<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 22, 1997.
FILE NO. 333-20075
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3291 13-3754366
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of incorporation or classification code number) Identification Number)
organization)
</TABLE>
------------------------
BETHANY CROSSING OFFICE CENTER
82 BETHANY ROAD
HAZLET, NEW JERSEY 07730
(908) 888-3828
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------
HARVEY GOLDMAN
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, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JULIE M. ALLEN, ESQ. MICHAEL J. SULLIVAN, ESQ.
O'Sullivan Graev & Karabell, LLP Greenberg, Traurig, Hoffman, Lipoff,
30 Rockefeller Plaza Rosen & Quental, P.A.
New York, New York 10112 111 North Orange Avenue, Suite 2050
(212) 408-2400 Orlando, Florida 32801
(407) 418-2376
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
effective time of the merger (the "Merger") of a subsidiary of Registrant with
and into Octagon, Inc., a Delaware corporation ("Octagon"), pursuant to the
Agreement and Plan of Reorganization described in the enclosed Proxy
Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
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>
OCTAGON, INC.
317 NORTH LAKE BOULEVARD, SUITE 1024
ALTAMONTE SPRINGS, FLORIDA 32701
Dear Octagon, Inc. Stockholder:
You are cordially invited to attend a special meeting of the stockholders of
Octagon, Inc. ("Octagon") to be held at 10:00 a.m. local time, on May 14, 1997,
at the offices of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A.,
153 East 53rd Street, 35th Floor, New York, New York 10022 (the "Special
Meeting").
At the Special Meeting, you will be asked to consider and vote on a proposal
to approve and adopt (i) the Agreement and Plan of Reorganization (the "Merger
Agreement"), dated November 18, 1996, as amended, among Octagon, Conversion
Technologies International, Inc. ("Conversion") and CTI ACQSUB-II, Inc., a
wholly-owned subsidiary of Conversion ("Sub"), and (ii) the merger of Sub with
and into Octagon (the "Merger"), whereby Octagon will become a wholly-owned
subsidiary of Conversion and the stockholders of Octagon will become
stockholders of Conversion.
The affirmative vote of the holders of a majority of the Common Stock, $.01
par value, of Octagon (the "Octagon Common Stock") is necessary for approval and
adoption of the Merger Agreement and the Merger. As disclosed in the Proxy
Statement/Prospectus, the holders of approximately 52% of the Octagon Common
Stock, which holders include the undersigned and certain other principal
stockholders of Octagon, have entered into agreements with Conversion, pursuant
to which they have agreed to vote in favor of the Merger Agreement and the
Merger. Accordingly, approval and adoption of the Merger Agreement and the
Merger appears to be assured.
OCTAGON'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF OCTAGON AND ITS
STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
Details of the proposed transaction and other important information
concerning Octagon and Conversion are more fully described in the accompanying
Proxy Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed postage
prepaid envelope. You may revoke your proxy in the manner described in the
accompanying Proxy Statement/Prospectus at any time before it has been voted at
the Special Meeting. If you attend the Special Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated.
Very truly yours,
<TABLE>
<S> <C>
William L. Amt Harry O. Christenson
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN AND CHIEF FINANCIAL OFFICER
</TABLE>
April , 1997
Altamonte Springs, Florida
<PAGE>
OCTAGON, INC.
317 NORTH LAKE BOULEVARD, SUITE 1024
ALTAMONTE SPRINGS, FLORIDA 32701
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14, 1997
------------------------
TO: THE STOCKHOLDERS OF OCTAGON, INC.
A special meeting of the stockholders of Octagon, Inc., a Delaware
corporation ("Octagon"), will be held at 10:00 a.m. local time, on May 14, 1997,
at the offices of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A.,
153 East 53rd Street, 35th Floor, New York, New York 10022 (the "Special
Meeting"), for the following purposes:
1. To approve and adopt (a) the Agreement and Plan of Reorganization (the
"Merger Agreement"), dated November 18, 1996, as amended, among Octagon,
Conversion Technologies International, Inc. ("Conversion") and CTI ACQSUB-II,
Inc., a wholly-owned subsidiary of Conversion ("Sub"), and (b) the merger
contemplated thereby of Sub with and into Octagon (the "Merger"), whereby
Octagon will become a wholly-owned subsidiary of Conversion and the stockholders
of Octagon will become stockholders of Conversion. By virtue of the Merger, each
outstanding share of common stock of Octagon ("Octagon Common Stock") will be
converted into the right to receive 0.10 (one-tenth) of a share of common stock
of Conversion. A copy of the Merger Agreement is attached as Exhibit A to the
Proxy Statement/Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the Special
Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on April 18, 1997 as
the record date for the determination of the holders of Octagon Common Stock
entitled to notice of, and to vote at, the Special Meeting. Accordingly, only
stockholders of record at the close of business on such date are entitled to
notice of and to vote at the Special Meeting and any adjournment or postponement
thereof.
