stage and the Company was a holding company, with no investments in operational
entities. Neither the Company nor Dunkirk realized any revenue during fiscal
1994. During the fiscal year ended June 30, 1995 ("fiscal 1995"), the Company
began generating revenue and, accordingly, a comparison of operating results of
fiscal 1995 to fiscal 1994 is not meaningful. Fiscal 1995 includes 10 months of
operations of Dunkirk since the merger transaction occurred effective August 31,
1994.
In fiscal 1994, the principal expenses incurred by the Company and Dunkirk
were selling, general and administrative ("SG&A") costs in the amount of
approximately $358,000 and $721,000, respectively, and approximately $766,000 of
process development costs incurred by Dunkirk which represented research and
development costs associated with the CRT glass recycling operations and the
development of ALUMAGLASS abrasives. The Company's SG&A expenses primarily
consisted of financing costs and administrative compensation. Dunkirk's SG&A
expenses primarily consisted of personnel, consulting, audit and legal costs.
The Company and Dunkirk also incurred net interest expense on their debt of
approximately $13,000 and $26,000, respectively, for fiscal 1994.
The Company's consolidated revenue for fiscal 1995 was approximately
$1,173,000, which consisted primarily of revenue generated from CRT glass
recycling, with ALUMAGLASS sales totaling only approximately $78,000. Limited
production of ALUMAGLASS did not commence until the spring of 1995.
Consolidated cost of goods sold for fiscal 1995 amounted to approximately
$2,789,000, the major components of which were plant personnel costs,
approximately $935,000 in additions to a reserve for potential disposal costs of
raw materials, plus energy costs and depreciation expense. Consolidated SG&A
costs for fiscal 1995 totaled approximately $2,529,000, which included
consulting, legal and audit services, administrative personnel costs, costs
associated with initial abrasives testing and marketing efforts and other
general administrative expenses. The Company also incurred approximately
$1,532,000 of process development costs in fiscal 1995, which included costs for
energy and utilities, personnel and depreciation as they related to the
development of the Company's CRT glass recycling services and ALUMAGLASS product
line. The Company also incurred a one-time, non-cash charge to operations
relating to the write-off of approximately $6,232,000 relating to purchased
research and development technologies in conjunction with the Merger. Finally,
the Company incurred net interest expense of approximately $346,000 on its debt.
If Dunkirk had been acquired July 1, 1994, the Company's consolidated revenue,
net loss and pro forma net loss per common share would have been $1,235,716,
$(12,974,814) and $(17.24), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company has funded its
operations principally from debt financing and the sale of its Series A
Preferred Stock. At March 31, 1996, the Company had approximately $11,900,000 in
principal amount of long-term indebtedness (excluding capital lease obligations)
and a working capital deficit of approximately $(7,366,000). The Company had
approximately $2,600,000 of accounts payable as of March 31, 1996. As of such
date, approximately $420,000 were past due more than 30
but less than 60 days, approximately $190,000 were past due more than 60 but
less than 90 days and
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approximately $1,040,000 were past due more than 90 days. The Company currently
has negative cash flow from operations averaging approximately $250,000 per
month and has been dependent on equity financings and stockholder loans to fund
its operations. The Company's debt service requirements are currently
approximately $412,000 per quarter (excluding capital lease obligations and
indebtedness to be repaid from the net proceeds of the Offering). The Company's
long-term indebtedness is secured by liens on substantially all of its fixed
assets.
Dunkirk was initially capitalized by the issuance to its CRT glass recycling
customers of $535,000 principal amount of subordinated unsecured promissory
notes during the period from January 1994 to March 1994. An aggregate of
$535,000 principal amount of such notes, bearing interest at the prime rate plus
2%, were outstanding as of March 31, 1996. In addition, another CRT glass
recycling customer has committed to purchase subordinated debt based upon
shipments to Dunkirk and, at March 31, 1996, has an outstanding principal
balance of $104,543. Principal on the subordinated notes is payable in varying
quarterly installments beginning in April 1998 through January 2004.
During the period from June 1994 to October 1994, Dunkirk issued an
additional $636,000 principal amount of promissory notes to quasi-governmental
agencies, of which $535,754 principal amount was outstanding at March 31, 1996.
Of this amount, $344,258 is a mortgage note secured by Dunkirk's real property
and the balance are subordinated promissory notes secured by liens on equipment
of Dunkirk. Such notes bear interest at rates ranging from 5% to 8% and are
payable in monthly installments through October 2004.
In December 1994 and January 1995, Dunkirk borrowed an aggregate of
$2,585,400 from Key Bank, of which $2,334,313 principal amount was outstanding
at March 31, 1996, bearing interest at the prime rate. Approximately $398,000 of
the proceeds of the loan were placed in a segregated reserve fund to secure a
portion of the Company's obligations under the loan. The collateral for the loan
is a first purchase money lien on certain machinery and equipment and repayment
is guaranteed by the New York State Job Development Authority. This debt is also
guaranteed by the Company and Gerald Balcar, a founder of Dunkirk and a former
officer and director of Dunkirk and the Company. The debt is payable in monthly
installments through January 2002. Key Bank has waived principal payments in an
aggregate amount of approximately $97,000 due under the loans for the months of
January, February, March and April, however, such amount is required to be
repaid together with the regularly scheduled principal payments for May, out of
the proceeds of the Offering.
The proceeds of such financings were used for working capital and the
purchase of fixed assets. The promissory notes and agreements related thereto
contain a limited number of customary covenants and default provisions.
Dunkirk borrowed $386,500 in short-term borrowings from Key Bank during the
period from April 1994 to April 1995, which has been used for working capital,
including $252,500 principal amount outstanding at March 31, 1996 at the prime
rate plus 2.5% under a $300,000 line of credit arrangement. The line of credit
is collateralized by accounts receivable and inventory and is guaranteed by Mr.
Balcar. The borrowings also include a $124,000 demand note at the prime rate
plus 1% secured by a certificate of deposit owned by Mr. Balcar. The line of
credit is repayable over a 12-month period commencing March 15, 1996, or in full
upon the closing of the Offering. The agreements with Key Bank contain a limited
number of covenants and default provisions. The Company intends to repay
borrowings under the line of credit and the demand note with proceeds of the
Offering. See "Use of Proceeds."
In addition to the foregoing indebtedness, in January 1994, Dunkirk
purchased its facility from Sullivan Graphics, Inc. for $750,000, $475,000 of
which was paid in subordinated mortgage notes issued by Dunkirk. The principal
balance of the notes at March 31, 1996 is $330,998, payable in monthly
installments through February 2004 with interest at 10%. The notes are
collateralized by Dunkirk's real property and contain normal covenant and
default provisions of a mortgage agreement. Sullivan Graphics, Inc. has waived
approximately $15,000 of interest and principal payments due under the notes
which must be repaid on the closing of the Offering.
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In March and July 1995, Dunkirk issued an aggregate of $8,000,000 principal
amount of IDA Bonds. Approximately $800,000 of the proceeds of the IDA Bonds
were placed in a segregated reserve fund to secure a portion of the Company's
obligations under the IDA Bonds. The balance of the proceeds of the IDA Bonds
have been used for capital expenditures including components of the Company's
current abrasives finishing area capital expenditure program. The IDA Bonds are
secured by the fixed assets purchased with the proceeds thereof. The IDA Bonds
have an interest rate of 11.5%, subject to downward adjustment if certain debt
service coverage ratios are achieved. The current quarterly interest payment due
under the IDA Bonds is $230,000. The holder of the IDA Bonds has waived the
interest payments due December 1995 and March 1996 (and any event of default
which would otherwise have occurred under the applicable indenture) and
permitted those payments to be made from the Company's debt service reserve
funds. Such amounts must be replenished within 10 days following the closing of
the Offering. Principal repayments commence in 1998 and continue over the
following 12-year period. The terms of the IDA Bonds restrict Dunkirk's ability,
under certain circumstances, to pay dividends to the Company. See "Dividend
Policy."
In April 1994, the Company sold $600,000 of convertible bridge notes to
certain stockholders of the Company (the "1994 Financing"). The proceeds of such
notes were used primarily for working capital. All of such bridge notes (with
interest) were converted into 45,304 shares of Common Stock at the closing of
the Merger.
During the period commencing August 1994 and ending May 1995, the Company
sold an aggregate of 2,958,000 shares of its Series A Preferred Stock at a
purchase price of $2.50 per share, all of which shares will convert into an
aggregate of 1,023,054 shares of Common Stock at the closing of the Offering.
The Company received approximately $6,000,000 in net proceeds from the private
placement, which was used principally for working capital and general corporate
purposes.
In September, October and November 1995, the Company issued an aggregate of
$650,000 principal amount of bridge notes to certain of its stockholders to fund
working capital requirements. Pursuant to the terms of those notes, the
principal amount of such notes was exchanged for Bridge Notes and Bridge
Warrants in December 1995. Accrued interest on the notes was paid in cash
following the exchange. See "Certain Transactions."
In December 1995, the Company consummated the Bridge Financing, pursuant to
which it issued $2,225,000 aggregate principal amount of Bridge Notes (including
the $650,000 referred to in the preceding paragraph) and Bridge Warrants to
purchase an aggregate 1,112,500 shares of Common Stock. See "Certain
Transactions." The proceeds of the Bridge Financing, which were approximately
$1,849,750, have been and are being used for certain capital expenditures
related to the Company's abrasives finishing area and working capital. The
principal of and accrued interest on the Bridge Notes will be paid with a
portion of the proceeds of the Offering. A charge in the amount of approximately
$466,000 will occur in the quarter in which the Bridge Notes are repaid as a
result of the unamortized debt discount, debt issuance costs and interest
incurred in connection with the Bridge Financing.
In March 1996, the Company borrowed an aggregate of $200,000 from certain
directors, officers and securityholders pursuant to promissory notes bearing
interest at the rate of 10% per annum, payable on the earlier of the closing of
the Offering and September 27, 1996. The proceeds of such notes are being used
primarily for working capital. In May 1996, the Company borrowed an additional
$200,000 from one of such securityholders pursuant to promissory notes bearing
interest at the rate of 10% per annum and payable on the earlier of the closing
of the Offering and November 1996. See "Certain Transactions."
The Company's capital lease payments were approximately $82,000 for the year
ended June 30, 1995 and are estimated to be approximately $115,000, $84,000 and
$40,000 for the fiscal years ending June 30, 1996, 1997 and 1998, respectively,
under current commitments. The Company's utility expenses average approximately
$65,000 per month. Such amount is expected to increase as the Company's current
capital expansion program is completed.
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From January 1994 through March 31, 1996, the Company made an aggregate of
approximately $12,866,000 in capital expenditures. Of such amount, approximately
$1,870,000 was used in the construction of its CRT glass recycling lines,
approximately $9,200,000 was used in the construction of its abrasives
manufacturing operations, including the pre-melting, preparation and batching
area, the Company's melter and the post-melting abrasives finishing area
(crushing, sorting and packaging) and approximately $1,796,000 was used for the
Company's laboratory and other miscellaneous capital expenditures.
The Company intends to complete a capital expansion program to make
improvements and additions to its post-melting abrasives finishing area. The
Company expects to use approximately $350,000 of the proceeds of this Offering
for completion of such program. These improvements and additions, which will
become operational in phases in 1996, are anticipated to result in an increase
in the Company's abrasives finishing capacity and will provide further capacity
for its manufacturing and waste conversion operations. At March 31, 1996, the
Company had capital commitments of approximately $46,000.
Subject to achieving sufficient demand for the Company's ALUMAGLASS
abrasives, the Company anticipates using approximately $2,200,000 of the
proceeds of the Offering for the construction of a second melter, which would
bring abrasives production capacity at the Dunkirk facility to approximately 100
tons per day. The Company anticipates that construction of such melter could be
completed approximately six months following the date of order. If the Company
does not build such melter, an additional $2,200,000 of the proceeds of the
Offering will be available for working capital and general corporate purposes.
The Company may also seek opportunities within the United States and abroad
to construct and operate additional abrasives manufacturing facilities, which
may include CRT glass recycling operations, either independently or through
joint ventures or other collaborative arrangements with strategic partners. The
Company expects that future abrasives manufacturing facilities, if any, will be
financed through debt issuances such as the capital equipment loans described
above and, in the case of on-site facilities, capital provided in part by
strategic partners. There can be no assurance that such debt financing or other
collaborative arrangements will be available on terms favorable to the Company
or at all.
Certain of the Company's contracts with its CRT customers contain minimum
Company purchase requirements and, in certain cases, minimum customer purchase
obligations. See "Business."
The Company anticipates that the net proceeds from the Offering and
anticipated revenues from CRT glass recycling, sales of ALUMAGLASS and
mechanical conversion services should be sufficient to bring the Company's
payables current, to construct a second melter at the Company's Dunkirk facility
and to fund the Company's operations for at least 12 months following the
closing of the Offering. The Company's fixed expenses for such period include
approximately $484,000 in aggregate annual base compensation for the current
executive officers of the Company and debt service obligations relating to the
Company's outstanding indebtedness, which are estimated to aggregate
approximately $1,647,000 (excluding capital lease obligations and indebtedness
to be repaid from the net proceeds of the Offering) for the 12-month period
following the closing of the Offering. In the event that in management's
estimation there are not adequate revenues to justify construction of the second
melter at the Dunkirk facility, the proceeds of the Offering will be sufficient
for the Company to remain in operation, with certain modifications to its
business plan, for at least 12 months following completion of the Offering. See
"Risk Factors -- Capital Intensive Business; Need for Additional Financing" and
"Use of Proceeds."
The Company has federal net operating loss carryforwards that amounted to
approximately $5.8 million at June 30, 1995, including approximately $1.5
million of net operating loss carryforwards generated by Dunkirk prior to August
31, 1994. Pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), utilization of net operating loss carryforwards is limited
if there has been a change in control (ownership) of the Company. Upon the
merger transaction with Dunkirk, effective August 31, 1994, such a change in
control (ownership) occurred. As a result of the change, the Company's ability
to utilize its net operating loss carryforwards generated by Dunkirk prior to
August 31, 1994 (approximately $1.5 million) will be limited. See Note 9 of
Notes to Consolidated Financial Statements.
The Report of Independent Auditors includes an explanatory paragraph
indicating that there is substantial doubt as to the Company's ability to
continue as a going concern. See Report of Independent Auditors.
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BUSINESS
OVERVIEW
The Company is an early-stage specialty materials company currently engaged
in (i) developing, manufacturing and marketing industrial abrasives produced in
a patented process utilizing industrial wastes as raw materials, together with
certain virgin materials, and (ii) recycling CRT glass used in televisions for
sale to the original manufacturers of such glass and others. Substantially all
of the Company's revenues to date have been derived from its CRT glass recycling
operations and, although the Company plans to continue its CRT glass recycling
operations, the Company's primary focus is on the development, manufacture and
marketing of its abrasives. The Company also utilizes its manufacturing
equipment to convert certain types of CRT glass and certain other manufacturing
by-products and industrial wastes into manufacturing raw materials for use by
the Company in its production of abrasives and for sale to other manufacturers.
The Company's initial abrasives product is its ALUMAGLASS brand of
manufactured abrasives. ALUMAGLASS can be used as a loose grain abrasive applied
with blasting equipment or as an ingredient in products such as polishing agents
and non-skid flooring. Blasting of loose grain abrasives is used in numerous
industries throughout the world for various cleaning, stripping and other
surface treatment or surface preparations applications such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning and
preparations of surface substrates. The Company believes, based on its
applications testing, that ALUMAGLASS may provide performance advantages and
cost savings in comparison to competitive products such as aluminum oxide, steel
grit, glass beads, plastic media and other abrasives in many applications.
Potential purchasers of ALUMAGLASS include military and defense agencies,
entities engaged in the electronics, aerospace, automotive, glass products and
construction industries and entities engaged in surface finishing, coating
removal and maintenance of manufacturing and processing equipment, buildings,
highways, bridges and commercial vehicles and vessels. ALUMAGLASS is also
marketed as an aggregate for direct incorporation into products such as non-skid
flooring and as an additive for direct incorporation into products such as
plasters, tiles and other construction materials.
ALUMAGLASS is manufactured from an alumino-silicate glass which the Company
produces in a glass melting furnace customized for the Company's patented
process. The Company's technology enables it to produce such glass utilizing as
raw materials primarily waste products from the aluminum and other industries,
including the electronics industry with which the Company has established a
relationship through its CRT glass recycling. In many cases, the Company is
either paid to take these waste materials or receives them at little or no cost.
The Company believes that its ability to procure raw materials utilizing
recycling and recovery techniques will enable it to offer its products at a cost
savings to comparable products for many applications.
STRATEGY
The Company's strategy is to focus its efforts on the sale and marketing of
its ALUMAGLASS product line and, if warranted by market demand for its abrasives
products, the Company may use a substantial portion of the proceeds of the
Offering to increase its manufacturing capacity by building a second melter at
its facility in Dunkirk, New York. The Company may also seek opportunities
within the United States and abroad to construct and operate additional
abrasives manufacturing facilities, which may include CRT glass recycling
operations, either independently or through joint ventures or other
collaborative arrangements with strategic partners. At the same time, the
Company plans to continue its CRT glass recycling business, which it believes is
important to its strategic positioning as a waste conversion company as well as
its ability to continue to obtain raw materials for its manufactured products.
The Company also intends to utilize certain of its manufacturing equipment to
convert manufacturing by-products and other industrial wastes into raw materials
for use by the Company or for sale to others. The Company also intends to
continue its research and development efforts to identify and test additional
applications for its ALUMAGLASS abrasives, to pursue the development of
processes to manufacture other products, such as specialty glass and glass
ceramics, utilizing industrial waste as raw materials and to identify
synergistic products, services or technologies that could be available to the
Company through acquisition, corporate teaming or other opportunities.
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PRODUCTS AND SERVICES
ALUMAGLASS ABRASIVES
The Company's initial product line is its ALUMAGLASS brand of manufactured
abrasives. ALUMAGLASS is manufactured from an alumino-silicate glass, produced
in a patented process utilizing commercially available melting technologies
customized for the Company's manufacturing processes. ALUMAGLASS can be used as
a loose grain abrasive applied with blasting equipment for industrial cleaning
and maintenance and manufacturing operations or as an ingredient in products
such as polishing agents and non-skid flooring. Other product applications are
under development and the Company believes that such applications may include
utilizing ALUMAGLASS as a coated abrasive in industrial sanding or grinding
operations. See "-- Market Overview."
The Company's manufacturing process allows it to utilize post-consumer
bottle glass, sludges generated by CRT glass manufacturers and other
manufacturing by-products and industrial wastes as raw materials for the
manufacture of its abrasives. In many cases, the Company is paid to take these
wastes or receives them at little or no cost. The Company has entered into
supply agreements to procure certain of the waste materials it receives from
industrial entities. These agreements set forth requirements relating to the
nature, composition, quantity, transportation and packaging of the material
supplied to the Company. These agreements also contain mutual indemnities
pursuant to which each party agrees to indemnify and hold the other harmless for
breaches by such indemnifying party of its representations and covenants and for
environmental liabilities caused by such indemnifying party. The Company
performs batch tests on each delivery to ensure that such requirements are met.
Material not meeting specifications is rejected and returned at the generator's
cost.
The Company believes that the provision of wastes to the Company is less
costly to its customers than other regulated waste disposal alternatives. The
Company also believes that providing wastes to the Company reduces the
generator's liability and offers a pollution prevention alternative to
traditional waste treatment and disposal practices. In addition, these
generators may be eligible to receive beneficial re-use certification that the
waste material is used for product manufacture. In many situations, this may
allow such generators to claim pollution prevention credits, by eliminating a
former waste stream and providing it to the Company as raw material. See
"Business -- Environmental Matters." In certain cases, the Company's abrasives
may also be capable of being reclaimed by the Company after the product is used
by customers.
The Company's manufacturing process gives it the flexibility to customize
its abrasives to provide the various characteristics required for particular
applications. For example, by altering the batch mix of raw material
ingredients, the Company can alter the chemical composition of its abrasives to
alter performance characteristics. In addition, the Company's mechanized
finishing area allows ALUMAGLASS to be produced in coarse, medium or fine
particle or "grit" sizes and, with further processing, into micro grits. The
Company expects fine to medium grit ALUMAGLASS to be suitable for use in
equipment maintenance operations, industrial process cleaning and other
applications where the integrity of substrates is critical, such as the
maintenance of turbine blades in power generation equipment and equipment used
in the aerospace industry. The Company expects medium to coarse grit ALUMAGLASS
to be suitable for use in a variety of cabinet and blast room applications and
as an ingredient for direct incorporation into products such as non-skid
flooring. The Company expects coarse grit ALUMAGLASS to be suitable for cleaning
structures or items having steel substrates such as bridges, ships, rail cars,
car carriers and cargo containers.
The Company's applications testing efforts to date have focused on utilizing
ALUMAGLASS for industrial metal finishing, structural and commercial vehicle
cleaning, paint removal and the cleaning and preparation of other surfaces with
steel or other metal or plastic substrates. Such tests have been conducted by or
at the direction of the Company. Based on the results of such tests, the Company
believes that ALUMAGLASS provides performance advantages and cost savings in
comparison to competitive products, such as aluminum oxide, steel grit, glass
beads and plastic abrasives, in many applications. For example:
- ALUMAGLASS, unlike many other abrasives, is angular, with sharp edges. The
product fractures when blasted, continually yielding sharp edges for reuse
until consumed. As a result, the product offers superior speed of cleaning
and less of it is required.
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- ALUMAGLASS is a relatively hard abrasive, suitable for many applications
where metallic abrasives, such as steel grit and aluminum oxide, are used;
however, ALUMAGLASS has a relatively low specific gravity requiring
significantly less energy to compress air for blasting the product.
- ALUMAGLASS requires no special health and safety equipment for blasting
personnel. Because it is lighter in weight and blasted at lower pressures
than heavy abrasives, it is safer for operators to use when deploying
blast hoses and creates less wear and tear in blasting equipment. In
addition, compared to metallic abrasives blasted at higher pressures,
there is less risk of sparking, which may cause fires or explosions in
sensitive applications such as petrochemical or refining operations.
- As an ingredient in non-slip, non-skid flooring applications, the higher
particle density of ALUMAGLASS compared to metallic abrasives results in
approximately 30% less ALUMAGLASS being required for comparable jobs.
ALUMAGLASS is also typically less expensive than products typically used
such as aluminum oxide.
- While results may vary depending upon the blast conditions and the
substrate being blasted, ALUMAGLASS typically yields a comparable number
of reuse cycles compared to aluminum oxide and glass beads, although steel
grit and plastic abrasives typically yield more reuse cycles than
ALUMAGLASS. However, because ALUMAGLASS will not rust, it may exceed these
reuse cycles and be more effective than steel grit in certain
applications, such as outdoor steel blasting operations in humid or
coastal areas.
- Unlike metallic abrasives, ALUMAGLASS typically will not become embedded
in metal substrates where a hard abrasive is required. This negates the
need for subsequent surface preparation treatment.
- ALUMAGLASS is an alumino-silicate glass, rather than a metallic abrasive.
Therefore, ALUMAGLASS can be used in applications where softer abrasives,
such as glass beads and plastics, are used. When used at the recommended
blasting pressures, ALUMAGLASS creates the fine surface finishes of these
competing softer abrasives and works faster. ALUMAGLASS is less expensive
than plastic abrasives, although typically more expensive than glass
beads. In many glass bead applications, however, customers blend glass
beads with aluminum oxide to achieve desired cleaning and surface
preparation results and ALUMAGLASS is typically less expensive than such
composites.
RECYCLING OF CRT GLASS
The Company is engaged in recycling CRT glass used in televisions. The
Company's CRT glass recycling customers include electronics manufacturers such
as Techneglas, Inc., Thomson Consumer Electronics, Inc., Toshiba Display
Devices, Inc. and Hitachi Electronic Devices, U.S.A., Inc. In the Company's CRT
recycling operations, waste CRT glass, or "dirty cullet," is shipped to the
Company by its customers pursuant to agreements with the Company. These
agreements provide that the Company is to be paid a fee for receiving the CRT
glass. Certain of the Company's contracts with its CRT customers contain minimum
Company purchase requirements and, in certain cases, minimum customer purchase
obligations. The Company receives both funnel glass (the back of a television
screen, which is relatively thin and tubular in shape) and panel glass (the
front of a television screen, which is relatively thick and flat in shape). The
funnel glass is cleaned, separated and sold back to the original manufacturers
and others. The panel glass is cleaned, separated and sold as a raw material to
the original manufacturers and others or used as a raw material by the Company
in the production of its ALUMAGLASS abrasives.
The Company employs a CRT glass recycling system utilizing a sorting
technology for which the Company has filed a joint patent application with Asoma
Instruments, Inc. of Austin, Texas ("ASOMA"). The sorting technology uses X-ray
fluorescence to identify and sort CRT glass by chemical composition. The Company
and ASOMA are joint owners of the patent application and any patent that issues,
and neither the Company nor ASOMA can grant licenses of such patent without the
consent of the other party. In the event that either party grants any license
with respect to such patent to a third party, 66-2/3% of the royalties will be
paid to ASOMA and 33-1/3% of such royalties will be paid to the Company.
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CRT glass fragments received by the Company of approximately one inch or
less in diameter are not currently recycled by the Company due to limitations of
its X-ray fluorescence technology. The Company is currently in discussions with
potential customers to purchase such glass and, although there can be no
assurance, believes that it can sell such glass at prices acceptable to the
Company. In the event the Company is unable to sell such glass, it believes it
can dispose of such glass at little or no cost by delivering it to others who
use various glass materials in the manufacture of their products or the products
of others. The Company also believes that it can dispose of such glass in
landfills at prevailing rates. The Company maintains a reserve for the potential
cost of disposing of CRT glass it is unable to recycle or use in its
manufacturing process. Such reserve is adjusted periodically for the amount of
such material on-hand, landfill rate changes and management's determination of
the need for any such reserves based upon the proven saleability or disposition
options for such materials.
Through March 31, 1996, CRT glass recycling has accounted for substantially
all of the Company's revenues. The Company's initial sources of CRT glass for
recycling have been television manufacturers, who provided financial and
technical support to the Company. The Company also approached certain computer
manufacturers early in its operations, but such manufacturers indicated a desire
for the Company's CRT glass recycling operations to be fully operational prior
to considering sending their glass to the Company. The Company has recently
contacted these and other manufacturers as well as disassemblers of post-
consumer televisions and computers to seek to enter into arrangements to obtain
CRT glass from them. There can be no assurance that the Company will enter into
arrangements with such manufacturers on terms acceptable to the Company or at
all.
The Company believes that the recycling of CRT glass is important to its
strategic positioning and to its overall relationship with its customers. The
Company believes that the recycling of CRT glass provides its customers with a
less costly and more environmentally responsible means of disposing of waste CRT
glass compared to currently available alternative methods of CRT glass disposal.
Further, customers can repurchase recycled CRT glass from the Company at a
savings compared to virgin ingredients. Based upon discussions with its
customers, the Company believes that the purchase price for the Company's
recycled glass may be up to 30% less than the cost of virgin materials. In
addition, the Company is able to utilize certain types of CRT glass which are
not recycled as raw materials for ALUMAGLASS and may be able to use such glass
for its specialty glass products under development. In addition, the Company
believes that the electronics industry may be a source of other waste streams as
raw materials in the Company's abrasives and planned glass-ceramics product
lines. The Company believes that relationships with its CRT glass customers may
serve as a catalyst for the development of new facilities, including potential
facilities to serve CRT glass recycling needs where landfill laws restrict or
ban landfill disposal of televisions and computers. The Company believes that
its CRT glass recycling and materials reuse capability positions the Company to
process large volume end-of-life television and computer waste if and when
regulation excludes them from U.S. landfills.
MECHANICAL CONVERSION
The Company utilizes its post-melting abrasives finishing equipment and
know-how to convert manufacturing by-products and waste glass and ceramics into
raw materials for use by the Company in its manufacture of abrasives or for sale
to others. Examples include the cleaning, sorting and grinding of waste bisque
otherwise used for china as a source of alumina for the Company's abrasives or
for sale to others as a raw material, and the cleaning, sorting and grinding of
soda lime glass as a raw material for the Company's abrasives or as a raw
material for glass producers. The Company intends to use a portion of the
proceeds of this Offering to expand its post-melting abrasives finishing area,
thereby increasing the Company's capacity to mechanically convert waste
materials into raw material for the Company or others. The planned increase in
the Company's abrasives finishing capacity will provide additional capacity for
the crushing, grinding and packaging of materials which other manufacturers can
utilize as raw materials for their manufacturing processes.
The Company believes that there may be demand for these services and will
devote additional resources to identifying these materials and locating
customers for these services after the Offering. The Company has engaged in
discussions with several manufacturers of glass and glass-ceramic products that
may be interested
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in purchasing crushed, screened and packaged china bisque, soda lime glass and
CRT panel glass from the Company. The Company has made initial test shipments of
such products to several customers and has itself developed a number of end
product applications for these materials, such as the Company's planned glass
bead product.
POTENTIAL FUTURE PRODUCTS
SPECIALTY GLASS. The Company's first potential future product in the
specialty glass area is a glass bead to be made in part from panel glass
received by the Company from its CRT glass recycling customers. Such panel glass
would be crushed in the Company's post-melting abrasives finishing area and then
used as a raw material, together with other materials, in the manufacturing of
the glass bead. The Company believes that such beads will have a high
retroreflective index and greater durability and elasticity, expected to be
useful in applications which include surface finishing and highway signage and
possibly pavement marking. The Company has filed a patent application with
respect to the formulation and production of such glass beads, although there
can be no assurance that such patent will issue. The Company is currently in
discussions with several established companies in the glass bead business and
may determine to enter into a joint venture or other collaborative arrangement
with a corporate partner in order to pursue the commercial development of this
product. The Company may attempt to develop other specialty glass products
including frit for electrical resistance glass, decorative glass and high
density glass.
GLASS-CERAMICS. The Company plans to evaluate the production of a series of
high-strength, low-weight glass-ceramic products using waste materials to be
provided through its relationships with the specialty steel and electronics
industries and other industries generating silica and metals-enriched industrial
wastes. The Company believes that, combined with virgin materials, these
products have potential uses as substitutes for structural materials, including
steel, in the aircraft, automotive, construction and machinery industries. The
Company also believes that ALUMAGLASS particles may be sold as ingredients for
direct incorporation into products such as floor tiles, glass-ceramic powders,
plastic fillers and other ceramic product applications. These applications may
be pursued independently or through joint venture or cooperative efforts with
others.
OTHER ABRASIVE PRODUCTS. The Company expects to develop future products in
its core abrasives business. Such products may include (i) higher strength
abrasives which may be produced utilizing new formulations, (ii) blended
composites of ALUMAGLASS and other abrasive materials, (iii) products utilizing
ALUMAGLASS as a coated abrasive on sandpaper, grinding wheels or other items and
(iv) abrasives such as crushed glass produced through the Company's mechanical
conversion processes.
No assurance can be given that the Company will be successful in developing
any future products or that it will be able to market any such products
successfully.
MANUFACTURING, RECYCLING AND CONVERSION PROCESSES
ABRASIVES MANUFACTURING PROCESS
The Company's abrasives are manufactured in a three-step process -- the
pre-melting, batching process, the melting process and the post-melting
finishing process.
PRE-MELTING, BATCHING PROCESS. The pre-melting, batching process includes
the collection and intake of materials such as post-consumer bottle glass,
sludges produced in the manufacture of CRT glass and other manufacturing
by-products and industrial wastes, as well as certain virgin materials, to be
used as raw materials for the Company's abrasives. Various alumina, silica and
certain other metal or calcia-enriched manufacturing by-products and wastes of
the electronics, aluminum, specialty steel, automotive and other industries have
been identified and utilized by the Company as product ingredients for its
manufacturing processes. The Company has entered into supply agreements for
certain of the materials with industrial entities, and secured authorization
from applicable environmental regulatory authorities to utilize various waste
materials as product ingredients. Other virgin and waste materials are available
on a purchase order basis. The Company's procedures to secure wastes for
beneficially utilized production ingredients in its
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manufacturing process has been determined to be exempt from RCRA regulation,
enabling the Company to utilize these materials without subjecting itself to the
financial and operational constraints typically imposed on waste management
facilities. See "Business -- Environmental Matters."
Once collected, raw materials are loaded into bins or otherwise separated so
that specified quantities of each material can be assembled pursuant to a
computerized batching system for which the Company has been issued a patent.
Once a batch of raw materials having the desired chemical components, consisting
principally of soda, silica, alumina and calcia, has been assembled, it is taken
to the Company's melter for the next phase of manufacture.
MELTING PROCESS. Each mixed batch of raw material is loaded into the
Company's melter in order to produce the alumino-silicate glass comprising
ALUMAGLASS. The Company's melter is a customized glass melting furnace. The
melter employs a customized air emissions scrubber and heat exchange technology
that reduces harmful solid or liquid residual waste or air emissions in the
production process. Certain emissions captured in the scrubber are returned to
the melter for use as raw materials. The alumino-silicate glass produced in the
melter is cooled, where it forms hard particles or "frit" and is taken to the
abrasives finishing area.
The melter went into service in February 1995 and went through a shake-down,
stress-test and a final modification program to bring its production capacity to
25 tons of ALUMAGLASS per day, although there can be no assurance that it will
maintain such capacity consistently. From time to time, the Company has
experienced mechanical or technical difficulties with such melter which have
required repairs and maintenance that have interrupted the Company's ability to
manufacture its abrasives. In early 1995, the melter did not successfully
oxidize a sludge being tested, which resulted in the formation of a thick glass
that clogged the pouring area. The melter had to be flushed with soft glass for
five days before returning to normal production. In November 1995, the
repositioning of air bubblers used to speed the flow of glass resulted in a leak
because of increased wear on a relatively soft area of the melter's refractory
brick floor. The Company took the melter out of service for three weeks to
replace and fortify the area, to make additional planned improvements and to
conduct a full examination of the melter. Such examination showed minimal wear
in other parts of the melter. The Company estimates that the melter will have to
be taken out of service approximately once every four years for approximately a
three-week period to replace worn refractory bricks, which is required
maintenance for glass melters generally. Any mechanical or technical
difficulties with the melter in the future could result in an interruption in
the Company's ability to manufacture its abrasives. The failure of the Company
to effect prompt repairs and otherwise keep its melter operating at targeted
capacities could have a material adverse effect on the business, financial
condition and results of operations of the Company.
If warranted by demand for the Company's abrasives, the Company will
construct a second melter expected to have the capacity to produce approximately
75 tons of ALUMAGLASS per day. The Company has allocated a substantial amount of
the proceeds of the Offering for the construction of such melter. The Company
believes that there are a number of potential suppliers of glass melters and
other furnaces. The Company believes that a 75-ton-per-day unit can provide the
Company with economies of scale in both capital and operating costs. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." In addition, if sufficient levels of demand are achieved
in certain areas of the United States or abroad, the Company may seek to build
additional facilities to manufacture its abrasives, which may include CRT glass
recycling lines. These facilities may be developed independently by the Company
or pursuant to arrangements with corporate partners such as large volume users
of loose grain abrasives such as shipyards or large heavy-industry corporations.
These entities may have many of the desired waste items on hand and may require
volumes of the abrasives that justify on-site construction to avoid shipping
costs. Any excess capacity of such facilities could be used for third party
sales. It is anticipated that the construction of these facilities would be
financed with debt, with an equity component to be provided by the Company and,
if applicable, its corporate partner.
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POST-MELTING FINISHING PROCESS. The post melting abrasives finishing area
consists of various items of equipment which perform the functions of crushing
ALUMAGLASS frit to desired sizes, sieving the crushed frit to separate the
particles and, once the ALUMAGLASS has been tested to assure "grit" size is
consistent with industry standards, packaging ALUMAGLASS for sale to customers.
The abrasives finishing area currently has a production capacity of
approximately 15 tons per day for coarse grit sizes and lower volumes for medium
and fine grit sizes. However, the Company intends to complete a capital
expansion program to make improvements and additions to its finishing area which
is expected to result in a three-to four-fold increase in finishing capacity.
See "Management Discussion of Analysis of Financial Condition and Results of
Operations." The Company also utilizes the abrasives finishing area to convert
certain manufacturing by-products and other materials it receives into raw
materials for its abrasives and for sale to others.
The Company believes that the cost-effectiveness of the Company's abrasives
manufacturing processes resulting from its ability to utilize waste materials or
raw materials will provide significant competitive advantages. The Company
enjoys further operating cost advantages compared to competitors in that certain
of the waste materials used in the production of ALUMAGLASS provide a British
Thermal Unit or "BTU" value which lowers the Company's energy costs, which
typically are a major cost component of glass and glass-ceramics production. In
addition, the Company expects its products to be classified as "recycled" under
applicable guidelines of the United States Environmental Protection Agency, and
accordingly to achieve preferential procurement status. The Company believes
that such classification may be significant to users who express a preference or
provide special procurement consideration for recycled products. See
"Environmental Matters."
CRT GLASS RECYCLING PROCESS
The first step in the recycling of CRT glass is the inspection of the glass
received by the Company to assure that it complies with requirements set forth
in purchase and supply agreements between the Company and its CRT customers
relating to the nature of the glass, amounts of extraneous materials mixed in
with the glass and other requirements. Such inspection is generally conducted
manually, but may involve the use of hand held devices which identify chemical
constituents of CRT glass. Nonconforming shipments are rejected and returned to
the supplier at the supplier's expense.
Once accepted, CRT glass is processed through the Company's "primary" cullet
line. The process involves extracting pieces of CRT glass of less than a
specified size, separating the panel glass from the funnel glass, cleaning and
removing coatings on the glass, identifying the chemical composition of the
panel glass by use of X-ray fluorescence and batching the funnel glass and panel
glass for resale back to customers. This process is repeated for CRT glass
fragments too small for the Company's primary cullet line by identical
processing through the Company's "secondary" cullet line. CRT glass fragments
received by the Company of approximately one inch or less in diameter are not
currently recycled by the Company due to limitations of its X-ray fluorescence
technology.
MECHANICAL CONVERSION PROCESS
The Company has identified several waste streams which it receives,
including post-consumer bottle glass, bisque used to make china and CRT panel
glass, as materials which, if converted from the form in which they are received
by the Company into a form suitable to be used as a manufacturing raw material,
become valuable materials independent of the Company's recycling or abrasives
manufacturing operations. The Company identifies the chemical or other valuable
properties of these materials and identifies third parties that can utilize the
materials in their manufacturing or other operations. Then, depending on the
customer's needs, the Company utilizes its equipment, principally its recycling
lines and post-melting, abrasives finishing equipment, to sort, clean and/or
grind and crush the material into the desired form. The material is then
packaged and shipped to customers.
The Company also has the ability to make composite materials, if requested,
by mixing the waste material being converted with other waste or virgin
materials. The Company also uses its equipment to mechanically convert these
materials into a form suitable for use as a raw material in its abrasives
production.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts are conducted principally
through (i) the Company's internal staff, (ii) the Center for Advanced Ceramic
Technology at Alfred University pursuant to agreements with the Company and
(iii) the Company's Scientific Advisory Board.
The Company currently employs five individuals principally devoted to
research and development, including, among others, Robert Dejaiffe, the
Company's Vice President-Technology, Dr. Ashvin Srivastava, Director of Research
at Dunkirk, and Dr. Kimberly Lotter, Laboratory Director at Dunkirk, all of whom
have extensive experience in glass and ceramic technologies. See "Management."
The Company maintains an on-site laboratory at its Dunkirk facility where
various analyses, tests and other research and development activities are
conducted on a regular basis.
The Company has entered into a research agreement (the "Research Agreement")
with The Center for Advanced Ceramic Technology at Alfred University ("CACT"),
pursuant to which CACT performs various tests and studies on behalf of the
Company, as directed by the Company. CACT is the Company's primary research and
development partner. CACT is currently engaged in a study of the basic
characterization of ALUMAGLASS. The Research Agreement expires in December 1996.
Under the Research Agreement, the Company is obligated to pay CACT an amount not
to exceed $163,728 for the term of the Agreement. Payments are made quarterly
based on a budget approved in advance by the Company. The Agreement provides
that royalties or other consideration received from a third party from the sale
or licensing of any patents developed pursuant to the Agreement are to be
divided equally between CACT and the Company, except that the Company is
entitled to all royalties received from third parties in which the Company has
an equity interest of 20% or more. Individuals at CACT were also involved in the
development of the Company's abrasives manufacturing process and the related
patent, but assigned their rights thereto to the Company. Richard M. Spriggs,
Ph.D., the Chairman of the Company's Scientific Advisory Board, is the Director
of CACT. The Company also engages other academic institutions to provide
specific research and development services from time to time.
The Company also utilizes its Scientific Advisory Board for research and
development activities such as advising as to potential product applications,
the feasibility of new product formulations and the impact of process
modifications on product characteristics. See "Management -- Scientific Advisory
Board."
The Company co-developed the X-ray fluorescence technology for its CRT glass
recycling operation with ASOMA, with respect to which the Company and ASOMA have
filed a joint patent application. The Company may pursue other co-development
opportunities with third parties in the future or look to others for licenses of
technology or other arrangements, although the Company has no plans or
commitments to do so as of the date of this Prospectus.