Details of the proposed transaction and other important information
concerning Octagon and Conversion are more fully described in the accompanying
Proxy Statement/Prospectus. Please give this material your careful attention.
You may revoke your proxy in the manner described in the accompanying Proxy
Statement/Prospectus at any time before it has been voted at the Special
Meeting. Any stockholder attending the Special Meeting may vote in person even
if he or she has returned a proxy.
By Order of the Board of Directors,
<TABLE>
<S> <C>
William L. Amt Harry O. Christenson
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN AND CHIEF FINANCIAL OFFICER
</TABLE>
April , 1997
Altamonte Springs, Florida
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO
SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY CARD WHICH IS BEING SOLICITED ON
BEHALF OF THE OCTAGON BOARD OF DIRECTORS. A RETURN ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR THAT PURPOSE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 22, 1997
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>
PROXY STATEMENT/PROSPECTUS
------------------------
PROXY STATEMENT OF OCTAGON, INC.
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14 1997
------------------------
PROSPECTUS OF CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
FOR SHARES OF COMMON STOCK TO BE ISSUED IN THE MERGER
------------------------
This Proxy Statement/Prospectus is being furnished to holders of Common
Stock, $.01 par value per share (the "Octagon Common Stock"), of Octagon, Inc.,
a Delaware corporation ("Octagon"), in connection with the solicitation of
proxies by the Board of Directors of Octagon (the "Octagon Board") for use at
the Special Meeting of Stockholders of Octagon to be held at the offices of
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. ("Greenberg,
Traurig"), 153 East 53rd Street, 35th Floor, New York, New York 10022, on May
14, 1997, beginning at 10:00 a.m., local time, and at any and all adjournments
or postponements thereof (the "Special Meeting").
This Proxy Statement/Prospectus relates, among other things, to the proposed
merger (the "Merger") of CTI ACQSUB-II, Inc. ("Sub"), a newly-formed,
wholly-owned subsidiary of Conversion Technologies International, Inc.
("Conversion"), with and into Octagon pursuant to the Agreement and Plan of
Reorganization, dated November 18, 1996, as amended (the "Merger Agreement"),
among Conversion, Octagon and Sub. Upon consummation of the Merger, the separate
corporate existence of Sub will cease and Octagon will become a wholly-owned
subsidiary of Conversion. In the Merger, each outstanding share of Octagon
Common Stock will be converted into the right to receive 0.10 (one-tenth) of a
share of Common Stock, $.00025 par value, of Conversion (the "Conversion Common
Stock").
This Proxy Statement/Prospectus also constitutes the Prospectus of
Conversion with respect to an aggregate of approximately 850,000 shares of
Conversion Common Stock to be issued in connection with the Merger (the "Merger
Shares"). Immediately after the consummation of the Merger, the Merger Shares
will represent an aggregate of approximately 13.3% of the outstanding shares of
Conversion Common Stock, based on the number of such shares outstanding as of
March 1, 1997 and without giving effect to the Private Placement (as defined
herein). Conversion Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol CTIX. On April , 1997, the last reported sale price for Conversion
Common Stock was $ per share.
All information contained in this Proxy Statement/Prospectus with respect to
Conversion and Sub has been provided by Conversion, and all information with
respect to Octagon has been provided by Octagon.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER, SEE
"RISK FACTORS" BEGINNING ON PAGE 13.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Octagon on or about April , 1997. A
stockholder of Octagon who has given a proxy may revoke it at any time prior to
its exercise. See "The Special Meeting".
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THE MERGER 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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is April , 1997
<PAGE>
AVAILABLE INFORMATION
Conversion is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information can be inspected and copied at the public reference
facility of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained by
mail from the public reference section of the SEC at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Conversion
Common Stock is listed on the Nasdaq SmallCap Market and such reports, proxy
statements and other information concerning Conversion may be inspected and
copied at the offices of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006. In addition, Conversion is required
to file electronic versions of these documents with the SEC through the SEC's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC.
This Proxy Statement/Prospectus constitutes a part of a Registration
Statement on Form S-4 (herein, together with all amendments and exhibits
thereto, referred to as the "Registration Statement") filed by Conversion with
the SEC under the Securities Act of 1933, as amended (the "Securities Act").
This Proxy Statement/Prospectus omits certain of the information contained in
the Registration Statement, and reference is hereby made to the Registration
Statement for further information with respect to the Conversion Common Stock
offered hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of the document filed as an exhibit to the Registration Statement or
otherwise filed with the SEC. Each such statement is qualified in its entirety
by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CONVERSION OR OCTAGON OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
CONVERSION COMMON STOCK MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CONVERSION OR
OCTAGON SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 4
RISK FACTORS.......................................................................... 13
THE SPECIAL MEETING................................................................... 26
BACKGROUND OF THE MERGER.............................................................. 27
RECOMMENDATION OF THE OCTAGON BOARD AND REASONS FOR THE MERGER........................ 28
OPINION OF BROOKS, HOUGHTON........................................................... 30
THE MERGER............................................................................ 34
DISSENTERS' RIGHTS.................................................................... 43
EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON.................................. 45
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... 46
BUSINESS OF CONVERSION................................................................ 51
CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 66
MANAGEMENT OF CONVERSION.............................................................. 72
CONVERSION EXECUTIVE COMPENSATION..................................................... 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION.......................... 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT OF
CONVERSION.......................................................................... 84
BUSINESS OF OCTAGON................................................................... 86
OCTAGON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 88
MANAGEMENT OF OCTAGON................................................................. 91
OCTAGON EXECUTIVE COMPENSATION........................................................ 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF OCTAGON............................. 97
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT OF
OCTAGON............................................................................. 97
DESCRIPTION OF CONVERSION SECURITIES.................................................. 98
COMPARATIVE RIGHTS OF CONVERSION STOCKHOLDERS AND OCTAGON STOCKHOLDERS................ 101
LEGAL MATTERS......................................................................... 101
EXPERTS............................................................................... 102
INDEPENDENT ACCOUNTANTS............................................................... 102
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
EXHIBIT A -- AGREEMENT AND PLAN OF REORGANIZATION..................................... A-1
EXHIBIT B-1 -- OPINION OF BROOKS, HOUGHTON & COMPANY, INC............................. B-1
EXHIBIT B-2 -- OPINION OF BROOKS, HOUGHTON & COMPANY, INC............................. B-2
EXHIBIT C -- SECTION 262 OF DELAWARE GENERAL CORPORATION LAW.......................... C-1
EXHIBIT D -- VOTING AGREEMENTS AND IRREVOCABLE PROXIES................................ D-1
</TABLE>
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY
ARE DEFINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO,
AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS AND THE EXHIBITS HERETO.
A COPY OF THE MERGER AGREEMENT IS ATTACHED AS EXHIBIT A TO THIS PROXY
STATEMENT/PROSPECTUS AND REFERENCE IS MADE THERETO FOR A COMPLETE DESCRIPTION OF
THE TERMS OF THE MERGER. EACH STOCKHOLDER SHOULD READ CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS AND THE EXHIBITS HERETO IN THEIR ENTIRETY.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS A NUMBER OF FORWARD-LOOKING
STATEMENTS WHICH REFLECT THE CURRENT VIEWS OF CONVERSION AND/OR OCTAGON WITH
RESPECT TO FUTURE EVENTS THAT MAY HAVE AN EFFECT ON THEIR FUTURE PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE HEREIN, THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL OR CURRENTLY
ANTICIPATED RESULTS. STOCKHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS.
GENERAL
This Proxy Statement/Prospectus relates to the proposed Merger of Sub with
and into Octagon pursuant to the Merger Agreement, whereby Octagon will become a
wholly-owned subsidiary of Conversion. See "THE MERGER".