The Company will continue its research and development efforts to identify
additional applications for its ALUMAGLASS abrasives, to pursue the development
of processes to manufacture other products and to identify synergistic products,
services or technologies that could be available to the Company through
acquisitions, corporate teaming or other opportunities. The Company believes
that there are many environmentally oriented manufacturing and processing
technologies that are in early stages of commercialization and development that
could provide synergies with the Company's technologies through licensing, joint
ventures, acquisitions or otherwise.
MARKET OVERVIEW
ABRASIVES
Traditionally, a variety of media and methodologies have been used in the
broad market of industrial equipment and facilities cleaning and maintenance. In
particular, sand used in blasting applications and chemical solvents have held a
significant share of the market. In recent years, however, increased regulations
relating to the environment and worker health and safety, have resulted in a
dramatic decline in the use of sand, which is known to contribute to the lung
disease silicosis. In addition, given the greater demand for reclaimable
abrasives, which reduce the amount of spent abrasive material subject to
landfill and potential environmental liability, the Company believes that
non-reclaimable abrasives, such as sand and metal slags,
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are competitively disadvantaged. Chemical solvents have also decreased in use
with respect to many applications due to such regulatory changes, particularly
regulations which have resulted in increased disposal costs. Products such as
ALUMAGLASS, glass beads and mineral, metallic and plastic abrasives, are
affected to a lesser extent by such regulations due to the nature of their
composition and the fact that they are reclaimable for multiple uses and have a
lower quantity for disposal. ALUMAGLASS, for example, contains no free silica,
which causes silicosis, and, depending on the application, can be recycled by
the Company at its Dunkirk facility rather than disposed of after use. Other
approaches such as water blasting are also gaining acceptance. The Company
believes that this regulatory framework, as well as the other performance
advantages offered by its abrasives, will result in increased market
opportunities for ALUMAGLASS.
Loose grain abrasives, typically applied with blasting equipment, are used
in numerous industries throughout the world for equipment and facilities
maintenance. Applications include cleaning, stripping and other surface
treatment or surface preparation applications, such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning,
paint removal and the cleaning and preparation of service substrates. Potential
purchasers of the Company's abrasives include military and defense agencies,
entities engaged in the electronics, aerospace, automotive, glass products and
construction industries and entities engaged in surface finishing, coating
removal and the maintenance of manufacturing and process industries equipment
and facilities, buildings, highways, bridges and commercial vehicles and
vessels.
Industrial abrasives can also be directly incorporated into other products
such as non-skid flooring, sand paper, grinding wheels and polishing compounds.
Abrasives are mixed with cement and paints to provide non-skid surfaces.
Abrasives are applied as a coating on plastic wood. Abrasives are also used for
applications such as softening leather, stonewashing denim and shot peening to
remove metal fatigue found in aircraft.
The Company believes that ALUMAGLASS provides performance advantages and
cost savings compared to competing abrasive products and that ALUMAGLASS will be
able to obtain significant market acceptance through the Company's marketing and
sales efforts. See "-- Products and Services," "-- Sales and Marketing" and "--
Competition." To some degree, the cost advantages associated with ALUMAGLASS are
derived from the Company's ability to obtain industrial wastes to use as
manufacturing raw materials at little or no cost. To the extent that the
suppliers of such wastes utilize alternative means of disposal, the Company
would be required to purchase virgin materials for use as manufacturing raw
materials. However, the Company believes that adequate supplies of such
materials would be available to the Company on satisfactory terms and
conditions, including cost.
There can be no assurance that ALUMAGLASS will achieve market acceptance.
The decision by a potential customer to utilize the Company's abrasives is,
among other things, technical in nature, requiring the customer to make an
evaluation as to whether changes in its capital equipment or operating
procedures will be required in order to realize the performance benefits of the
Company's products. The primary capital equipment change that could be required
relates to equipment used to reclaim abrasives. ALUMAGLASS has been designed as
a reclaimable abrasive that can be reused between five and ten times during a
single application. Current techniques to reclaim abrasives and separate
contaminants from the abrasive include gravity separation, cyclone separators
and air classifier systems. Of these, gravity separation is typically
inappropriate for ALUMAGLASS due to the relatively light weight of ALUMAGLASS
compared to the contaminants to be removed. Thus, a potential customer with
gravity separation equipment may have to replace such equipment with a cyclone
separator or air classifier at a cost that the Company believes would range from
$20,000 to $50,000, depending on the size of the unit. The primary operating
procedure change that potential customers must employ is reducing blasting
pressure for ALUMAGLASS by 20% to 30% compared to pressures used for heavier,
metallic abrasives. There can be no assurance that potential customers will
choose to change their equipment or established procedures or be willing to
incur any necessary costs to make such changes or that the benefits derived from
utilizing ALUMAGLASS will outweigh the costs incurred to make such changes.
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CRT GLASS RECYCLING
The Company currently recycles only waste CRT glass generated by television
manufacturers located in the United States. There are several manufacturers from
which the Company does not receive glass and it does not receive all of the
waste glass produced by its current customers. Such manufacturers typically seek
more than one outlet for their CRT glass, in order to avoid dependence on any
one source. In some cases, manufacturers ship their waste CRT glass to smelters
or landfills. Therefore, the Company believes that there is some growth
potential for its CRT recycling operations. However, such market, as narrowly
defined, is limited by the relatively few manufacturers located in the United
States, the relatively low percentage of CRT glass which becomes waste prior to
being incorporated into televisions and shipping costs associated with doing
business with manufacturers located at significant distances from the Company.
The Company also plans to expand its CRT glass recycling business by
recycling waste CRT glass generated by manufacturers of computer monitors and
post-consumer CRT glass obtained from entities engaged in television or computer
disassembly as discussed below. However, the Company does not currently have any
commitments to take such glass and there can be no assurance that the Company
will enter into any arrangements to do so.
Additional large markets for CRT recycling are presented by post-consumer
television and computer monitor glass. However, such business involves
disassembly which is currently a manually intensive operation and may not be
commercially viable for the Company. The Company may enter this business by
obtaining CRT glass directly from entities engaged in television or computer
disassembly. In addition, the Company has from time to time engaged in
discussions with potential strategic partners with respect to a co-venture to
enter this business but has no commitments to do so as of the date of this
Prospectus. The Company believes that this may be a large market in the future
as environmental regulations move toward banning or significantly limiting the
amount of such glass which can be disposed of in landfills. There can be no
assurance that the Company will be able to enter this market on commercially
acceptable terms or at all.
MECHANICAL CONVERSION
The Company believes that the U.S. demand for the Company's waste conversion
services as part of its manufacturing process will be driven by industries'
needs to remove and manage manufacturing by-products and industrial wastes in
compliance with various federal, state and local environmental statutes and
regulations. See "-- Environmental Matters." Other industrialized countries
around the world are also proposing or enforcing similar, and in some cases,
more stringent environmental legislation. Consequently, the Company believes
that demand for the Company's waste conversion services may increase because of
anticipated, increasingly stringent environmental regulations and the concerns
of waste generators over accompanying waste disposal liabilities in the U.S. and
abroad. The Company's competitive advantage and successful market penetration
will depend on its ability to provide low-cost waste conversion services while
also minimizing the waste generators' liabilities. See "-- Competition."
SALES AND MARKETING
The Company only recently began to implement its marketing program for
ALUMAGLASS and will increase its marketing and sales efforts following the
Offering by increasing its sales and marketing force and increasing its
distribution support efforts through additional telemarketing and trade journal
and direct mail advertising. Particular attention will be given to direct sales
efforts with respect to potential large volume customers, such as utilities,
shipyards and large corporations with various manufacturing, maintenance and/ or
processing operations. In addition, the Company will continue to add
distributors to increase market penetration of ALUMAGLASS. The Company will also
increase its efforts to market ALUMAGLASS for other applications, such as
non-skid flooring and polishing compounds.
ALUMAGLASS brand abrasives are marketed and distributed in the United States
through the Company's direct sales efforts and through distributors. N.T.
Ruddock & Company, Fusco Abrasive Systems, Inc. and Omni Finishing Systems, Inc.
are initial lead regional distributors of the Company's abrasives and are
large-volume distributors of loose grain abrasives in the United States. Recent
additions to the Company's domestic distribution network include, among others,
Porter Warner Industries Inc., Standard
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Sand & Silica Co., Corrosion Specialties Incorporated, Carpenter Brothers Inc.,
Grand Northern Products, Inc., MJD Enterprises Inc., Dawson MacDonald Company,
Metal Preparations Co., Inc. and W. H. Shurtleff Company. In addition, Midvale
Industries, Air Power Equipment Corp. and Ryan Equipment Co., Inc. are among the
regional sub-distributors served by N.T. Ruddock & Company, although such
distributors may also order directly from the Company. Other distributors are
currently testing the product. The Company has also established distributors in
the United Kingdom, Canada, Mexico and Israel. Many of the Company's
distributors sell and have blasting equipment in place at numerous customer
locations. The Company is working with these distributors and suppliers of
blasting equipment to have equipment users test and convert to ALUMAGLASS.
The Company is also pursuing the introduction of highly focused abrasive
product offerings in certain market segments, such as auto refinishing and
non-skid flooring additives. Marketing of such potential products may be
conducted directly by the Company or through retail channels and could include
private branded products. The Company may also seek to sell ALUMAGLASS to micro
abrasives manufacturers who would grind ALUMAGLASS into micro grit sizes for
sale as a micro abrasive for specialty manufacturing applications and
applications such as cleaning intricate medical or dental equipment and
polishing compounds.
The Company is a party to a Purchase, Supply and Distributorship Agreement
(the "VANGKOE Agreement"), entered into in March 1996 and amended in May 1996,
with VANGKOE, as assignee of Cytech Laboratories, Inc., relating to the sale of
ALUMAGLASS and certain waste materials processed in the Company's abrasives
finishing area for use as aggregates and additives for products such as swimming
pool plasters, tiles and other construction materials. The VANGKOE Agreement
contains a guaranteed minimum purchase commitment of approximately 350 tons of
ALUMAGLASS per month over a twelve-month period commencing October 1996. At
VANKGKOE's option, VANGKOE may satisfy its minimum purchase commitment by
substituting one-third of such commitment with crushed CRT glass (resulting in
the sale of approximately 234 tons of ALUMAGLASS per month). If the guaranteed
minimum purchase commitment is purchased, the Company will receive approximately
$1,560,000 in revenue (or approximately $1,240,000 if VANGKOE substitutes
crushed CRT glass for one-third of such commitment). In consideration for such
minimum purchase commitment, the Company has agreed not to knowingly sell
ALUMAGLASS to other customers for use as an ingredient in pool plasters during
the term of the VANGKOE Agreement. VANGKOE is a newly-formed entity with nominal
assets and no experience in marketing and distributing materials similar to
those required to be purchased by VANGKOE under the VANKGKOE Agreement.
Accordingly, there can be no assurance that VANGKOE will meet its minimum
purchase commitments under the VANKGKOE Agreement or that VANKGKOE will ever
satisfy any of its obligations under the VANGKOE Agreement. In such event, the
Company's ability to enforce its rights under the VANGKOE Agreement will be
limited.
The VANGKOE Agreement also provides the Company with a 60-day option to
enter into a joint venture with VANGKOE relating to technology to apply color
coating to materials to be purchased by VANGKOE under the VANGKOE Agreement. If
the Company determines to proceed with the joint venture, the parties will
create a new company ("NEWCO") to apply at cost certain color coatings to the
material purchased from the Company. VANGKOE will grant NEWCO an exclusive,
perpetual, royalty-free license of its technology related to such color coating
process. The Company has agreed to invest one-half of the cost to fund the
purchase of coating equipment (not to exceed $125,000) and VANGKOE will obtain a
loan to finance the remaining 50% of the funds required for the purchase of such
equipment and the Company will guarantee such VANGKOE loan (not to exceed
$125,000). The VANGKOE Agreement provides that the Company will share 50% of
VANGKOE's profit from its sales of the finished material color coated by NEWCO.
VANGKOE has agreed to obtain a primary lease for a facility to be subleased at
cost to NEWCO and to provide a minimum of $30,000 of working capital to NEWCO.
If VANGKOE defaults on its loan and the Company's guarantee of such loan is
drawn upon and not repaid immediately by VANGKOE or if VANGKOE does not perform
certain of its other obligations under the VANGKOE Agreement, the coating
technology will be assigned to NEWCO and VANGKOE's interest in NEWCO will be
assigned to the Company, which will become the sole owner of NEWCO. The VANGKOE
Agreement further commits
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VANGKOE to license its coating technology to the Company for use at any future
facility the Company may establish for a royalty of $0.01 per pound. The color
coating technology has been recently developed and products coated utilizing
such technology have not been commercially sold. Accordingly, there can be no
assurance that NEWCO will be successful in commercializing such technology, that
the Company will ever receive revenues as a result of products sold coated with
such technology or that the Company will not lose its entire investment in
NEWCO.
The Company's marketing strategies include, among others, telemarketing,
direct mail and trade journal advertising, product sampling programs and
customer support programs such as technical assistance programs and testing
support.
Certain members of the Company sales and marketing force also provide sales
support for the Company's CRT glass recycling business and are actively engaged
in identifying additional sources of CRT glass and sales outlets for processed
glass.
The Company currently has six individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis. The Company has allocated a portion of the proceeds of the
Offering to expand its sales and marketing staff in the near future and as
market acceptance of ALUMAGLASS grows.
INTELLECTUAL PROPERTY
The Company has been awarded two United States patents. The first patent was
issued in December 1993 and relates to the Company's process for manufacturing
abrasive particles from inorganic waste materials, including sludges from
various industrial processes and waste water treatment, emission control dusts
from high-temperature industrial processes, fly ash from incineration of
industrial and residential wastes and certain other process-specific effluents.
Examples of such inorganic wastes are spent pot liner from the aluminum
industry, refractory wastes from smelting, melting or refining furnaces, various
types of slags and precipitants related to metal recovery operations, foundry
sands, glass wastes, including television and computer moniter CRT glass, and
certain wastes from the manufacture of ceramic products. The second patent was
issued in October 1995 and relates to the pre-melting batching process involved
in the manufacture of the Company's abrasives. In addition, the Company and
ASOMA have jointly filed an application for a U.S. patent on the X-ray
fluorescence technology used in the Company's CRT glass recycling operations.
See "-- Products and Services -- CRT Glass Recycling." The Company also has two
additional patent applications on file. One relates to the Company's abrasives
and one relates to the Company's planned glass bead product.
The Company's success will depend, in part, on its ability to maintain
protection for its products and manufacturing processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. There can be no assurance
that any of the Company's patent applications will result in issued patents,
that any issued patents will afford adequate protection to the Company or not be
challenged, invalidated, infringed or circumvented or that any rights thereunder
will afford competitive advantages to the Company. Furthermore, there can be no
assurance that others have not independently developed, or will not
independently develop, similar products and technologies or otherwise duplicate
any of the Company's products and technologies. There can be no assurance that
the validity of any patent issued to the Company would be upheld if challenged
by others in litigation or that the Company's activities would not infringe
patents owned by others. The Company could incur substantial costs in defending
itself in suits brought against it, or in suits in which the Company seeks to
enforce its patent rights against others. Should the Company's products or
technologies be found to infringe patents issued to third parties, the Company
would be required to cease the manufacture, use and sale of the Company's
products and the Company could be required to pay substantial damages. In
addition, the Company may be required to obtain licenses to patents or other
proprietary rights of third parties in connection with the development and use
of its products and technologies. No assurance can be given that any such
licenses required would be made available on terms acceptable to the Company, or
at all.
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The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its university
research partners, employees, consultants, advisors and others. There can be no
assurance that such parties will maintain the confidentiality of such trade
secrets or proprietary information, or that the trade secret or proprietary
information of the Company will not otherwise become known or be independently
developed by competitors in a manner that would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's logo is a registered trademark. In addition, the Company has
filed a trademark application for ALUMAGLASS with the Patent and Trademark
Office. A request to extend the time for filing an objection to the mark was
requested by a third party and granted. Such extension expired December 31,
1995. The Company has not been notified of the filing of a request for a further
extension of such time period.
COMPETITION
The Company's manufactured abrasives will compete with product offerings of
other companies, principally aluminum oxide, glass beads, plastic abrasives,
garnet, steel grit, coal slag and, with respect to certain applications, sand or
water blasting techniques. Many of the companies offering such products are
large corporations with substantially greater financial resources than the
Company. Large international competitors of manufactured metallic abrasives
include: Exolon-ESK, General Abrasives Triebacher, Inc., Washington Mills
Electro Minerals Corp., Irvin Industries, Inc. and others. Various other
manufacturers produce mined, plastic, glass bead and mineral abrasives, as well
as high speed water jet spray abrasive systems. The Company's ability to
effectively compete against these companies could be adversely affected by the
ability of these competitors to offer their products at lower prices than the
Company's products and to devote greater resources to the marketing and
promotion of their products than are available to the Company.
The principal competitive factors in the abrasives market are cost of usage,
performance, reliability of supply and health and safety issues. Sophisticated
users tend to evaluate the total cost of usage of an abrasives product, and
consider factors such as (i) the per pound cost of the abrasive; (ii) the speed
of cleaning (as it relates to labor and overhead cost to accomplish the job);
(iii) energy consumption cost to apply the abrasive; (iv) special equipment
costs and equipment maintenance costs; (v) disposal costs of the spent abrasive;
and (vi) post-abrasive application costs, such as removal of embedded abrasive.
The Company believes that ALUMAGLASS provides users with superior performance
and lower total cost of usage in many applications. See "Business -- Products
and Services."
The Company competes for certain of its raw materials for its abrasives and
waste conversion services in the hazardous and non-hazardous waste and
industrial by-products treatment and disposal markets, which are characterized
by several large companies and numerous small companies and publicly-owned
landfills who charge for the disposal of waste. International waste disposal
competitors include, among others, WMX Technologies, Inc. Laidlaw Waste Systems,
Inc., Browning-Ferris Industries, Inc., Mid-American Waste Systems, Inc., Allied
Waste Industries, Inc. and Strategic Materials, Inc. and a number of large
European-based companies. Although the Company beneficially reuses the wastes it
receives and may accept qualified wastes for reduced fees compared to its
disposal competitors, any such companies or any other competitor may develop
technologies superior to those of the Company or offer waste disposal services
at competitive prices. In addition, to the extent that the burdens of complying
with environmental laws and regulations are eased as a result of, among other
things, political factors, competitors may offer the Company's customers and
potential customers alternative and less costly means to dispose of their
wastes. The Company's competitive advantage and successful market penetration
will depend on its ability to provide low-cost waste conversion services while
also minimizing the waste generators' liabilities.
With respect to its industrial CRT glass recycling operations, the Company
competes with several other companies who accept waste CRT glass for recycling
or other purposes, each of which may deal with customers of the Company and
satisfy their recycling, beneficial reuse or disposal needs. In addition, under
certain conditions, CRT glass might also be disposed of by melting it to
recapture the residuals. See "-- Market Overview" and "-- Strategy."
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ENVIRONMENTAL MATTERS
The federal environmental legislation and policies that the Company believes
are applicable to its manufacturing operations in the United States include
RCRA, the Clean Water Act, the Clean Air Act, CERCLA, the Superfund Amendments
and Reauthorization Act ("SARA") and the Pollution Prevention Act of 1990. The
Company is also subject to state air, water and solid and hazardous waste laws
and regulations that affect its manufacturing operations. State laws and
regulations normally must be at least as stringent, and may be more stringent,
than their federal counterparts. These federal and state laws regulate the
management and disposal of hazardous and non-hazardous wastes, control the
discharge of pollutants into the air and water, provide for the investigation
and remediation of contaminated land and groundwater resources and encourage
pollution prevention programs. Many of these laws have international
counterparts, particularly in Europe and elsewhere in North America.
RCRA provides a comprehensive regulatory framework for the generation,
transportation, treatment, storage and disposal of solid and hazardous waste.
RCRA regulations require that hazardous waste generators, transporters and
operators of hazardous waste treatment, storage and disposal facilities meet
strict standards set by government agencies. In certain circumstances, RCRA
requires owners/operators of treatment, storage and disposal facilities to
obtain RCRA Part B permits from the EPA or from state agencies authorized to
implement the RCRA program. Obtaining such permits may be a lengthy and costly
process that requires regulatory inspection and approval of, among other things,
the facility design, equipment and operating plans and procedures. In addition,
applicants for a RCRA permit for a treatment, storage or disposal facility must
submit detailed information regarding all past waste management practices at the
facility, and may be required to undertake corrective action for past
contamination.
Additionally, RCRA regulations establish "land disposal restrictions"
("LDRs") that prohibit disposal of specified hazardous wastes on land unless,
subject to certain exemptions, these wastes meet or are treated to meet Best
Demonstrated Available Technology ("BDAT") treatment standards. The statute
imposes civil and, under certain circumstances, criminal liability for failure
to comply with the regulatory requirements.
Under RCRA, wastes are classified as hazardous either by specific listing or
because they display certain hazardous characteristics. Under current
regulations, waste residues derived from listed hazardous wastes are generally
considered to be hazardous wastes until they are delisted through a formal
rulemaking process that may require a few months to several years. For this
reason, waste residue generated by the processing of listed hazardous wastes
will be considered a hazardous waste, regardless of whether this waste residue
may be environmentally benign. Subsequent management of such waste residue would
be subject to full RCRA regulation, including the prohibition against land
disposal without treatment in compliance with BDAT.
To maximize the market acceptance of the Company's manufacturing technology,
the Company has chosen to focus its initial project efforts on the development
of recycling processes, materials and products which are most likely to qualify
for exemptions or favorable regulatory treatment. For example, the Company will
use materials that are not solid wastes and are not subject to RCRA permitting
requirements (for example, reclaimed characteristically hazardous by-products or
sludges). The Company will handle secondary materials in a way to qualify such
materials for exclusions under state or federal RCRA regulations (for example,
use of materials as effective substitutes for other products in a manufacturing
process), and the Company will store materials in an environmentally sound
manner (for example, within the manufacturing building or on a concrete slab).
The permitting burden on a facility utilizing its current manufacturing
technology will depend on the nature of the waste streams (including whether
they are classified as solid wastes or hazardous wastes), the configuration of
the process at the particular facility, the manner in which products are
recovered from the waste and the type of waste residuals created by the process.
The New York State Department of Environmental Conservation ("NYSDEC") has
been delegated authority to administer the RCRA program in New York, and has
adopted regulations governing the treatment, storage and disposal of solid and
hazardous wastes. NYSDEC regulations require the Company to obtain regulatory
exemptions and/or beneficial use determinations for each hazardous waste
material it
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accepts for recycling purposes. Without these regulatory exemptions and/or
beneficial use determinations, the Company would be required to obtain a State
RCRA permit to operate its facility, and would become subject to onerous RCRA
regulatory requirements.
The Company presently has obtained both regulatory determinations and
beneficial use determinations from NYSDEC concluding that the materials and
processes that it will use and the products that it will produce at its Dunkirk
Facility are not subject to permits under the New York State solid and hazardous
waste laws. However, in view of the fact-specific, case-by-case nature of the
approval process and the varying policies of different jurisdictions, there can
be no guarantee that any or all of the Company's projects will qualify for
favorable regulatory treatment in other jurisdictions. In addition, there can be
no assurance that new materials accepted at the Dunkirk facility will qualify
for favorable regulatory treatment.
Pursuant to RCRA and New York State law, federal and state regulations exist
governing aboveground and underground storage tanks. Under these regulations,
tanks used to store various types of petroleum must be registered with the State
until they are permanently closed. These regulations also establish standards
for permanent closure, and impose penalties for failure to comply with the
registration or closure requirements. Although the Company does not utilize any
underground storage tanks, there are several empty tanks at the Dunkirk facility
that were used by the former owner of the property to store various materials,
including fuel oil for consumptive heating use on the premises, mineral oil for
use in formulating printing ink and a non-hazardous wash solution for cleaning
printing presses. The estimated cost to clean and close the tanks is in the
range of $28,000 to $34,000, based upon bid proposals from a qualified
environmental services firm. An investigation by an environmental engineering
firm has disclosed modest soil contamination confined to the immediate vicinity
of two tank locations. Because of the amount and confined location of the
contamination, it is not certain that any remediation will be required. The
environmental engineering firm has estimated that, if remediation of soil and
groundwater is required, the cost of excavation, removal and disposal of
contaminated material would not exceed $30,000. Thus, total remediation and tank
closure costs are expected to range from approximately $28,000, if no
remediation is required, to approximately $64,000 if soil and groundwater
remediation is required.
The Clean Air Act empowers EPA to establish and enforce ambient air quality
standards and limits on emissions of pollutants from specific facilities. The
Clean Air Act Amendments of 1990 impose specific requirements upon "major" or
"area" sources of regulated air pollutants. In certain cases, depending upon the
area the source is located, such sources may be required to meet
technology-based emissions limits based upon Best Available Control Technology
("BACT") for sources subject to new source performance standards; Maximum
Achievable Control Technology ("MACT") for hazardous air pollutant sources and
Reasonably Available Control Technology ("RACT") or Lowest Achievable Emission
Rates ("LAER") for criteria pollutant sources in non-attainment areas. New York
State has also enacted the Air Pollution Control Act, and has promulgated
regulations pursuant to that Act that regulate air contaminant sources.
Under the Clean Air Act and its Amendments, and state laws and regulations,
the Company may be required to obtain a Title V operating permit, as well as
various other air permits to construct or operate emission sources at its
facility. The Dunkirk facility has obtained, or is in the process of obtaining,
all necessary air permits.
CERCLA and subsequent amendments under SARA impose continuing liability upon
generators of hazardous substances and owners and operators of facilities where
hazardous waste is released or threatened to be released, as well as upon
parties who arrange for the transportation of hazardous substances to such
facilities. CERCLA effectively imposes strict, joint and several liability upon
these parties. Accordingly, the Company could incur liability as an owner or
operator for releases of hazardous substances at its Dunkirk Facility, or
possibly as a hazardous waste generator. In addition, the Company plans to own
and operate other production units and installations, and may be exposed to
potential liability under CERCLA for releases of hazardous substances into the
environment at those sites.
The NYSDEC has reviewed extensive environmental sampling data regarding the
Company's Dunkirk facility and concluded that it is unnecessary to consider the
site for inclusion on the list of facilities that warrant further investigation
for potential remediation.
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The Community Right-to-Know mandate established by SARA requires full
disclosure of certain environmental releases to the public and contributes to
public awareness and activity regarding corporate environmental management
issues. The Company is required pursuant to this mandate to immediately report
any release that meets an established reportable quantity threshold and to
report annually the release of certain listed chemicals in excess of applicable
thresholds. The Company could be found liable and subject to penalties for
failure to immediately report a reportable spill or release.
The Clean Water Act establishes effluent guidelines and water quality
criteria to protect the nation's waterways. Facilities that discharge effluent
containing regulated pollutants directly to "waters of the United States" are
required to obtain a National Pollution Discharge Elimination System ("NPDES")
permit that regulates the amount of pollutant that may be discharged into the
water. Facilities that discharge into publicly operated sewer systems, such as
the Dunkirk facility, are required to obtain sewer use permits. Dunkirk is
presently discharging its effluent to a local sewer system in compliance with a
sewer use permit.
The Pollution Prevention Act of 1990 establishes pollution prevention as a
national objective, naming it a primary goal wherever feasible. The Act states
that if pollution cannot be prevented, materials should be recycled in an
environmentally safe manner in lieu of treatment or disposal. Under the Act,
companies would be encouraged to use recycling facilities, such as Dunkirk,
rather than to dispose of their sludges or byproducts as wastes. The Act also
requires facilities like Dunkirk to report annually the volume of certain listed
chemicals that are recycled on site. The Dunkirk facility has filed the
requisite appropriate reports.
LEGAL PROCEEDINGS
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct the improved abrasives finishing area, which is part of the Company's
current capital expansion program. The contractor commenced work in April 1995,
but was asked to stop work in November 1995 following significant cost overruns,
problems and delays in construction and disputes with the Company over the scope
of the work to be performed by the contractor. Each of the Company and the
contractor have filed and served a summons with notice. The contractor claims
damages of approximately $425,000. The Company has served the contractor with
its complaint, alleging, among other things, breach of contract, fraud and
defamation, and seeks damages in excess of $1,000,000. Until such time as the
contractor serves the Company with its answer, the precise counterclaims of the
contractor cannot be ascertained. The Company has engaged an engineering firm to
review the contractor's work and oversee completion of the improved abrasives
finishing area. Approximately $350,000 of the proceeds of the Offering have been
designated for completion of the abrasives finishing area.
The Company does not believe that an adverse outcome in the foregoing
dispute would have a material adverse effect on the Company. The Company is not
involved in any other material legal proceedings.
EMPLOYEES
At March 1, 1996, the Company had approximately 67 full-time employees,
including approximately 49 in manufacturing, 5 in research and product
applications development, approximately 6 in sales and marketing and
approximately 7 in finance and administration. The Company also currently has
one part-time employee. From time to time, the Company utilizes temporary
employees. The Company has used up to 20 temporary employees to meet its
requirements. The Company believes that additional permanent and temporary
employees can be hired on satisfactory terms.
In February 1996, a majority of the employees of Dunkirk elected the United
Steelworkers of America to act as their bargaining representative pursuant to
the NLRA. Dunkirk is obligated under the NLRA to bargain with the Union in good
faith. The outcome of such bargaining cannot be determined. There can be no
assurance that the election of the Union or the outcome of the bargaining
process will not result in higher labor costs, work stoppages, strikes or
otherwise have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company has not experienced any work stoppages and the Company considers
its relations with its employees to be satisfactory.
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PROPERTIES
The Company owns its 230,000 square foot manufacturing facility in Dunkirk,
New York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua Region
Industrial Development Corporation, with respect to which approximately $344,000
principal amount was outstanding at March 31, 1996. In addition, such facility
is subject to a second mortgage securing a promissory note issued to the former
owner of the property as part of the purchase price therefor, with respect to
which approximately $331,000 principal amount was outstanding on March 31, 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company leases approximately 3,000 square feet of executive office space
in Hazlet, New Jersey, pursuant to a lease expiring December 31, 1997.
The Company believes that its existing facilities are adequate to meet its
current and currently foreseeable requirements.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --------- --------------------------------------------------
<S> <C> <C>
Harvey Goldman (1)..................... 49 Chairman, Chief Executive Officer, President and
Director
Robert Dejaiffe........................ 58 Vice President -- Technology
Perry A. Pappas........................ 35 Vice President and General Counsel
Catherine Susan Kirby.................. 36 Vice President and Secretary
David L. Sanders....................... 61 Chief Accounting Officer
Eckardt C. Beck........................ 52 Director
Norman L. Christensen, Jr., Ph.D....... 49 Director
Scott A. Katzmann (1)(2)(3)............ 40 Director
Peter H. Gardner (2)(3)................ 29 Director
Alexander P. Haig...................... 44 Director
Donald R. Kendall, Jr.................. 43 Director
Irwin M. Rosenthal..................... 67 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
HARVEY GOLDMAN joined the Company in March 1994 as President and Chief
Executive Officer and was elected Chairman of the Board in October 1994. From
June 1991 through March 1994, Mr. Goldman served as Executive Vice President and
as a director of Air & Water Technologies Corporation, a publicly held
environmental technologies company (and successor to Research-Cottrell, Inc.),
and as its Chief Financial Officer from June 1987 through June 1991. Prior to
joining Research Cottrell, Inc. in 1985, Mr. Goldman was a partner at Arthur
Young & Co. (now Ernst & Young LLP), where he served as Director of Financial
Consulting in New York City and National Director of Environmental Consulting.
Mr. Goldman received his B.A. from Duke University and his M.B.A. from Harvard
Business School.
ROBERT DEJAIFFE is the Company's Vice President -- Technology and has been
Vice President and Technical Director of Dunkirk since joining Dunkirk in July
1992. His career started as an engineer with Corning Incorporated where he was
responsible for the design and construction of several specialty glass furnaces.
Mr. Dejaiffe then became Manager of Research and Development for the 48
Insulations Division of Foster Wheeler Corporation, where he developed a new
electric furnace design and worked with high temperature industrial insulations
using reduced glass. From 1981 to 1989, he was at Potters Industries as Manager
of Advanced Technology and Manager of Process Development Engineering, and from
October 1989 until joining the Company, he managed a research and testing
facility at Penn State University. He holds several patents on glass composites,
furnace accessories and refractory treatments. Mr. Dejaiffe received his B.S. in
Ceramics Engineering from Penn State University and M.B.A. from Syracuse
University.
PERRY A. PAPPAS is Vice President and General Counsel of the Company. Mr.
Pappas joined the Company in September 1995. Prior to joining the Company, Mr.
Pappas was an attorney with O'Sullivan Graev & Karabell, LLP, a New York law
firm, where he specialized in venture capital and mergers and acquisitions.
Prior to joining O'Sullivan Graev & Karabell, LLP in October 1989, Mr. Pappas
was an attorney with the firm of Weil Gotshal & Manges. Mr. Pappas received his
B.S. in Psychology and Master's degree in Labor and Industrial Relations from
Michigan State University and his J.D. from the University of Michigan.
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CATHERINE SUSAN KIRBY is Vice President and Secretary of the Company. Ms.
Kirby has over 10 years of marketing experience, including the positions of
Creative Services Manager and Account Executive with the public relations firm
of Stern & Associates, where she worked from October 1987 to April 1990 and
focused on new product introductions and product innovations. Ms. Kirby then
worked on a consulting basis for various clients including divisions of AT&T,
until joining the Company in March 1994. Ms. Kirby received her B.A. in
Communications and Advertising and M.A. in Communications and Public Relations
from Rowan College of New Jersey.
DAVID L. SANDERS is the Company's Chief Accounting Officer. Mr. Sanders
began working for the Company in October 1994 and held the position of
Controller from April 1995 through October 1995. Mr. Sanders has held various
financial positions, including Controller for the Roy Jacobs Company, a Dallas,
Texas distribution subsidiary of Grow Group, Inc. of New York, NY, Corporate
Controller for Oxirane Corporation, a petrochemical manufacturing subsidiary of
ARCO Chemical Company, Group Controller for BASF Chemicals U.S. and Division
Controller for the textile manufacturing division of Johnson & Johnson. From the
period January 1990 until joining the Company, Mr. Sanders worked as a
consultant on various accounting and computer related projects. Mr. Sanders
holds a B.A. from Columbia University.
ECKARDT C. BECK has been a director of the Company since February 1995. Mr.
Beck served as the Chairman and Chief Executive Officer of Air & Water
Technologies Corporation from October 1987 through June 1994 and as a director
from June 1990 through November 1994. Mr. Beck has served as Chairman and Chief
Executive Officer of other environmental technologies companies prior to 1987.
Mr. Beck also served as the Assistant Administrator of the United States
Environmental Protection Agency in charge of the national water and waste
programs and as the Regional Administrator of EPA Region 2.
NORMAN L. CHRISTENSEN, JR., PH.D. has been a director of the Company since
June 1994 and is the Board of Directors' liaison to the Scientific Advisory
Board. Dr. Christensen is the Dean of the Nicholas School of the Environment at
Duke University, a position he has held since its founding in July 1991. From
January 1990 to July 1991, Dr. Christensen was Professor and Chair of Botany at
Duke University. Dr. Christensen has held other academic positions and has
served as an advisor to the USDA Forest Service, the National Science Foundation
and NASA, and he is a Fellow of the American Association for the Advancement of
Science and the National Association of Environmental Professionals.
SCOTT A. KATZMANN has been a director of the Company since October 1994. Mr.
Katzmann is a Managing Director and the Head of Capital Markets at Paramount
Capital, Inc., the placement agent for the Company's Series A Preferred Stock.
See "Certain Transactions." Prior to joining Paramount Capital, Inc. in March
1993, Mr. Katzmann spent over 10 years with The First Boston Corporation, where
he specialized in early stage venture capital financings, leveraged acquisition
financings, investment partnerships, oil and gas transactions, expansion capital
financings and project financings. Prior to that, he was an Investment Officer
in the Investment Department of Aetna Life & Casualty, where he specialized in
private placements.
PETER H. GARDNER was elected as a director of the Company in October 1995.
Mr. Gardner is an Investment Officer at Technology Funding Inc., the Managing
General Partner of two investment funds which are stockholders of and
consultants to the Company. See "Certain Transactions." Mr. Gardner joined
Technology Funding Inc. in July 1994. Mr. Gardner held the position of Project
Leader and Project Scientist at Roy F. Weston, Inc., an environmental
engineering firm, from June 1990 through August 1993. During the period
September 1993 through June 1995, Mr. Gardner earned an M.B.A. from the Anderson
School at UCLA.
ALEXANDER P. HAIG was appointed as a director of the Company in May 1996.
Since February 1996, Mr. Haig has been President and Chief Operating Officer of
Sky Station International, Inc., a telecommunications company. He has also
served since 1988 as a principal and legal counsel to Worldwide Associates,
Inc., a business adviser to both U.S. and foreign countries for marketing and
sales activities. Prior to 1988, Mr. Haig was an attorney in private practice.
Mr. Haig received his B.A. and J.D. from Georgetown University.
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<PAGE>
DONALD R. KENDALL, JR. has been a director of the Company since June 1994.
From May 1993 through the present, Mr. Kendall has served as the President of
Cogen Technologies Capital Company, L.P., a power cogeneration company, the
general partner of which is owned by an affiliate of Cogen Technologies, Inc., a
privately-held corporation engaged in the business of, among other things, the
development of cogeneration power plants. Also from May 1993 through the
present, Mr. Kendall has served as the Chairman and Chief Executive Officer of
Palmetto Partners, Ltd., a privately-held partnership engaged in the business of
making investments, the general partner of which is also an affiliate of Cogen
Technologies, Inc. From May 1992 to May 1993, Mr. Kendall was a Managing
Director at CS First Boston Corporation. From February 1990 to May 1992, Mr.
Kendall served as President of Kendall Capital Partners, L.P. Mr. Kendall is a
director of Cogen Technologies, Inc.
IRWIN M. ROSENTHAL was appointed as a director of the Company in May 1996.
Mr. Rosenthal is an attorney and since 1960 has specialized in securities law.
He is currently a senior partner at Rubin Baum Levin Constant & Friedman. From
January 1990 to November 1991, Mr. Rosenthal was a senior partner at Baer, Marks
and Upham and prior thereto he was an attorney at various other law firms. Mr.
Rosenthal serves as Secretary and as a director of Magar Inc. a private
investment firm, of which he is a principal stockholder. He is also a director
of Magna-Lab, Inc., a publicly-traded medical technology company, and Symbollon
Corporation, a publicly-traded chemical and medical technology company, and is a
general partner of Alliance which is a partnership which invests in companies
and may take on a management role in such companies.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has a Compensation Committee, an Audit Committee and
an Executive Committee. The Compensation Committee makes recommendations to the
Board concerning salaries and incentive compensation for officers and employees
of the Company and administers the Company's Employee Stock Option Plan. See
"Management -- Stock Option Plans." The Audit Committee which reviews the
results and scope of the audit and other accounting related matters. The
Executive Committee has the full authority of the Board of Directors, subject to
the Delaware General Corporation Law.
The Company has agreed, if requested by the Underwriter, to nominate a
designee of the Underwriter to the Company's Board of Directors for a period of
five years from the date of this Prospectus. See "Underwriting."
Mr. Gardner serves as the designee of Technology Funding Inc., the Managing
General Partner of two investment funds that are stockholders of the Company.
See "Certain Transactions" and "Principal Stockholders."
DIRECTORS' COMPENSATION
Directors receive no cash compensation for serving on the Board of
Directors. Pursuant to the Conversion Technologies International, Inc. 1994
Stock Option Plan for Non-Employee Directors, directors who are not employees
receive a grant of non-qualified stock options as described below under "Stock
Option Plan for Non-Employee Directors."
In March 1995, the Company entered into a Consulting Agreement with Eckardt
C. Beck, a director of the Company, pursuant to which Mr. Beck receives $1,000
per month for his services and is eligible to receive additional compensation on
a project basis if approved by the Company. The Consulting Agreement expires in
March 1997. See "Certain Transactions."
In May 1995, the Company issued warrants to purchase 54,250 shares of Series
A Preferred Stock to Scott A. Katzmann, a director of the Company, at an
exercise price of $2.75 per share. Such warrants have been amended to become
warrants to purchase 18,764 shares of Common Stock at an exercise price of $4.40
per share effective upon the date of this Prospectus. See "Certain
Transactions."
OTHER KEY PERSONNEL
MICHAEL S. M. O'DONOUGHUE is Vice President and Plant Manager at Dunkirk.
Mr. O'Donoughue joined Dunkirk in October 1994. Prior to joining Dunkirk, Mr.
O'Donoughue spent six years as General
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<PAGE>
Manager and Plant Manager with Ferranti-Packard Transformers, Inc. Prior to
that, Mr. O'Donoughue held various manufacturing positions with General Electric
Company, Canadian General Electric Company and Philip Morris Companies Inc. Mr.
O'Donoughue received his Bachelor's degree in Mechanical Engineering from
Carleton University, Ottawa, Ontario.
MARK R. GEISE has been the Coordinator of Marketing and Materials
Acquisition at Dunkirk since joining Dunkirk in February 1993, and serves as a
member of the product marketing team, specializing in technical applications.
From February 1992 until joining Dunkirk, Mr. Geise served as Director of
Development for the City of Dunkirk, New York. Prior to that, Mr. Geise spent
over four years with a housing and development agency in Buffalo, New York. Mr.
Geise received his B.S. in Environmental Design and his M.S. in Urban Planning
from the State University of New York at Buffalo.
ASHVIN SRIVASTAVA, PH.D. is Director of Research at Dunkirk. Dr. Srivastava
joined Dunkirk in August 1994. From February 1992 until September 1992, Dr.
Srivastava worked in different capacities, including Vice President-Electronic
Ceramics, with Crest Ultrasonics Corporation, a publicly held company based in
Trenton, New Jersey. Dr. Srivastava held the position of Research Assistant at
Penn State University from September 1987 until December 1992. From December
1992 until joining the Company, Dr. Srivastava was in India attending to
personal affairs. Dr. Srivastava has also served as a member of the Advanced
Technology Department for General Electric Company and Teaching Assistant at
Alfred University. Dr. Srivastava received his Bachelors degree from the
Institute of Technology, B.H.U., India, an M.S. in Ceramic Engineering from
Alfred University and a Ph.D. in Solid State Science from Penn State University.
KIMBERLY K. LOTTER, PH.D. joined Dunkirk in July 1995 as Laboratory
Director. Dr. Lotter was an Assistant Professor at the State University of New
York at Fredonia from August 1994 until joining Dunkirk. Prior to August 1994,
Dr. Lotter was pursuing her graduate studies at the State University of New York
at Buffalo and held various teaching and research positions. Dr. Lotter received
her B.S. in Chemistry from the State University of New York at Fredonia and
Ph.D. in Inorganic Chemistry from the State University of New York at Buffalo.
ANDREW C. CANNON joined the Company in May 1995 as Product Marketing
Specialist, focusing on telemarketing, generation of leads and direct sales.
From February 1988 through June 1994, Mr. Cannon was employed with Air & Water
Technologies Corporation, working in various sales and marketing capacities,
including managing telemarketing efforts, developing lead tracking database
systems and key account management. Mr. Cannon received his B.A. in Economics
from St. Frances College in Loretto, Pennsylvania.
SCIENTIFIC ADVISORY BOARD
Since the Company's inception, the Company has sought the advisory services
of a number of scientists, researchers and clinicians with extensive experience
in the Company's fields of interest (the "Scientific Advisors"). The Company has
established a Scientific Advisory Board whose members assist the Company in
identifying product development opportunities, in reviewing and evaluating with
management the progress of research programs, and in recruiting and evaluating
scientists and other employees.
Most of the Scientific Advisors are employed by and/or have consulting
agreements with entities other than the Company, some of which may conflict or
compete with the Company, and they are expected to devote only a small portion
of their time to the Company. They are not expected to actively participate in
the Company's activities. Certain of the institutions with which the Scientific
Advisors are affiliated may have regulations or policies which limit the ability
of such personnel to act as part-time consultants or in other capacities for a
commercial enterprise or may adopt such regulations or policies in the future.
Furthermore, it is probable that any inventions or processes discovered by the
Scientific Advisors will not become the property of the Company but will remain
the property of such persons or of such persons' full-time employers.
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The Company's Scientific Advisory Board presently consists of the following
individuals:
RICHARD M. SPRIGGS, PH.D. is Chairman of the Scientific Advisory Board and
is the Executive Director of the NYS Center for Advanced Ceramic Technology at
Alfred University, the John F. McMahon Professor of Ceramic Engineering and the
Director of Sponsored Research Activities at CACT. Dr. Spriggs has held several
national and international positions of leadership in scientific research and
higher education administration. Dr. Spriggs is recognized internationally for
his pioneering work in advanced ceramic materials and their processing,
structure, and behavior. He is the author and co-author of over 100 articles and
publications in the field of ceramic engineering. He jointly holds three patents
for his work with structural adhesives and sintering procedures of ceramic
materials. As Project Director of the National Research Council at the National
Academy of Sciences, he was involved with the 1984 landmark study of the status
of high technology ceramics in Japan and other assessments of advanced areas of
technology.
JOEL CLARK, PH.D. is Professor of Materials Engineering in the Department of
Materials Science and Engineering at the Massachusetts Institute of Technology.
Dr. Clark has been with MIT since 1968, except from 1972 through 1975, during
which period Dr. Clark was Project Manager for the Development of Intermetallic
Alloys at Texas Instruments. Dr. Clark received his S.M. degree from Sloan
School of Management at MIT in 1975, his Sc.D. degree in Materials Science and
Engineering from MIT in 1972 and his M.S. and B.S. in Engineering Science from
Florida State University in 1970 and 1966, respectively. Dr. Clark has published
numerous articles on advanced materials.
DOTSEVI Y. SOGAH, PH.D. is a professor of Chemistry at Cornell University.
Previously, Dr. Sogah spent ten years in a number of senior research positions
at DuPont Central Research, Wilmington, Delaware and served on various U.S.
government Advisory Boards including the NRC Board on Chemical Science and
Technology from 1989 to 1992 and as Vice Chairman of the NRC Polymer Science &
Engineering Committee. Dr. Sogah has served since 1989 on several editorial
advisory boards including the International Advisory Board for Science and
Engineering of Composite Materials. Dr. Sogah holds a dozen U.S. patents and has
published numerous articles in the area of composite materials.
WILLIAM R. PRINDLE, SC.D. was the Division Vice President and Associate
Director-Technology Group at Corning Incorporated from 1980 to 1991. From 1976
to 1980, Dr. Prindle served in Washington, D.C. as Executive Director of The
National Materials Advisory Board, a unit of the National Research Council of
the National Academy of Sciences. He has particular interest and experience in
the management of glass and ceramics research and development, and in the
structure and properties of materials. Dr. Prindle received his B.S. and M.S. in
Physical Metallurgy from the University of California at Berkeley in 1948 and
1950, respectively, and his Sc.D. in Ceramics from MIT in 1955.
SYLVIA M. JOHNSON, PH.D. is Program Manager, Ceramics, in the Physical
Sciences Division of SRI International. In addition to over 13 years' experience
with SRI International, Dr. Johnson has served as Research Officer at Clay
Minerals Research at CSR Building Materials Inc. in Sydney, Australia. Dr.
Johnson has published numerous articles, edited two books and is an inventor on
four patents in the ceramics area. Dr. Johnson received a B.Sc. in Ceramic
Engineering from the University of New South Wales, Australia, and an M.S. and
Ph.D. in Materials Science from the University of California at Berkeley. Dr.
Johnson is also a Fellow of the American Ceramics Society.
LIMITATION OF LIABILITY
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty with certain exceptions. The exceptions include a breach of
fiduciary duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, improper declarations of
dividends, and transactions from which the directors derived an improper
personal benefit. The Company's Certificate of Incorporation exonerates its
directors from monetary liability to the fullest extent permitted by this
statutory provision but does not restrict the availability of non-monetary and
other equitable relief.
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The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liabilities arising under
the Securities Act, the provision is against public policy as expressed in the
Securities Act and is therefore unenforceable. Such limitation of liability also
does not affect the availability of injunctive relief or recission.
The Company intends to enter into Indemnification Agreements with each of
its directors and executive officers prior to the date of this Prospectus. Each
such Indemnification Agreement will provide that the Company will indemnify the
indemnitee against expenses, including reasonable attorney's fees, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of the performance of his duties as an officer, director,
employee or agent of the Company. Indemnification is available if the acts of
the indemnitee were in good faith, if the indemnitee acted in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, the indemnitee had no reasonable
cause to believe his conduct was unlawful.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by Harvey Goldman, the Company's Chairman, President and Chief Executive
Officer, and Gerald P. Balcar, a founder of Dunkirk and former officer and
director of Dunkirk and the Company, for services rendered in all capacities to
the Company during the fiscal year ended June 30, 1995. No other executive
officer of the Company received salary and bonus compensation in excess of
$100,000 during such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
NAMED AND PRINCIPAL POSITION YEAR SALARY
- ---------------------------------------------------------------- --------- ----------
<S> <C> <C>
Harvey Goldman ................................................. 1995 $ 180,000
Chairman, President and Chief Executive Officer
Gerald P. Balcar (1)............................................ 1995 $ 151,440
</TABLE>
- ------------------------
(1) Gerald P. Balcar is a founder of Dunkirk and a former officer and director
of Dunkirk and the Company. Mr. Balcar is no longer employed by or a
director of, or otherwise engaged to represent in any capacity, the Company
or Dunkirk.
EMPLOYMENT AGREEMENTS
Harvey Goldman is employed with the Company under a four-year employment
agreement, which contains a one-year renewal option, effective as of March 1,
1994. Under the terms of the employment agreement, which includes
confidentiality and non-competition provisions, Mr. Goldman receives an annual
salary of $180,000, subject to increase at the discretion of the Board of
Directors. Pursuant to the employment agreement, Mr. Goldman was issued 27,194
shares of Common Stock at a price of $.002 per share as additional compensation.
Under the employment agreement, Mr. Goldman is eligible to receive an annual
bonus at the discretion of the Compensation Committee. Both the Company and Mr.
Goldman may terminate the employment agreement at any time by providing written
notice to the other party. If the termination is initiated by the Company
without cause, Mr. Goldman is entitled to receive a one-time severance payment
equal to three times his then effective base salary. In the event of a
termination for cause or a termination initiated by Mr. Goldman, the Company has
a repurchase right with respect to 15,500 shares at a price of $.002 per share.
Such number decreases to approximately 5,500 after March 1996 and, in September
1996, such shares shall no longer be subject to any repurchase right by the
Company. In addition to the foregoing shares, Mr. Goldman purchased an aggregate
of 71,643 shares of Common Stock for nominal consideration during the period
from February 1994 to June 1994. In connection with the 1994 Financing, Mr.
Goldman was also issued 1,888 shares of Common Stock and warrants which,
effective as of the date of this Prospectus, will represent the right to acquire
5,239 shares of Common Stock. See "-- Stock Option Plans." In April 1996, Mr.
Goldman was granted options, effective as of the date of this Prospectus, to
purchase 50,000 shares of Common Stock at an exercise price of $4.40 per share.
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Perry A. Pappas is employed with the Company under a three-year employment
agreement which contains a one-year renewal option, effective as of September 1,
1995. Under the terms of the employment agreement, which includes
confidentiality and non-competition provisions, Mr. Pappas receives an annual
salary of $125,000, subject to increase at the discretion of the Board of
Directors. In addition, the agreement provides for the issuance of options to
purchase 7,307 shares of Common Stock at an exercise price of $20.53 per share,
which options have been repriced to $4.40 per share effective upon the date of
this Prospectus. See "-- Stock Option Plans." Mr. Pappas is also entitled to
receive performance bonuses upon recommendation of the President and approval by
the Board of Directors. The employment agreement permits both Mr. Pappas and the
Company to terminate the employment agreement by providing written notice to the
other party. If the termination is initiated by the Company without cause, Mr.
Pappas is entitled to receive a one-time severance payment equal to his base
salary and continuation of benefits for a period of one year. In addition to the
foregoing options, Mr. Pappas received options to purchase an additional 14,616
shares of Common Stock in September 1995, which have been repriced at $4.40 per
share effective as of the date of this Prospectus. See "-- Stock Option Plans."
STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLAN
In June 1994, the Board of Directors adopted, and in April 1995 the
Stockholders approved the Conversion Technologies International, Inc. 1994
Employee Stock Option Plan (the "Employee Stock Option Plan"). The Employee
Stock Option Plan provides for the grant to consultants, officers and employees
of both "incentive stock options" within the meaning of Section 422 of the Code,
and stock options that are non-qualified for federal income tax purposes.
Effective upon the closing of the Offering, the total number of shares which may
be issued upon exercise of options granted pursuant to the Employee Stock Option
Plan will increase from 79,170 shares to 440,000 shares pursuant to an amendment
to the Employee Stock Option Plan adopted by the Board and approved by the
holders of a majority of the outstanding voting capital stock of the Company in
November 1995.
As of the date of this Prospectus, the Company has options to purchase an
aggregate of 73,010 shares of Common Stock outstanding under the Employee Stock
Option Plan. Effective as of the date of this Prospectus, pursuant to
resolutions adopted by the Board in December 1995, all options outstanding under
the Employee Stock Option Plan have been repriced to have an exercise price of
$4.40 per share, representing the Board's good faith estimate of the fair value
of one share of Common Stock as of the date of this Prospectus after giving
effect to the Offering.
The Employee Stock Option Plan will terminate in June 2004, unless
terminated earlier by the Board of Directors. The Compensation Committee
administers the Employee Stock Option Plan and determines which of the Company's
consultants, officers and employees will receive options, the time when options
are granted, whether the options are incentive stock options or non-qualified
stock options, the terms of such options, the exercise date of any options and
the number of shares subject to options. Members of the Compensation Committee
are not eligible to receive options under the Employee Stock Option Plan.
Directors who are also employees are eligible to receive options under the
Employee Stock Option Plan. Non-employee directors are not eligible to receive
options under the Employee Stock Option Plan.
The exercise price of incentive stock options granted under the Employee
Stock Option Plan may not be less than 100% of the fair market value of the
Common Stock at the time of grant, and the term of any option may not exceed 10
years. With respect to any employee who owns stock representing more than 10% of
the voting power of the outstanding capital stock of the Company, the exercise
price of any incentive stock option may not be less than 110% of the fair market
value of such shares at the time of grant, and the term of such option may not
exceed five years. The exercise price of a non-qualified stock option is
determined by the Compensation Committee on the date the option is granted.
However, in the case of options granted after the date of this Prospectus, the
exercise price of a non-qualified stock option may not be less than 100% of the
fair market value of the Common Stock at the time of grant. Subsequent to the
date of the grant of a non-qualified stock option, the Compensation Committee
may, at its discretion and with the consent of the optionee, establish a new
price for such non-qualified stock option.
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Options granted under the Employee Stock Option Plan are nontransferable
and, with certain exceptions in the event of the death or disability of an
optionee, may be exercised by the optionee only during the term of his or her
employment. Options granted under the Employee Stock Option Plan typically vest
over a three-year period and expire after seven years.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In June 1994, the Board of Directors adopted, and in April 1995 the
Stockholders approved the Conversion Technologies International, Inc. 1994 Stock
Option Plan for Non-Employee Directors (the "Stock Option Plan for Non-Employee
Directors"). The purpose of the Stock Option Plan for Non-Employee Directors is
to attract and retain the services of experienced and knowledgeable independent
directors of the Company for the benefit of the Company and its stockholders and
to provide additional incentive for such directors to continue to work for the
best interests of the Company and its stockholders through continuing ownership
of Common Stock. Effective upon the closing of the Offering, the total number of
shares which may be issued upon exercise of options granted pursuant to the
Stock Option Plan for Non-Employee Directors will increase from 24,360 shares to
70,400 shares pursuant to an amendment to the Stock Option Plan for Non-Employee
Directors adopted by the Board and approved by the holders of a majority of the
outstanding voting capital stock of the Company in November 1995.
As of the date of this Prospectus, the Company has options to purchase an
aggregate of 7,483 shares of Common Stock outstanding under the Stock Option
Plan for Non-Employee Directors. Effective as of the date of this Prospectus,
pursuant to resolution adopted by the Board in December 1995, all options
outstanding under the Stock Option Plan for Non-Employee Directors have been
repriced to have an exercise price of $4.40, representing the Board's good faith
estimate of the fair value of one share of Common Stock as of the date of this
Prospectus after giving effect to the Offering.
The Stock Option Plan for Non-Employee Directors is administered by the
Board of Directors. Subject to the terms of the Stock Option Plan for
Non-Employee Directors, the Board of Directors has the sole authority to
determine questions arising under, and to adopt rules for the administration of,
the Stock Option Plan for Non-Employee Directors. The Directors will determine
which of the Company's non-employee directors will receive options, the time
when options are granted, the terms of such options and the exercise date of any
options. The Stock Option Plan for Non-Employee Directors may be terminated at
any time by the Board of Directors, but such action will not affect options
previously granted pursuant thereto.
Directors of the Company who are not, and who have not been during the
immediately preceding 12-month period, employees of the Company or any
subsidiary of the Company (a "Non-Employee Director") are automatically
participants in the Stock Option Plan for Non-Employee Directors.
Prior to the Effective Date of the Stock Option Plan for Non-Employee
Directors (as defined below), the Board of Directors shall determine the number
of shares subject to each option. After the Effective Date, each Non-Employee
Director who is in office on July 1 of any year (commencing with the first July
1 occurring after the Effective Date of the Stock Option Plan for Non-Employee
Directors) shall, as of July 1, automatically be granted an option to acquire
121 shares of Common Stock. The Effective Date will be the date on which the
Offering is consummated. The price of shares that may be purchased upon exercise
of an option is the fair market value of the Common Stock on the date of grant,
as evidenced by the average of the high and low sales prices of Common Stock on
such date as reported on the Nasdaq Stock Market or the closing price, if
applicable, or the average of the last bid and asked prices on the date of the
grant as reported on the Nasdaq Stock Market. If there is no public trading
market for such shares, the fair value of such shares shall be determined in
good faith by the Board of Directors of the Company. The term of each option,
except as discussed below, is for a period not exceeding ten years from the date
of grant. Options may not be assigned or transferred except by will or by
operation of the laws of descent and distribution.
In the event of a Change in Control of the Company (as defined below), an
option granted to a Non-Employee Director will become fully exercisable if,
within one year of such Change in Control, such Non-Employee Director ceases for
any reason to be a member of the Board of Directors. A Change in Control will be
deemed to have occurred if (a) there is consummated any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or any sale of all, or substantially all, of the
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assets of the Company; (b) the stockholders approve any plan or proposal for the
liquidation or dissolution of the Company; (c) any person or entity becomes the
beneficial owner of 50% or more of the outstanding Common Stock; or (d) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period. Any exercise of an option permitted in
the event of a Change of Control must be made within 180 days of the relevant
Non-Employee Director's termination as a director of the Company.
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CERTAIN TRANSACTIONS
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Harvey Goldman, the
Chairman, President and Chief Executive Officer of the Company, and Perry A.
Pappas, Vice President and General Counsel of the Company. See "Management --
Employment Agreements."
SERIES A PRIVATE PLACEMENT
Between August 1994 and May 1995, Paramount Capital, Inc. ("Paramount")
acted as placement agent in connection with the private placement of the
Company's Series A Preferred Stock (the "Series A Placement"). Paramount
received $632,250 in commissions and a non-accountable expense allowance of
$281,000 in consideration of its services as placement agent. In addition,
designees of Paramount received, as additional compensation, warrants to
purchase an aggregate of 281,000 shares of Series A Preferred Stock, at an
exercise price of $2.75 per share, exercisable at any time for a period of 10
years following the closing of the Offering. Such warrants have been amended and
restated as of the date of this Prospectus to be warrants to purchase 97,185
shares of Common Stock at an exercise price of $4.84 per share. Until November
1997, Paramount will be entitled to receive a fee of 13% on any investments
received by the Company from investors or corporate partners (excluding project
finance investors) that were introduced to the Company by Paramount. Such right
has been waived with respect to the securities sold in the Bridge Financing and
in the Offering.
Lindsay Rosenwald, M.D., is the President and Chairman, and Peter Kash is a
Managing Director of Paramount. In connection with the Series A Placement, Dr.
Rosenwald and Mr. Kash received warrants to purchase shares of Series A
Preferred Stock, which will represent warrants to purchase 34,353 and 4,788
shares of Common Stock, respectively, as of the date of this Prospectus. In
addition, Mr. Kash is the trustee of The Long Term Equity Holdings Trust (1994)
(the "Trust"), a principal stockholder of the Company. The beneficiaries of the
Trust are the minor children of Dr. Rosenwald. The limited partners of
VentureTek L.P. ("VentureTek"), also a principal stockholder of the Company,
include Dr. Rosenwald's wife and their minor children. Certain of the limited
partners of VentureTek, including Dr. Rosenwald's wife, are stockholders of D.H.
Blair & Co., Inc., and are the daughters of the sole stockholder of the parent
company of the Underwriter. See "Underwriting." The remaining limited partners
are their children. The Company issued 138,218 shares of Common Stock to each of
the Trust and VentureTek in April 1994 for a purchase price of $.002 per share.
See "Principal Stockholders." Scott Katzmann, a director of the Company, is also
employed by Paramount.
CONSULTING AGREEMENTS
In April 1995, the Company entered into a Project Development Assistance
Agreement (the "Paramount Assistance Agreement") with Paramount, the placement
agent for the Company's Series A Placement. Pursuant to the Paramount Assistance
Agreement, principals of Paramount having experience in foreign project
development will, among other things, introduce the Company to potential
strategic partners, assist in obtaining requisite regulatory approvals and
otherwise facilitate project development activities. The Company agreed to pay
to Paramount or its designees a success fee of $75,000 for completed projects
and a fee of 7% on any funds invested in the Company by a foreign partner
introduced by Paramount (together with warrants to purchase that number of
shares of Common Stock of the Company as is equal to 5% of the amount invested
divided by the Common Stock share purchase price, at an exercise price equal to
110% of such Common Stock purchase price). The term of the Paramount Assistance
Agreement is one year, cancellable by either party upon 30-days' prior written
notice. See "-- Series A Private Placement."
In May 1995, the Company entered into a Consulting Agreement (the "TFI
Consulting Agreement") with Technology Funding Partners III, L.P. ("TFP III")
and Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P.
("TFVP V"), which will collectively hold 276,727 shares of Common Stock upon
conversion of the Series A Preferred Stock at the closing of the Offering.
Pursuant to the TFI Consulting Agreement, the consultants will, among other
things, introduce the Company to strategic partners and potential customers,
provide strategic marketing advice, identify complementary technologies
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with strategic synergies, and identify and assist in procuring appropriate media
channels for the Company's products. As compensation for their services, the
consultants received warrants to purchase up to an aggregate of 200,000 shares
of Series A Preferred Stock at an exercise price of $3.00 per share, subject to
vesting. The Company has amended such warrants effective as of the date of this
Prospectus to make such warrants exercisable for 69,177 shares of Common Stock,
at an exercise price of $5.28 per share. Peter H. Gardner, a director of the
Company, is an Investment Officer at Technology Funding Inc. ("TFI"), the
Managing General Partner of TFP III and TFVP V, and serves as TFI's designee on
the Board of Directors of the Company.
In July 1995, the Company entered into a Project Development Assistance
Agreement (the "TFI Assistance Agreement") with TFI. Pursuant to the TFI
Assistance Agreement, certain designated principals of TFI will, among other
things, assist the Company in project development efforts both in the United
States and abroad by identifying potential strategic partners, assisting in
obtaining regulatory approvals and providing regulatory guidance and otherwise
facilitating project development activities. The Company will pay to TFI or its
designees a success fee of $75,000 for completed projects and a fee of 7% on any
funds invested in the Company by a strategic partner introduced by TFI (together
with warrants to purchase that number of shares of Common Stock of the Company
as is equal to 5% of the amount invested divided by the Common Stock share
purchase price, at an exercise price equal to 110% of such purchase price). The
term of the TFI Assistance Agreement is one year, subject to renewal, cancelable
by either party upon 30-days' prior written notice.
In July 1995, the Company entered into a Consulting Agreement with Palmetto
Partners, Ltd. ("Palmetto"), a stockholder of the Company and an affiliate of
Donald Kendall, a director and stockholder of the Company. Pursuant to the
Consulting Agreement, Palmetto, among other things, will provide assistance in
identifying and developing project finance opportunities for the new facilities
in the United States and abroad, present the Company's products to certain
affiliates and provide product testimonials. Pursuant to the Consulting
Agreement, Palmetto received warrants to purchase an aggregate of 1,217 shares
of Common Stock at an exercise price of $24.63 per share, subject to vesting
over a three-year period. The price of such warrants has been amended, effective
as of the date of this Prospectus, to $5.28 per share.
In March 1995, the Company entered into a Consulting Agreement with Eckardt
C. Beck, a director and stockholder of the Company, pursuant to which Mr. Beck
receives $1,000 per month for his services and is eligible to receive additional
compensation on a project basis if approved by the Company. The Consulting
Agreement expires in March 1997.
BRIDGE LOANS
In April 1994, the Company consummated the 1994 Financing whereby Harvey
Goldman, the Chairman, President and Chief Executive Officer of the Company,
Jeffrey Wolf, a former Chairman, director and a stockholder of the Company,
Donald R. Kendall, Jr., a director and stockholder of the Company, and Palmetto
Partners, Ltd., a stockholder of the Company of which Mr. Kendall is President
and Chief Executive Officer, purchased $600,000 in an aggregate principal amount
of 7% Convertible Bridge Notes, due October 31, 1995. These notes converted
(together with interest) into 45,304 shares of Common Stock of the Company
simultaneously with the closing of the Merger. In addition, each purchaser
received a warrant to purchase shares of Common Stock at an aggregate exercise
price equal to the principal amount of the note purchased by such purchaser. The
warrants had an initial per share exercise price equal to $13.55. Such warrants
have been amended and restated, effective as of the date of this Prospectus, to
become exercisable for 125,786 shares of Common Stock at an exercise price of
$4.77 per share. In connection with the 1994 Financing, Palmetto has a right of
first refusal to provide project financing to the Company.
In connection with the 1994 Financing, designees of Paramount, the placement
agent for the 1994 Financing, received warrants to purchase an aggregate of
7,307 shares of Common Stock with an initial per share exercise price equal to
$13.55. Such warrants have been amended and restated, effective as of the date
of this Prospectus, to become exercisable for 20,750 shares of Common Stock at
an exercise price of $4.77
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per share. Effective as of the date of this Prospectus, such warrants include
warrants to purchase 10,374 shares of Common Stock issued to Dr. Rosenwald and
warrants to purchase 4,671 shares of Common Stock issued to Mr. Kash.
In September, October and November 1995, the Company borrowed an aggregate
of $650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, $200,000 was provided by Palmetto and an aggregate of $200,000 was
provided by the Aries Domestic Fund L.P. and the Aries Trust, two funds in which
Lindsay Rosenwald is the sole stockholder and President of the general partner
and investment manager, respectively. The principal amount of such loans was
exchanged at the closing of the Bridge Financing for $650,000 principal amount
of Bridge Notes and Bridge Warrants to purchase 325,000 shares of Common Stock
(which Bridge Warrants will be exchanged automatically on the closing of the
Offering for the Selling Securityholder Warrants).
In December 1995, the Company completed the Bridge Financing of an aggregate
of $2,225,000 principal amount of Bridge Notes and 1,112,500 Bridge Warrants in
which it received net proceeds of approximately $1,849,750 (after expenses of
such offering). The Bridge Notes are payable, together with interest at the rate
of 10% per annum, on the earlier of December 1996 and the closing of the
Offering. See "Use of Proceeds." The Bridge Warrants entitled the holders
thereof to purchase one share of Common Stock commencing in December 1996 but
will be exchanged automatically on the closing of the Offering for the Selling
Securityholder Warrants, each of which will be identical to the Class A Warrants
included in the Units offered hereby. The Selling Securityholder Warrants have
been registered for resale in the Registration Statement of which this
Prospectus forms a part, subject to the contractual restriction that the Selling
Securityholders have agreed not to exercise the Selling Securityholder Warrants
for a period of one year from the closing of the Offering and not to sell the
Securityholder Warrants except after specified periods commencing 90 days after
the closing date of the Offering. Certain stockholders of the Company purchased
an aggregate of $650,000 principal amount of Bridge Notes and 325,000 Bridge
Warrants by cancellation of promissory notes previously issued by the Company to
them in an equivalent principal amount. See "Concurrent Offering."
In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
primissory notes bearing interest at the rate of 10% per annum, payable on the
earlier of the closing of the Offering and September 1996. Of such amount, Dr.
Rosenwald provided $150,000, Scott Katzmann and Peter Kash each provided $18,750
and Harvey Goldman provided $12,500.
In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, payable on the
earlier of the closing of the Offering and November 1996.
INDEMNIFICATION OF FORMER OFFICER; NON-COMPETE
In December 1995, the Company agreed to indemnify and hold harmless Gerald
Balcar, a founder of Dunkirk, a former officer of Dunkirk and the Company and a
principal stockholder of the Company with respect to guarantees made by Mr.
Balcar and his wife of obligations of Dunkirk. In addition, the Company agreed
to use reasonable efforts to cause Mr. Balcar to be released from such
guaranties as soon as practicable following the closing of the Offering. Mr.
Balcar has agreed not to compete with the Company for a two-year period ending
August 31, 1997.
ISSUANCES OF SECURITIES TO EXECUTIVE OFFICERS AND DIRECTORS
In February, April and June 1994, the Company issued 98,837 shares of Common
Stock to Harvey Goldman, the Chairman, Chief Executive Officer and President of
the Company, at a price of $.002 per share.
In April 1994, in connection with the 1994 Financing, the Company issued to
Mr. Goldman warrants to purchase 1,845 shares of Common Stock at an exercise
price of $13.55 per share. Such warrants have been amended and restated
effective as of the date of this Prospectus to become warrants to purchase 5,239
shares of Common Stock at an exercise price of $4.77 per share. See "-- Bridge
Loans."
In April 1994, in connection with the 1994 Financing, the Company issued
warrants to purchase 3,691 shares of Common Stock to Donald R. Kendall, Jr., a
director of the Company, at an exercise price of $13.55
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<PAGE>
per share. Such warrants have been amended and restated effective as of the date
of this Prospectus to become warrants to purchase 10,482 shares of Common Stock
at an exercise price of $4.77 per share. See "-- Bridge Loans."
In April 1994, for services rendered in connection with the 1994 Financing,
the Company issued warrants to purchase 1,644 shares of Common Stock to Scott A.
Katzmann, a director of the Company, at an exercise price of $13.55 per share.
Such warrants have been amended and restated effective as of the date of this
Prospectus to become warrants to purchase 4,669 shares of Common Stock at an
exercise price of $4.77 per share. See "-- Bridge Loans."
In August 1994, the Company issued 2,455 shares of Common Stock to Robert
Dejaiffe, Vice President-Technology of the Company, in exchange for his shares
of Common Stock of Dunkirk.
In August 1994, the Company issued 1,888 shares of Common Stock to Mr.
Goldman upon conversion of $25,000 principal amount of notes issued to Mr.
Goldman in April 1994.
In August 1994, the Company issued 3,775 shares of Common Stock to Mr.
Kendall upon conversion of $50,000 principal amount of notes issued to Mr.
Kendall in April 1994.
In February 1995, the Company issued 40,000 shares of Series A Preferred
Stock to Mr. Eckardt C. Beck, a director of the Company, for $100,000. Such
shares will automatically convert upon the closing of the Offering into 13,833
shares of Common Stock.
In March 1995, the Company issued 10,000 shares of Series A Preferred Stock
to Mr. Kendall for $25,000. Such shares will automatically convert upon the
closing of the Offering into 3,456 shares of Common Stock.
In May 1995, the Company issued warrants to purchase 54,250 shares of Series
A Preferred Stock to Scott A. Katzmann, a director of the Company, at an
exercise price of $2.75 per share. Such warrants have been amended and restated
effective as of the date of this Prospectus to become warrants to purchase
18,764 shares of Common Stock at an exercise price of $4.84 per share.
From the period from inception (June 23, 1993) to December 1995, the Company
granted options to purchase an aggregate of 48,891 shares of Common Stock to
executive officers and directors of the Company with exercise prices ranging
from $13.55 to $20.53 per share. Such options have been repriced effective as of
the date of this Prospectus at $4.40 per share.
In April 1996, the Company issued options to Mr. Goldman, effective as of
the date of this Prospectus, to purchase 50,000 shares of Common Stock, at an
exercise price of $4.40 per share. Such options vest ratably over three years on
an annual basis.
BOARD DESIGNEE AND OTHER TFI COVENANTS
The Company, TFP III and TFVP V entered into a Series A Preferred Stock
Purchase Agreement in May 1995. The agreement, as amended in December 1995,
provides that following the closing of the Offering, the Company will (i) use
its best efforts to nominate a designee of TFI to the Board of Directors and
(ii) sell shares of stock and grant options to employees, officers, directors
and consultants only pursuant to Board approved plans and agreements containing
three-year vesting provisions (except in the case of sales of stock or grants of
options to new employees where the Board determines otherwise for valid business
reasons). Such covenants will terminate upon the earlier of (a) three years
following the closing of the Offering and (b) such time as TFP III and TFVP V
cease to hold approximately 18,270 shares of Common Stock in the aggregate.
The terms of the transactions described above were negotiated by the parties
thereto, and the Company believes that such transactions were on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties. All future transactions between the Company and any of its officers,
directors, principal stockholders and affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested members of the Board of the
Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, (i) by each person known to the Company
to own beneficially more than 5% of the outstanding shares of any class of the
Company's securities, (ii) by each of the Company's executive officers, (iii) by
each of the Company's directors and (iv) by all of the executive officers and
directors as a group, (a) prior to the Offering giving pro forma effect to the
conversion of the Series A Preferred Stock upon the closing of the Offering and
the amendment and restatement of all outstanding warrants as of the date of this
Prospectus and (b) as adjusted to give effect to the sale of the Shares offered
hereby.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY OWNED
SHARES --------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) (2) OFFERING OFFERING
- ----------------------------------------------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
Harvey Goldman (2)(3).................................................. 105,964 5.5% 2.1%
Norman L. Christensen, Jr. (4)......................................... 2,615 * *
Eckardt C. Beck (5).................................................... 15,050 * *
Scott A. Katzmann (2)(6)............................................... 36,829 1.9 *
Donald R. Kendall, Jr. (7)............................................. 175,953 8.6 3.4
Peter H. Gardner (8)................................................... 319,206 16.2 6.3
Alexander P. Haig...................................................... 4,871 * *
Irwin M. Rosenthal..................................................... -- -- --
Robert Dejaiffe (9).................................................... 4,485 * *
Catherine Susan Kirby (10)............................................. 1,826 * *
Perry A. Pappas (11)................................................... 2,435 * *
David L. Sanders (12).................................................. 405 * *
The Long Term Equity Holdings Trust (2)(13)............................ 138,218 7.2 2.8
VentureTek L.P. (2)(14)................................................ 138,218 7.2 2.8
TFVP V (15)............................................................ 319,206 16.2 6.3
Palmetto Partners, Ltd. (16)........................................... 157,023 7.7 3.1
Gerald P. Balcar (17).................................................. 165,557 8.6 3.3
AXA Banque (18)........................................................ 242,139 12.6 4.9
All officers and directors as a group (10 persons)..................... 669,639 31.5 12.9
</TABLE>
- ------------------------
* Less than one percent.
(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect to
all shares of Common Stock beneficially owned by such stockholder. Unless
otherwise indicated, the address of each principal stockholder is c/o the
Company, Bethany Crossing Office Center, 82 Bethany Road, Hazlet, New
Jersey 07730.
(2) Includes 100,725 Escrow Shares beneficially owned by Harvey Goldman, 12,179
Escrow Shares beneficially owned by Scott A. Katzmann, 138,218 Escrow
Shares beneficially owned by The Long Term Equity Holdings Trust and
138,218 Escrow Shares beneficially owned by VentureTek L.P., as the case
may be. See " -- Escrow Securities."
(3) Includes currently exercisable warrants to purchase 5,239 shares of Common
Stock. Excludes options to purchase 50,000 shares of Common Stock which are
not exercisable within 60 days. All of such options are Escrow Options. See
" -- Escrow Securities."
(4) Includes currently exercisable options to purchase 2,615 shares of Common
Stock. The address of such stockholder is Nicholas School of the
Environment, Duke University, Box 90328, Durham, North Carolina 27708-0328.
(5) The address of such stockholder is 6345 N.W. 26th Terr., Boca Raton,
Florida 33496.
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(6) Includes currently exercisable options and warrants to purchase 24,650
shares of Common Stock. The address of such stockholder is c/o Paramount
Capital, Inc., 375 Park Avenue, Suite 1501, New York, New York 10152.
(7) Includes currently exercisable options and warrants to purchase 11,699
shares of Common Stock. Also includes 51,588 shares of Common Stock and
warrants, exercisable within 60 days to purchase an aggregate of 105,130
shares of Common Stock owned by Palmetto Partners Ltd., of which Mr.
Kendall is Chairman and Chief Executive Officer. Mr. Kendall disclaims
beneficial ownership of all securities of the Company owned by Palmetto
Partners, Ltd., other than 30,000 shares of Common Stock issuable upon
exercise of warrants held by Palmetto Partners, Ltd. in which Mr. Kendall
has a pecuniary interest. The address of such stockholder is c/o Palmetto
Partners, Ltd., 1600 Smith Street, 50th Floor, Houston, Texas 77002.
(8) Includes shares beneficially owned by TFP III and TFVP V. Mr. Gardner is an
Investment Officer at Technology Funding Inc., the Managing General Partner
of TFP III and TFVP V. Mr. Gardner disclaims beneficial ownership of all
securities of the Company owned by TFP III and TFVP V. Excludes options to
purchase 1,217 shares of Common Stock which are not exercisable within 60
days. The address of such stockholder is c/o Technology Funding Inc., 2000
Alameda de las Pulgas, San Mateo, California 94403.
(9) Includes options exercisable within 60 days to purchase 2,030 shares of
Common Stock. Excludes options to purchase 5,886 shares of Common Stock
which are not exercisable within 60 days.
(10) Includes currently exercisable options to purchase 1,826 shares of Common
Stock. Excludes options to purchase 5,481 shares of Common Stock which are
not exercisable within 60 days.
(11) Includes currently exercisable options to purchase 2,435 shares of Common
Stock. Excludes options to purchase an additional 19,488 shares of Common
Stock which are not exercisable within 60 days. All of such options are
Escrow Options. See " -- Escrow Securities."
(12) Includes currently exercisable options to purchase 405 shares of Common
Stock. Excludes options to purchase 3,857 shares of Common Stock which are
not exercisable within 60 days.
(13) The trustee of The Long Term Equity Holdings Trust (1994) is Peter M.
Kash. Mr. Kash is a Senior Managing Director of Paramount. Mr. Kash may be
considered a beneficial owner of the shares owned by the Trust by virtue
of his authority to vote and/or dispose of such shares. Mr. Kash disclaims
beneficial ownership of such shares. The beneficiaries of the Trust are
the minor children of Lindsay A. Rosenwald, M.D., the Chairman and
President of Paramount. Dr. Rosenwald disclaims beneficial ownership of
any of the Company's securities other than warrants to purchase 44,727
shares of Common Stock issued to him. The address of such stockholder is
c/o Paramount Capital, Inc., 375 Park Avenue, Suite 1501, New York, New
York 10152.
(14) The general partner of VentureTek is C. David Selingut. Mr. Selingut may
be considered a beneficial owner of the shares owned by VentureTek by
virtue of his authority as general partner to vote and/or dispose of such
shares. VentureTek is a limited partnership, the limited partners of which
include the wife of Lindsay D. Rosenwald, M.D., the Chairman and President
of Paramount, and their children. The limited partners of VentureTek are
the children and grandchildren of J. Morton Davis. Mr. Davis is the sole
stockholder of the parent company of the Underwriter. The address of such
stockholder is 39 Broadway, New York, New York 10006.
(15) Includes (i) 207,547 shares of Common Stock, (ii) warrants, exercisable
within 60 days to purchase 32,913 shares of Common Stock, (iii) 69,180
shares of Common Stock held by TFP III and (iv) warrants, exercisable
within 60 days to purchase 10,971 shares of Common Stock. Excludes options
issued to Peter Gardner to purchase 1,217 shares of Common Stock which are
not exercisable within 60 days. Excludes (i) warrants to purchase 18,971
shares of Common Stock held by TFVP V and (ii) 6,322 shares of Common
Stock held by TFP III, in each case, which are not exercisable within 60
days.
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(16) Includes currently exercisable warrants to purchase 105,435 shares of
Common Stock. The address of such stockholder is 1600 Smith Street,
Houston, Texas 77002.
(17) The address of such stockholder is 5338 Lakeside Boulevard, Dunkirk, New
York 14048.
(18) The address of such stockholder is 5-7 Rue De Milan, 75439 Paris, CEDEX 09
France.
ESCROW SECURITIES
740,559 shares of Common Stock have been deposited into escrow by the
holders thereof, including Harvey Goldman (100,725), Scott A. Katzmann (12,179
shares), The Long Term Equity Holdings Trust (138,218 shares) and VentureTek
L.P. (138,218 shares). Mr. Goldman and Perry A. Pappas, executive officers of
the Company, have deposited into escrow options to purchase 50,000 and 21,923
shares of Common Stock, respectively, held by them on the date hereof. The
Escrow Securities are not assignable or transferable. The holders thereof have
the power to vote the Escrow Shares while such Shares are held in escrow.
Holders of any options in escrow may exercise their options prior to their
release from escrow; however, the shares issuable upon any such exercise will
continue to be held in escrow as Escrow Shares. The Escrow Securities will be
released from escrow, on a pro rata basis, if, and only if, one or more of the
following conditions is/are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings or charges which would result from
the release of the Escrow Securities (all as audited by the Company's
independent public accountants) (the "Minimum Pretax Income") amounts to at
least $4.7 million for the fiscal year ending June 30, 1998;
(b) the Minimum Pretax Income amounts to at least $7.0 million for the
fiscal year ending June 30, 1999;
(c) the Minimum Pretax Income amounts to at least $9.3 million for the
fiscal year ending June 30, 2000;
(d) the Closing Price (as defined) of the Company's Common Stock
averages in excess of $11.25 per share for 60 consecutive business days
during the 18-month period commencing on the date of this Prospectus;
(e) the Closing Price of the Company's Common Stock averages in excess
of $15.00 per share for 60 consecutive business days during the 18-month
period commencing 18 months from the date of this Prospectus; or
(f) during the periods specified in (d) or (e) above, the Company is
acquired by or merged into another entity in a transaction in which the
value of the per share consideration received by the stockholders of the
Company on the date of such transaction or at any time during the applicable
period set forth in (d) or (e), respectively, equals or exceeds the
applicable levels set forth in (d) or (e), respectively.
The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusive of any extraordinary earnings or any charges to income resulting from
release of the Escrow Securities, and (ii) be increased proportionately, with
certain limitations, in the event additional shares of Common Stock or
securities convertible into, exchangeable for or exercisable into Common Stock
are issued after completion of the Offering. The Closing Price amounts set forth
above are subject to adjustment in the event of any stock splits, reverse stock
splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Securities, including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be cancelled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total stockholders' equity, it may
have a negative effect on the market price of the Company's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Underwriter and should not
be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securites.
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<PAGE>
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders. The Selling Securityholders' Warrants are being issued to the
Selling Securityholders as of the closing of the Offering upon the automatic
conversion of all of the Company's outstanding Bridge Warrants. These Class A
Warrants are identical to the Class A Warrants being offered hereby. All of the
Selling Securityholder Warrants issued upon conversion of the Bridge Warrants,
the Common Stock and Class B Warrants issuable upon exercise of such Class A
Warrants and the Common Stock issuable upon exercise of the Class B Warrants
will be registered, at the Company's expense, under the Securities Act and are
expected to become tradable on or about the effective date of the Offering,
subject to a contractual restriction that such Class A Warrants and underlying
securities may not be sold for a period of between 90 and 270 days after the
closing of the Offering. The Selling Securityholders have also agreed not to
exercise the Selling Securityholder Warrants for a period of one year following
the closing of the Offering; provided, however, that purchasers of such Selling
Securityholder Warrants are not subject to such restrictions on exercise. After
the one year period following the closing of the Offering, the Selling
Securityholders may exercise and sell the Common Stock issuable upon exercise of
the Selling Securityholder Warrants without restriction if a current prospectus
relating to such Common Stock is in effect and the securities are qualified for
sale. The Company will not receive any proceeds from the sale of the Selling
Securityholder Warrants. Sales of Selling Securityholder Warrants issued upon
conversion of the Bridge Warrants or the securities underlying such Class A
Warrants or even the potential of such sales could have an adverse effect on the
market prices of the Common Stock and the Warrants.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise.
There are no material relationships between any Selling Securityholder and
the Company, except that TFP III, TFVP V and Palmetto Partners, Ltd.,
stockholders of the Company, are Selling Securityholders. In addition, the Aries
Domestic Fund L.P. and the Aries Trust, two investment funds in which Lindsay
Rosenwald, the President and Chairman of Paramount, the Company's placement
agent for the Series A Placement, is the sole stockholder and President of the
general partner and investment manager, respectively, are Selling
Securityholders. See "Certain Transactions." The Company has been informed by
the Underwriter that there are no agreements between the Underwriter and any
Selling Securityholder regarding the distribution of the Selling Securityholder
Warrants or the underlying securities.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder's Warrants may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable "cooling-off" period (at least two and
possibly nine business days) prior to the commencement of such distribution.
Accordingly, in the event the Underwriter or Blair & Co. is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period.
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However, neither the Underwriter nor Blair & Co. has agreed to nor is either of
them obligated to act as broker-dealer in the sale of the Selling Securityholder
Warrants and the Selling Securityholders may be required, and in the event Blair
& Co. is a market-maker, will likely be required, to sell such securities
through another broker-dealer. In addition, each Selling Securityholder desiring
to sell Warrants will be subject to the applicable provisions of the Exchange
Act and the rules and regulations thereunder, including without limitation Rules
10b-6 and 10b-7, which provisions may limit the timing of the purchases and
sales of shares of the Company's securities by such Selling Securityholder.
The Selling Securityholders and broker-dealers, if any, acting in connection
with such sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit on the resale of the securities might be deemed to be underwriting
discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Incorporation,
as amended, and By-laws, the Warrant Agreement among the Company, the
Underwriter and American Stock Transfer & Trust Company, as warrant agent,
pursuant to which the Warrants will be issued and the Underwriting Agreement
between the Company and the Underwriter, copies of all of which have been filed
with the Commission as Exhibits to the Registration Statement of which this
Prospectus is a part.
GENERAL
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, $.00025 par value, and 15,000,000 shares of preferred stock, $.001
par value ("Preferred Stock"), of which 2,958,000 shares are designated as
Series A Preferred Stock and 12,042,000 are "blank check" or subject to
designation by the Board. All of the Company's 2,958,000 shares of Series A
Preferred Stock outstanding will convert into 1,023,054 shares of Common Stock
at the closing of the Offering and will not be subject to reissuance.
COMMON STOCK
The Company currently has outstanding 902,096 shares of Common Stock, held
of record by approximately 60 holders. An additional 1,023,054 shares of Common
Stock will be issued upon conversion of the Series A Preferred Stock at the
closing of the Offering. Holders of Common Stock have the right to cast one vote
for each share held of record on all matters submitted to a vote of holders of
Common Stock, including the election of directors. There is no right to cumulate
votes for the election of directors. Stockholders holding a majority of the
voting power of the capital stock issued and outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of the Company's stockholders, and the vote by the holders of a majority
of such outstanding shares is required to effect certain fundamental corporate
changes such as liquidation, merger or amendment of the Company's Restated
Certificate of Incorporation.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding Preferred Stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding Preferred Stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.
REDEEMABLE WARRANTS
CLASS A WARRANTS. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $5.85 at any time until 5:00 P.M., New York
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City time, on , 2001. Commencing one year from the date of this
Prospectus, the Class A Warrants are redeemable by the Company on 30 days'
written notice at a redemption price of $.05 per Class A Warrant if the "closing
price" of the Company's Common Stock for any 30 consecutive trading days ending
within 15 days of the notice of redemption averages in excess of $8.20 per
share. "Closing price" shall mean the closing bid price if listed in the
over-the-counter market on Nasdaq or otherwise or the closing sale price if
listed on the Nasdaq National Market or a national securities exchange. All
Class A Warrants must be redeemed if any are redeemed.
CLASS B WARRANTS. Each Class B Warrant entitles the registered holder to
purchase one share of Common Stock at an exercise price of $7.80 at any time
after issuance until 5:00 P.M. New York City time, on , 2001. Commencing
one year from the date of this Prospectus, the Class B Warrants are redeemable
by the Company on 30 days' written notice at a redemption price of $.05 per
Class B Warrant, if the closing price (as defined above) of the Company's Common
Stock for any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $10.95 per share. All Class B Warrants must be
redeemed if any are redeemed.
GENERAL. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York, as
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the Common Stock or upon issuance of
shares of Common Stock at prices lower than the market price of the Common
Stock, with certain exceptions.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Class A Warrants and the Class B Warrants. A Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of the Warrant Agent, with the form of
"Election to Purchase" on the reverse side of the Warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. See "Risk Factors
- -- Current Prospectus Required to Exercise Warrants." Shares issued upon
exercise of Warrants and payment in accordance with the terms of the Warrants
will be validly issued, fully paid and non-assessable. For the life of the
Warrants, the holders thereof have the opportunity to profit from a rise in the
market value of the Common Stock, with a resulting dilution in the interest of
all other stockholders. So long as the Warrants are outstanding, the terms on
which the Company could obtain additional capital may be adversely affected. The
holders of the Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a new
offering of securities on terms more favorable than those provided for by the
Warrants.
The Warrants do not confer upon the Warrantholder any voting or other rights
of a stockholder of the Company. Upon notice to the Warrantholders, the Company
has the right to reduce the exercise price or extend the expiration date of the
Warrants.
UNDERWRITER'S OPTIONS
The Company has agreed to grant to the Underwriter or its designees, upon
the closing of the Offering, the Underwriter's Options to purchase up to 306,700
shares of Common Stock and/or 306,700 Class A Warrants and/or 306,700 Class B
Warrants. These securities will be identical to the securities offered hereby
except that the Class A Warrants and the Class B Warrants issuable upon exercise
of the Underwriter's Options will not be subject to redemption by the Company
until the Underwriter's Options have been exercised and the underlying warrants
are outstanding. The Underwriter's Options cannot be transferred,
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<PAGE>
sold, assigned or hypothecated for two years, except to any officer of the
Underwriter or members of the selling group or their officers. The Underwriter's
Options are exercisable during the three-year period commencing two years from
the date of this Prospectus at an exercise price of $6.16 per share of Common
Stock, $.07 per Class A Warrant and $.07 per Class B Warrant (140% of the
initial public offering price of such securities) subject to adjustment in
certain events to protect against dilution. The holders of the Underwriter's
Options have certain demand and piggyback registration rights. See
"Underwriting."
OTHER WARRANTS
As of the closing of the Offering, exclusive of the Warrants offered hereby
and the Selling Securityholder Warrants and after giving effect to the
conversion of the Series A Preferred Stock into Common Stock, the Company will
have outstanding warrants to purchase an aggregate of 319,204 shares of Common
Stock, issued to stockholders of and consultants to the Company having exercise
prices ranging from $4.40 to $5.28 per share. See "Certain Transactions."
PREFERRED STOCK
After completion of the Offering, the Company will be authorized to issue up
to 12,042,000 shares of "blank-check" Preferred Stock. The Board of Directors
will have the authority to issue this Preferred Stock in one or more series and
to fix the number of shares and the relative rights, conversion rights, voting
rights and terms of redemption (including sinking fund provisions) and
liquidation preferences, without further vote or action by the stockholders. If
shares of Preferred Stock with voting rights are issued, such issuance could
affect the voting rights of the holders of the Company's Common Stock by
increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights. If the Board of Directors authorizes
the issuance of shares of Preferred Stock with conversion rights, the number of
shares of Common Stock outstanding could potentially be increased by up to the
authorized amount. Issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Stock.
Also, Preferred Stock could have preferences over the Common Stock (and other
series of preferred stock) with respect to dividend and liquidation rights. The
Company currently has no plans to issue any Preferred Stock.
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
BUSINESS COMBINATION PROVISIONS
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The Company has not sought to "elect
out" of the statute and, therefore, upon closing of the Offering and the
registration of its shares of Common Stock under the Exchange Act, the
restrictions imposed by such statute will apply to the Company.
REGISTRATION RIGHTS
The Company has granted certain demand and piggy-back registration rights to
holders of 1,023,054 shares of Common Stock issuable upon conversion of the
Series A Preferred Stock purchased in the Series A Placement.
The Company has granted certain demand and piggy-back registration rights to
holders of 45,304 shares of Common Stock issued in connection with the 1994
Financing.
The Company has granted certain piggy-back registration rights to holders of
257,808 shares of Common Stock issued in connection with the Merger.
67
<PAGE>
The Company has granted certain demand and piggy-back registration rights to
the holders of warrants to purchase 293,365 shares of Common Stock and the
holders of the Common Stock issued or issuable upon exercise thereof.
All of the above described registration rights have been waived for a period
of 13 months following completion of the Offering.
The holders of the Underwriter's Options will have demand and piggy-back
registration rights relating to such options and the underlying securities. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 4,992,150
shares of Common Stock. Of these shares, the 3,067,000 shares of Common Stock
offered hereby will be freely transferable without restriction or further
registration under the Securities Act, unless purchased by affiliates of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 1,925,150 shares of Common Stock currently
outstanding (after giving effect to conversion of the Series A Preferred Stock)
are "restricted securities" or within the meaning of Rule 144 and may not be
sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Such shares will be
eligible for sale in the public market pursuant to Rule 144 commencing in August
1996. However, the holders of approximately 1,891,440 shares (or approximately
98% of the Common Stock outstanding prior to the Offering (after giving effect
to the conversion of the Series A Preferred Stock into Common Stock)), and the
holders of all of the Company's options and warrants outstanding prior to the
Offering, have agreed not to publicly sell or otherwise dispose of any shares of
Common Stock without the Underwriter's prior written consent for a period of 13
months after the date of this Prospectus. See "Underwriting."
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 24,046 shares subject to outstanding vested stock options
may be sold pursuant to such rule at the end of this 90-day period, subject to
an agreement by all option holders not to sell or otherwise dispose of any
shares of Common Stock for a period of 13 months after the date of this
Prospectus without the Underwriter's prior written consent.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf of
the Selling Securityholders, the Selling Securityholder
68
<PAGE>
Securities subject to the contractual restriction that the Selling
Securityholders agreed with the Company (i) not to exercise the Selling
Securityholder Warrants for a period of one year for the closing of the Offering
and (ii) not to sell the Selling Securityholder Warrants except pursuant to the
restrictions set forth below:
<TABLE>
<CAPTION>
PERCENTAGE ELIGIBLE
LOCK-UP PERIOD FOR RESALE
- --------------------------------------------------------------------------- ---------------------
<S> <C>
Before 90 days after closing............................................... 0%
Between 91 and 150 days after closing...................................... 25%
Between 151 and 210 days after closing..................................... 50%
Between 211 and 270 days after closing..................................... 75%
After 270 days after closing............................................... 100%
</TABLE>
The Underwriter also has demand and "piggy-back" registration rights with
respect to the securities underlying the Underwriter's Option. See
"Underwriting." In addition, the Company has granted demand and "piggy-back"
registration rights to the holders of 1,326,166 shares of Common Stock. See
"Description of Securities -- Registration Rights."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
UNDERWRITING
D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company the 3,067,000 shares of Common Stock, 3,067,000 Class A Warrants and
3,067,000 Class B Warrants offered hereby on a "firm commitment" basis, if any
are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Common Stock and Warrants offered hereby.
It is also expected that Blair & Co. will make a market in the Company's
securities following the Offering. Blair & Co. is substantially owned by family
members of J. Morton Davis, including limited partners of a principal
stockholder of the Company. See "Certain Transactions." Mr. Davis is the sole
stockholder of an entity which is the parent and sole stockholder of the
Underwriter.
The Underwriter has advised the Company that it proposes to offer the Shares
and Warrants to the public at the public offering prices set forth on the cover
page of this Prospectus and to certain dealers who are members of the NASD, at
such prices less concessions of not in excess of $ per Share, $ per Class
A Warrant and $ per Class B Warrant, of which a sum not in excess of $ per
Share, per Class A Warrant and $ per Class B Warrant may in turn be
reallowed to other dealers who are members of the NASD. After the commencement
of the offering, the public offering prices, the concession and the reallowance
may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Shares and Warrants offered
hereby, including any Shares and Warrants purchased pursuant to the
Underwriter's overallotment option, $20,000 of which has been paid to date.
The Company has granted to the Underwriter an option exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts, up to 460,050
additional shares of Common Stock and/or 460,050 Class A Warrants and/or 460,050
Class B Warrants for the purpose of covering over-allotments, if any.
The holders of approximately 98% of the shares of Common Stock outstanding
prior to the Offering (after giving effect to the conversion of the Series A
Preferred Stock), and the holders of all of the Company's options and warrants
outstanding prior to the Offering, have agreed not to sell, assign, transfer or
otherwise dispose publicly of any of their shares of Common Stock for a period
of 13 months from the
69
<PAGE>
date of this Prospectus without the prior written consent of the Underwriter.
The holders of 740,559 shares of Common Stock and options to purchase 71,923
shares of Common Stock have deposited such shares and options into escrow as
described under "Principal Stockholders -- Escrow Securities."
The Company has agreed to nominate one director designated by the
Underwriter to the Company's Board of Directors for a period of five years from
the completion of the Offering, although it has not yet selected any such
designee. Such designee may be a director, officer, partner, employee or
affiliate of the Underwriter.
During the five-year period from the date of this Prospectus, in the event
the Underwriter originates a financing or a merger, acquisition or transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction ranging from
7% of the first $1,000,000 to 2 1/2% of any consideration in excess of
$9,000,000.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, if (i) the market price of the Company's Common
Stock, on the date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was solicited in
writing by a member of the NASD; (iii) the Warrants are not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the Offering and at the time of exercise of the Warrants;
and (v) the solicitation of exercise of the Warrant was not in violation of Rule
10b-6 promulgated under the Exchange Act.
Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Underwriter of the exercise of Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, Blair &
Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Underwriter's Option to purchase up to 306,700 shares
of Common Stock and/or 306,700 Class A Warrants and/or 306,700 Class B Warrants,
substantially identical to the Shares and Warrants being offered hereby, except
that the Class A Warrants and Class B Warrants included therein are subject to
redemption by the Company at any time after the Underwriter's Option has been
exercised and the underlying warrants are outstanding. The Underwriter's Option
will be exercisable during the three-year period commencing two years from the
date of this Prospectus at an exercise price of $6.16 per share of Common Stock,
$.07 per Class A Warrant and $.07 per Class B Warrant, subject to adjustment in
certain events to protect against dilution, and are not transferable for a
period of two years from the date of this Prospectus except to officers of the
Underwriter or to members of the selling group. The Company has agreed to
register during the four-year period commencing one year from the date of this
Prospectus, on two separate occasions, the securities issuable upon exercise
thereof under the Securities Act, the initial such registration to be at the
Company's expense and the second at the expense of the holders. The
Underwriter's Option includes a provision permitting the holder to elect a
cashless exercise. The Company has also granted certain "piggy-back"
registration rights to holders of the Underwriter's Option.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts.
The Underwriter acted as Placement Agent for the Bridge Financing in
December 1995 for which it received a Placement Agent fee of $222,500 and a
non-accountable expense allowance of $66,750.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which will
distribute substantially all of the Shares and Warrants offered hereby. The
investigation appears to be broad in scope, involving numerous aspects of the
70
<PAGE>
Underwriter's and Blair & Co.'s compliance with the federal securities laws and
compliance with the federal securities laws by issuers whose securities were
underwritten by the Underwriter or Blair & Co., or in which the Underwriter or
Blair & Co. made over-the-counter markets, persons associated with the
Underwriter or Blair & Co., such issuers and other persons. The Company has been
advised by the Underwriter that the investigation has been ongoing since at
least 1989 and that it is cooperating with the investigation. The Underwriter
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or Blair & Co., or, if so, whether
any such action might have an adverse effect on the Underwriter or the
securities offered hereby. The Company has been advised that Blair & Co. will
make a market in the securities following the Offering. An unfavorable
resolution of the Commission's investigation could have the effect of limiting
such firm's ability to make a market in the Company's securities, which could
affect the liquidity or price of such securities.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering prices of the Shares
and Warrants offered hereby and the terms of the Warrants have been determined
by negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's management,
the Company's capital structure and such other factors as were deemed relevant.
VentureTek L.P., a limited partnership whose limited partners consist of the
children and grandchildren of J. Morton Davis, the sole stockholder of the
parent company of the Underwriter, and The Long Term Equity Holdings Trust, a
trust whose beneficiaries consist of the grandchildren of Mr. Davis,
beneficially own in the aggregate approximately 14.4% of the outstanding Common
Stock of the Company prior to the Offering. See "Principal Stockholders" and
"Certain Transactions." As a result of such stockholdings, the Underwriter may
be deemed an affiliate of the Company by the NASD. Accordingly, the Offering is
being made pursuant to Schedule E to the By-Laws of the NASD. In accordance with
Schedule E to the By-Laws of the NASD, the independent investment banking firm
of RAS Securities Corp. ("RAS") has recommended a maximum initial public
offering price of $4.40 per Share, $.05 per Class A Warrant and $.05 per Class B
Warrant. Pursuant to Schedule E to the NASD By-Laws, the Shares and the Warrants
are being offered at a price no greater than the maximum recommended by RAS,
which firm has informed the Company that it has performed "due diligence" with
respect to information contained in the Registration Statement of which this
Prospectus is a part and has participated in the preparation of the Registration
Statement. The NASD and the Commission have indicated that, in their view, a
qualified independent underwriter, such as RAS, may be deemed to be an
underwriter, as the term is defined in the Securities Act. The Underwriter will
pay a fee of $50,000 to RAS for its services in connection with recommending the
maximum initial public offering price of the Shares and Warrants in this
offering. The Company has agreed to indemnify RAS against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by O'Sullivan Graev & Karabell, LLP, New York, New York. The statements
relating to United States patent rights and federal government environmental
regulations have been passed upon by Collier, Shannon, Rill & Scott, Washington,
D.C. Certain legal matters will be passed upon for the Underwriter by Bachner,
Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at June 30, 1994 and
1995 and for the period from March 1, 1994 (commencement of operations) to June
30, 1994 and the year ended June 30, 1995 and the financial statements of
Dunkirk at June 30, 1994 and August 31, 1994 and for the year ended June 30,
1994 and two months ended August 31, 1994, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which
71
<PAGE>
contains an explanatory paragraph with respect to the Company's ability to
continue as a going concern as mentioned in Note 3 of Notes to Consolidated
Financial Statements) appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheet of Conversion Technologies International, Inc. and
Subsidiary as of June 30, 1995 and March 31, 1996 (unaudited)....................... F-3
Statements of Operations of Dunkirk International Glass and Ceramics Corporation
(Predecessor) for the year ended June 30, 1994 and the two months ended August 31,
1994 and Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiary for the period from March 1, 1994 (date
operations commenced) to June 30, 1994, the year ended June 30, 1995 and the nine
months ended
March 31, 1995 and 1996 (unaudited)................................................. F-4
Consolidated Statements of Stockholders' Deficiency of Conversion Technologies
International, Inc. and Subsidiary for the period from March 1, 1994 (date
operations commenced) to June 30, 1994, the year ended June 30, 1995 and the nine
months ended March 31, 1996 (unaudited)............................................. F-5
Statements of Stockholders' Deficiency of Dunkirk International Glass and Ceramics
Corporation (Predecessor) for the year ended June 30, 1994 and the two months ended
August 31, 1994..................................................................... F-6
Statements of Cash Flows of Dunkirk International Glass and Ceramics Corporation
(Predecessor) for the year ended June 30, 1994 and the two months ended August 31,
1994 and Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiary for the period from March 1, 1994 (date
operations commenced) to June 30, 1994, the year ended June 30, 1995 and the nine
months ended
March 31, 1995 and 1996 (unaudited)................................................. F-7
Notes to Consolidated Financial Statements........................................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conversion Technologies International, Inc.
We have audited the accompanying consolidated balance sheet of Conversion
Technologies International, Inc. and Subsidiary (Company) at June 30, 1995, and
the related consolidated statements of operations, stockholders' deficiency and
cash flows for the period from March 1, 1994 (date operations commenced) to June
30, 1994 and the year ended June 30, 1995. We have also audited the accompanying
statements of operations, stockholders' deficiency and cash flows of Dunkirk
International Glass and Ceramics Corporation (Predecessor) for the year ended
June 30, 1994 and the two months ended August 31, 1994. These financial
statements are the responsibility of the Companies' managements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Conversion
Technologies International, Inc. and Subsidiary at June 30, 1995, and the
consolidated results of their operations and cash flows for the period from
March 1, 1994 (date operations commenced) to June 30, 1994 and the year ended
June 30, 1995 and Dunkirk International Glass and Ceramics Corporation's results
of operations and cash flows for the year ended June 30, 1994 and the two months
ended August 31, 1994 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company has generated only minimal revenue, has incurred significant losses
since inception, has a working capital and stockholders' deficiency and is
dependent upon additional funding. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
ERNST & YOUNG LLP
MetroPark, New Jersey
July 28, 1995, except for Note 10, as to
which the date is May 9, 1996
F-2
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1995
------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $ 733,843 $ 214,513
Accounts receivable, less allowance for doubtful accounts of $0 and $25,000 at
June 30, 1995 and March 31, 1996, respectively............................... 283,571 236,621
Inventories................................................................... 227,724 317,287
Deferred bridge financing charges............................................. 375,250
Prepaid expenses and other current assets..................................... 133,032 98,945
------------- -------------
Total current assets............................................................ 1,378,170 1,242,616
Property, plant and equipment:
Land.......................................................................... 75,000 75,000
Building and improvements..................................................... 1,184,344 1,224,852
Machinery and equipment....................................................... 6,298,912 7,013,130
Construction in progress...................................................... 2,393,829 5,390,696
------------- -------------
9,952,085 13,703,678
Less accumulated depreciation and amortization................................ (824,632) (1,385,906)
------------- -------------
9,127,453 12,317,772
Deferred finance charges, less accumulated amortization of $26,970 and $67,643
at June 30, 1995 and March 31, 1996, respectively.............................. 508,718 504,972
Deferred registration costs..................................................... 420,324
Other noncurrent assets......................................................... 31,266 38,304
Restricted assets:
Project Fund.................................................................. 78,772 585
Debt Service Reserve Funds.................................................... 915,136 796,526
------------- -------------
$ 12,039,515 $ 15,321,099
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Notes payable................................................................. $ 386,500 $ 2,734,750
Accounts payable.............................................................. 1,077,714 2,604,877
Deferred revenue.............................................................. 944,230 583,416
Reserve for disposal.......................................................... 1,360,000 821,200
Accrued expenses.............................................................. 1,168,696 1,294,381
Current portion of capital lease obligations.................................. 94,130 81,821
Current portion of long-term debt............................................. 404,387 488,282
------------- -------------
Total current liabilities....................................................... 5,435,657 8,608,727
Capital lease obligations, less current portion................................. 147,227 87,154
Long-term debt, less current portion............................................ 8,657,582 11,396,116
Stockholders' deficiency:
Preferred stock, $.001 par value, authorized 15,000,000 shares, issued and
outstanding 2,958,000 shares at June 30, 1995 and March 31, 1996............. 2,958 2,958
Common stock, $.00025 par value, authorized 25,000,000 shares, issued and
outstanding 909,404 shares at June 30, 1995 and 902,096 shares at March 31,
1996......................................................................... 227 226
Additional paid-in capital.................................................... 10,421,981 10,389,732
Accumulated deficit........................................................... (12,626,117) (15,163,814)
------------- -------------
Total stockholders' deficiency.................................................. (2,200,951) (4,770,898)
------------- -------------
$ 12,039,515 $ 15,321,099
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------
PERIOD FROM
PREDECESSOR COMPANY MARCH 1, 1994
--------------------------- (DATE NINE MONTHS ENDED
TWO MONTHS OPERATIONS MARCH 31,
YEAR ENDED ENDED AUGUST COMMENCED) TO YEAR ENDED -----------------------------
JUNE 30, 1994 31, 1994 JUNE 30, 1994 JUNE 30, 1995 1995 1996
------------- ------------ --------------- -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $ -- $ 62,452 $ -- $ 1,173,264 $ 724,536 $ 2,076,894
Cost of goods sold............ (379,661) (2,788,599) (2,397,917) (2,025,851)
------------- ------------ --------------- -------------- -------------- -------------
Gross (loss) profit........... -- (317,209) -- (1,615,335) (1,673,381) 51,043
Selling, general and
administrative............... 721,441 297,792 358,336 2,529,263 1,822,913 1,213,315
Process development costs..... 765,981 82,427 -- 1,531,955 899,670 776,113
Write-off of in-process
technologies................. -- -- -- 6,232,459 6,232,459 --
------------- ------------ --------------- -------------- -------------- -------------
Loss from operations.......... (1,487,422) (697,428) (358,336) (11,909,012) (10,628,423) (1,938,385)
Interest expense, net......... (26,084) (40,999) (13,079) ( 345,690) (182,589) (681,123)
Other Income.................. -- -- -- -- -- 81,811
------------- ------------ --------------- -------------- -------------- -------------
Net loss...................... $ (1,513,506) $ (738,427) $ (371,415) $ (12,254,702) $ (10,811,012) $ (2,537,697)
------------- ------------ --------------- -------------- -------------- -------------
------------- ------------ --------------- -------------- -------------- -------------
Pro forma net loss per common
share........................ $ (19.88) $ (16.68) $ (2.14)
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------- -----------------------------------------------
ADDITIONAL ADDITIONAL TOTAL
NUMBER PAID-IN NUMBER PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT SUBSCRIPTIONS CAPITAL DEFICIT DEFICIENCY
--------- ------ ---------- --------- ------ ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1,
1994 (date
operations
commenced)......... 558,808 $140 $ 1,007 $ 1,147
Issuance of
common stock... 27,438 7 $ (131) 5,048 4,924
Net loss........ $ (371,415 ) (371,415)
--------- ------ ------ ---------- ------------ -------------
Balance at June 30,
1994............... 586,246 147 (131) 6,055 (371,415 ) (365,344)
Issuance of
common stock... 323,158 80 4,421,655 4,421,735
Issuance of
preferred
stock.......... 2,958,000 $2,958 $5,994,271 5,997,229
Payment received
for common
stock
subscriptions... 131 131
Net loss........ (12,254,702 ) (12,254,702)
--------- ------ ---------- --------- ------ ------ ---------- ------------ -------------
Balance at June 30,
1995 2,958,000 2,958 5,994,271 909,404 227 -- 4,427,710 (12,626,117 ) (2,200,951)
Common Stock
surrendered and
cancelled...... (7,308) (1) (98,999 ) (99,000)
Issuance of
warrants in
connection with
Bridge Notes... 66,750 66,750
Net Loss........ (2,537,697 ) (2,537,697)
--------- ------ ---------- --------- ------ ------ ---------- ------------ -------------
Balance at March 31,
1996............... 2,958,000 $2,958 $5,994,271 902,096 $226 -- $4,395,461 $(15,163,814) $(4,770,898)
--------- ------ ---------- --------- ------ ------ ---------- ------------ -------------
--------- ------ ---------- --------- ------ ------ ---------- ------------ -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
DUNKIRK INTERNATIONAL GLASS AND CERAMICS CORPORATION
(PREDECESSOR COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEAR ENDED JUNE 30, 1994 AND TWO MONTHS ENDED AUGUST 31, 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ------------------- ADDITIONAL TOTAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
--------- ------ --------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993................ $-- 5,200 $ 5,200 $ 94,800 $ (593,040 ) $ (493,040)
Issuance of common stock at $1 per
share on January 28, 1994............ 20 20 20
Issuance of preferred stock at $144
per share on February 24, 1994....... 35 5,040 5,040
Reduction in par value of common stock
from $1 to $.001 on February 24,
1994................................. (5,215) 5,215 --
Issuance of common stock at $.001 per
share on May 17, 1994................ 30 --
Net loss.............................. (1,513,506 ) (1,513,506)
--
------ --------- ------- ---------- ----------- -------------
Balance at June 30, 1994................ 35 -- 5,250 5 105,055 (2,106,546 ) (2,001,486)
Capital contribution of parent company
upon merger at August 31, 1994....... 1,500,000 1,500,000
Cancellation of preferred stock upon
merger............................... (35) --
Net loss.............................. (738,427 ) (738,427)
--
------ --------- ------- ---------- ----------- -------------
Balance at August 31, 1994.............. -- $-- 5,250 $ 5 $1,605,055 $(2,844,973) $(1,239,913)
--
--
------ --------- ------- ---------- ----------- -------------
------ --------- ------- ---------- ----------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------
PREDECESSOR COMPANY PERIOD FROM
---------------------------- MARCH 1, 1994 NINE MONTHS ENDED
TWO MONTHS (DATE OPERATIONS MARCH 31,
YEAR ENDED ENDED AUGUST COMMENCED) TO YEAR ENDED -------------------------
JUNE 30, 1994 31, 1994 JUNE 30, 1994 JUNE 30, 1995 1995 1996
------------- ------------ ---------------- ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................... $(1,513,506) $ (738,427) $(371,415) $(12,254,702) $(10,811,012) $(2,537,697)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization expense..... 48,622 33,607 312 742,090 487,886 639,711
Amortization of deferred
financing................ 12,599 39,568 30,363 40,673
Non cash payment for
services provided to the
Company.................. 4,999
Interest expense converted
to equity................ 13,767 13,767
Write-off of in-process
technologies............. 6,232,459 6,232,459
Settlement from former
Officer.................. (99,000)
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts
receivable........... (106,819) (48,299) (115,478) (177,521) 46,950
Increase in
inventories.......... (227,724) (183,963) (89,563)
Decrease (increase) in
other current
assets............... (86,397) 44 (233,276) 173,623 174,704 34,087
Increase in other
noncurrent assets.... (2,101) (29,165) (451) (7,038)
Increase (decrease) in
deferred revenue..... 303,467 136,754 504,010 457,610 (360,814)
Increase (decrease) in
accounts payable,
reserve for disposal
and other accrued
expenses............. 1,627,931 (314,051) 368,466 1,418,150 1,921,897 746,291
------------- ------------ ---------------- ------------- ------------ -----------
Net cash (used in) provided by
operating activities......... 273,298 (930,372) (220,416) (3,503,402) (1,854,261) (1,586,400)
INVESTING ACTIVITIES
Capital expenditures.......... (1,488,062) (559,149) (1,870) (6,986,377) (4,019,918) 3,830,030
Notes receivable and due from
Dunkirk International Glass
and Ceramics Corporation..... (221,980)
Investment in Dunkirk
International Glass and
Ceramics Corporation......... (5,040)
Net cash impact from
acquisition of Dunkirk
International Glass and
Ceramics Corporation......... (1,328,338) (1,328,338)
------------- ------------ ---------------- ------------- ------------ -----------
Net cash used in investing
activities................... (1,488,062) (559,149) (228,890) (8,314,715) (5,348,256) (3,830,030)
FINANCING ACTIVITIES
Due to Conversion Technologies
International, Inc........... 221,980 9,670
Increase in deferred finance
and registration
costs........................ (60,231) (30,425) (113,389) (424,228) (445,011) (464,744)
Issuance of notes payable..... 66,500 205,000 320,000 156,000 2,425,000
Payment of notes payable...... (195,430) (195,430) (10,000)
Issuance of long-term debt.... 1,025,690 191,193 600,000 7,938,455 8,361,109 3,044,302
Decrease (increase) in
restricted assets............ (993,908) (3,243,446) 196,797
Principal payments on
long-term debt............... (7,415) (6,397) (259,476) (437,677) (221,873)
Principal payments under
capital lease obligations.... (20,610) (23,794) (81,690) (54,778) (72,382)
Issuance of common stock...... 20 1,072 7,631 131
Issuance of preferred stock... 5,040 5,997,229 4,268,029
Capital contribution.......... 1,500,000
------------- ------------ ---------------- ------------- ------------ -----------
Net cash provided by financing
activities................... 1,230,974 1,640,247 692,683 12,308,583 8,408,927 4,897,100
------------- ------------ ---------------- ------------- ------------ -----------
Increase (decrease) in cash
and cash equivalents......... 16,210 150,726 243,377 490,466 1,206,410 (519,330)
Cash and cash equivalents at
beginning of period.......... 4,725 20,935 -- 243,377 243,377 733,843
------------- ------------ ---------------- ------------- ------------ -----------
Cash and cash equivalents at
end of period................ $ 20,935 $ 171,661 $ 243,377 $ 733,843 $ 1,449,787 $ 214,513
------------- ------------ ---------------- ------------- ------------ -----------
------------- ------------ ---------------- ------------- ------------ -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR COMPANY ------------------------------------------------------------
---------------------------- PERIOD FROM
TWO MONTHS MARCH 1, 1994 NINE MONTHS ENDED
ENDED (DATE OPERATIONS MARCH 31,
YEAR ENDED AUGUST 31, COMMENCED) TO YEAR ENDED ----------------------
JUNE 30, 1994 1994 JUNE 30, 1994 JUNE 30, 1995 1995 1996
------------- ------------ ------------------- ------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid, net of amount
capitalized.................. $ 19,584 $12,040 $67 $ 470,765 $ 194,238 $ 549,933
------------- ------------ --- ------------- ---------- ----------
------------- ------------ --- ------------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON
CASH TRANSACTIONS
Purchase of equipment through
capital lease agreements..... $221,433 $16,220 $ 129,791 $ 126,613
Accrued deferred finance and
registration costs........... $ 367,757
Purchase of land and building
by incurring mortgage to
seller....................... 475,000
Debt assumed by Conversion
Technologies International,
Inc.......................... 270,028
Common stock/paid-in capital:
Debt converted to common
stock:
Long-term debt........ 969,928 969,928
Interest expense on
long-term debt....... 13,767 13,767
Accounts payable...... 31,225 31,225
Write-off of investment in
Dunkirk International
Glass and Ceramics
Corporation.............. (5,040) (5,040)
Issuance of shares to
stockholders of Dunkirk
International Glass and
Ceramics Corporation..... 3,492,547 3,492,547
Write-off of deferred
finance charges.......... (88,192) (88,192)
Surrender and cancellation
of common stock.......... (99,000)
Issuance of warrants in
connection with Bridge
Notes.................... 66,750
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
1. ORGANIZATION
Conversion Technologies International, Inc. (the "Company") is a specialty
materials company (i) manufacturing industrial abrasives marketed under the name
ALUMAGLASS-TM-, (ii) processing certain glass and ceramic materials, such as
cathode ray tube (CRT) glass, for resale to original manufacturers or others or
converting such materials into manufacturing raw materials for the Company and
others and (iii) developing certain other technologies. The Company has
developed products and services to meet the needs of a number of its strategic
industrial partners and to potentially serve large international markets. The
Company's revenue streams are a combination of waste conversion fees and
manufactured product sales.
On June 10, 1994, the Company authorized a four for one stock split and
reduced the common stock par value to $.00025 per share. Additionally, the
Company increased its common and preferred shares authorized to 25,000,000 and
15,000,000, respectively.
2. ACQUISITION OF DUNKIRK INTERNATIONAL GLASS AND CERAMICS CORPORATION
Effective August 31, 1994, Conversion Technologies International, Inc. and
Dunkirk International Glass and Ceramics Corporation ("Dunkirk" or "Predecessor
Company") completed a merger whereby the common shareholders of Dunkirk
exchanged their common shares for 257,808 shares of the Company's common stock
valued at $13.55 per share (each common share of Dunkirk was converted to 49.107
common shares of the Company). Prior to this transaction, Conversion
Technologies International, Inc. had owned 35 shares of Dunkirk's Convertible
Series A Preferred Stock, which were cancelled upon the merger transaction. The
Company contributed $1.5 million to Dunkirk as a condition of the closing. This
transaction has been accounted for as a purchase. In conjunction with this
merger transaction, the Company recorded a charge against earnings of $6,232,459
relating to the write-off of purchased research and development (in process)
technology that had not reached technological feasibility and, in management's
opinion, had no alternative future use at the merger date. The in-process
technology was expensed on the date of acquisition. As part of this merger
transaction, a portion of Dunkirk's debt was converted into 13,281 shares of the
Company's common stock at a conversion price of $20.36 per share.
If this merger transaction had occurred on July 1, 1994, the Company's
consolidated revenue, net loss and pro forma net loss per common share for the
year ended June 30, 1995 would have been $1,235,716, ($12,974,814) and ($17.24),
respectively.
As of the date of the merger transaction, Dunkirk was in the development
stage. Dunkirk was incorporated on July 3, 1990, for the purpose of recycling
and beneficially reusing industrial waste CRT glass and converting other
industrial waste materials into high value specialty abrasives and other
glass-ceramic materials. Dunkirk started developing its patented processes in
1991. CRT glass processing commenced in the summer of 1994 and Dunkirk commenced
production of its ALUMAGLASS-TM- family of abrasives in the spring of 1995 and
accordingly, the Company has exited the development stage. Product application
testing and initial marketing of ALUMAGLASS-TM- is currently underway. Dunkirk
incurred cumulative net losses of approximately $2,845,000 from its inception,
July 3, 1990 to August 31, 1994. In addition, as of August 31, 1994, Dunkirk had
a working capital deficiency of approximately $2,728,000 and a shareholders'
deficiency of approximately $1,240,000 which includes the above mentioned $1.5
million capital contribution from the Company.
F-9
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. The Company has
had limited revenue, has incurred significant losses since inception which has
resulted in a working capital and stockholders' deficiency and has only limited
available borrowing facilities for working capital. In view of the foregoing,
continuation of the Company as a going concern depends on its ability to achieve
profitability through an adequate revenue stream and/or obtain additional
funding. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
Management is in active discussions with several additional sources of
capital and is also in discussions with several potential strategic partners to
assist in the Company's commercialization plans.
The consolidated financial statements and related notes thereto as of March
31, 1996 and for the nine months ended March 31, 1995 and 1996 are unaudited and
have been prepared in a manner consistent with the preparation of the audited
consolidated financial statements of the Company included herein. In the opinion
of management, such unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Conversion
Technologies International, Inc. and its wholly-owned subsidiary, Dunkirk
International Glass and Ceramics Corporation. The consolidated statement of
operations and cash flows for the nine months ended March 31, 1995 and the year
ended June 30, 1995 include the results of Dunkirk from August 31, 1994 (date of
merger). Intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company derives most of its revenue from a combination of fees charged
to accept waste materials and from the sale of its products. Revenue recognition
of the fees charged to accept the waste material is deferred until the material
is placed through the conversion process.
For the year ended June 30, 1995, 90.8% of the Company's revenue was derived
from three major customers. Revenue generated from each of these customers
amounted to $436,246, $387,752 and $241,838 which represents 37.2%, 33.0% and
20.6% of total revenue, respectively.
RESERVE FOR DISPOSAL
Dunkirk began accepting waste materials (primarily CRT glass) in early 1994.
Upon accepting the waste materials, Dunkirk established a reserve for the
potential disposal costs for the waste materials accepted, in the event that the
conversion processes being developed were not successful. For the year ended
June 30, 1994 and two months ended August 31, 1994, Dunkirk recorded additions
of $290,000 and $135,000, respectively, to this reserve. From August 31, 1994
(date of merger) to June 30, 1995, the Company recorded an addition of $935,000
to this reserve. From July 1, 1995 to March 31, 1996, the Company reduced the
reserve by approximately $539,000. The increases/decreases in the reserve, which
substantially resulted from changes in the volume of inventory, have been
charged/credited against operations. The Company intends to adjust the reserve
when the conversion processes prove commercially successful.
F-10
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
by the first-in, first-out (FIFO) method.
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Raw materials.............................................................. $ 48,015 $ 93,984
Work-in-process............................................................ 109,168 132,929
Finished goods............................................................. 70,541 90,374
-------- ---------
$227,724 $ 317,287
-------- ---------
-------- ---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The Company capitalized
interest costs of $63,499 and $361,512 for the year ended June 30, 1995 and nine
months ended March 31, 1996, respectively, with regard to the construction of
certain long-term assets. Depreciation and amortization is computed on the
straight-line method over the estimated useful lives of the assets. Amortization
of assets under capital leases is provided on a straight-line basis over the
lesser of the useful lives of the related assets or the terms of the leases.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original
maturity of three months or less to be cash equivalents.
INCOME TAXES
Deferred income tax assets and liabilities are recorded for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
PROCESS DEVELOPMENT COSTS
Process development costs represent research and development associated with
the Company's CRT glass processing and ALUMGLASS-TM- product lines
(technologies) since the date of the merger transaction.
PRO FORMA NET LOSS PER COMMON SHARE
The pro forma net loss per common share is based on the net loss for the
relevant period or year, divided by the weighted average number of common shares
outstanding during the period or year (excluding the common shares that will be
deposited into escrow in connection with the Company's initial public offering
- -- see Note 10). Common Stock equivalents such as stock options and warrants are
not included as their effect is anti-dilutive. However, immediately prior to the
closing of the Company's initial public offering (see Note 10), the Company's
Series A Preferred Stock will be converted into 1,023,054 shares of common
shares (see Note 10). The weighted average number of these converted shares, at
June 30, 1994 and 1995 and March 31, 1996 were 0, 587,742 and 1,023,054
respectively, and they have been included in the
F-11
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related pro forma net loss per common share calculation. Therefore, the pro
forma weighted average number of common shares outstanding at June 30, 1994 and
1995 and March 31, 1996 were 18,679, 734,754 and 1,185,387, respectively.
DEFERRED FINANCING COSTS
Costs related to obtaining debt financing are being amortized under the
interest method of accounting. During the nine months ended March 31, 1996, the
Company incurred $375,250 and $420,324 of costs related to a Bridge Financing in
December 1995 and a proposed initial public offering ("IPO") of the Company's
securities, respectively (see Note 10). The deferred finance costs associated
with the Bridge Financing will be treated as an extraordinary loss upon payment
of such financing which will be made upon the completion of the IPO (see Note
10). The deferred finance costs associated with the IPO will be netted against
equity when the proceeds are received.
RECLASSIFICATION
Certain June 30, 1994 balances for Dunkirk have been reclassified to conform
to the current presentation.
PENDING ACCOUNTING PRONOUNCEMENT
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" proscribes new rules for recognizing
impairments to property, plant and equipment. The standard is effective for the
Company no later than fiscal 1997. Assuming the Company can generate sufficient
revenue to achieve profitability and/or obtain additional financing, management
believes this standard would have no impact on the Company.
4. DEBT
Long-term debt consists of the following obligations as of June 30, 1995:
<TABLE>
<S> <C>
Dunkirk -- Chautauqua Region Industrial Development Corporation
(CRIDA) mortgage note (collateralized by a mortgage on real property
having a carrying value of approximately $1,135,000 at June 30, 1995)
payable in monthly installments of $4,285 including interest at a
variable rate (6% at June 30, 1995) through October 1, 2004.......... $ 366,762
Dunkirk -- Term loans with a bank payable in 84 monthly installments
of $40,944 including principal and interest at the prime rate (9% at
June 30, 1995) through December 27, 2001. Collateral for this loan is
a first purchase money lien on the Company's machinery and equipment,
and repayment is guaranteed by the former Dunkirk president and the
New York State Job Development Authority (JDA) (See Note 10)......... 2,492,767
Dunkirk -- Subordinated mortgage note (collateralized by a mortgage on
real property having a carrying value of approximately $1,135,000 at
June 30, 1995) payable in monthly installments of $4,956 including
interest at 10% through January 21, 2004............................. 343,806
</TABLE>
F-12
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
4. DEBT (CONTINUED)
<TABLE>
<S> <C>
Dunkirk -- Chautauqua County Industrial Development Agency (CCIDA)
subordinated note payable in monthly payments of $1,485 including
interest at 7% through June 1, 1999. The note contains various
restrictive covenants, is guaranteed by the former Dunkirk president
and is collateralized by a subordinated security interest in certain
machinery and equipment having a carrying value of approximately
$6,722,000 (See Note 10)............................................. 64,245
Dunkirk -- Southern Tier Enterprise Development Organization (STEDO)
subordinated note payable in monthly payments of $1,169 including
interest at 8% through July 1, 2002. The note contains various
restrictive covenants, is guaranteed by the former Dunkirk president
and is collateralized by a subordinated security interest in certain
equipment having a carrying value of approximately $6,722,000 (See
Note 10)............................................................. 68,816
Dunkirk -- New York Job Development Authority (Al Tech) subordinated
note payable in monthly payments of $1,887 including interest at 5%
through September 1, 1999. The note contains various restrictive
covenants, is guaranteed by the former Dunkirk president and is
collateralized by a subordinated security interest in certain
equipment having a carrying value of approximately $6,722,000 (See
Note 10)............................................................. 86,543
Dunkirk -- Chautauqua County Industrial Development Agency solid waste
disposal facility bonds payable in quarterly payments of interest
only through September 1, 1998 at a rate of 11.5% subject to
adjustment upon the achievement of stated debt service coverage
ratio. Beginning December 1, 1998 and annually through December 1,
2010 principal payments which increase from $203,125 to $640,625 are
payable with interest continuing to be paid quarterly. The bond
security agreement contains various restrictive covenants and the
bonds are collateralized by a security interest in the equipment
acquired with the proceeds (see Note 6, Restricted Assets and Note
10, Subsequent Events)............................................... 5,000,000
Dunkirk -- Subordinated unsecured debt from various electronic
companies; OI-NEG TV Products, Inc. (Techneglas), Thomson Consumer
Electronics, Sanyo Manufacturing Corp., Toshiba Display Devices and
Hitachi Electronic Devices (USA), begin with quarterly payments of
interest only at prime plus 2% (11% at June 30, 1995) through a range
of dates ending January 1, 1999. Beginning between March 31, 1998 and
April 1, 1999 and going through a range of dates ending January 1,
2004 quarterly installments of principal plus interest at prime plus
2% are payable. The first five quarterly interest payments for a
portion of the debt has been converted by the Company into
subordinated notes ($43,789 converted at June 30, 1995) payable in
quarterly payments of interest only at 8% for nineteen quarters and
the principal amount plus interest being due between April 1, 1999
through April 1, 2000................................................ 639,030
-----------
Total debt............................................................ 9,061,969
Less current maturities............................................... 404,387
-----------
$ 8,657,582
-----------
-----------
</TABLE>
F-13
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
4. DEBT (CONTINUED)
Maturities on long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
June 30:
<S> <C>
1996............................................................ $ 404,387
1997............................................................ 412,110
1998............................................................ 482,598
1999............................................................ 880,596
2000............................................................ 948,333
Thereafter...................................................... 5,933,945
---------
$9,061,969
---------
---------
</TABLE>
5. NOTES PAYABLE
In August 1994, Conversion Technologies International, Inc. repaid $205,000
of promissory notes from a related party, which bore interest at 10% per annum.
Dunkirk has a $300,000 line of credit with a bank. At June 30, 1995 and
March 31, 1996, Dunkirk had borrowed $262,500 and 252,500, respectively, against
this line. The line of credit is limited to a percentage of acceptable accounts
receivable. Interest is payable monthly at a bank-determined variable base rate
plus 2.5% (11.5% at June 30, 1995). The note payable is collateralized by
accounts receivable, a first priority lien on all finished manufactured products
and is guaranteed by the former Dunkirk president (see Note 10).
Dunkirk has a $124,000 demand note payable to a bank (collateralized by the
former Dunkirk president's certificate of deposit having a carrying value of
$130,000 at June 30, 1995 and March 31, 1996 -- see Note 10). Interest accrues
and is due monthly at a variable base rate determined by the bank plus 1% (10%
at June 30, 1995).
6. RESTRICTED ASSETS
Dunkirk has $78,772 and $585 of project funds available at June 30, 1995 and
March 31, 1996, respectively, for the acquisition of qualified machinery and
equipment from the unexpended balance on the sale of the solid waste disposal
facility bonds. In addition, a debt service reserve fund equivalent to 10% of
the bonds plus interest is required to be deposited in escrow ($508,291 at June
30, 1995 and $833,671 at March 31, 1996) (see Note 10), and may be released
under certain conditions. In anticipation of the Company's IPO, $230,000 of
interest due at December 1, 1995 and again at March 1, 1996 on the Dunkirk
Chautaqua County Industrial Development Agency solid waste disposal facility
bonds, a total of $460,000, was paid from the debt service reserve fund and must
be restored from the proceeds of the offering. As a result of these interest
payments, the actual debt service reserve fund balance at March 31, 1996 was
reduced to $373,671.
Dunkirk also has a debt service reserve fund, including interest, of
$406,845 at June 30, 1995 and $422,855 at March 31, 1996, deposited in escrow as
required by the JDA for payment of the final installments due on the related
debt.
F-14
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
7. LEASES
The Company has entered into capital leases for machinery and equipment that
may be purchased on expiration of the leases on various dates through 2000. The
net asset value of property under capitalized leases at June 30, 1995, included
in property, plant and equipment, is as follows:
<TABLE>
<S> <C>
Machinery and equipment................................... $ 351,224
Less accumulated amortization............................. 116,844
---------
$ 234,380
---------
---------
</TABLE>
Lease amortization of the Company of $80,424 for the year ended June 30,
1995, and lease amortization of Dunkirk of $24,006 for the year ended June 30,
1994 and $12,414 for the two months ended August 31, 1994 is included in cost of
goods sold.
Future minimum lease payments under capitalized leases together with the
present value of the net minimum lease payments as of June 30, 1995 is as
follows:
<TABLE>
<CAPTION>
June 30:
<S> <C>
1996.................................................... $ 114,979
1997.................................................... 84,051
1998.................................................... 40,533
1999.................................................... 27,179
2000.................................................... 15,878
---------
Total minimum lease payments.............................. 282,620
Less amount representing interest......................... 41,263
---------
Present value of net minimum lease payments............... $ 241,357
---------
---------
</TABLE>
Total rent expense of the Company for the periods ended June 30, 1994 and
1995 was $4,285 and $28,396, respectively. All non-cancellable operating lease
agreements expire during fiscal 1996.
8. CAPITAL STOCK
During fiscal 1995, the Company issued 2,958,000 shares of Series A
Preferred Stock, par value $.001, at $2.50 per share through private equity
placements. The Series A Preferred Stock was convertible into the Company's
common stock on a one for one basis subject to certain anti-dilution provisions.
These shares are now convertible on an approximate 0.1218-to-one basis
concurrent with the Company's reverse common stock split (see Note 10). In the
event of involuntary or voluntary liquidation, the holders of Series A Preferred
Stock are entitled to receive a liquidation preference out of the assets of the
Company legally available for distribution. The liquidation preference is equal
to the original issuance price per share plus any declared and unpaid dividends
thereon. Dividends are payable at the annual rate of 5% of the original issuance
price per share of Series A Preferred Stock, on a non-cumulative basis as, when,
and if declared by the Board of Directors. The Company does not intend to
declare dividends in the foreseeable future. At any time after June 1, 1998,
upon not less than thirty days nor more than sixty days written notice, the
Company may, at its option, redeem the Series A Preferred Stock, in whole, at an
amount per share equal to $2.50 plus any declared and unpaid dividends. Each
share of Series A Preferred Stock entitles the holder to votes equal to the
number of shares of common stock into which such shares are then convertible.
However, the affirmative votes of the holders of at least 60% of the Series A
Preferred Stock is required for certain transactions as outlined in the Restated
Certificate of Incorporation. (See Note 10.)
F-15
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
8. CAPITAL STOCK (CONTINUED)
As part of the merger transaction described in Note 2, the Company's 7%,
$600,000 convertible bridge notes, issued in fiscal 1994 to related parties,
were converted into the Company's common stock (at $13.55 per share). All
related deferred finance charges were charged to equity upon the conversion.
In conjunction with the issuance of the Company's 7%, $600,000 convertible
bridge notes in fiscal 1994, the private equity placement, as well as for other
business reasons, the Company has issued the following common stock and Series A
Preferred Stock purchase warrants, all of which expire between the fifth and
seventh anniversary of the date of grant:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------
COMMON PREFERRED
----------- -----------
<S> <C> <C>
Outstanding at March 1, 1994
Granted April 21, 1994 at $13.55 per share......................... 51,598
-----------
Outstanding at June 30, 1994......................................... 51,598
Granted October 19, 1994 through June 30, 1995 at $20.53 to $24.63
per common share and $2.75 to $3.00 per preferred share........... 6,796 481,000
Exercised at $20.53 per share........................................ (608)
Cancelled.......................................................... (2,315)
----------- -----------
Outstanding at June 30, 1995......................................... 55,471 481,000
----------- -----------
----------- -----------
</TABLE>
The amounts above do not consider the potential impact of anti-dilution
provisions to which the Series A Preferred Stock warrants and certain common
stock warrants are subject to (see Note 10).
In June 1994, the Company adopted an Employee Stock Option Plan (the
"Employee Plan") and a Non-Employee Director Stock Option Plan (the
"Non-Employee Plan"). Stock options may be granted at the discretion of the
Board of Directors. The Company has reserved 79,170 and 24,360 shares of its
common stock for issuance upon the exercise of options granted under the
Employee and Non-Employee Plans, respectively (see Note 10). The Non-Employee
Plan options are exercisable in full one year after the date of grant and expire
ten years from the date of grant. The Employee Plan options primarily vest
one-third on each of the first three anniversaries of the date of grant and
expire on the seventh anniversary of the date of grant. The Company grants stock
options at exercise prices equal to or greater than the fair market value of the
Company's Common Stock on the date of grant.
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
8. CAPITAL STOCK (CONTINUED)
The following table summarizes the activity in options under the Employee
and Non-Employee Plans:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
----------- --------------
<S> <C> <C>
EMPLOYEE PLAN OPTIONS
Outstanding at March 1, 1994.................................... --
Granted....................................................... 3,896 $ 13.55
----------- --------------
Outstanding at June 30, 1994.................................... 3,896 13.55
Granted....................................................... 39,630 13.55-20.53
Cancelled..................................................... (5,443) 20.53
----------- --------------
Outstanding at June 30, 1995.................................... 38,083 $ 13.55-20.53
----------- --------------
----------- --------------
NON-EMPLOYEE PLAN OPTIONS
Outstanding at March 1, 1994.................................... --
Granted....................................................... 1,397 $ 13.55
----------- --------------
Outstanding at June 30, 1994.................................... 1,397 13.55
Granted....................................................... 4,869 20.53
----------- --------------
Outstanding at June 30, 1995.................................... 6,266 $ 13.55-20.53
----------- --------------
----------- --------------
</TABLE>
9. INCOME TAXES
There was no income tax expense/benefit for the Company for the period from
March 1, 1994 (date operations commenced) to June 30, 1994 and the year ended
June 30, 1995, nor was there any tax expense/ benefit for Dunkirk for the year
ended June 30, 1994 and the two months ended August 31, 1994.
Following is a reconciliation of income tax expense (credit) to the amount
based on the U.S. statutory rate of 34%:
<TABLE>
<CAPTION>
COMPANY
------------------------------
PREDECESSOR COMPANY PERIOD FROM
-------------------------- MARCH 1, 1994
TWO MONTHS (DATE
ENDED OPERATIONS
YEAR ENDED AUGUST 31, COMMENCED) TO YEAR ENDED
JUNE 30, 1994 1994 JUNE 30, 1994 JUNE 30, 1995
------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Income tax benefit based on U.S. statutory
rate................................................. $ (514,592) $ (251,065) $ (126,281) $ (4,166,599)
Write-off of in-process technologies with no tax
deduction............................................ 2,119,036
Losses which provide no current tax benefit........... 514,592 251,065 126,281 2,047,563
------------- ----------- --------------- -------------
$ -- $ -- $ -- $ --
------------- ----------- --------------- -------------
------------- ----------- --------------- -------------
</TABLE>
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows
at June 30, 1995:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue...................................... $ 377,692
Reserve for disposal.................................. 544,000
Start-up costs........................................ 114,667
Tax loss carryforward................................. 2,351,232
----------
Total deferred tax assets 3,387,591
Valuation allowance..................................... (3,387,591)
----------
Net deferred tax assets $ --
----------
----------
</TABLE>
The above net deferred tax asset has been reserved because it is not more
likely than not that it would be recognized.
At June 30, 1995, the Company has approximately $5.8 million of tax loss
carryforwards (including approximately $1.5 million generated by Dunkirk prior
to August 31, 1994) available to offset future taxable income, which expire
between 2006 and 2010. The Tax Reform Act of 1986 enacted a complex set of rules
limiting the potential utilization of net operating loss carryfowards in periods
following a corporate "ownership change." In general, for federal income tax
purposes, an ownership change is deemed to occur if the percentage of stock of a
loss corporation owned (actually, constructively and, in some cases, deemed) by
one or more "5% shareholders" has increased by more than 50 percentage points
over the lowest percentage of such stock owned during a three year testing
period. Subsequent to August 31, 1994, such a change in ownership has occurred.
As a result of the change, the Company's ability to utilize its net operating
loss carryforwards generated by Dunkirk prior to August 31, 1994 (approximately
$1.5 million) will be limited.
10. SUBSEQUENT EVENTS
On July 26, 1995, the Company issued an additional $3,000,000 (resulting in
total borrowings of $8,000,000) of Chautauqua County Industrial Development
Agency solid waste disposal facility bonds with terms similar to the bonds
included in Note 4. The annual principal payments (on the total debt of
$8,000,000) which begin on December 1, 1998 and end on December 1, 2010 increase
from $325,000 in 1998 to $1,025,000 in 2010. The proceeds will and have been
used for the purchase and installation of equipment at the Company's Dunkirk
facility.
From the period commencing September 1995 and ending November 1995, the
Company issued $700,000 of 6% convertible promissory notes, in anticipation of
additional equity financing, of which $50,000 has been paid to date (see below).
From the period commencing December 7, 1995 and ending December 15, 1995,
the Company obtained additional bridge financing ("bridge loan") in the
principal amount of $2,225,000, (recorded, net of the value assigned to the
attached warrants, at $2,158,250) which includes the conversion of $650,000 of
the $700,000 convertible promissory notes discussed above. The bridge loan was
issued through a private placement arranged by the underwriter of the Company's
proposed initial public offering ("IPO") (see below). This bridge loan is
comprised of bridge units, each consisting of a bridge note in the principal
amount of $50,000 bearing interest at the rate of 10% per annum, and warrants to
purchase 25,000 shares of the Company's common stock at an exercise price of
$4.00 per share commencing one year from the date of issuance and expiring three
years after the initial closing date of the bridge loan offering. However, upon
the completion of the Company's IPO, the related bridge warrants will be
converted into the equivalent amount of Class A warrants, which will be
registered in the Company's IPO.
F-18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR MARCH 31, 1995 AND 1996 ARE UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
In March 1996, the Company issued $200,000 of promissory notes, due upon the
earlier of the closing of the IPO and six months from the date issued, to
certain directors, officers and securityholders which bear interest at 10% per
annum. In May 1996, the Company issued an additional $200,000 of promissory
notes to a securityholder with identical terms to the notes issued in March
1996.
On October 2, 1995, the Board of Directors approved a letter of intent
relating to an initial public offering of the Company's common stock, Class A
warrants and Class B warrants. Upon the closing of the offering, the Series A
Preferred Stock will be converted into 1,023,054 shares of common stock as a
result of the restatement of the Company's Certificate of Incorporation which
will adjust the Series A Preferred Stock conversion ratio due to anti-dilution
provisions and the reverse split of the Company's common stock (see below). In
addition, preferred stock warrants will become exercisable for common stock
(adjusted for a 0.1218-for-one reverse common stock split -- see below) and the
number of common shares into which certain common stock warrants and all
preferred stock warrants are convertible, will increase by a factor of
approximately 2.84 upon the effective date of the IPO due to the fact that those
warrants have protection against the dilutive effect of the valuation placed on
the Company upon the IPO. In connection with the IPO, 740,559 shares of the
Company's common stock and options to purchase 71,923 shares of Common Stock
(the "Escrow Securities") will be deposited into escrow by the holders thereof.
The Escrow Securities will only be released from escrow when the Company attains
certain earnings levels or the market price of the Company's common stock
achieves certain levels. These Escrow Securities are subject to cancellation if
such conditions are not achieved.
On November 9, 1995, the Board of Directors approved an approximate
0.1218-for-one reverse split of its common stock. The accompanying consolidated
financial statements have been retroactively restated to reflect this reverse
stock split.
On November 9, 1995, the Board of Directors approved an amendment to the
1994 Employee Stock Option Plan and Non-Employee Director Stock Option Plan,
effective upon the closing of the IPO, so as to increase the number of shares of
common stock available thereunder to 440,000 and 70,400 shares, respectively.
The Company will also, upon the effective date of the IPO, adjust the exercise
price of all the options and warrants outstanding prior to the IPO to $4.40 with
certain warrants having an exercise price equal to $4.40 plus a premium in
certain circumstances.
In December 1995, the Company agreed to indemnify and hold harmless the
former Dunkirk president with respect to guarantees made by him for obligations
of Dunkirk. In addition, the Company agreed to use its reasonable efforts to
cause the release of such guarantees following the IPO.
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct the improved abrasives finishing area, which is part of the Company's
current capital expansion program. The contractor commenced work in April 1995,
but was asked to stop work in November 1995 following significant cost overruns,
problems and delays in construction and disputes with the Company over the scope
of the work to be performed by the contractor. Each of the Company and the
contractor have filed and served a summons with notice. The contractor claims
damages of approximately $425,000. The Company has served the contractor with
its complaint, alleging, among other things, breach of contract, fraud and
defamation, and seeks damages in excess of $1,000,000. Until such time as the
contractor serves the Company with its answer, the precise counterclaims of the
contractor cannot be ascertained. The Company has engaged an engineering firm to
review the contractor's work and oversee completion of the abrasives finishing
area.
The Company does not believe that an adverse outcome in the foregoing
dispute would have a material adverse effect on the Company.
F-19
<PAGE>
DESCRIPTION OF PHOTOGRAPHS
Inside back cover:
Photographs depicting CRT glass recycling process, including a photograph of
each of the following: (i) the primary cullet sorting line at the Dunkirk
facility; (ii) the CRT glass cullet sorting line; and (iii) sorted "clean"
cullet.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN CONTAINED IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Dividend Policy................................ 17
Use of Proceeds................................ 17
Capitalization................................. 20
Dilution....................................... 21
Unaudited Pro Forma Consolidated Financial
Data.......................................... 22
Selected Financial Data........................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business....................................... 31
Management..................................... 48
Certain Transactions........................... 57
Principal Stockholders......................... 61
Concurrent Offering............................ 64
Description of Securities...................... 65
Shares Eligible for Future Sale................ 68
Underwriting................................... 69
Legal Matters.................................. 71
Experts........................................ 71
Additional Information......................... 72
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
CONVERSION
TECHNOLOGIES
INTERNATIONAL, INC.
3,067,000 SHARES OF COMMON STOCK,
3,067,000 REDEEMABLE CLASS A
WARRANTS AND
3,067,000 REDEEMABLE CLASS B
WARRANTS
---------------------
PROSPECTUS
---------------------
D. H. BLAIR INVESTMENT
BANKING CORP.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Alternate Prospectus Page
SUBJECT TO COMPLETION, DATED MAY 10, 1996
PROSPECTUS
1,112,500 REDEEMABLE CLASS A WARRANTS,
1,112,500 SHARES OF COMMON STOCK AND
1,112,500 REDEEMABLE CLASS B WARRANTS ISSUABLE UPON EXERCISE OF THE
REDEEMABLE CLASS A WARRANTS AND 1,112,500 SHARES OF
COMMON STOCK ISSUABLE UPON EXERCISE OF THE CLASS B WARRANTS
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
This Prospectus relates to 1,112,500 Redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Conversion
Technologies International, Inc., a Delaware corporation (the "Company"), held
by certain holders (the "Selling Securityholders"), the 1,112,500 shares of
Common Stock, $.00025 par value ("Common Stock"), and 1,112,500 Redeemable Class
B Warrants ("Class B Warrants") issuable upon the exercise of the Selling
Securityholder Warrants. The Selling Securityholder Warrants and the Class B
Warrants are referred to herein collectively as the "Warrants" and the
securities issuable upon exercise of the Selling Securityholder Warrants,
together with the Selling Securityholder Warrants, are sometimes collectively
referred to herein as the "Selling Securityholder Securities." The Selling
Securityholder Warrants were issued to the Selling Securityholders in exchange
for warrants they received in a private placement by the Company in December
1995 (the "Bridge Financing"). See "Selling Securityholders" and "Plan of
Distribution." Each Selling Securityholder Warrant entitles the holder to
purchase, at an exercise price of $5.85, subject to adjustment, one share of
Common Stock and one Class B Warrant, and each Class B Warrant entitles the
holder to purchase, at an exercise price of $7.80, subject to adjustment, one
share of Common Stock. The Warrants are exercisable at any time after issuance
through the fifth anniversary of the date of this Prospectus, provided that the
Selling Securityholders have agreed not to exercise the Selling Securityholder
Warrants for a period of one year from the closing of the Offering and not to
sell the Selling Securityholder Warrants for at least 90 days after the closing
of the Offering and, for the period expiring 270 days after such closing, have
agreed to certain resale restrictions. Commencing one year from the date hereof
the Warrants are subject to redemption by the Company at a redemption price of
$.05 per Warrant, upon 30 days' written notice, provided that the average
closing bid price of the Common Stock averages in excess of $8.20 per share with
respect to the Class A Warrants and $10.95 per share with respect to the Class B
Warrants (subject to adjustment in each case) for 30 consecutive business days
ending within 15 days of the date of the notice of redemption. See "Description
of Securities."
The securities offered by the Selling Securityholders by this Prospectus may
be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants, Common Stock and the
Class B Warrants offered hereby by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary brokers' transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders.
The Selling Securityholders, and intermediaries through whom such securities
are sold, may be deemed underwriters within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered,
and any profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities under the Securities Act.
The Company will not receive any of the proceeds from the sale of securities
by the Selling Securityholders. In the event the Selling Securityholder Warrants
are exercised, the Company will receive gross proceeds of $ . See "Selling
Securityholders" and "Plan of Distribution."
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
(the "Offering") of 3,067,000 shares of Common Stock, 3,067,000 Class A Warrants
and 3,067,000 Class B Warrants, was declared effective by the Securities and
Exchange Commission (the "Commission"). The Company will receive approximately
$ in net proceeds from the Offering (assuming no exercise of the
Underwriter's over-allotment option) after payment of underwriting discounts and
commissions and estimated expenses of the Offering.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK, WHICH MAY
RESULT IN THE LOSS OF AN INVESTOR'S ENTIRE INVESTMENT.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL
OFFENSE.
-------------
The date of this Prospectus is , 1996
A-1
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of up to 1,112,500 Class A Warrants, 1,112,500 shares of Common
Stock and 1,112,500 Class B Warrants issuable upon exercise of such Class A
Warrants and 1,112,500 shares of Common Stock issuable upon exercise of such
Class B Warrants may be offered for resale by investors who received their Class
A Warrants in exchange for warrants received in the Bridge Financing.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. The Company will not receive
any of the proceeds from the sale of such securities. There are no material
relationships between any Selling Securityholder and the Company except that TFP
III, TFVP V and Palmetto Partners, Ltd., stockholders of the Company, are
Selling Securityholders. In addition, the Aries Domestic Fund L.P. and the Aries
Trust, two investment funds in which Lindsay Rosenwald, the President and
Chairman of Paramount, the Company's placement agent for the Series A Placement,
is the sole stockholder and President of the general partner and investment
manager, respectively, are Selling Securityholders. Dr. Rosenwald's wife and
children are limited partners of VentureTek L.P., a principal stockholder of the
Company, and his children are the beneficiaries of the Long Term Equity Holdings
Trust, also a principal stockholder. Further, Dr. Rosenwald's wife is a
stockholder of Blair & Co. and is the daughter of the indirect sole stockholder
of the Underwriter of the Offering. See "Certain Transactions."
<TABLE>
<CAPTION>
NUMBER OF CLASS A WARRANTS BENEFICIALLY
SELLING SECURITYHOLDERS OWNED AND MAXIMUM NUMBER TO BE SOLD(1)
- ------------------------------------------------------------ ----------------------------------------
<S> <C>
Palmetto Partners, Ltd...................................... 100,000
Technology Funding Venture Partners V....................... 93,750
Aries Domestic Fund, LP..................................... 62,500
David James Brown........................................... 50,000
Daniel and Pherron Mulhaney................................. 50,000
Aries Trust................................................. 37,500
Michael Cantor.............................................. 37,500
Technology Funding Partners III, L.P........................ 31,250
Nathan and Rose Eisen....................................... 25,000
Herbert M. Gardner.......................................... 25,000
Robert Klein and Myriam Gluck............................... 25,000
William G. and Patricia B. Hylind........................... 25,000
Roger N. Keesee............................................. 25,000
Raymond Chattwell King...................................... 25,000
Gary L. Prior............................................... 25,000
Matthew C. Schilowitz....................................... 25,000
Gershon Stern............................................... 25,000
W. Ed and Vickie S. Tyler................................... 25,000
Louis Wolcowitz............................................. 25,000
Aaron Wolfson............................................... 25,000
Abraham Wolfson............................................. 25,000
Mark H. Brafman............................................. 12,500
Leonard J. Adams............................................ 12,500
Jacob and Channah Borenstein................................ 12,500
Kenneth and Sherry Cohen.................................... 12,500
Future Vision Wireless Cable, Inc........................... 12,500
Josef Geldwert.............................................. 12,500
Stuart Gruber............................................... 12,500
The Holding Company......................................... 12,500
Louis and Irene Katz........................................ 12,500
Jay Kestenbaum.............................................. 12,500
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A WARRANTS BENEFICIALLY
SELLING SECURITYHOLDERS OWNED AND MAXIMUM NUMBER TO BE SOLD(1)
- ------------------------------------------------------------ ----------------------------------------
Solomon Kurz................................................ 12,500
<S> <C>
Benjamin Lehrer............................................. 12,500
Albert Milstein............................................. 12,500
George Y. and Irene M. Montonaga............................ 12,500
Michael Pizitz.............................................. 12,500
Richard Pizitz.............................................. 12,500
RL Capital Partners......................................... 12,500
Wayne Saker................................................. 12,500
E. Donald Shapiro........................................... 12,500
Sheldon Silver.............................................. 12,500
Gary J. Strauss............................................. 12,500
Paul N. Temple.............................................. 12,500
Vetchfield Company Limited.................................. 12,500
J. Michael Wolfe............................................ 12,500
Marc Roberts and Ron Cantor................................. 6,250
Eugene Silverman............................................ 6,250
</TABLE>
- ------------------------
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants and issuable upon exercise of the Class B Warrants issuable upon
exercise of the Class A Warrants. The Selling Securityholders have agreed
not to exercise the Class A Warrants being offered hereby for a period of
one year from the closing of the Offering. None of the Selling
Securityholders beneficially own in excess of 1% of the outstanding shares
of Common Stock after the Offering.
PLAN OF DISTRIBUTION
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, through the writing of options on the securities,
a combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale or
at negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
Each Selling Securityholder has agreed with the Company (i) not to sell,
transfer or otherwise dispose publicly the Selling Securityholder Warrants
except after the time periods and in the percentage amounts set forth below, on
a cumulative basis, and (ii) not to exercise the Selling Securityholder Warrants
for a period of one year after the closing of this offering. Purchasers of the
Selling Securityholder Warrants will not be subject to such restrictions.
<TABLE>
<CAPTION>
PERCENTAGE ELIGIBLE
LOCK UP PERIOD FOR RESALE
- ----------------------------------------------------------------- ---------------------
<S> <C>
Before 90 days after Closing..................................... 0%
Between 91 and 150 days.......................................... 25%
Between 151 and 210 days......................................... 50%
Between 211 and 270 days......................................... 75%
After 270 days................................................... 100%
</TABLE>
A-3
<PAGE>
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended ("Exchange Act"), any person engaged in the distribution of the
Selling Securityholder Warrants may not simultaneously engage in market making
activities with respect to any securities of the Company during the applicable
"cooling off" period (at least two, and possibly nine, business days) prior to
the commencement of such distribution. Accordingly, in the event that the
Underwriter of the Company's initial public offering or D.H. Blair & Co. Inc.
("Blair") is engaged in a distribution of the Selling Securityholder Warrants,
neither of such firms will be able to make a market in the Company's securities
during the applicable restrictive period. However, neither the Underwriter nor
Blair has agreed to nor are either of them obliged to act as broker/ dealer in
the sale of the Selling Securityholder Warrants and the Selling Securityholders
may be required, and in the event Blair is a market maker, will likely be
required, to sell such securities through another broker/dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6 and 10b-7, which
provisions may limit the timing of the purchases and sales of shares of the
Company's securities by such Selling Securityholders.
The Selling Securityholders and broker/dealers, if any, acting in connection
with such sale might be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act and any commissions received by them and any profit
on the resale of the securities might be deemed to be underwriting discounts and
commissions under the Securities Act.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 3,067,000 shares of Common Stock, 3,067,000 Class A Warrants and
3,067,000 Class B Warrants by the Company and up to 460,050 additional shares of
Common Stock and/or 460,050 Class A Warrants and/or 460,050 Class B Warrants to
cover over-allotments, if any.
A-4
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN CONTAINED IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................
Risk Factors...................................
Dividend Policy................................
Capitalization.................................
Dilution.......................................
Selected Financial Data........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business.......................................
Management.....................................
Certain Transactions...........................
Principal Stockholders.........................
Selling Securityholders........................ A-2
Plan of Distribution........................... A-3
Concurrent Public Offering..................... A-4
Description of Securities......................
Shares Eligible for Future Sale................
Legal Matters..................................
Experts........................................
Additional Information.........................
Index to Financial Statements.................. F-1
</TABLE>
------------------------
CONVERSION
TECHNOLOGIES
INTERNATIONAL, INC.
1,112,500 REDEEMABLE CLASS A
WARRANTS,
1,112,500 REDEEMABLE CLASS B
WARRANTS
2,225,000 SHARES OF COMMON
STOCK
---------------------
PROSPECTUS
---------------------
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
A-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation and By-Laws of the Registrant
filed as Exhibits 3.1 and 3.2 hereto, provide that the Registrant shall
indemnify any person to the fullest extent permitted by the Delaware General
Corporation Law (the "GCL").
In accordance with Section 102(a)(7) of the GCL, the Restated Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
The Registrant also intends to enter into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.5
and reference is hereby made to such form.
Reference is made to Section 6 of the Underwriting Agreement (filed as
Exhibit 1.1) which provides for indemnification by the Underwriter of the
Registrant, its officers and directors.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
SEC Registration Fee............................................................ $ 40,100
NASD Filing Fee................................................................. 12,022
Nasdaq Listing Fee.............................................................. 10,000
Printing and Engraving Expenses................................................. 85,000
Accounting Fees and Expenses.................................................... 155,000
Legal Fees and Expenses......................................................... 255,000
Blue Sky Fees and Expenses...................................................... 50,000
Transfer and Warrant Agent's Fees and Expenses.................................. 10,000
Underwriter's Non-Accountable Expense Allowance................................. 414,045
Miscellaneous Expenses.......................................................... 35,878
------------
Total....................................................................... $ 1,067,045
------------
------------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities during the past
three years:
On January 31, 1994, the Registrant issued 24,360 shares of Common Stock at
a price of $.002 per share to one director.
On February 15, 1994, the Registrant issued 5,413 shares of Common Stock to
one director and executive officer at a price of $.002 per share.
On April 1, 1994, the Registrant issued 462,813 shares of Common Stock at a
price of $.002 per share to 36 accredited investors.
On April 11, 1994, the Registrant issued 66,230 shares of Common Stock at a
price of $.002 per share to one director.
On April 21, 1994, the Registrant granted warrants to purchase 7,307 shares
of Common Stock at a conversion price of $13.55 per share to one director and
three consultants. Such warrants have been amended to become warrants to
purchase 20,750 shares of Common Stock upon the effective date of the Offering
at an exercise price of $4.77 per share.
II-1
<PAGE>
On April 21, 1994, the Registrant granted warrants to purchase 44,291 shares
of Common Stock at a conversion price of $13.55 per share to four accredited
investors. Such warrants have been amended to become warrants to purchase
125,786 shares of Common Stock upon the effective date of the Offering at an
exercise price of $4.77 per share.
On June 8, 1994, the Registrant granted options to purchase 8,945 shares of
Common Stock at an exercise price of $13.55 per share to two employees, four
consultants and one director. Such options have been repriced to $4.40 per
share, effective upon the effective date of the Offering.
On June 8, 1994, the Registrant granted a warrant to purchase 2,656 shares
of Common Stock at an aggregate exercise price of $60,000 to a company as
payment for services rendered. Such warrants have been repriced to $4.84 per
share, effective upon the effective date of the Offering.
On June 9, 1994, the Registrant issued 27,194 shares of Common Stock at a
purchase price of $.002 per share to one director and executive officer.
On August 19, 1994, the Registrant issued 257,808 shares of Common Stock to
stockholders of its subsidiary pursuant to the acquisition of such subsidiary.
On August 19, 1994, the Registrant issued 13,281 shares of Common Stock upon
conversion of certain notes executed by its subsidiary in favor of one employee
and three accredited investors at a conversion price of $20.32 per share.
On August 19, 1994, the Registrant issued 45,304 shares of Common Stock upon
conversion of debt in the principal amount of $600,000 to two directors and two
accredited investors.
On August 19, 1994, the Registrant issued 1,600,000 shares of Series A
Convertible Preferred Stock to 23 accredited investors at a purchase price of
$2.50 per share. Such shares will automatically convert upon the effective date
of the Offering into 553,376 shares of Common Stock.
On October 14, 1994, the Registrant issued 4,872 shares of Common Stock upon
conversion of a note held by one accredited investor at a conversion price of
$20.53 per share.
On October 19, 1994, the Registrant granted options to purchase 730 shares
of Common Stock at an exercise price of $20.53 per share to one consultant. Such
options have been repriced to $4.40 per share, effective upon the effective date
of the Offering.
On October 19, 1994, the Registrant granted options to purchase 3,651 shares
of Common Stock at an exercise price of $20.53 per share to three directors.
Such options have been repriced to $4.40 per share, effective upon the effective
date of the Offering.
On October 19, 1994, the Registrant issued 1,521 shares of Common Stock to
one individual in settlement of a claim.
On December 27, 1994, the Registrant issued 120,000 shares of Series A
Convertible Preferred Stock to three accredited investors at a price of $2.50
per share. Such shares will automatically convert upon the effective date of the
Offering into 41,503 shares of Common Stock.
From January 1, 1995 through April 7, 1995, the Registrant issued 418,000
shares of Series A Convertible Preferred Stock to 21 accredited investors at a
price of $2.50 per share. Such shares will automatically convert upon the
effective date of the Offering into 144,570 shares of Common Stock.
On January 23, 1995, the Registrant granted options to purchase 29,506
shares of Common Stock at an exercise price of $20.53 per share to 57 employees
and two executive officers. Such options have been repriced to $4.40 per share,
effective upon the effective date of the Offering.
On January 23, 1995, the Registrant granted options to purchase 1,217 shares
of Common Stock at an exercise price of $20.53 per share and warrants to
purchase 2,923 shares of Common Stock at a purchase price of $20.53 per share to
one consultant. Such options have been repriced to $4.40 per share, effective
upon the effective date of the Offering.
II-2
<PAGE>
On February 13, 1995, the Registrant granted options to purchase 1,217
shares of Common Stock at an exercise price of $20.53 per share to one director.
Such options and warrants have been repriced to $4.40 per share, effective upon
the effective date of the Offering.
On March 7, 1995, the Registrant granted options to purchase 1,217 shares of
Common Stock at an exercise price of $20.53 per share to two employees and one
executive officer. Such options have been repriced to $4.40 per share, effective
upon the effective date of the Offering.
On April 20, 1995, the Registrant issued a warrant to purchase 1,217 shares
of Common Stock at an exercise price of $24.63 per share to one consultant. Such
warrant has been repriced to $5.28 per share, effective upon the effective date
of the Offering.
On May 1, 1995, the Registrant granted options to purchase 1,521 shares of
Common Stock at an exercise price of $20.53 per share to one employee and one
executive officer. Such options have been repriced to $4.40 per share, effective
upon the effective date of the Offering.
On May 5, 1995, the Registrant issued 820,000 shares of Series A Convertible
Preferred Stock to three accredited investors at a price of $2.50 per share.
Such shares will automatically convert upon the effective date of the Offering
into 283,605 shares of Common Stock.
On May 5, 1995, the Registrant issued warrants to purchase 200,000 shares of
Series A Convertible Preferred Stock at an exercise price of $3.00 per share to
one consultant. Such warrants have been amended and restated to become warrants
to purchase 69,177 shares of Common Stock at an exercise price of $5.28 per
share, effective upon the effective date of the Offering.
On May 5, 1995, the Registrant granted warrants to purchase 281,000 shares
of Series A Convertible Preferred Stock at a conversion price of $2.75 per share
to an accredited investor for services rendered as a placement agent. Such
warrants have been amended and restated to become warrants to purchase 97,185
shares of Common Stock at an exercise price of $4.84 per share, effective upon
the effective date of the Offering.
On May 8, 1995, the Registrant granted options to purchase 1,826 shares of
Common Stock at an exercise price of $20.53 per share to one employee. Such
options have been repriced to $4.40 per share, effective upon the effective date
of the Offering.
On August 1, 1995, the Registrant granted options to purchase 4,019 shares
of Common Stock at an exercise price of $20.53 per share to five employees,
executive officers and consultants. Such options have been repriced to $4.40 per
share, effective upon the effective date of the Offering.
On September 1, 1995, the Registrant granted options to purchase 7,308
shares of Common Stock at an exercise price of $20.53 per share to one executive
officer. Such options have been repriced to $4.40 per share, effective upon the
effective date of the Offering.
On September 19, 1995, the Registrant granted options to purchase 1,217
shares of Common Stock at an exercise price of $20.53 per share to one director.
Such options have been repriced to $4.40 per share, effective upon the effective
date of the Offering.
On September 19, 1995, the Registrant granted options to purchase 25,882
shares of Common Stock at an exercise price of $20.53 per share to three
employees and four executive officers. Such options have been repriced to $4.40
per share, effective upon the effective date of the Offering.
On October 12, 1995, the Registrant issued warrants to purchase 2,433 shares
of Common Stock at an exercise price of $20.53 per share to three distributors
of the Company's products. Such warrants have been repriced to $4.40 per share,
effective upon the effective date of the Offering.
On October 16, 1995, the Registrant granted options to purchase 1,217 shares
of Common Stock at an exercise price of $20.53 to one employee. Such options
have been repriced to $4.40 per share, effective upon the effective date of the
Offering.
II-3
<PAGE>
On April 21, 1996, the Registrant granted, efffective as of the effective
date of the Offering, options to purchase 50,000 shares of Common Stock at an
exercise price of $4.40 per share to an executive officer and director.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) only in
the case of options granted to employees, officers, directors and consultants,
Rule 701 under the Securities Act. In the case of private placements exempt
pursuant to Section 4(2), offers and sales were made only to accredited
investors; neither the Registrant nor any placement agent acting on its behalf
engaged in any form of general solicitation or advertising; and the Registrant
exercised reasonable care to assure that the purchasers of the Registrant's
securities were not underwriters within the meaning of Section 2(11) of the
Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization dated August 16, 1994, among the
Registrant, CTI Acquisition Corporation, Dunkirk International Glass and
Ceramics Corporation ("Dunkirk") and certain shareholders of Dunkirk listed
on the signature pages thereto
3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2 By-laws of the Registrant
4.1* Form of Warrant Agreement, including Form of Class A and Class B Warrant
Certificates
4.2 Form of Underwriter's Option
4.3 Term Note No. 2 dated as of January 27, 1995, in the principal amount of
$1,973,905 between Key Bank of New York and Dunkirk
4.4 Security Agreement dated as of January 27, 1995, between Key Bank of New
York and Dunkirk
4.5 Debt Service Reserve Agreement dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
4.6 Form of Escrow Agreement with respect to Escrow Shares
4.7* Form of Escrow Agreement with respect to Escrow Securities
5.1 Opinion of O'Sullivan Graev & Karabell, LLP
10.1 Conversion Technologies International, Inc. 1994 Employee Stock Option
Plan, As Amended
10.2 Conversion Technologies International, Inc. 1994 Stock Option Plan for
Non-Employee Directors, As Amended
10.3 Amended and Restated Employment Agreement dated as of June 9, 1994, between
the Registrant and Harvey Goldman
10.4 Employment Agreement dated as of September 1, 1995, between the Registrant
and Perry A. Pappas
10.5 Form of Indemnification Agreement
10.6 Lease dated as of March 1, 1995 between County of Chautauqua Industrial
Development Agency and Dunkirk
10.7** Sludge and Mixed Cullet Purchase Agreement dated January 1994, between
Toshiba Display Devices, Inc. and Dunkirk
10.8** Clean Cullet Sale Agreement dated as of August 27, 1993, between OI-Neg TV
Products, Inc. and Dunkirk
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.9** Raw Materials Purchase and Clean Cullet Sale Agreement dated November 4,
1993, between Thomson Consumer Electronics Inc. and Dunkirk
10.10 Project Development Assistance Agreement dated as of April 20, 1995,
between the Registrant and Paramount Capital, Inc.
10.11 Consulting Agreement dated as of May 5, 1995, among the Registrant,
Technology Funding Partners III, L.P. and Technology Funding Venture
Partners V, An Aggressive Growth Fund, L.P.
10.12 Project Development Assistance Agreement dated July 13, 1995, among the
Registrant, Technology Funding Partners III, L.P. and Technology Funding
Venture Partners V, An Aggressive Growth Fund, L.P.
10.13 Consulting Agreement dated March 1, 1995, between the Registrant and
Eckardt C. Beck
10.14 Consulting Agreement dated July 5, 1995, between the Registrant and
Palmetto Partners, Ltd.
10.15 Registration Rights Agreement dated as of May 5, 1995, among the
Registrant, Technology Funding Partners III, L.P. and Technology Funding
Venture Partners V, An Aggressive Growth Fund, L.P.
10.16 Registration Rights Agreement dated as of April 21, 1994, among the
Registrant, Palmetto Partners, Ltd., Harvey Goldman and Donald R. Kendall,
Jr.
10.17 Registration Rights Agreement dated as of August 19, 1994, among the
Registrant and certain former Dunkirk stockholders, including Gerald P.
Balcar and Robert Dejaiffe
10.18 Warrant for the Purchase of shares of Series A Convertible Preferred Stock
issued to Paramount Capital, Inc. by the Registrant
10.19 Research Agreement dated December 1994, between Dunkirk and Alfred
University
10.20 Note and Warrant Purchase Agreement dated as of April 21, 1994 among the
Registrant and each of the investors listed on Schedule I thereto
10.21 Series A Preferred Stock Purchase Agreement dated as of May 5, 1995, among
the Registrant, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.
10.22 Business Lease dated as of December 31, 1995, between the Registrant and
Bethany Road Associates
10.23 Purchase, Supply and Distributorship Agreement dated as of March 28, 1996,
among the Registrant, Dunkirk and Cytech Laboratories, Inc. ("Cytech")
10.24* Amendment to Purchase and Supply Agreement dated May 9, 1996, among the
Registrant, Dunkirk and VANGKOE Industries, Inc., assignee of Cytech
11.1* Statement of Computation of Net Loss Per Share
23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its
opinion filed as Exhibit 5.1 hereto)
23.2 Consent of Collier, Shannon, Rill & Scott
23.3* Consent of Ernst & Young LLP (included on page II-8)
24.1 Power of Attorney
</TABLE>
- ------------------------
*Filed herewith.
**Portions of the exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registrant's Application for
Confidential Treatment under Rule 406 under the Securities Act.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
(1)The undersigned Registrant hereby undertakes that it will:
(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii)
Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement, and
(iii)
Include any additional or changed material information on the
plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial BONA FIDE offering.
(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.
(2)The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(3)Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4)The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as of
the time it was declared effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has authorized this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Hazlet, State of New Jersey, on the 9th day of May, 1996.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: /s/ HARVEY GOLDMAN
-----------------------------------
Harvey Goldman
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement has been signed by or on behalf of the
following persons in the capacities stated on the 9th day of May, 1996.
<TABLE>
<C> <S>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
/s/ HARVEY GOLDMAN
------------------------------------------- Chairman of the Board, President, Chief Executive Officer
Harvey Goldman and Director (principal executive officer)
/s/ DAVID L. SANDERS*
------------------------------------------- Chief Accounting Officer (principal financial and
David L. Sanders accounting officer)
/s/ ECKARDT C. BECK*
------------------------------------------- Director
Eckardt C. Beck
/s/ NORMAN L. CHRISTENSEN, JR.*
------------------------------------------- Director
Norman L. Christensen, Jr.
/s/ PETER H. GARDNER*
------------------------------------------- Director
Peter H. Gardner
/s/ SCOTT A. KATZMANN*
------------------------------------------- Director
Scott A. Katzmann
------------------------------------------- Director
Alexander P. Haig
/s/ DONALD R. KENDALL, JR.*
------------------------------------------- Director
Donald R. Kendall, Jr.
------------------------------------------- Director
Irwin M. Rosenthal
*By: /s/ HARVEY GOLDMAN
---------------------------------------
Harvey Goldman
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 28, 1995, except for Note 10, as to which the
date is May 9, 1996, in Amendment No. 3 to the Registration Statement (Form SB-2
No. 33-80973) and related Prospectus of Conversion Technologies International,
Inc. for the registration of 3,067,000 shares of the Company's Common Stock,
3,067,000 Redeemable Class A Warrants and 3,067,000 Redeemable Class B Warrants.
ERNST & YOUNG LLP
MetroPark, New Jersey
May 9, 1996
II-8
<PAGE>
EXHIBIT INDEX
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EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NO.
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1.1* Form of Underwriting Agreement.................................................................
2.1 Agreement and Plan of Reorganization dated August 16, 1994, among the Registrant, CTI
Acquisition Corporation, Dunkirk International Glass and Ceramics Corporation ("Dunkirk") and
certain shareholders of Dunkirk listed on the signature pages thereto.........................
3.1 Amended and Restated Certificate of Incorporation of the Registrant............................
3.2 By-laws of the Registrant......................................................................
4.1* Form of Warrant Agreement, including Form of Class A and Class B Warrant Certificates..........
4.2 Form of Underwriter's Option...................................................................
4.3 Term Note No. 2 dated as of January 27, 1995, in the principal amount of $1,973,905 between Key
Bank of New York and Dunkirk..................................................................
4.4 Security Agreement dated as of January 27, 1995, between Key Bank of New York and Dunkirk......
4.5 Debt Service Reserve Agreement dated as of January 27, 1995, between Key Bank of New York and
Dunkirk.......................................................................................
4.6 Form of Escrow Agreement with respect to Escrow Shares.........................................
4.7* Form of Escrow Agreement with respect to Escrow Securities.....................................
5.1 Opinion of O'Sullivan Graev & Karabell, LLP....................................................
10.1 Conversion Technologies International, Inc. 1994 Employee Stock Option Plan, As Amended........
10.2 Conversion Technologies International, Inc. 1994 Stock Option Plan for Non-Employee Directors,
As Amended....................................................................................
10.3 Amended and Restated Employment Agreement dated as of June 9, 1994, between the Registrant and
Harvey Goldman................................................................................
10.4 Employment Agreement dated as of September 1, 1995, between the Registrant and Perry A.
Pappas........................................................................................
10.5 Form of Indemnification Agreement..............................................................
10.6 Lease dated as of March 1, 1995 between County of Chautauqua Industrial Development Agency and
Dunkirk.......................................................................................
10.7** Sludge and Mixed Cullet Purchase Agreement dated January 1994, between Toshiba Display Devices,
Inc. and Dunkirk..............................................................................
10.8** Clean Cullet Sale Agreement dated as of August 27, 1993, between OI-Neg TV Products, Inc. and
Dunkirk.......................................................................................
10.9** Raw Materials Purchase and Clean Cullet Sale Agreement dated November 4, 1993, between Thomson
Consumer Electronics Inc. and Dunkirk.........................................................
10.10 Project Development Assistance Agreement dated as of April 20, 1995, between the Registrant and
Paramount Capital, Inc........................................................................
10.11 Consulting Agreement dated as of May 5, 1995, among the Registrant, Technology Funding Partners
III, L.P. and Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P...........
10.12 Project Development Assistance Agreement dated July 13, 1995, among the Registrant, Technology
Funding Partners III, L.P. and Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.....................................................................................
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EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NO.
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10.13 Consulting Agreement dated March 1, 1995, between the Registrant and Eckardt C. Beck...........
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10.14 Consulting Agreement dated July 5, 1995, between the Registrant and Palmetto Partners, Ltd.....
10.15 Registration Rights Agreement dated as of May 5, 1995, among the Registrant, Technology Funding
Partners III, L.P. and Technology Funding Venture Partners V, An Aggressive Growth Fund,
L.P...........................................................................................
10.16 Registration Rights Agreement dated as of April 21, 1994, among the Registrant, Palmetto
Partners, Ltd., Harvey Goldman and Donald R. Kendall, Jr......................................
10.17 Registration Rights Agreement dated as of August 19, 1994, among the Registrant and certain
former Dunkirk stockholders, including Gerald P. Balcar and Robert Dejaiffe...................
10.18 Warrant for the Purchase of shares of Series A Convertible Preferred Stock issued to Paramount
Capital, Inc. by the Registrant...............................................................
10.19 Research Agreement dated December 1994, between Dunkirk and Alfred University..................
10.20 Note and Warrant Purchase Agreement dated as of April 21, 1994 among the Registrant and each of
the investors listed on Schedule I thereto....................................................
10.21 Series A Preferred Stock Purchase Agreement dated as of May 5, 1995, among the Registrant,
Technology Funding Partners III, L.P. and Technology Funding Venture Partners V, An Aggressive
Growth Fund, L.P..............................................................................
10.22 Business Lease dated as of December 31, 1995, between the Registrant and Bethany Road
Associates....................................................................................
10.23 Purchase, Supply and Distributorship Agreement dated as of March 28, 1996, among Registrant,
Dunkirk and Cytech Laboratories, Inc. ("Cytech")..............................................
10.24* Amendment to Purchase and Supply Agreement dated May 9, 1996, among the Registrant, Dunkirk and
VANGKOE Industries, Inc., assignee of Cytech..................................................
11.1* Statement of Computation of Net Loss Per Share.................................................
23.1 Consent of O'Sullivan Graev & Karabell, LLP (included as part of its opinion filed as Exhibit
5.1 hereto)...................................................................................
23.2 Consent of Collier, Shannon, Rill & Scott......................................................
23.3* Consent of Ernst & Young LLP (included on page II-8)...........................................
24.1 Power of Attorney..............................................................................
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*Filed herewith.
**Portions of the exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registrant's Application for
Confidential Treatment under Rule 406 under the Securities Act.
<PAGE>
EXHIBIT 1.1
3,067,000 Shares
3,067,000 Class A Warrants
3,067,000 Class B Warrants
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
UNDERWRITING AGREEMENT
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Conversion Technologies International, Inc., a Delaware corporation
(the "Company"), proposes to issue and sell to D.H. Blair Investment Banking
Corp. (the "Underwriter"), an aggregate of 3,067,000 shares of Common Stock of
the Company, par value $.00025 per share, ("Shares"), 3,067,000 redeemable Class
A warrants ("Class A Warrants") and 3,067,000 redeemable Class B warrants
("Class B Warrants"). Each Class A Warrant is exercisable to purchase one share
of Common Stock and one Class B Warrant at a price of $5.85 from May __, 1996 to
May __, 2001. Each Class B Warrant is exercisable to purchase one share of
Common Stock at a price of $7.80 from May __, 1996 to May __, 2001. The Class A
Warrants and Class B Warrants are collectively referred to as the "Warrants".
The Warrants are subject to redemption in certain instances commencing one year
from the date of this Agreement. In addition, the Company proposes to grant to
the Underwriter the option referred to in Section 2(b) to purchase all or any
part of an aggregate of 460,050 additional Shares, 460,050 additional Class A
Warrants and 460,050 additional Class B Warrants. Unless the context otherwise
indicates, the term "Shares" and "Warrants" shall include the 460,050 additional
Shares, the 460,050 additional Class A Warrants and the 460,050 additional Class
B Warrants referred to above.
The Common Stock of the Company is herein called the "Common Stock."
The Shares and Warrants and the shares of Common Stock and Warrants underlying
the Warrants (including the Shares and Warrants which the Underwriter has the
option to purchase) are herein collectively called the "Securities."
You have advised the Company that you desire to purchase the Shares
and Warrants. The Company confirms the agreements made by it with respect to
the purchase of the Shares and Warrants by you as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriter that:
<PAGE>
(a) A registration statement (File No. 33-80973) on Form SB-2
relating to the public offering of the Shares and Warrants, including a form of
prospectus subject to completion, copies of which have heretofore been delivered
to you, has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the Commission
under the Act and one or more amendments to such registration statement may have
been so filed. After the execution of this Agreement, the Company will file
with the Commission either (i) if such registration statement, as it may have
been amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Shares and Warrants that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b) under
the Act or (B) if the Company does not rely on Rule 434 under the Act a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under the Act and in the
case of either clause (i)(A) or (i)(B) of this sentence, as shall be provided to
and approved by you, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the Act,
an amendment to such registration statement, including a form of prospectus, a
copy of which amendment shall be furnished to and approved by you.
As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Shares and Warrants that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus identified
therein that such Term Sheet supplements; (B) if the Company does not rely on
Rule 434 under the Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act or (C) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to said
Rule 424(b), such term means the prospectus included in the Registration
Statement; except that if such registration statement or prospectus is amended
or such prospectus is supplemented after the effective date of such registration
statement and prior to the Option Closing Date (as hereinafter defined), the
terms "Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall include
the prospectus as so supplemented, or both, as the case may be; and the term
"Term Sheet" means any term sheet that satisfies the requirements of Rule 434
under the Act. Any reference to the "date" of a Prospectus that includes a Term
Sheet shall mean the date of such Term Sheet.
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(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on the
Closing Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and
(ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus on page 2 with respect to stabilization,
under the heading "Underwriting" and the identity of counsel to the Underwriter
under the heading "Legal Matters" constitute the only information furnished in
writing by or on behalf of the Underwriter for inclusion in the Registration
Statement and Prospectus, as the case may be.
(c) Each of the Company and Dunkirk International Glass and
Ceramics Corporation (the "Subsidiary") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially adversely affect the
Company's or the Subsidiary's business, properties or financial condition.
(d) The authorized, issued and outstanding capital stock of the
Company as of March 31, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Shares and Warrants, when issued and delivered pursuant
to this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable and free of preemptive rights of any security holder of the
Company. Neither the filing of the Registration Statement nor the offering or
sale of the Shares and Warrants as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
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The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the warrant agreement pursuant to which such Warrants are to be issued (the
"Warrant Agreement"). The shares of Common Stock issuable upon exercise of the
Warrants have been reserved for issuance upon the exercise of the Warrants and,
when issued in accordance with the terms of the Warrants and Warrant Agreement,
will be duly and validly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights and no personal liability will
attach to the ownership thereof. The Warrant Agreement has been duly authorized
and, when executed and delivered pursuant to this Agreement, will have been duly
executed and delivered and will constitute the valid and legally binding
obligation of the Company enforceable in accordance with its terms. The
Warrants and the Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Warrants contained in the Underwriter's Option (defined herein)
have been duly authorized and, when duly issued and delivered, such Warrants
will constitute valid and legally binding obligations of the Company enforceable
in accordance with their terms and entitled to the benefits provided by the
Underwriter's Option. The Shares included in the Underwriter's Option (and the
shares of Common Stock issuable upon exercise of such Warrants) when issued and
sold, will be duly authorized, validly issued, fully paid and non-assessable and
free of preemptive rights and no personal liability will attach to the ownership
thereof.
(f) This Agreement, the Underwriter's Option, the M/A Agreement
(defined herein) and the Escrow Agreement (defined herein) have been duly and
validly authorized, executed and delivered by the Company. The Company has full
power and lawful authority to authorize, issue and sell the Shares and Warrants
to be sold by it hereunder on the terms and conditions set forth herein, and no
consent, approval, authorization or other order of any governmental authority is
required in connection with such authorization, execution and delivery or with
the authorization, issue and sale of the Shares and Warrants or the
Underwriter's Option, except such as may be required under the Act or state
securities laws.
(g) Except as described in the Prospectus, neither the Company
or the Subsidiary is in violation, breach or default of or under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any of the property or assets of the Company or the Subsidiary pursuant to the
terms of any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or the Subsidiary is a party or by
which the Company or the Subsidiary may be bound or to which any of the property
or assets of the Company or the Subsidiary is subject, nor will such action
result in any violation of the provisions of the articles of incorporation or
the by-laws of the Company or the Subsidiary, as amended, or any statute or any
order, rule or regulation applicable
-4-
<PAGE>
to the Company or the Subsidiary of any court or of any regulatory authority or
other governmental body having jurisdiction over the Company or the Subsidiary.
(h) Subject to the qualifications stated in the Prospectus, each
of the Company and the Subsidiary has good and marketable title to all
properties and assets described in the Prospectus as owned by it, free and clear
of all liens, charges, encumbrances or restrictions, except such as are not
materially significant or important in relation to its business; all of the
material leases and subleases under which the Company or the Subsidiary is the
lessor or sublessor of properties or assets or under which the Company or the
Subsidiary holds properties or assets as lessee or sublessee as described in the
Prospectus are in full force and effect, and, except as described in the
Prospectus, neither the Company nor the Subsidiary is in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or the Subsidiary as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company or the Subsidiary to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and each of the Company and the
Subsidiary owns or leases all such properties described in the Prospectus as are
necessary to its operations as now conducted and, except as otherwise stated in
the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Ernst & Young LLP, who have given their reports on certain
financial statements filed with the Commission as a part of the Registration
Statement which are incorporated in the Prospectus, are with respect to the
Company independent public accountants as required by the Act and the Rules and
Regulations.
(j) The financial statements, together with related notes, set
forth in the Prospectus (or if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or the Registration Statement present fairly the
financial position and results of operations and changes in cash flow position
of the Company and the Subsidiary on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements and Schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved. The information set forth
under the captions "Dilution", "Capitalization", and "Selected Financial Data"
in the Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein. The pro forma financial information filed as part
of the Registration Statement or included in the Prospectus (or such Preliminary
Prospectus) has been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, and includes all
adjustments necessary to present fairly the pro forma financial condition and
results of operations at the respective dates and for the respective periods
indicated and all assumptions used in preparing such pro forma financial
statements are reasonable.
-5-
<PAGE>
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), neither the Company
nor the Subsidiary has incurred any liabilities or obligations, direct or
contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company or the Subsidiary, and there has not been any change in
the capital stock of, or any incurrence of short-term or long-term debt by, the
Company or the Subsidiary or any issuance of options, warrants or other rights
to purchase the capital stock of the Company or the Subsidiary or any material
adverse change or any development involving, so far as the Company can now
reasonably foresee a prospective material adverse change in the condition
(financial or other), net worth, results of operations, business, key personnel
or properties of it which would be material to the business or financial
condition of the Company or the Subsidiary and neither the Company nor the
Subsidiary has become a party to, and neither the business nor the property of
the Company or the Subsidiary has become the subject of, any material litigation
whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company or the Subsidiary is a party before or by any
court or governmental agency or body, which might result in any material adverse
change in the condition (financial or other), business prospects, net worth or
properties of the Company or the Subsidiary, nor are there any actions, suits or
proceedings against the Company or the Subsidiary related to environmental
matters or related to discrimination on the basis of age, sex, religion or race;
and except as set forth in the Prospectus, no labor disputes involving the
employees of the Company or the Subsidiary exist or are imminent which might be
expected to materially adversely affect the conduct of the business, property or
operations or the financial condition or results of operations of the Company or
the Subsidiary.
(m) Except as disclosed in the Prospectus, each of the Company
and the Subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been asserted or, to the knowledge of the Company,
threatened against the Company or the Subsidiary.
(n) Each of the Company and the Subsidiary has sufficient
licenses, permits and other governmental authorizations currently required for
the conduct of its business or the ownership of its properties as described in
the Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, service marks, trade-names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of such
business and had not received any notice of conflict with the asserted rights of
others in respect thereof. To the best knowledge of the Company, none of the
activities or business of the Company or the Subsidiary are in violation of, or
cause the Company or the Subsidiary to violate, any law, rule, regulation or
order of the United
-6-
<PAGE>
States, any state, county or locality, or of any agency or body of the United
States or of any state, county or locality, the violation of which would have a
material adverse impact upon the condition (financial or otherwise), business,
property, results of operations or net worth of the Company or the Subsidiary.
(o) Neither the Company nor the Subsidiary has, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution, in
violation of law or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments or contributions required or allowed by
applicable law. The Company's and the Subsidiary's internal accounting controls
and procedures are sufficient to cause the Company and the Subsidiary to comply
in all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
(p) On the Closing Dates (hereinafter defined), all transfer or
other taxes (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction), if any, which are required to be paid in
connection with the sale and transfer of the Shares and Warrants to the
Underwriter hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which are,
under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares and Warrants hereby.
(s) Except for the Subsidiary, the Company has no other
subsidiaries.
(t) The Company has not entered into any agreement pursuant to
which any person is entitled either directly or indirectly to compensation from
the Company for services as a finder in connection with the proposed public
offering.
(u) To the Company's knowledge, except as previously disclosed
in writing by the Company to you, no officer, director or stockholder of the
Company has any affiliation or association with any member of the National
Association of Securities Dealers, Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from
the sale of the Shares and Warrants will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
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<PAGE>
(w) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Shares and Warrants other than the Preliminary
Prospectus, the Prospectus, the Registration Statement or the other materials
permitted by the Act, if any.
(x) The conditions for use of Form SB-2, as set forth in the
General Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party
transactions of the nature described in Item 404 of Regulation S-KB involving
the Company, the Subsidiary and any person described in such Item that are
required to be disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and that have not been so
disclosed.
2. PURCHASE, DELIVERY AND SALE OF THE SHARES AND WARRANTS.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties and agreements herein
contained, the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to buy from the Company, 3,067,000 Shares, 3,067,000 Class A
Warrants and 3,067,000 Class B Warrants, at a purchase price of $4.103 per
share, $.0467 per Class A Warrant and $.0467 per Class B Warrant, at the place
and time hereinafter specified ("First Shares and Warrants").
Delivery of the First Shares and Warrants against payment
therefor shall take place at the offices of D.H. Blair Investment Banking Corp.,
44 Wall Street, New York, N.Y. (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on ,
1996, such time and date of payment and delivery for the First Shares and
Warrants being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter to
purchase all or any part of an aggregate of an additional 460,050 Shares, and/or
460,050 Class A Warrants and/or 460,050 Class B Warrants at the same price per
Share, Class A Warrant and Class B Warrant as the Underwriter shall pay for the
First Shares and Warrants being sold pursuant to the provisions of
subsection (a) of this Section 2 (such additional Shares and Warrants being
referred to herein as the "Option Shares and Warrants"). This option may be
exercised within 30 days after the effective date of the Registration Statement
upon notice by you to the Company advising as to the amount of Option Shares and
Warrants as to which the option is being exercised, the names and denominations
in which the certificates for such Option Shares and Warrants are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by you but shall not be earlier than four
nor later than ten full business days after the exercise of said option, nor in
any event prior to the First Closing Date, and such time and date is
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referred to herein as the "Option Closing Date." Delivery of the Option Shares
and Warrants against payment therefor shall take place at the offices of D.H.
Blair Investment Banking Corp., 44 Wall Street, New York, N.Y. The Option
granted hereunder may be exercised only to cover overallotments in the sale by
the Underwriter of the First Shares and Warrants referred to in subsection (a)
above. In the event the Company declares or pays a dividend or distribution on
its Common Stock, whether in the form of cash, shares of Common Stock or any
other consideration, prior to the Option Closing Date, such dividend or
distribution shall also be paid on the Option Shares and Warrants on the Option
Closing Date.
(c) The Company will make the certificates for the Securities to
be purchased by the Underwriter hereunder available to you for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date (which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request at
least two full business days prior to the Closing Dates. Time shall be of the
essence and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Shares and
Warrants to be purchased by the Underwriter hereunder will be delivered by the
Company to you against payment of the purchase price by certified or bank
cashier's checks in New York Clearing House funds, payable to the order of the
Company.
In addition, in the event the Underwriter exercises the option to
purchase from the Company all or any portion of the Option Shares and Warrants
pursuant to the provisions of subsection (b) above, payment for such Shares and
Warrants shall be made to or upon the order of the Company by certified or bank
cashier's checks payable in New York Clearing House funds at the offices of D.H.
Blair Investment Banking Corp., at the time and date of delivery of such Shares
and Warrants as required by the provisions of subsection (b) above, against
receipt of the certificates for such Shares and Warrants by the Underwriter for
the account of the Underwriter registered in such names and in such
denominations as the Underwriter may request.
It is understood that the Underwriter proposes to offer the
Shares and Warrants to be purchased hereunder to the public upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement becomes effective.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible. If
required, the Company will file the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
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424(b) under the Act. Upon notification from the Commission that the
Registration Statement has become effective, the Company will so advise you and
will not at any time, whether before or after the effective date, file the
Prospectus, Term Sheet or any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you or your counsel shall have reasonably
objected in writing or which is not in compliance with the Act and the Rules and
Regulations. At any time prior to the later of (A) the completion by the
Underwriter of the distribution of the Shares and Warrants contemplated hereby
(but in no event more than nine months after the date on which the Registration
Statement shall have become or been declared effective) and (B) 25 days after
the date on which the Registration Statement shall have become or been declared
effective, the Company will prepare and file with the Commission, promptly upon
your request, any amendments or supplements to the Registration Statement or
Prospectus which, in your reasonable opinion, may be necessary or advisable in
connection with the distribution of the Shares and Warrants.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any comments of
the Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of the Prospectus, or of the suspension of the qualification
of the Shares and Warrants for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriter and dealers to use the Prospectus in connection with
the sale of the Shares and Warrants for such period as in the opinion of counsel
to the Underwriter the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer, of any event of
which the Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the Company or
counsel for the Underwriter should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Shares and Warrants or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Rules and Regulations, the Company
will notify you promptly and forthwith prepare and furnish to you copies of such
amended
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Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case any Underwriter is required, in connection with the sale of
the Shares and Warrants to deliver a Prospectus nine months or more after the
effective date of the Registration Statement, the Company will upon request of
and at the expense of the Underwriter, amend or supplement the Registration
Statement and Prospectus and furnish the Underwriter with reasonable quantities
of prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934 and the rules and regulations thereunder
in connection with the offering and issuance of the Shares and Warrants.
(b) The Company will use its best efforts to qualify to register
the Shares and Warrants for sale under the securities or "blue sky" laws of such
jurisdictions as the Underwriter may designate and will make such applications
and furnish such information as may be required for that purpose and to comply
with such laws, provided the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or to execute a general consent of
service of process in any jurisdiction in any action other than one arising out
of the offering or sale of the Shares and Warrants. The Company will, from time
to time, prepare and file such statements and reports as are or may be required
to continue such qualification in effect for so long a period as the Underwriter
may reasonably request.
(c) If the sale of the Shares and Warrants provided for herein
is not consummated for any reason caused by the Company, the Company shall pay
all costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in
Section 8, including the accountable expenses of the Underwriter.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Securities Exchange Act of 1934 to be declared
effective concurrently with the completion of this offering and will notify the
Underwriter in writing immediately upon the effectiveness of such registration
statement, and (ii) if requested by the Underwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the
Company, at its expense will furnish to its stockholders an annual report
(including financial statements audited by independent
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public accountants) in reasonable detail and at its expense, will furnish to you
during the period ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the Company
and any of its subsidiaries as at the end of such fiscal year, together with
statements of income, surplus and cash flow of the Company and any subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission or any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to you at or before the First
Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon the order of the Underwriter, from
time to time until the effective date of the Registration Statement, as many
copies of any Preliminary Prospectus filed with the Commission prior to the
effective date of the Registration Statement as the Underwriter may reasonably
request. The Company will deliver to the Underwriter on the effective date of
the Registration Statement (as set forth in the next sentence) and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriter may from time to time reasonably
request. The Company, not later than (i) 5:00 p.m., New York City time, on the
date of determination of the public offering price, if such determination
occurred at or prior to 12:00 noon, New York City time, on such date or
(ii) 6:00 p.m., New York City time, on the business day following the date of
determination of the public offering price, if such determination occurred after
12:00 noon, New York City time, on such date, will deliver to the Underwriter,
without charge, as many copies of the Prospectus and any amendment or supplement
thereto as the Underwriter may reasonably request for purposes of confirming
orders that are expected to settle on the First Closing Date.
(h) The Company will make generally available to its security
holders and to the registered holders of its Warrants and deliver to you as soon
as it is practicable to do so but in no event later than 90 days after the end
of twelve months after its current fiscal quarter, an
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earnings statement (which need not be audited) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the
Shares and Warrants for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Shares and Warrants and the application of the proceeds therefrom as
may be required pursuant to Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action, which
in the reasonable opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to
the Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Shares and Warrants, and will use its best efforts to cause
the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Underwriter's Option outstanding from time to time.
(l) The Company has previously delivered to you agreements
(collectively, the "Lock-up Agreements") pursuant to which each officer and
director of the Company and stockholders owning at least an aggregate of 98% of
the Company's outstanding capital stock have agreed for a period of thirteen
months from the First Closing Date, not to directly or indirectly, offer, sell
(including any short sale), grant any option for the sale of, acquire any option
to dispose of, or otherwise dispose of any shares of Common Stock without the
prior written consent of the Underwriter. In order to enforce the Lock-up
Agreements, the Company shall impose stop-transfer instructions with respect to
the shares owned by the Principal Stockholders until the end of such period.
(m) Prior to completion of this offering, the Company will make
all filings required, including registration under the Securities Exchange Act
of 1934, to obtain the listing of the Common Stock, the Class A Warrants and
Class B Warrants on the Nasdaq Small Cap Market (or a listing on such other
market or exchange as the Underwriter consents to), and will effect and maintain
such listing for at least five years from the date of this Agreement.
(n) The Company represents that it has not taken and agrees that
it will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Shares or the Warrants or to
facilitate the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the delivery of
the Shares and Warrants, the Company shall execute and deliver to you, the
Underwriter's Option.
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The Underwriter's Option will be substantially in the form of the Underwriter's
Option filed as an Exhibit to the Registration Statement.
(p) During the 18 month period commencing on the date of this
Agreement, the Company will not, without the prior written consent of the
Underwriter, grant options to purchase shares of Common Stock to employees at an
exercise price less than the greater of (i) the initial public offering price of
the Shares or (ii) the fair market value of the Common Stock on the date of
grant. During the three year period from the First Closing Date, the Company
will not, without the prior written consent of the Underwriter, offer or sell
any of its securities pursuant to Regulation S under the Act.
(q) Harvey Goldman shall be President and Chief Executive
Officer of the Company on the Closing Dates. The Company has obtained key
person life insurance on the life of Mr. Goldman in an amount of not less than
$2 million and will use its best efforts to maintain such insurance during the
three year period commencing on the First Closing Date or the term of his
employment, whichever period is longer. In the event Mr. Goldman's employment
is terminated prior to the three year period commencing on the First Closing
Date, the Company will obtain a comparable policy on the life of his successor
for the balance of the three year period. For a period of thirteen months from
the First Closing Date, the compensation of the executive officers of the
Company shall not be increased from the compensation levels disclosed in the
Prospectus.
(r) On the Closing Date and simultaneously with the delivery of
the Shares and Warrants the Company shall execute and deliver to you, an
agreement with you regarding mergers, acquisitions, joint ventures and certain
other forms of transactions, in the form previously delivered to the Company by
you (the "M/A Agreement").
(s) Prior to the Effective Date, the Company, the escrow agent
and certain stockholders of the Company shall execute an agreement regarding the
escrow of an aggregate of 639,834 shares of Common Stock outstanding, in the
form previously delivered to you by the Company (the "Escrow Agreement").
(t) So long as any Warrants are outstanding, the Company shall
use its best efforts to cause post-effective amendments to the Registration
Statement to become effective in compliance with the Act and without any lapse
of time between the effectiveness of any such post-effective amendments and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant and to furnish to each Underwriter and dealer as many
copies of each such Prospectus as such Underwriter or dealer may reasonably
request. The Company shall not call for redemption any of the Warrants unless a
registration statement covering the securities underlying the Warrants has been
declared effective by the Commission and remains current at least until the date
fixed for redemption. In addition, for so long as any Warrant is outstanding,
the Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company.
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(u) Upon the exercise of any Warrant or Warrants after May __,
1997, the Company will pay D.H. Blair Investment Banking Corp., a fee of 5% of
the aggregate exercise price of the Warrants, of which 1% may be reallowed to
the dealer who solicited the exercise (which may also be D.H. Blair Investment
Banking Corp.) if (i) the market price of the Company's Common Stock is greater
than the exercise price of the Warrants on the date of exercise; (ii) the
exercise of the Warrant was solicited in writing by a member of the National
Association of Securities Dealers, Inc., (iii) the Warrant is not held in a
discretionary account; (iv) the disclosure of compensation arrangements has been
made in documents provided to customers, both as part of the original offering
and at the time of exercise, and (v) the solicitation of the Warrant was not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934,
as amended. The Company agrees not to solicit the exercise of any Warrants
other than through D.H. Blair Investment Banking Corp. and will not authorize
any other dealer to engage in such solicitation without the prior written
consent of D.H. Blair Investment Banking Corp. D.H. Blair Investment Banking
Corp. shall solicit the exercise of Warrants following notice of redemption of
the Warrants, subject to applicable federal and state securities law.
(v) For a period of five (5) years from the Effective Date the
Company (i) at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm to other than a "Big
Six" firm without the prior written consent of the Chairman or the President of
the Underwriter.
(w) As promptly as practicable after the Closing Date, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute at least four of such volumes to the
individuals designated by the Underwriter or counsel to the Underwriter.
(x) For a period of five years from the First Closing Date (i)
the Underwriter shall have the right, but not the obligation, to designate one
director of the Board of Directors of the Company and (ii) the Company shall
engage a public relations firm reasonably acceptable to the Underwriter.
(y) The Company shall, for a period of six years after date of
this Agreement, submit which reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(z) With respect to the Selling Stockholders, the Company will
send all post-effective amendments or prospectus supplements disclosing actual
price and selling terms to
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the NASD concurrently with the filing thereof with the Commission. The Company
will notify the Underwriter and the NASD if the Company becomes aware that any
5% or greater stockholder of the Company becomes an affiliated or associated
person of an NASD member participating in the distribution of this offering.
4. CONDITIONS OF UNDERWRITER'S OBLIGATION. The obligations of the
Underwriter to purchase and pay for the Shares and Warrants which it has agreed
to purchase hereunder, are subject to the accuracy (as of the date hereof, and
as of the Closing Dates) of and compliance with the representations and
warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New
York time, on the date on which the amendment to the registration
statement originally filed with respect to the Shares and Warrants or
to the Registration Statement, as the case may be, containing
information regarding the initial public offering price of the Shares
and Warrants has been filed with the Commission, or such later time
and date as shall have been agreed to by the Representative; if
required, the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto shall have been filed
with the Commission in the manner and within the time period required
by Rule 434 and 424(b) under the Act; on or prior to the Closing Dates
no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or a
similar purpose shall have been instituted or shall be pending or, to
your knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter;
(b) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of O'Sullivan Graev &
Karabell, LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriter, to the effect that:
(i) each of the Company and the Subsidiary has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware, with full
corporate power and authority to own its properties and conduct
its business as described in the Registration Statement and
Prospectus and is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction
in which the Company or the Subsidiary, as the case may be, owns
or leases real property or maintains an office;
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(ii) the authorized capitalization of the Company as of
March 31, 1996 is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board of
directors have been duly authorized, validly issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; to such counsel's knowledge, the
outstanding shares of Common Stock of the Company have not been
issued in violation of the preemptive rights of any shareholder
and the shareholders of the Company do not have any preemptive
rights or other rights to subscribe for or to purchase, nor are
there any restrictions upon the voting or transfer of any of the
Common Stock (except for transfer restrictions under applicable
law and those imposed by the Lock-up Agreements); the Common
Stock, the Warrants, the Underwriter's Option and the Warrant
Agreement conform to the respective descriptions thereof
contained in the Prospectus; the Shares have been, and the shares
of Common Stock to be issued upon exercise of the Warrants and
the Underwriter's Option, upon issuance in accordance with the
terms of such Warrants, the Warrant Agreement and Underwriter's
Option have been, duly authorized and, when issued and delivered,
will be duly and validly issued, fully paid, non-assessable, and,
to such counsel's knowledge, free of preemptive rights and no
personal liability will attach to the ownership thereof; all
prior sales by the Company of the Company's securities have been
made in compliance with or under an exemption from registration
under the Act and no shareholders of the Company have any
rescission rights under federal law with respect to Company
securities, assuming that any placement agent on behalf of the
Company complied with the provisions of Section 4(2) of the
Securities Act and the provisions of Regulation D promulgated
under the Securities Act and assuming the accuracy of information
provided by the purchasers of such securities; a sufficient
number of shares of Common Stock has been reserved for issuance
upon exercise of the Warrants and Underwriter's Option and to the
best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Shares and
Warrants as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which have
been waived or satisfied for or relating to the registration of
any shares of Common Stock;
(iii) this Agreement, the Underwriter's Option, the Warrant
Agreement, the Escrow Agreement and the M/A Agreement have been
duly and validly authorized, executed and delivered by the
Company and, assuming due execution by each other party hereto or
thereto, each constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with
its respective terms
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(except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in
any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law;
(iv) the certificates evidencing the shares of Common Stock
are in valid and proper legal form; the Warrants will be
exercisable for shares of Common Stock of the Company in
accordance with the terms of the Warrants and at the prices
therein provided for; the shares of Common Stock of the Company
issuable upon exercise of the Warrants have been duly authorized
and reserved for issuance upon exercise of such Warrants and such
shares, when issued upon such exercise in accordance with the
terms of the Warrants and at the price provided for, will be duly
and validly issued, fully paid and non-assessable;
(v) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company or the Subsidiary
is a party which could materially adversely affect the business,
property, financial condition or operations of the Company or the
Subsidiary or which question the validity of the Securities, this
Agreement, the Warrant Agreement, the Underwriter's Option, the
Escrow Agreement or the M/A Agreement, or of any action taken or
to be taken by the Company pursuant to this Agreement, the
Warrant Agreement, the Underwriter's Option, the Escrow Agreement
or the M/A Agreement; and no such proceedings are known to such
counsel to be contemplated against the Company or the Subsidiary;
to such counsel's knowledge, there are no governmental
proceedings or regulations required to be described or referred
to in the Registration Statement which are not so described or
referred to;
(vi) Neither the execution and delivery of this Agreement,
the Underwriter's Option, the Warrant Agreement, the Escrow
Agreement or the M/A Agreement, and the incurrence of the
obligations herein and therein set forth and the consummation of
the transactions herein or therein contemplated, will result in
a breach or violation of, or constitute a default under the
certificate or articles of incorporation or by-laws, or, to such
counsel's knowledge, any bond, debenture, note or other evidence
of indebtedness or in any material contract, indenture, mortgage,
loan agreement, lease, joint venture or other material agreement
or instrument to which the Company or the Subsidiary is a party
or by which it or any of its properties may be bound or, to such
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counsel's knowledge, any material order, rule, regulation, writ,
injunction, or decree of any government, governmental
instrumentality or court, domestic or foreign having jurisdiction
over the Company or any of its property or business;
(vii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement
is in effect, and no proceedings for that purpose have been
instituted or are pending before, or threatened by, the
Commission; the Registration Statement and the Prospectus (except
for the financial statements and other financial data contained
therein, or omitted therefrom, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the Rules and
Regulations;
(viii) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to
the attention of such counsel to cause such counsel to have
reason to believe that the Registration Statement or any
amendment thereto at the time it became effective or as of the
Closing Dates contained any untrue statement of a material fact
required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any
supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the
Prospectus and any supplement thereto, for the financial
statements, notes thereto and other financial information and
schedules contained therein, as to which such counsel need
express no opinion);
(ix) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts
are accurate and fairly present the information required to be
shown, and such counsel is familiar with all contracts and other
documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement or filed as
exhibits to the Registration Statement, and such counsel does not
know of any contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed;
(x) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection
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with the authorization, issuance, transfer, sale or delivery of
the Shares and Warrants by the Company, in connection with the
execution, delivery and performance of this Agreement by the
Company or in connection with the taking of any action
contemplated herein, or the issuance of the Underwriter's Option
or the Securities underlying the Underwriter's Option, other than
registrations or qualifications of the Shares and Warrants under
applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xi) the statements in the Registration Statement under the
captions "Business," "Use of Proceeds," "Management," and
"Description of Securities" have been reviewed by such counsel
and insofar as they refer to descriptions of agreements,
statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material
respects; and
(xii) the Shares and the Warrants have been duly authorized
for quotation on the Nasdaq SmallCap Market.
(c) At the First Closing Date, you shall have received the
opinion, addressed to the Underwriter, dated as of the First Closing
Date, of Collier, Shannon, Rill & Scott, patent counsel to the
Company, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) We have carefully read and analyzed the material set
forth in the Prospectus under "Risk Factors - Dependence on
Patents and Proprietary Technology" and "Business - Intellectual
Property." Based upon the information supplied to us by the
Company and the facts of which we are aware, it is our opinion
that this material accurately and adequately discloses the
Company's patent position and does not contain an untrue
statement of material fact or omit a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(ii) The patent applications referred to in the attached
status report are currently on file in the Patent and Trademark
Office ("PTO"). Based upon the information available to us at
this time, the PTO has taken the actions indicated in the
attached status report. We have reviewed the file wrappers for
each one and based on the facts of which we are aware, and the
information supplied to us by the Company, we are aware of no
public use or sale by the Company or its subsidiaries prior to
the filing of any of the patents or patent applications that
would affect their validity. The two U.S. patent applications
currently on file on behalf of the
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Company which are identified in the attached status report
(Attachment 1) were filed by another law firm. We have reviewed
the filing documents, what we believe to be the relevant prior
art, and the statutes that control their allowability, namely,
the United States Code, Title 35, Section 101 (defining eligible
subject matter), 112 (defining claims formalities), and 102
(defining conditions for patentability). We believe there to be
patentable subject matter in those applications, however, as is
common during prosecution of a patent application, such claims
may have been or may be subsequently amended or modified in view
of factors such as any newly discovered prior art or additional
facts, or to overcome a difference of opinion with the Patent
Office Examiner regarding the permissible scope of protection,
the form of the claims, or the subject matter claimed.
(iii) Based upon the facts of which we are aware and the
information that has been provided to us by the Company, we are
aware of no facts that would preclude the Company from having
clear title to the United States patents and United States patent
applications owned by the Company.
(iv) Based upon the facts of which we are aware and the
information that has been provided to us by the Company, we are
not aware of either the Company or its subsidiaries having
received any notice challenging the validity or enforceability of
any of the United States patents owned by or licensed to the
Company.
(v) We have reviewed the Intellectual Property Assignment
Agreements between Dunkirk International and the Company and
based on those agreements and based upon facts of which were are
aware and information provided us by the Company, it is our
opinion that the Company has obtained all rights previously owned
by Dunkirk International in the patents and patent applications
on file with the PTO.
(vi) Based upon the facts of which we are aware and the
information that has been provided to us by the Company and with
the exception of the proceeding identified in the second
paragraph of this section (referring to the prosecution of the
patent applications), we are not aware of any material legal or
governmental proceedings pending or threatened with respect to
any patents or patent applications of the Company.
(vii) Based upon the facts of which we are aware and the
information that has been provided to us by the Company, we are
aware of no claims asserted against the Company relating to the
potential
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infringement of or conflict with any patents, copyrights, trade
secrets, or trademarks of others (except for the item identified
in the paragraph immediately following this one).
(viii) A company named Miller Edge has filed an Extension of
Time in which to oppose one of the Company's trademarks. That
company's intentions are unknown at this time, and we are not
aware that they have opposed registration of the trademark. They
have only asked for an extension of the 30 day period within
which to file an opposition.
(ix) Based on our review of the prior art, it is our opinion
that none of the references identified in our search of the
records of the PTO is sufficient to invalidate the Company's
patents and we are aware of no other existing United States
patents with claims that might cover the Company's technology or
of any United States patent which the Company's technology
infringes.
(d) At the First Closing Date, you shall have received an
opinion of Collier, Shannon, Rill & Scott, regulatory counsel for the
Company, addressed to the Underwriter and dated the First Closing
Date, in form and substance satisfactory to counsel to the Underwriter
to the effect that:
(i) The statements in the Prospectus under caption "Risk
Factors - Reliance on Environmental Regulation - Regulatory
Status of Operations and Potential Environmental Liability" and
"Business Environmental Matters," insofar as such statements
relate to the Company's and the Subsidiary's operations and
constitute a description of the environmental legal matters,
environmental documents or proceeding referred to therein, are
accurate and fairly present the information purported to be shown
and, in our opinion, such material fairly discloses the regulated
operations of the Company's and the Subsidiary's facility at
Dunkirk and does not fail to state a material fact or omit to
state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading:
(ii) There currently are no environmental statutes or
regulations of the United States or the State of New York which
we consider to be material to the operations or proposed
operations of the Company or the Subsidiary at the Dunkirk
facility, other than as described in the Prospectus.
(iii) The Company and the Subsidiary are in substantial
compliance with all environmental statutes or regulations of the
United
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States and the State of New York applicable to the Company and
its Subsidiary at the Dunkirk facility, except, in the case of
any noncompliance that would not have a material adverse effect
on the business, financial condition or prospects of the Company
and the Subsidiary, taken as a whole.
(iv) Each of the Company and the Subsidiary has obtained all
environmental permits, regulatory determinations and beneficial
use determinations necessary to the conduct of its business.
Such opinion[s] shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter shall reasonably request.
In rendering such opinion, such counsel may rely upon certificates of any
officer of the Company or public officials as to matters of fact; and may rely
as to all matters of law other than the law of the United States or of the State
of New York upon opinions of counsel satisfactory to you, in which case the
opinion shall state that they have no reason to believe that you and they are
not entitled to so rely.
(e) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Bachner, Tally, Polevoy &
Misher LLP, counsel to the Underwriter, and you shall have received from such
counsel a signed opinion, dated as of the First Closing Date, with respect to
the validity of the issuance of the Shares and Warrants, the form of the
Registration Statement and Prospectus (other than the financial statements and
other financial data contained therein), the execution of this Agreement and
other related matters as you may reasonably require. The Company shall have
furnished to counsel for the Underwriter such documents as they may reasonably
request for the purpose of enabling them to render such opinion.
(f) You shall have received a letter prior to the effective date
of the Registration Statement and again on and as of the First Closing Date from
Ernst & Young LLP, independent public accountants for the Company, substantially
in the form approved by you, and including estimates of the Company's revenues
and results of operations for the period ending at the end of the month
immediately preceding the effective date and results of the comparable period
during the prior fiscal year.
(g) At the Closing Dates, (i) the representations and warranties
of the Company contained in this Agreement shall be true and correct with the
same effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto
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<PAGE>
shall contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; (iii) there shall have been, since the respective dates
as of which information is given, no material adverse change, or any development
involving a prospective material adverse change, in the business, properties,
condition (financial or otherwise), results of operations, capital stock,
long-term or short-term debt or general affairs of the Company or the Subsidiary
from that set forth in the Registration Statement and the Prospectus, except
changes which the Registration Statement and Prospectus indicate might occur
after the effective date of the Registration Statement, and neither the Company
nor the Subsidiary shall have incurred any material liabilities or entered into
any agreement not in the ordinary course of business other than as referred to
in the Registration Statement and Prospectus; and (iv) except as set forth in
the Prospectus, no action, suit or proceeding at law or in equity shall be
pending or threatened against the Company or the Subsidiary which would be
required to be set forth in the Registration Statement, and no proceedings shall
be pending or threatened against the Company or the Subsidiary before or by any
commission, board or administrative agency in the United States or elsewhere,
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company or the Subsidiary, and
(v) you shall have received, at the First Closing Date, a certificate signed by
each of the Chairman of the Board or the President and the principal financial
or accounting officer of the Company, dated as of the First Closing Date,
evidencing compliance with the provisions of this subsection (g).
(h) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Underwriter to purchase and pay for the Option
Shares and Warrants referred to therein will be subject (as of the date hereof
and as of the Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at
the Option Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been instituted or shall be pending,
or, to your knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any reasonable request on the
part of the Commission for additional information shall have been
complied with to the satisfaction of Bachner, Tally, Polevoy &
Misher LLP, counsel to the Underwriter.
(ii) At the Option Closing Date there shall have been
delivered to you the signed opinions of O'Sullivan Graev &
Karabell, LLP and Collier, Shannon, Rill & Scott, counsel for the
Company, dated as of the Option Closing Date, in form and
substance satisfactory to Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter, which opinions shall be substantially
the same in scope and substance as the opinions furnished to you
at the First Closing Date pursuant to Section 4(b), (c) and (d)
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<PAGE>
hereof, except that such opinion, where appropriate, shall cover
the Option Shares and Warrants.
(iii) At the Option Closing Date there shall have been
delivered to you a certificate of the Chairman of the Board or
the President and the principal financial or accounting officer
of the Company, dated the Option Closing Date, in form and
substance satisfactory to Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter, substantially the same in scope and
substance as the certificate furnished to you at the First
Closing Date pursuant to Section 4(g) hereof.
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory to
you from Ernst & Young, LLP, dated the Option Closing Date and
addressed to the Underwriter confirming the information in their
letter referred to in Section 4(f) hereof and stating that
nothing has come to their attention during the period from the
ending date of their review referred to in said letter to a date
not more than five business days prior to the Option Closing
Date, which would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option
Shares and Warrants shall be satisfactory in form and substance
to you, and you and Bachner, Tally, Polevoy & Misher LLP, counsel
to the Underwriter, shall have been furnished with all such
documents, certificates, and opinions as you may request in
connection with this transaction in order to evidence the
accuracy and completeness of any of the representations,
warranties or statements of the Company or its compliance with
any of the covenants or conditions contained herein.
(i) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date, for members of the NASD to execute transactions (as principal or
agent) in the Common Stock or the Warrants and no proceedings for the taking of
such action shall have been instituted or shall be pending, or, to the knowledge
of the Underwriter or the Company, shall be contemplated by the Commission or
the NASD. The Company represents that at the date hereof it has no knowledge
that any such action is in fact contemplated by the Commission or the NASD. The
Company shall have advised the Underwriter of any NASD affiliation of any of its
officers, directors, stockholders or their affiliates.
(j) If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriter
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under this Agreement may be cancelled at, or at any time prior to, each Closing
Date by the Underwriter. Any such cancellation shall be without liability of
the Underwriter to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of
the Company to sell and deliver the Shares and Warrants is subject to the
condition that at the Closing Dates, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in
this Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Shares and Warrants on
exercise of the option provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, such Underwriter
and such controlling persons for any legal or other expenses reasonably incurred
in connection with investigating, defending against or appearing as a third
party witness in connection with any losses, claims, damages or liabilities,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Shares and Warrants under the securities laws thereof (any such
application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus,
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be liable in any such case to the extent, but only to the extent, that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation of the Registration Statement or any such amendment or supplement
thereof or any such Blue Sky Application or any such
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<PAGE>
preliminary Prospectus or the Prospectus or any such amendment or supplement
thereto. This indemnity will be in addition to any liability which the Company
may otherwise have.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (i) in reliance upon and in conformity with written
information furnished to the Company by you specifically for use in the
preparation thereof and (ii) relates to the transactions effected by the
Underwriter in connection with the offer and sale of the Shares and Warrants
contemplated hereby. This indemnity agreement will be in addition to any
liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the
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expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is an Underwriter or a person who
controls such Underwriter within the meaning of the Act, the fees and expenses
of such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying party and in the judgment of the Underwriter, it is advisable
for the Underwriter or controlling persons to be represented by separate counsel
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such Underwriter or such controlling person,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys for the Underwriter and controlling
persons, which firm shall be designated in writing by you). No settlement of
any action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
7. CONTRIBUTION.
In order to provide for just and equitable contribution under the Act
in any case in which the Underwriter makes claim for indemnification pursuant to
Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriter,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that (a) if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriter and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company, or the Underwriter and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriter to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages (even if the Underwriter in the aggregate were treated as one
entity for such
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purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the first sentence of this Section 7.
No person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. As used in this paragraph,
the word "Company" includes any officer, director, or person who controls the
Company within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company, its officers, directors and controlling persons
to the full extent permitted by law. The foregoing contribution agreement shall
in no way affect the contribution liabilities of any persons having liability
under Section 11 of the Act other than the Company and the Underwriter. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement; provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the sale
of the Shares and Warrants to the Underwriter is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement by the
Company including, but not limited to, the fees and expenses of counsel to the
Company and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, or the Term Sheet, the fee of the NASD in connection with the
filing required by the NASD relating to the offering of the Shares and Warrants
contemplated hereby; all expenses, including reasonable fees and disbursements
of counsel to the Underwriter, in connection with the qualification of the
Shares and Warrants under the state securities or blue sky laws which the
Underwriter shall designate; the cost of printing and furnishing to the
Underwriter copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, this Agreement, Selling Agreement and the Blue Sky Memorandum,
any fees relating to the listing of the Common Stock and Warrants on the Nasdaq
SmallCap Market or any other securities exchange, the cost of printing the
certificates representing the Shares and Warrants, the fees of the transfer
agent and warrant agent the cost of publication of at least three "tombstones"
of the offering (at least one of which shall be in national business newspaper
and one of which shall be in a major New York newspaper) and the cost of
preparing at least four hard cover "bound volumes" relating to the offering, in
accordance with the Underwriter's request. The Company shall pay any and all
taxes (including any transfer, franchise, capital stock or other tax imposed by
any jurisdiction) on sales to the Underwriter hereunder. The Company will also
pay all costs and expenses incident to the furnishing of any amended Prospectus
or of any supplement to be attached to the Prospectus as called for in
Section 3(a) of this Agreement except as otherwise set forth in said Section.
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(b) In addition to the foregoing expenses, the Company shall at
the First Closing Date pay to D.H. Blair Investment Banking Corp., a
non-accountable expense allowance of $414,045 of which $_______ has been paid.
In the event the overallotment option is exercised, the Company shall pay to
D.H. Blair Investment Banking Corp. at the Option Closing Date an additional
amount equal to 3% of the gross proceeds received upon exercise of the
overallotment option. In the event the transactions contemplated hereby are not
consummated by reason of any action by the Underwriter (except if such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained herein or because any other condition to the Underwriter's
obligations hereunder required to be fulfilled by the Company is not fulfilled)
the Company shall be liable for the accountable expenses of the Underwriter,
including legal fees up to a maximum of $40,000. In the event the transactions
contemplated hereby are not consummated by reason of any action of the Company
or because of a breach by the Company of any covenant, representation or
warranty herein, the Company shall be liable for the out-of-pocket accountable
expenses of the Underwriter, including legal fees, up to a maximum of $360,000.
In the event the offering is not consummated for any reason, any portion of the
non-accountable expense allowance previously paid to the Underwriter which is
not accounted for shall be returned to the Company.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter, against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or person may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed offering
by reason of such person's or entity's influence or prior contact with the
indemnifying party.
9. EFFECTIVE DATE.
The Agreement shall become effective upon its execution except that
you may, at your option, delay its effectiveness until 11:00 A.M., New York time
on the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first commence the initial public
offering by the Underwriter of any of the Shares and Warrants. The time of the
initial public offering shall mean the time of release by you of the first
newspaper advertisement with respect to the Shares and Warrants, or the time
when the Shares and Warrants are first generally offered by you to dealers by
letter or telegram, whichever shall first occur. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect
notwithstanding such termination.
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10. TERMINATION.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13,
14 and 15 hereof, may be terminated at any time prior to the First Closing Date,
and the option referred to in Section 2(b) hereof, if exercised, may be
cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Shares and Warrants agreed to be purchased
hereunder by reason of (i) the Company having sustained a material loss, whether
or not insured, by reason of fire, earthquake, flood, accident or other
calamity, or from any labor dispute or court or government action, order or
decree; (ii) trading in securities on the New York Stock Exchange, the American
Stock Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having
been suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could materially adversely affect the Company;
(vii) except as contemplated by the Prospectus, the Company is merged or
consolidated into or acquired by another company or group or there exists a
binding legal commitment for the foregoing or any other material change of
ownership or control occurs; (viii) the passage by the Congress of the United
States or by any state legislative body or federal or state agency or other
authority of any act, rule or regulation, measure, or the adoption of any
orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Representative to have a material impact on
the business, financial condition or financial statements of the Company or the
market for the securities offered pursuant to the Prospectus; (ix) any adverse
change in the financial or securities markets beyond normal market fluctuations
having occurred since the date of this Agreement, or (x) any material adverse
change having occurred, since the respective dates of which information is given
in the Registration Statement and Prospectus, in the earnings, business
prospects or general condition of the Company, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10 or in
Section 9, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
11. UNDERWRITER'S OPTION.
At or before the First Closing Date, the Company will sell to D.H.
Blair Investment Banking Corp. (for its own account), or its designees for a
consideration of $6.16 per share, $.07 per Class A Warrant and $.07 per Class B
Warrant, and upon the terms and conditions set forth in the form of
Underwriter's Option annexed as an exhibit to the Registration Statement,
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an option to purchase an aggregate of 306,700 shares of Common Stock, and/or
306,700 Class A Warrants and/or 306,700 Class B Warrants. In the event of
conflict in the terms of this Agreement and the Underwriter's Option, the
language of the Underwriter's Option will control.
12. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties
and other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Shares and Warrants and the termination of this Agreement.
13. NOTICE.
Any communications specifically required hereunder to be in writing,
if sent to the Underwriter, will be mailed, delivered and confirmed to them at
D.H. Blair Investment Banking Corp., 44 Wall Street,, New York, New York 10005,
with a copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue,
New York, New York 10017, or if sent to the Company, will be mailed, delivered
and confirmed to it at Conversion Technologies International, Inc., 82 Bethany
Road, Suite 6, Hazlet, New Jersey 07730, Attention: Harvey Goldman, with a copy
sent to O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New
York 10112, Attention: Julie M. Allen, Esq.
14. PARTIES IN INTEREST.
The Agreement herein set forth is made solely for the benefit of the
Underwriter, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriter of the Shares and Warrants.
15. APPLICABLE LAW.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of New York applicable to agreements made and to be
entirely performed within New York.
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If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: ____________________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: ____________________________________
Martin A. Bell, Vice Chairman and
General Counsel
<PAGE>
EXHIBIT 4.1
WARRANT AGREEMENT
AGREEMENT, dated as of this ____th day of ___________, 1996, by and
among CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a Delaware corporation
("Company"), AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the
"Warrant Agent"), and D.H. BLAIR INVESTMENT BANKING CORP., a New York
corporation ("Blair").
W I T N E S S E T H
WHEREAS, in connection with (i) a public offering of up to 3,527,050
shares ("Shares") of the Company's Common Stock, $.00025 par value ("Common
Stock"), 3,527,050 redeemable Class A Warrants ("Class A Warrants") and
3,527,050 redeemable Class B Warrants ("Class B Warrants") pursuant to an
underwriting agreement (the "Underwriting Agreement") dated _______________,
1996 between the Company and Blair (ii) the issuance to Blair or its designees
of an Option to purchase an aggregate of 306,700 additional shares of Common
Stock, and/or 306,700 Class A Warrants and/or 306,700 Class B Warrants to be
dated as of __________, 1996 (the "Underwriter's Option"), and (iii) the
issuance of 1,112,500 Class A Warrants to certain security holders of the
Company upon the conversion of warrants acquired by them in a private placement
in December 1995, the Company may issue up to 4,946,250 Class A Warrants and
3,833,750 Class B Warrants (the Class A Warrants and Class B Warrants may be
collectively referred to as "Warrants"); and
WHEREAS, each Class A Warrant initially entitles the Registered Holder
thereof to purchase one (1) share of Common Stock and one (1) Class B Warrant,
and accordingly, the Company may issue up to an additional 4,946,250 Class B
Warrants; and
WHEREAS, each Class B Warrant initially entitles the Registered Holder
thereof to purchase one (1) share of Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the registered holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
<PAGE>
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of earnings and assets of the Company without limit as to amount or
percentage, which at the date hereof consists of 25,000,000 shares of Common
Stock, $.00025 par value.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 40 Wall Street, New
York, New York 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and
(b) payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean as to each Class A
Warrant and Class B Warrant the date of issuance.
(e) "Purchase Price" shall mean the purchase price per share to be
paid upon exercise of each Class A Warrant or Class B Warrant in accordance with
the terms hereof, which price shall be $5.85 as to the Class A Warrants and
$7.80 as to the Class B Warrants, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof, and subject to the Company's
right to reduce the Purchase Price upon notice to all Registered Holders of
Warrants.
(f) "Redemption Price" shall mean the price at which the Company may,
at its option in accordance with the terms hereof, redeem the Class A Warrants
and/or Class B Warrants, which price shall be $0.05 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time)
on May ___, 2001 or, with respect to Warrants which are outstanding as of the
applicable Redemption Date (as defined in Section 8) and specifically excluding
Warrants issuable upon exercise of Underwriter's Options if the Underwriter's
Options have not been exercised, the Redemption
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<PAGE>
Date, whichever is earlier; provided that if such date shall in the State of New
York be a holiday or a day on which banks are authorized or required to close,
then 5:00 P.M. (New York time) on the next following day which in the State of
New York is not a holiday or a day on which banks are authorized or required to
close. Upon notice to all Registered Holders, the Company shall have the right
to extend the Warrant Expiration Date.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Class A Warrant initially shall entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase one share of
Common Stock and one Class B Warrant upon the exercise thereof, in accordance
with the terms hereof, subject to modification and adjustment as provided in
Section 9.
(b) A Class B Warrant initially shall entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(c) The Class B Warrants will be detachable and separately
transferable immediately from the shares of Common Stock issued upon exercise of
the Class A Warrants.
(d) Upon execution of this Agreement, Warrant Certificates
representing the number of Class A Warrants and Class B Warrants sold pursuant
to the Underwriting Agreement shall be executed by the Company and delivered to
the Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued and delivered by the Warrant
Agent as part of the Shares and Warrants.
(e) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 13,726,250 shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(f) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder,
(ii) those issued on or after the Initial Warrant Exercise Date, upon the
exercise of fewer than all Warrants represented by any Warrant Certificate, to
evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6;
(iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the Unit
Purchase Option; (vi) at the option of the Company, in such form as may be
approved by the its
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Board of Directors, to reflect any adjustment or change in the Purchase Price,
the number of shares of Common Stock purchasable upon exercise of the Warrants
or the Target Price(s) therefor made pursuant to Section 8 hereof; and
(vii) those Class B Warrants issued upon exercise of Class A Warrants.
(g) Pursuant to the terms of the Underwriter's Option, Blair may
purchase up to 306,700 shares of Common Stock, and/or 306,700 Class A Warrants
and/or 613,400 Class B Warrants. Notwithstanding anything to the contrary
contained herein, the Warrants underlying the Underwriter's Option shall not be
subject to redemption by the Company except under the terms and conditions set
forth in the Underwriter's Option.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A as to the Class A Warrants and Exhibit B as to the
Class B Warrants (the provisions of which are hereby incorporated herein) and
may have such letters, numbers or other marks of identification or designation
and such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Class A Warrants or Class B Warrants may be
listed, or to conform to usage or to the requirements of Section 2(d). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates shall be numbered serially with the letters AW on Class A Warrants
of all denominations and the letters BW on Class B Warrants of all
denominations.
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a) hereof.
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<PAGE>
SECTION 4. EXERCISE.
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the Initial Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the applicable Warrant Certificate. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the Exercise Date
and the person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder of those securities upon the
exercise of the Warrant as of the close of business on the Exercise Date. As
soon as practicable on or after the Exercise Date, the Warrant Agent shall
deposit the proceeds received from the exercise of a Warrant and shall notify
the Company in writing of the exercise of the Warrants. Promptly following, and
in any event within five days after the date of such notice from the Warrant
Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and
delivered by the Transfer Agent, to the person or persons entitled to receive
the same, a certificate or certificates for the securities deliverable upon such
exercise (plus a Warrant Certificate for any remaining unexercised Warrants of
the Registered Holder) unless prior to the date of issuance of such certificates
the Company shall instruct the Warrant Agent to refrain from causing such
issuance of certificates pending clearance of checks received in payment of the
Purchase Price pursuant to such Warrants. Notwithstanding the foregoing, in the
case of payment made in the form of a check drawn on an account of Blair or such
other investment banks and brokerage houses as the Company shall approve in
writing to the Warrant Agent, certificates shall immediately be issued without
prior notice to the Company or any delay. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant (the "Warrant Proceeds") to the Company or as
the Company may direct in writing, subject to the provisions of Sections 4(b)
and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of any
Warrant after May _____, 1997, (i) the market price (determined in the manner
set forth in Section 10) of the Company's Common Stock is greater than the then
Purchase Price of the Warrant, (ii) the exercise of the Warrant was solicited by
a member of the National Association of Securities Dealers, Inc. ("NASD") as
designated in writing on the Warrant Certificate Subscription Form, (iii) the
Warrant was not held in a discretionary account, (iv) disclosure of compensation
arrangements was made both at the time of the original offering and at the time
of exercise and (v) the solicitation of the exercise of the Warrant was not in
violation of Rule 10b-6 (as such rule or any successor rule may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Warrant Agent, simultaneously with the distribution of the Warrant
Proceeds to the Company shall, on behalf of the Company, pay from the Warrant
Proceeds a fee (the "Blair Fee") of 5% of the Purchase Price to Blair (of which
a portion may be reallowed by Blair to the dealer who solicited the exercise,
which may also be Blair or D.H. Blair & Co., Inc.). In the event the Blair Fee
is not received within five days of the date on which the Company receives
Warrant Proceeds, then the Blair Fee shall begin accruing interest at an annual
rate of prime plus four (4)%, payable by the Company to Blair at the time Blair
receives the Blair Fee. Within five days after exercise the Warrant Agent shall
send to Blair a copy of the reverse
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<PAGE>
side of each Warrant exercised. Blair shall reimburse the Warrant Agent, upon
request, for its reasonable expenses relating to compliance with this
Section 4(b). In addition, Blair and the Company may at any time during
business hours, examine the records of the Warrant Agent, including its ledger
of original Warrant Certificates returned to the Warrant Agent upon exercise of
Warrants. The provisions of this paragraph may not be modified, amended or
deleted without the prior written consent of Blair.
(c) In order to enforce the provisions of Section 4(b) above, in the
event there is any dispute or question as to the amount or payment of the Blair
Fee, the Warrant Agent is hereby expressly authorized to withhold payment to the
Company of the Warrant Proceeds unless and until the Company establishes an
escrow account for the purpose of depositing the entire amount of the Blair Fee,
which amount will be deducted from the net Warrant Proceeds to be paid to the
Company. The funds placed in the escrow account may not be released to the
Company without a written agreement from Blair that the required Blair Fee has
been received by Blair.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable and free from all taxes, liens and charges with
respect to the issue thereof, (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange, on which the other shares of outstanding Common
Stock of the Company are then listed or shall be eligible for inclusion in the
Nasdaq National Market or the Nasdaq SmallCap Market if the other shares of
outstanding Common Stock of the Company are so included.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will in good faith and as expeditiously as reasonably possible, endeavor
to secure such registration or approval. The Company will use reasonable
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws. With respect to any such securities, however, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares or Class B Warrants upon
exercise of the Class A Warrants, or the issuance or delivery of any shares upon
exercise of the Class B Warrants; provided, however,
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that if the shares of Common Stock or Class B Warrants, as the case may be, are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Common Stock issuable upon exercise of the Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
The Company will file with the Warrant Agent a statement setting forth the name
and address of the Transfer Agent of the Company for shares of Common Stock
issuable upon exercise of the Warrants.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter
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<PAGE>
retained by the Warrant Agent until termination of this Agreement or resignation
as Warrant Agent, or, with the prior written consent of Blair, disposed of or
destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Class A Warrants or Class B Warrants. Applicants for a substitute Warrant
Certificate shall comply with such other reasonable regulations and pay such
other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. REDEMPTION.
(a) Subject to the provisions of paragraph 2(g) hereof, on not less
than thirty (30) days notice given at any time after May ______, 1997, (the
"Redemption Notice"), to Registered Holders of the Warrants being redeemed, the
Warrants may be redeemed, at the option of the Company, at a redemption price of
$0.05 per Warrant, provided the Market Price of the Common Stock receivable upon
exercise of such Warrants shall exceed $8.20 with respect to the Class A
Warrants and $10.95 with respect to the Class B Warrants (the "Target Prices"),
subject to adjustment as set forth in Section 8(f) below. "Market Price" shall
mean (i) the average closing bid price of the Common Stock for thirty (30)
consecutive business days (or such other period as Blair may consent to) ending
on the Calculation Date as reported by Nasdaq, if the Common Stock is traded on
the Nasdaq SmallCap Market, or (ii) the average last reported sale price of the
Common Stock for thirty (30) consecutive business days ending on the Calculation
Date as reported by the primary exchange on which the Common Stock is traded, if
the Common Stock is traded on a national securities exchange, or by Nasdaq, if
the Common Stock is traded on the Nasdaq National Market. All Warrants of a
class must be redeemed if any of that class are redeemed, provided that the
Warrants underlying the Underwriter's Option may only be redeemed in compliance
with and subject to the terms and conditions of the Underwriter's Option. For
purposes of this Section 8, the Calculation Date shall mean a date within 15
days of the mailing of the Redemption Notice. The date fixed for redemption of
the Warrants is referred to herein as the
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<PAGE>
"Redemption Date." The Class B Warrant Redemption Date may not be earlier than
thirty-one (31) days after the Class A Warrant Redemption Date.
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall request
Blair to mail a Redemption Notice to each of the Registered Holders of the
Warrants to be redeemed, first class, postage prepaid, not later than the
thirtieth day before the date fixed for redemption, at their last address as
shall appear on the records maintained pursuant to Section 6(b). Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice.
(c) The Redemption Notice shall specify (i) the redemption price,
(ii) the Redemption Date, (iii) the place where the Warrant Certificates shall
be delivered and the redemption price paid, (iv) that Blair will assist each
Registered Holder of a Warrant in connection with the exercise thereof and
(v) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of Blair or the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M.
(New York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Registered Holders of the Warrants shall have
no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.
(e) From and after the Redemption Date, the Company shall, at the
place specified in the Redemption Notice, upon presentation and surrender to the
Company by or on behalf of the Registered Holder thereof of one or more Warrant
Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Registered Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the Redemption Price, shall
cease.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Prices shall be proportionally adjusted by the ratio which the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding immediately after such
event.
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<PAGE>
SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF
COMMON STOCK OR WARRANTS.
(a) (1) Subject to the exceptions referred to in Section 9(g) below,
in the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price of the Common Stock (as defined in Section 8, except that for
purposes of Section 9, the Calculation Date shall mean the date of the sale or
other transaction referred to in this Section 9) on the date of the sale (any
such sale being herein called a "Change of Shares"), then, and thereafter upon
each further Change of Shares, the Purchase Price in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent) determined by multiplying the Purchase Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
subsection 9(f)(F) below) for the issuance of such additional shares would
purchase at the Market Price and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately after the issuance
of such additional shares. Such adjustment shall be made successively whenever
such an issuance is made.
Upon each adjustment of the Purchase Price pursuant to this
Section 9, the total number of shares of Common Stock purchasable upon the
exercise of each Class A Warrant or Class B Warrant, as applicable, shall
(subject to the provisions contained in Section 9(a)(2) hereof) be such number
of shares (calculated to the nearest tenth) purchasable at the Purchase Price in
effect immediately prior to such adjustment multiplied by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(2) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Class A Warrants or Class B Warrants
outstanding, in lieu of the adjustment in the number of shares of Common Stock
purchasable upon the exercise of each Warrant as hereinabove provided, so that
each Class A Warrant outstanding after such adjustment shall represent the right
to purchase one share of Common Stock and one Class B Warrant, and each Class B
Warrant outstanding after such adjustment shall represent the right to purchase
one share of Common Stock. Each Warrant held of record prior to such adjustment
of the number of Warrants shall become that number of Warrants (calculated to
the nearest tenth) determined by multiplying the number one by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(b) In case the Company shall (i) declare and pay a dividend or make
a distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller
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number of shares, the Purchase Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Purchase Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such action, and the denominator of which shall be the number of shares
of Common Stock outstanding after giving effect to such action. Such adjustment
shall be made successively whenever any event listed above shall occur.
Whenever the Purchase Price is adjusted pursuant to this Subsection (b), the
number of Class A Warrants or Class B Warrants outstanding shall be adjusted so
that each Class A Warrant outstanding after such adjustment shall represent the
right to purchase one share of Common Stock and one Class B Warrant, and each
Class B Warrant outstanding after such adjustment shall represent the right to
purchase one share of Common Stock. Each Warrant held of record prior to such
adjustment of the number of Warrants shall become that number of Warrants
(calculated to the nearest tenth) determined by multiplying the number one by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment.
(c) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a Warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been purchased upon exercise of such Warrant immediately prior
to such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The Company shall not effect any
such consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase and the other
obligations of the Company under this Agreement. The foregoing provisions shall
similarly apply to successive reclassifications, capital reorganizations and
other changes of outstanding shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
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(d) (1) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(f) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefor were expressed in the Warrant Certificates
when the same were originally issued.
(2) Upon each adjustment of the number of Warrants pursuant to
this Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the Registered Holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to Blair and to each Registered
Holder of Warrants at his last address as it shall appear on the registry books
of the Warrant Agent. No failure to mail such notice nor any defect therein or
in the mailing thereof shall affect the validity thereof except as to the holder
to whom the Company failed to mail such notice, or except as to the holder whose
notice was defective. The affidavit of an officer of the Warrant Agent or the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (A) to (F) shall also be applicable:
(A) The number of shares of Common Stock outstanding at any
given time shall include shares of Common Stock owned or held by or
for the account of the Company and the sale or issuance of such
treasury shares or the distribution of
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any such treasury shares shall not be considered a Change of Shares
for purposes of said sections.
(B) No adjustment of the Purchase Price shall be made unless
such adjustment would require an increase or decrease of at least $.10
in the Purchase Price; provided that any adjustments which by reason
of this clause (B) are not required to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment(s) so
carried forward, shall require an increase or decrease of at least
$.10 in the Purchase Price then in effect hereunder.
(C) In case of (1) the sale by the Company for cash (or as a
component of a unit being sold for cash) of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or any securities convertible into or exchangeable for Common
Stock without the payment of any further consideration other than
cash, if any (such securities convertible, exercisable or exchangeable
into Common Stock being herein called "Convertible Securities"), or
(2) the issuance by the Company, without the receipt by the Company of
any consideration therefor, of any rights or warrants to subscribe for
or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of such rights,
warrants or options shall consist of cash, whether or not such rights,
warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the exercise of
such rights, warrants or options, plus the consideration, if any,
received by the Company for the issuance or sale of such rights,
warrants or options, plus, in the case of such Convertible Securities,
the minimum aggregate amount of additional consideration, other than
such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities issuable
upon the exercise of such rights, warrants or options) is less than
the Market Price of the Common Stock on the date of the issuance or
sale of such rights, warrants or options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such
rights, warrants or options) shall be deemed to be outstanding shares
of Common Stock for purposes of Sections 9(a) and 9(b) hereof and
shall be deemed to have been sold for cash in an amount equal to such
price per share.
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(D) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per
share for which Common Stock is issuable upon the conversion or
exchange of such Convertible Securities (determined by dividing
(x) the total amount of consideration received by the Company for the
sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by
(y) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities) is less
than the Market Price of the Common Stock on the date of the sale of
such Convertible Securities, then the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such Convertible
Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to
have been sold for cash in an amount equal to such price per share.
(E) In case the Company shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in (C) or
(D) above or any other securities of the Company convertible,
exchangeable or exercisable for shares of Common Stock, for any reason
other than an event that would require adjustment to prevent dilution,
so that the consideration per share received by the Company after such
modification is less than the Market Price on the date prior to such
modification, the Purchase Price to be in effect after such
modification shall be determined by multiplying the Purchase Price in
effect immediately prior to such event by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on
the date prior to the modification plus the number of shares of Common
Stock which the aggregate consideration receivable by the Company for
the securities affected by the modification would purchase at the
Market Price and of which the denominator shall be the number of
shares of Common Stock outstanding on such date plus the number of
shares of Common Stock to be issued upon conversion, exchange or
exercise of the modified securities at the modified rate. Such
adjustment shall become effective as of the date upon which such
modification shall take effect. On the expiration of any such right,
warrant or option or the termination of any such right to convert or
exchange any such Convertible Securities referred to in Paragraph (C)
or (D) above, the Purchase Price then in effect hereunder shall
forthwith be readjusted to such Purchase Price as would have obtained
(a) had the adjustments made upon the issuance or sale of such rights,
warrants, options or Convertible Securities been made upon the basis
of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received
therefor) upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities and
(b) had adjustments been made on the
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basis of the Purchase Price as adjusted under clause (a) for all
transactions (which would have affected such adjusted Purchase Price)
made after the issuance or sale of such rights, warrants, options or
Convertible Securities.
(F) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company
therefore shall be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the Company or any
underwriting discounts or commissions or concessions paid or allowed
by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
(i) upon the exercise of any of the options presently
outstanding under the Company's Stock Option Plans (the "Plans") for
officers, directors and certain other key personnel of the Company; or
(ii) upon the issuance or exercise of any other securities which
may hereafter be granted or exercised under the Plans or under any
other employee benefit plan of the Company; or
(iii) upon the sale or exercise of the Warrants, including without
limitation the sale or exercise of any of the Warrants comprising the
Underwriter's Option or upon the sale or exercise of the Underwriter's
Option; or
(iv) upon the sale of any shares of Common Stock or Convertible
Securities in a firm commitment underwritten public offering,
including, without limitation, shares sold upon the exercise of any
overallotment option granted to the underwriters in connection with
such offering; or
(v) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not such rights, warrants or
options were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(vi) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment
in the Purchase Price was made or required to be made upon the
issuance or sale of such Convertible Securities and whether or not
such Convertible Securities were
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<PAGE>
outstanding on the date of the original sale of the Warrants or were
thereafter issued or sold.
(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Shares and Warrants and shall also include any capital stock of any class
of the Company thereafter authorized which shall not be limited to a fixed sum
or percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Shares and Warrants or (i) in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section or (ii) in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
SECTION 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon
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the exercise of any Warrant, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(1) if the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange
or is traded on the Nasdaq National Market, the current market value
shall be the last reported sale price of the Common Stock on such
exchange or market on the last business day prior to the date of
exercise of this Warrant or if no such sale is made on such day, the
average of the closing bid and asked prices for such day on such
exchange or market; or
(2) if the Common Stock is not listed or admitted to unlisted
trading privileges on a national securities exchange or is not traded
on the Nasdaq National Market, the current market value shall be the
mean of the last reported bid and asked prices reported by the Nasdaq
SmallCap Market or, if not traded thereon, by the National Quotation
Bureau, Inc. on the last business day prior to the date of the
exercise of this Warrant; or
(3) if the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. RIGHTS OF ACTION. All rights of action with respect to
this Agreement are vested in the respective Registered Holders of the Warrants,
and any Registered Holder of a Warrant, without consent of the Warrant Agent or
of the holder of any other Warrant, may, in his own behalf and for his own
benefit, enforce against the Company his right to exercise his Warrants for the
purchase of shares of Common Stock in the manner provided in the Warrant
Certificate and this Agreement.
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SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant,
by his acceptance thereof, consents and agrees with the Company, the Warrant
Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office of the Warrant Agent, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Warrant Agent
and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company
shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or
Warrant Certificates evidencing the same shall thereupon be delivered to the
Warrant Agent and cancelled by it and retired. The Warrant Agent shall also
cancel the Warrant Certificate or Warrant Certificates following exercise of any
or all of the Warrants represented thereby or delivered to it for transfer or
exchange.
SECTION 15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate or (iii) be
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liable for any act or omission in connection with this Agreement except for its
own negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board, President, any Vice President, its Secretary or
Assistant Secretary (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after giving
30 days' prior written notice to the Company. At least 15 days prior to the
date such resignation is to become effective, the Warrant Agent shall cause a
copy of such notice of resignation to be mailed to the Registered Holder of each
Warrant Certificate at the Company's expense. Upon such resignation, or any
inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company that is a registered
transfer agent under the Securities Exchange Act of 1934. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning
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Warrant Agent and shall forthwith cause a copy of such notice to be mailed to
the Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not the Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
SECTION 16. MODIFICATION OF AGREEMENT. Subject to the provisions of
Section 4(b), the parties hereto and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; (ii) to reflect an
increase in the number of Class A or Class B Warrants which are to be governed
by this Agreement resulting from a subsequent public offering of Company
securities which includes Class A or Class B Warrants having the same terms and
conditions as the Class A or Class B Warrants, respectively, originally covered
by or subsequently added to this Agreement under this Section 16; or (iii) that
they may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Warrant Certificates; PROVIDED, HOWEVER, that this
Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the consent in writing of the Registered Holders of Warrant
Certificates representing not less than 50% of the Warrants then outstanding;
and PROVIDED, FURTHER, that no change in the number or nature of the securities
purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or
the acceleration of the Warrant Expiration Date, shall be made without the
consent in writing of the Registered Holder of the Warrant Certificate
representing such Warrant, other than such changes as are specifically
prescribed by this Agreement as originally executed or are made in compliance
with applicable law.
SECTION 17. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at
the address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company, at Conversion Technologies International,
Inc., 82 Bethany Road, Hazlet, New Jersey 07730, Attention: Harvey Goldman, or
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at such other address as may have been furnished to the Warrant Agent in writing
by the Company; if to the Warrant Agent, at its Corporate Office; and if to
Blair, at D.H. Blair Investment Banking Corp., 44 Wall Street, New York, New
York 10005.
SECTION 18. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and the Warrant Agent and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates . Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 20. TERMINATION. This Agreement shall terminate at the close
of business on the earlier of the Warrant Expiration Date or the date upon which
all Warrants (including the warrants issuable upon exercise of the Underwriter's
Option) have been exercised, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 15 hereof shall
survive such termination.
-21-
<PAGE>
SECTION 21. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: ______________________________
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: ______________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING CORP.
By: ______________________________
Authorized Officer
-22-
<PAGE>
EXHIBIT A
[FORM OF FACE OF CLASS A WARRANT CERTIFICATE]
No. AW ____ Class A Warrants
VOID AFTER _____________, 2001
CLASS A WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK AND REDEEMABLE CLASS B WARRANTS
Conversion Technologies International, Inc.
This certifies that FOR VALUE RECEIVED __________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Class A Warrants ("Class A Warrants") specified above. Each Class A Warrant
represented hereby initially entitles the Registered Holder to purchase, subject
to the terms and conditions set forth in this Warrant Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.00025 value ("Common Stock"), of Conversion
Technologies International, Inc., a Delaware corporation (the "Company"), and
one Class B Warrant of the Company at any time between ____________ and the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer & Trust Company as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$5.85 (the "Purchase Price") in lawful money of the United States of America in
cash or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Class A Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
___________, 1996, by and among the Company, the Warrant Agent and D.H. Blair
Investment Banking Corp.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock and
Class B Warrants subject to purchase upon the exercise of each Class A Warrant
represented hereby are subject to modification or adjustment.
Each Class A Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the
A-1
<PAGE>
exercise of less than all the Class A Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Class A Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
_____________, 2001, or such earlier date as the Class A Warrants shall be
redeemed. If such date shall in the State of New York be a holiday or a day on
which banks are authorized to close, then the Expiration Date shall mean 5:00
P.M. (New York time) on the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Class A Warrants represented hereby unless a registration
statement under the Securities Act of 1933, as amended, with respect to such
securities is effective. The Company has covenanted and agreed that it will
file a registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Class A Warrants are outstanding. The Class A Warrants represented hereby
shall not be exercisable by a Registered Holder in any state where such exercise
would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class A Warrants, each of such new Warrant Certificates to
represent such number of Class A Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment with any
applicable transfer fee in addition to any tax or other governmental charge
imposed in connection therewith, for registration of transfer of this Class A
Warrant Certificate at such office, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Class A Warrants will be
issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Class A Warrants represented hereby may be redeemed at the option
of the Company, at a redemption price of $.05 per Class A Warrant at any time
after , 1997, provided the Market Price (as defined in the Warrant
Agreement) for the Common Stock shall exceed $8.20 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Class A
A-2
<PAGE>
Warrants represented hereby except to receive the $.05 per Class A Warrant upon
surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Class A Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
Dated: _____________________ By: ______________________________
By: ______________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By: ___________________________
Authorized Officer
A-3
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise _______ Class A Warrants represented by this Warrant Certificate, and
to purchase the securities issuable upon the exercise of such Class A Warrants,
and requests that certificates for such securities shall be issued in the name
of
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER
IDENTIFICATION NUMBER
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and if such number of Class A Warrants shall not be all the Class A Warrants
evidenced by this Warrant Certificate, that a new Class A Warrant Certificate
for the balance of such Class A Warrants be registered in the name of, and
delivered to, the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class A Warrants
evidenced hereby was solicited by a member of the National Association of
Securities Dealers, Inc. If not
A-4
<PAGE>
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by D.H. Blair Investment
Banking Corp. or D.H. Blair & Co., Inc.
____________________________________
(Name of NASD Member)
Dated: _______________ X _______________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER
IDENTIFICATION NUMBER OF TRANSFEREE
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
_________________ of the Class A Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated:________________ X ______________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE>
EXHIBIT B
[FORM OF FACE OF CLASS B WARRANT CERTIFICATE]
No. BW __ Class B Warrants
VOID AFTER _____________ ____, 2001
CLASS B WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
This certifies that FOR VALUE RECEIVED ___________________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Class B Warrants specified above. Each Class B Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.00025 par value ("Common Stock"), of Conversion Technologies International,
Inc., a Delaware corporation (the "Company"), at any time between
and the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of American Stock Transfer & Trust
Company as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by
payment of $7.80 (the "Purchase Price") in lawful money of the United States of
America in cash or by official bank or certified check made payable to the
Company.
This Warrant Certificate and each Class B Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
___________, 1996 by and among the Company, the Warrant Agent and D.H. Blair
Investment Banking Corp.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Class B Warrant represented hereby are
subject to modification or adjustment.
Each Class B Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Class B Warrants
represented hereby, the Company shall cancel this Warrant Certificate upon the
surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Class B Warrants.
B-1
<PAGE>
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
__________, 2001, or such earlier date as the Class B Warrants shall be
redeemed. If such date shall in the State of New York be a holiday or a day on
which banks are authorized to close, then the Expiration Date shall mean 5:00
P.M. (New York time) on the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Class B Warrants represented hereby unless a registration
statement under the Securities Act of 1933, as amended, with respect to such
securities is effective. The Company has covenanted and agreed that it will
file a registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Class B Warrants are outstanding. The Class B Warrants represented hereby
shall not be exercisable by a Registered Holder in any state where such exercise
would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class B Warrants, each of such new Warrant Certificates to
represent such number of Class B Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment with any
applicable transfer fee in addition to any tax or other governmental charge
imposed in connection therewith, for registration of transfer of this Warrant
Certificate at such office, a new Warrant Certificate or Warrant Certificates
representing an equal aggregate number of Class B Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Class B Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Class B Warrants represented hereby may be redeemed at the option
of the Company, at a redemption price of $.05 per Class B Warrant at any time
after ________, 1997, provided the Market Price (as defined in the Warrant
Agreement) for the Common Stock shall exceed $10.95 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Class B Warrants represented hereby except to receive the $.05 per Class B
Warrant upon surrender of this Warrant Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class B Warrant represented hereby
(notwithstanding any notations of ownership or writing
B-2
<PAGE>
hereon made by anyone other than a duly authorized officer of the Company or the
Warrant Agent) for all purposes and shall not be affected by any notice to the
contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Class B Warrants represented hereby.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile, by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
Dated: _________________ By: _______________________________
By: _______________________________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By: ______________________________
Authorized Officer
B-3
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ___________ Class B Warrants represented by this Warrant Certificate,
and to purchase the securities issuable upon the exercise of such Class B
Warrants, and requests that certificates for such securities shall be issued in
the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER
IDENTIFICATION NUMBER
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
and if such number of Class B Warrants shall not be all the Class B Warrants
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such Class B Warrants be registered in the name of, and delivered to,
the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class B Warrants
evidenced hereby was solicited by a member of the National Association of
Securities Dealers, Inc. If not
B-4
<PAGE>
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by D.H. Blair Investment
Banking Corp.
____________________________________
(Name of NASD Member)
Dated: ________________ X ______________________________
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER
IDENTIFICATION NUMBER OF TRANSFEREE
____________________________________________
____________________________________________
____________________________________________
____________________________________________
[please print or type name and address]
________________ of the Class B Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated:_________ X ______________________________
Signature Guaranteed
______________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-6
<PAGE>
ESCROW AGREEMENT
AGREEMENT, dated as of the 9th day of May, 1996, by and among American
Stock Transfer & Trust Company, a New York corporation (hereinafter referred to
as the "Escrow Agent"), Conversion Technologies International, Inc., a Delaware
corporation (the "Company"), and Harvey Goldman and Perry Pappas (hereinafter
collectively called the "Stockholders").
WHEREAS, the Company contemplates a public offering ("Public
Offering") of shares of Common Stock, par value $.00025 per share (the "Common
Stock"), redeemable Class A Warrants (the "Class A Warrants") and redeemable
Class B Warrants ("Class B Warrants") through D.H. Blair Investment Banking
Corp. as underwriter ("Blair") pursuant to the Registration Statement on Form
SB-2 (No. 33-80973) filed with the Securities and Exchange Commission (the
"Registration Statement"); and
WHEREAS, in connection with the Public Offering, the Stockholders have
agreed to deposit in escrow an aggregate of 100,725 shares of Common Stock and
options to purchase an aggregate of 71,923 shares of Common Stock, upon the
terms and conditions set forth herein.
In consideration of the mutual covenants and promises herein
contained, the parties hereto agree as follows:
1. The Stockholders and the Company hereby appoint American Stock
Transfer & Trust Company as Escrow Agent and agree that the Stockholders will,
prior to the Effective Date (as hereinafter defined) of the Public Offering
deliver to the Escrow Agent to hold in accordance with the provisions hereof,
certificates representing an aggregate of 100,725 shares of Common Stock owned
of record by the Stockholders in the respective amounts set
<PAGE>
forth on Exhibit A hereto (the "Escrow Shares"), together with stock powers
executed in blank and copies of the agreements representing outstanding options
to purchase an aggregate of 71,923 shares of Common Stock held by the
Stockholders in the respective amounts set forth on Exhibit A hereto ("Escrow
Options"). The Escrow Agent, by its execution and delivery of this Agreement
hereby acknowledges receipt of the Escrow Shares and Escrow Options
(collectively, the Escrow Securities) and accepts its appointment as Escrow
Agent to hold the Escrow Securities in escrow, upon the terms, provisions and
conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Securities in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of
the money, securities, rights or property distributed in respect of the Escrow
Securities then held in escrow, including any such property distributed as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, such property to be held and
distributed as herein provided and hereinafter referred to collectively as the
"Escrow Property."
4. (a) The Escrow Securities are subject to release to the
Stockholders only in the event the conditions set forth herein are met. The
Escrow Agent, upon notice to such effect from the Company as provided in
paragraph 5 hereof, shall deliver the Escrow Securities,
-2-
<PAGE>
together with stock powers executed in blank, and the Escrow Property deposited
in escrow with respect to such Escrow Securities, to the respective
Stockholders, if, and only if, one of the following conditions is met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings or charges which would
result from the release of Escrow Securities (all as audited by
the Company's independent public accountants) (the "Minimum
Pretax Income") equals or exceeds $4,700,000 for the fiscal year
ending June 30, 1998; or
(ii) the Minimum Pretax Income equals or exceeds $7,000,000 for the
fiscal year ending June 30, 1999; or
(iii) the Minimum Pretax Income equals or exceeds $9,300,000 for the
fiscal year ending June 30, 2000; or
(iv) The Closing Price (as defined herein) of the Company's Common
Stock shall average in excess of $11.25 per share for any 60
consecutive business days during the period commencing on the
Effective Date and ending 18 months from the Effective Date; or
(v) The Closing Price (as defined herein) of the Company's Common
Stock shall average in excess of $15 per share for any 60
consecutive business days during the period commencing on the
18th month after the Effective Date and ending 36 months from the
Effective Date; or
(vi) the Company is acquired by or merged into another entity in a
transaction in which stockholders of the Company receive per
share consideration at least equal to the levels set forth in
(iv) and (v) above during the applicable periods set forth in
(iv) and (v) above.
(b) As used in this Section 4, the term "Closing Price" shall be
subject to adjustments in the event of any stock dividend, stock distribution,
stock split or other similar event and shall mean:
(1) If the principal market for the Common Stock is a national
securities exchange or the Nasdaq National Market, the closing
sales price of the Common Stock as reported by such exchange or
market, or on a consolidated tape reflecting transactions on such
exchange or market; or
-3-
<PAGE>
(2) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the Common
Stock is quoted on the Nasdaq SmallCap Market, the closing bid
price of the Common Stock as quoted on the Nasdaq SmallCap
Market; or
(3) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the Common
Stock is not quoted on the Nasdaq SmallCap Market, the closing
bid for the Common Stock as reported by the National Quotation
Bureau, Inc. ("NQB") or at least two market makers in the Common
Stock if quotations are not available from NQB but are available
from market makers.
(c) The determination of Minimum Pretax Income shall be
calculated exclusive of (i) any charges to income incurred by the Company in
connection with the release from escrow of the Escrow Securities and any Escrow
Property in respect thereof pursuant to the provisions of this paragraph 4 and
(ii) any shares of Common Stock issued upon securities outstanding immediately
prior to the Effective Date which are convertible into Common Stock without the
payment of additional consideration.
(d) The Minimum Pretax Income amounts set forth in subparagraph
(a) above shall be increased during each fiscal year during the Escrow Period to
reflect the issuance of any additional securities after the Effective Date,
including any shares of Common Stock that may be issued upon the exercise of the
Class A Warrants, the Class B Warrants or any other options or warrants
presently outstanding or hereafter granted by the Company (excluding options
granted under the Company's 1994 Employee Stock Option Plan and the 1994 Stock
Option Plan for Non-Employee Directors (the "Plans") which, in the aggregate, do
not exceed 10% of the then outstanding shares of Common Stock, including Escrow
Shares) in accordance with the following formula: The Minimum Pretax Income
shall be increased during each fiscal year to an Adjusted Minimum Pretax Income
calculated by multiplying the applicable Minimum
-4-
<PAGE>
Pretax Income amount by a fraction, the numerator of which shall be the weighted
average number of shares of Common Stock outstanding during the fiscal year for
which the determination is being made (including the Escrow Shares and any
shares of Common Stock issuable upon conversion of any outstanding securities
but excluding shares of Common Stock issuable upon exercise of (i) outstanding
Class A and Class B Warrants sold pursuant to the Prospectus included in the
Registration Statement; (ii) outstanding Underwriter's Options [and the Class A
and Class B Warrants included therein] issued to Blair and (iii) options
outstanding under the Plans, and the denominator of which shall be the sum of
(x) the number of shares of Common Stock outstanding on the Effective Date
(including the Escrow Shares and any shares of Common Stock issuable upon
conversion of securities outstanding immediately prior to the Effective Date
which are convertible into Common Stock without the payment of additional
consideration), plus (y) the number of shares of Common Stock sold pursuant to
the Prospectus included in the Registration Statement.
(e) If the Escrow Agent has not received the notice provided for
in Paragraph 5 hereof and delivered all of the Escrow Securities and related
Escrow Property in accordance with the provisions of this Paragraph 4 on or
prior to October 15, 2000, the Escrow Agent shall deliver the certificates
representing the Escrow Shares, together with stock powers executed in blank,
and the agreements representing all of the remaining Escrow Options, and any
related Escrow Property to the Company to be placed in the Company's treasury
for cancellation thereof as a contribution to capital. After such date, the
Stockholders shall have no further rights as a stockholder of the Company with
respect to any of the cancelled Escrow Shares and no further rights with respect
to any of the cancelled Escrow Options.
-5-
<PAGE>
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Paragraph 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, Blair (and if the transfer agent of the
Company's Common Stock is different from the Escrow Agent, such transfer agent)
and present such documentation as is reasonably required by the Escrow Agent to
evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a
trustee for any party for any purpose and is merely acting as a depository and
in a ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to
have any responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Securities or any related Escrow Property other
than faithfully to carry out the obligations undertaken in this Agreement and to
follow the directions in such instruction or notice provided in accordance with
the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable
for any action taken or omitted by it in good faith and may rely upon, and act
in accordance with, the advice of its counsel without liability on its part for
any action taken or omitted in accordance with such advice. In any event, its
liability hereunder shall be limited to liability for gross negligence, willful
misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, telegram,
cablegram or other written instrument believed by it to be genuine and to have
been signed by the proper party or parties.
-6-
<PAGE>
(e) The Company agrees (i) to pay the Escrow Agent's reasonable
fees and to reimburse it for its reasonable expenses including attorney's fees
incurred in connection with duties hereunder and (ii) to save harmless,
indemnify and defend the Escrow Agent for, from and against any loss, damage,
liability, judgment, cost and expense whatsoever, including counsel fees,
suffered or incurred by it by reason of, or on account of, any misrepresentation
made to it or its status or activities as Escrow Agent under this Agreement
except for any loss, damage, liability, judgment, cost or expense resulting from
gross negligence, willful misconduct or bad faith on the part of the Escrow
Agent. The obligation of the Escrow Agent to deliver the Escrow Securities to
either the Stockholders or the Company shall be subject to the prior
satisfaction upon demand from the Escrow Agent, of the Company's obligations to
so save harmless, indemnify and defend the Escrow Agent and to reimburse the
Escrow Agent or otherwise pay its fees and expenses hereunder.
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless requested to do so by the Stockholders and indemnified
to the Escrow Agent's satisfaction against the cost and expense of such defense
by the party requesting such defense. If any such legal proceeding is
instituted against it, the Escrow Agent agrees promptly to given notice of such
proceeding to the Stockholders and the Company. The Escrow Agent shall not be
required to institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing,
-7-
<PAGE>
signed by the Escrow Agent, and only to the extent expressly therein set forth.
A waiver by the Escrow Agent under the term of this Agreement shall not be
construed as a bar to, or waiver of, the same or any other such right or remedy
which it would otherwise have on any other occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30
days written notice thereof to the Stockholders and the Company. Within 20 days
after receipt of such notice, the Stockholders and the Company shall furnish to
the Escrow Agent written instructions for the release of the Escrow Securities
and any related Escrow Property (if such shares and property, if any, have not
yet been released pursuant to Paragraph 4 hereof) to a substitute Escrow Agent
which (whether designated by written instructions from the Stockholders and the
Company jointly or in the absence thereof by instructions from a court of
competent jurisdiction to the Escrow Agent) shall be a bank or trust company
organized and doing business under the laws of the United States or any state
thereof. Such substitute Escrow Agent shall thereafter hold any Escrow
Securities and any related Escrow Property received by it pursuant to the terms
of this Agreement and otherwise act hereunder as if it were the Escrow Agent
originally named herein. The Escrow Agent's duties and responsibilities
hereunder shall terminate upon the release of all shares then held in escrow
according to such written instruction or upon such delivery as herein provided.
This Agreement shall not otherwise be assignable by the Escrow Agent without the
prior written consent of the Company.
7. The Stockholders shall have the sole power to vote the Escrow
Shares and any exercised Escrow Options and any securities deposited in escrow
under this Agreement while they are being held pursuant to this Agreement.
-8-
<PAGE>
8. (a) Each of the Stockholders agrees that during the term of this
Agreement he will not sell, transfer, hypothecate, negotiate, pledge, assign,
encumber or otherwise dispose of any or all of the Escrow Shares or Escrow
Options, as the case may be, set forth opposite his name on Exhibit A hereto,
unless and until the Company shall have given the notice as provided in
Paragraph 5. This restriction shall not be applicable to transfers upon death,
by operation of law, to family members of the Stockholders or to any trust for
the benefit of the Stockholders, provided that such transferees agree to be
bound by the provisions of this Agreement.
(b) The Stockholders will take any action necessary or
appropriate, including the execution of any further documents or agreements, in
order to effectuate the transfer of the Escrow Securities to the Company if
required pursuant to the provisions of this Agreement.
9. (a) Each of the certificates representing the Escrow Shares will
bear legends to the following effect, as well as any other legends required by
applicable law:
(i) "The sale, transfer, hypothecation, negotiation,
pledge, assignment, encumbrance or other disposition of
the shares evidenced by this certificate are restricted
by and are subject to all of the terms, conditions and
provisions of a certain Escrow Agreement entered into
among D.H. Blair Investment Banking Corp., Conversion
Technologies International, Inc. and its Stockholders,
dated as of May 9, 1996, a copy of which may be
obtained from the Secretary of Conversion Technologies
International, Inc. No transfer, sale or other
disposition of these shares may be made unless specific
conditions of such agreement are satisfied."
(ii) "The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as
amended. No transfer, sale or other disposition
-9-
<PAGE>
of these shares may be made unless a registration statement
with respect to these shares has become effective under said
act, or the Company is furnished with an opinion of counsel
satisfactory in form and substance to it that such
registration is not required."
Upon execution of this Agreement, the Company shall direct the
transfer agent for the Company to place stop transfer orders with respect to the
Escrow Shares and to maintain such orders in effect until the transfer agent and
Blair shall have received written notice from the Company as provided in
Paragraph 5.
(b) Each of the agreements representing the Escrow Options shall
contain provisions restricting their sale, transfer, hypothecation, negotiation,
pledge, assignment or other disposition in accordance with the terms of this
Agreement.
10. At any time during the Escrow Period, a Stockholder may exercise
all or a portion of his Escrow Options by delivering to the Company written
notice specifying the number of shares to be purchased pursuant to the Escrow
Options to be exercised, executed stock powers with respect to such shares and
the purchase price therefor, with a copy of such notice being sent to the Escrow
Agent. Upon receipt of such notice, stock power and the purchase price of said
shares, the Company shall promptly deliver a certificate or certificates for the
purchased shares with stock powers, executed in blank attached, to the Escrow
Agent against delivery of the Escrow Options which had been exercised, and the
Escrow Agent shall hold such shares as Escrow Shares in accordance with the
provisions hereof.
-10-
<PAGE>
11. Each notice, instruction or other certificate required or
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, fax or registered or certified mail, return receipt
requested, to the parties hereto at the addresses set forth below, or at such
other address as any of them may designate by notice to each of the others:
(i) If to the Company, to:
Conversion Technologies International, Inc.
82 Bethany Road
Hazlet, New Jersey 07730
(ii) If to the Stockholders to their respective addresses as set
forth on Exhibit A hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(iv) If to Blair, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Attn: Martin A. Bell, Esq.
Fax: 212-514-7837
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given
hereunder by the Escrow Agent shall be effective and deemed received upon
personal delivery or transmission by fax or, if mailed, five (5) calendar days
after mailing by the Escrow Agent.
A copy of all communications sent to the Company, the Stockholders or
the Escrow Agent shall be sent by ordinary mail to O'Sullivan Graev & Karabell,
LLP,
-11-
<PAGE>
30 Rockefeller Plaza, New York, New York 10112, Attention: Julie M. Allen,
Esq. A copy of all communications sent to Blair shall be sent by ordinary mail
to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue, New York, NY 10017,
Attention: Alison S. Newman, Esq.
12. This Agreement may not be modified, altered or amended in any
material respect or cancelled or terminated except with the prior consent of the
holders of all of the outstanding shares of Common Stock of the Company.
13. In the event that the Public Offering is not consummated within
twenty-five (25) days of the Effective Date of the Registration Statement, this
Agreement shall terminate and be of no further force and effect and the Escrow
Agent, upon written notice from both the Company and Blair in accordance with
paragraph 10 hereof of such termination, will return the Escrow Securities and
any Escrow Property in respect thereof to the Stockholders.
14. This Agreement shall be governed by and construed in accordance
with the laws of New York and shall be binding upon and inure to the benefit of
all parties hereto and their respective successors in interest and assigns.
15. This Agreement may be executed in several counterparts, which
taken together shall constitute a single instrument.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers on the day and year first above
written.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: ______________________
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: ______________________
____________________________
Harvey Goldman
____________________________
Perry Pappas
-13-
<PAGE>
EXHIBIT A
STOCKHOLDERS' LIST
Number
of
Name and Address Stock Escrow
of Stockholder Certificate No. Number of Escrow Shares Options
- ---------------- --------------- ----------------------- -------
Harvey Goldman
Perry Pappas
-14-
<PAGE>
EXHIBIT 10.24
VIA FACSIMILE
May 9, 1996
VANGKOE Industries, Inc.
1093 A1A Beach Blvd.
Suite 371
St. Augustine, Florida 32084
AMENDMENT TO PURCHASE AND SUPPLY AGREEMENT
Gentlemen:
Reference is made to the Purchase, Supply and Distributorship Agreement dated as
of March 28, 1996 (the "Agreement"), among Conversion Technologies
International, Inc. ("CTI"), Dunkirk International Glass and Ceramics
Corporation ("Dunkirk"; and collectively with CTI, the "Company") and VANGKOE
Industries, Inc. ("VANGKOE"), as assignee of Cytech Laboratories, Inc.
VANGKOE and the Company deem it to be in their mutual best interest to amend
the Agreement to expand the materials which the Company may supply to
VANGKOE, to provide for the potential establishment of a facility to apply
the color coatings contemplated for the material being purchased under the
Agreement and to address certain other matters. Accordingly, in
consideration of $1.00 and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereby amend the
Agreement as follows:
1. The parties agree that the purchase commitments set forth in the
Agreement shall be adjusted to commence in October 1996, rather than
June 1996, provided that if the coating facility described in
paragraph 4 below becomes operational prior to October, such
commitments shall commence in the month (not before August) that such
process comes on line. The parties agree to make appropriate
adjustment to such start date if the parties proceed to establish
such facility and events beyond the control of VANGKOE relating to the
construction of such facility delay its start-up. In addition,
VANGKOE shall have the option to substitute one-third (1/3) of the
monthly ALUMAGLASS-TM- purchase commitments set forth in the Agreement
with crushed cathode ray tube ("CRT") panel glass (approximately 24,
36 and 60 grit) to be provided by the Company at a purchase price of
$0.07 per pound.
<PAGE>
VANGKOE Industries, Inc. 2
2. VANGKOE anticipates that it will be able to sell ALUMAGLASS directly
(without further coating or processing) for use as ingredients by
third party manufacturers. The Company hereby gives VANGKOE the
option to purchase up to an additional 4,000 tons of ALUMAGLASS at
$0.185 per pound so that VANGKOE can resell ALUMAGLASS for any
purpose (other than loose grain blasting where the Company has
exclusive arrangements), subject to availability and the other terms
set forth in the Agreement relating to the distribution of ALUMAGLASS.
VANGKOE agrees that if it sells ALUMAGLASS for such application it
will pay to the Company, in addition to the $0.185 per pound purchase
price, 50% of its net receipts to the extent such net receipts exceed
$0.185 per pound (less a reasonable allowance for marketing expense).
3. VANGKOE further desires the option, and the Company hereby grants
VANGKOE such option, during the initial term of the Agreement, to
purchase from the Company (i) up to 2,000 tons of crushed china bisque
(approximately 16, 24, 36, 60 and 100 grit) at a purchase price of
$0.08 per pound and/or (ii) up to 2,000 tons of crushed CRT panel
glass (approximately 24, 36 and 60 grit) at a purchase price of $0.07
per pound, in each case for use as substrates to be color coated by
the facility described in paragraph 4 or sold uncoated for sale as
ingredients in various markets; provided, however, that each of such
amounts may be increased, and grit sizes may be modified, upon the
mutual agreement of the parties. VANGKOE will provide projections
and reasonable advance notice with respect to all quantities and grit
sizes of ALUMAGLASS, CRT glass and china bisque required.
4. VANGKOE has represented to the Company that it is the owner of a
proprietary color coating technology (the "Technology") that can be
used to apply the color coatings to the material contemplated by
the Agreement, which Technology presents certain performance and
cost advantages to competitive processes. VANGKOE has offered the
Company the opportunity to enter into a joint venture and co-invest
in the establishment of a facility which will apply such coatings,
with the parties to share equally in VANGKOE's profit from sales of
the material coated through such facility. The parties estimate
that the total start up cost of establishing such facility
(equipment, permitting, testing, etc.) will not exceed $250,000.
The Company, however, desires the opportunity to conduct a review
of the technical and commercial viability of the Technology and
prospects for sale of the coated material prior to entering into
such joint venture and making such investment, and VANGKOE is
willing to afford the Company such opportunity. Accordingly, the
parties agree as follows:
A. During the 45-day period following the date hereof, VANGKOE will
do the following at its sole expense:
(i) VANGKOE will purchase from the Company sufficient
quantities of ALUMAGLASS(TM), china bisque and CRT glass
to produce prototypes of
<PAGE>
VANGKOE Industries, Inc. 3
the color coated particles and make admixtures of the end
products;
(ii) VANGKOE will test the key performance characteristics of
these products against competitive products produced by 3M,
Estes, Duraflex, etc., and provide written results of such
tests to the Company. The Company will be invited to observe
and participate in such testing. In addition, VANGKOE will
arrange for independent lab testing of certain key product
attributes if requested by the Company;
(iii)VANGKOE will conduct test marketing/customer presentations
to prove market interest. The Company will be invited to
participate in these activities and will have direct access
to all such prospective customers to confirm their interest;
and
(iv) VANGKOE will develop a marketing plan for the Company's
ALUMAGLASS, china bisque and CRT glass substrates.
B. Within 60 days following the date hereof, the Company will
determine whether or not to proceed with the joint venture and
make the contemplated investment and shall notify VANGKOE of such
decision in writing. Such decision shall be made in good faith
based upon the results of the activities described in paragraph 4A
by a committee of independent directors of the Company's Board of
Directors. During such 60-day period, VANGKOE will not negotiate
or enter into an agreement with any party other than the Company
regarding the proposed joint venture and co-investment or other
means of financing the Company's proposed contribution to the
coating operation.
C. If the Company determines to proceed with the joint venture,
the following provisions shall apply:
(i) The parties will promptly organize a new company ("NEWCO")
in the State of Delaware and issue 50% of its stock to the
Company and 50% to VANGKOE. The Board of Directors of NEWCO
will consist of four individuals (Jeff Koebrick and Bo
Gimvang of VANGKOE and two individuals designated by the
Company). VANGKOE will grant to NEWCO a perpetual,
royalty-free, exclusive (except as contemplated by
paragraph(ix) below) license of the Technology. The Board of
Directors of NEWCO will approve all budgets and expenditures.
(ii) The parties will identify the equipment required to apply
the color coatings which, at the Company's option, may be
used or leased. The Company will make a capital contribution
to NEWCO in the amount of 50% of the funds needed for the
coating equipment (not to exceed $125,000) and VANGKOE will
obtain a loan in an amount equal to the remaining 50% of the
required funding and contribute such funds to
<PAGE>
VANGKOE Industries, Inc. 4
NEWCO. The Company will provide a guarantee of such loan
on behalf of VANGKOE.
(iii)In consideration of the Company's investment, any excess
capacity at NEWCO will be available to the Company to coat
ALUMAGLASS, china bisque, crushed CRT glass or other
substrates. If the Company uses any such excess capacity,
the Company will pay to NEWCO a pro rata share of the
production costs incurred by NEWCO in connection therewith;
PROVIDED, HOWEVER, that, unless VANGKOE is in breach of its
guaranteed minimum purchase commitment under the Agreement,
if the Company uses such capacity to color coat material that
is sold to any customer located in Louisiana, Mississippi,
North Carolina, South Carolina, Georgia, Virginia or Florida,
the Company will share its profit on the sale of such
material with VANGKOE on a 50/50 basis. The Company will
also share VANGKOE's profit on the sale of ALUMAGLASS and
other substrates, and any profit NEWCO may realize on its
operations on a 50/50 basis. VANGKOE further agrees to
negotiate in good faith with respect to licensing to the
Company or a new entity to be jointly owned by the Company
and VANGKOE the manufacturing technology or technologies
related to the products set forth on EXHIBIT A in connection
with any new facility established by the Company.
<PAGE>
VANGKOE Industries, Inc. 5
(iv) VANGKOE will have the obligation to reimburse the Company
immediately if the Company's guarantee of VANGKOE's loan is
drawn upon. If VANGKOE does not satisfy such obligation, or
if VANGKOE does not perform its obligations under paragraph
(v) or (ix) below, VANGKOE's equity interest in NEWCO shall
transfer to the Company and VANGKOE will assign the
Technology to NEWCO. In the event that either party at any
time fails to renew the Agreement for an additional one-year
term, the other party shall have the option to purchase the
non-renewing party's equity interest in NEWCO for a purchase
price equal to 50% of the book value of NEWCO (determined in
accordance with generally accepted accounting principles).
Each party shall have a right of first refusal with respect
to the other party's equity interest in NEWCO.
(v) VANGKOE will (i) obtain a lease for a facility at or adjacent
to 7 San Bartola, St. Augustine, Florida, and will provide at
least 5,000 square feet to NEWCO for its operations pursuant
to a sublease at a cost equal to NEWCO's pro rata share of
the rent (which pro rata share will not to exceed $2,500 per
month) and (ii) provide a minimum of $30,000 of working
capital to fund the preparation of marketing materials and
product specifications, preparation and distribution of test
amounts of coated material to prospective customers,
research and development and recruiting and training sales
representatives and technical employees. VANGKOE shall
utilize NEWCO as its exclusive source for applying color
coatings on all substrates purchased from the Company and,
unless otherwise agreed to by the Company, shall purchase
ALUMAGLASS, CRT glass and china bisque exclusively from the
Company.
<PAGE>
VANGKOE Industries, Inc. 6
(vi) In the event that VANGKOE shall at any time fail to meet its
minimum guaranteed purchase commitment under the Agreement,
(i) the exclusivity provision set forth in Section 1.2 of
the Agreement shall cease to apply and (ii) the Company
shall have the right to designate an additional director to
the Board of Directors of NEWCO (bringing the total to five
directors, three designated by the Company and two
designated by VANGKOE).
(vii) The Company shall have the right to assist VANGKOE in its
marketing efforts. VANGKOE agrees to provide the Company
within 5 days following the end of each month a report of
its sales (including type of product, volume and selling
price) from products utilizing the Company's substrates and
a good faith projection of sales for the current month,
which report shall be certified by an officer of VANGKOE.
In the event of any dispute relating to the amounts owed to
the Company under the Agreement, such dispute shall be
resolved by a big six accounting firm selected by the
parties by lot. VANGKOE's selling prices of products using
the Company's substrates will provide no preferential
discounts or other savings to those customers who are in any
way affiliated with the principals of VANGKOE or who might
be purchasing other products or services of any entity with
which the VANGKOE principals have an affiliation or
financial interest.
(viii) VANGKOE hereby commits during the term of the Agreement to
seek to develop additional color coated products for the
Company's ALUMAGLASS product, its CRT panel glass, its china
bisque and other applicable substrates that the Company may
provide, and shall license any applicable technologies for
such products to NEWCO on an exclusive, royalty-free basis.
VANGKOE will provide the Company with a report, within 5
days following the end of each month, of its production
costs and development activities, certified by an officer of
VANGKOE.
(x) VANGKOE will provide the Company with a license of its color
coating technology for future manufacturing facilities
established by the Company, which will provide for a royalty
not to exceed $0.01 per pound (or any lesser price given to
any third party).
5. To the extent any provision of the Agreement is inconsistent with the
amendments made hereby, such provision shall be deemed amended to be
consistent with the terms hereof.
6. Except as specifically set forth herein, the Agreement shall remain in
full force and effect.
7. The parties agree to work together in good faith and use best efforts
to carry out the intent of this amendment, including, without
limitation, executing such other documents and agreements as shall be
necessary to effectuate the terms hereof.
<PAGE>
VANGKOE Industries, Inc. 7
8. This amendment shall be governed by and construed in accordance with
the laws of the State of New York, applicable to contracts made and to
be performed wholly therein.
Please indicate your agreement by signing below where indicated.
Sincerely,
AGREED TO BY:
CONVERSION TECHNOLOGIES VANGKOE INDUSTRIES, INC.
INTERNATIONAL, INC.
By: By:
-------------------------------- -------------------------------------
Harvey Goldman Name:
President and Chief Executive Title:
Officer
DUNKIRK INTERNATIONAL GLASS
AND CERAMICS CORPORATION
By:
--------------------------------
Perry A. Pappas
Vice President
<PAGE>
EXHIBIT 11.1
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF PRO FORMA NET (LOSS) PER SHARE
PERIOD FROM MARCH 1, 1994 (DATE OPERATIONS COMMENCED) TO JUNE 30, 1994 AND THE
YEAR ENDED
JUNE 30, 1995 AND THE NINE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1994
(DATE OPERATIONS
COMMENCED) TO YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1995 MARCH 31, 1996
---------------- -------------- ------------------
<S> <C> <C> <C>
Net (loss) as reported..................................... $ (371,415) $ (12,254,702) $ (2,537,697)
---------------- -------------- ------------------
---------------- -------------- ------------------
Weighted average number of common shares outstanding....... 18,679 147,012 162,333
Weighted average number of common shares outstanding
considering the conversion of the Company's Series A
Preferred Stock into common stock upon the offering....... -- 587,742 1,023,054
---------------- -------------- ------------------
Shares used in the computation............................. 18,679 734,754 1,185,387
---------------- -------------- ------------------
---------------- -------------- ------------------
Pro forma net (loss) per common share (1).................. $ (19.88) $ (16.68) $ (2.14)
---------------- -------------- ------------------
---------------- -------------- ------------------
</TABLE>
- ------------------------
(1) Calculations of fully diluted and primary earnings per share are identical.