THE PARTIES TO THE MERGER
CONVERSION. Conversion's business consists of (i) producing various
substrates for use as industrial abrasives for surface cleaning and surface
preparation applications and for use as aggregates for incorporation into
non-skid flooring, roofing shingles, plasters and other construction materials
and (ii) recycling cathode ray tube ("CRT") glass for sale to the manufacturers
of such glass and others. Conversion's abrasives and construction materials
substrates include Conversion's initial product,
ALUMAGLASS-Registered Trademark-, an alumino-silicate glass produced in a
patented process utilizing industrial waste streams and certain virgin
materials, as well as other glass and fired ceramic materials produced utilizing
Conversion's manufacturing equipment.
To date, substantially all of Conversion's revenues have been derived from
recycling CRT glass used in the manufacture of televisions. Conversion has
generated only limited sales of ALUMAGLASS and has only recently commenced
production of other substrates. Although Conversion is currently manufacturing
certain glass and fired ceramic substrates, Conversion is not currently
manufacturing ALUMAGLASS and is relying on its inventory to satisfy customer
demand for ALUMAGLASS.
Following consummation of the Merger, in addition to pursuing opportunities
presented by Octagon's business, Conversion plans to focus its efforts on
recycling CRT glass used in computers as well as televisions and producing
industrial abrasives and substrates for construction materials. Conversion also
plans to continue to pursue joint venture or other arrangements with third
parties to manufacture ALUMAGLASS or other glass products on-site at their
facilities for their own internal use or for resale on a cost-effective basis.
Conversion's operations are conducted through its wholly-owned subsidiary,
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), which was
incorporated in Delaware in July 1990. Conversion acquired Dunkirk in August
1994. Conversion was incorporated in June 1993 for the purpose of acquiring
Dunkirk and conducted no business activities prior to such acquisition. All
references to Conversion in this Proxy Statement/Prospectus include Conversion
and Dunkirk, unless the context otherwise requires. Conversion consummated its
initial public offering of Conversion Common Stock in May 1996. Conversion's
executive offices are located at Bethany Crossing Office Center, 82 Bethany
Road, Hazlet, New Jersey 07730, and its telephone number is (908) 888-3828.
4
<PAGE>
OCTAGON. Octagon is a national leader in providing radiological control and
operations and maintenance services to nuclear utilities. Octagon is one of
three leading U.S. technical service firms providing such services. Octagon also
provides technical, operations and maintenance services to the Department of
Defense and the Department of Energy and other governmental agencies and
industrial concerns.
Octagon's predecessor company, Executive Resource Associates, Inc. ("ERA"),
was incorporated in the Commonwealth of Virginia in April 1977. ERA's business
was focused primarily on operations and maintenance services for the Department
of Defense. In September 1993, 80% of the Common Stock of Octagon was acquired
by John T. Royall and Steven W. Koinis, former executive officers and directors
and current principal stockholders of Octagon. In December 1993, ERA
reincorporated in the State of Delaware by merging with and into Octagon, Inc.,
which was incorporated in Delaware in December 1993 for the purpose of
consummating such merger. In February 1994, Octagon consummated its initial
public offering of Octagon Common Stock. In March 1994, Octagon purchased all of
the outstanding shares of stock of ABB Power Systems Energy Services, Inc.
("Power Systems"), which was a wholly-owned indirect subsidiary of Asea Brown
Boveri ("ABB"), a company organized under the laws of Switzerland. Power Systems
was incorporated in Delaware in 1984 as a subsidiary of Combustion Engineering,
Inc., which was acquired by ABB in 1990. Power Systems' business was focused
primarily on radiological control and operations and maintenance services for
utility companies and the Department of Energy. Octagon's executive offices are
located at 317 North Lake Boulevard, Suite 1024, Altamonte Springs, Florida
32701, and its telephone number is (407) 834-9993.
SUB. Sub was incorporated under the laws of Delaware in November 1996 as a
wholly-owned subsidiary of Conversion to serve as a vehicle to effect the
Merger. The address of Sub's executive offices and telephone number are the same
as those of Conversion.
THE SPECIAL MEETING
TIME, DATE AND PLACE. The Special Meeting will be held on May 14, 1997, at
the offices of Greenberg, Traurig, 153 East 53rd Street, 35th Floor, New York,
New York 10022, at 10:00 a.m., local time.
RECORD DATE, QUORUM AND SHARES ENTITLED TO VOTE. Only holders of record of
shares of Octagon Common Stock at the close of business on April 18, 1997 are
entitled to vote at the Special Meeting. At the close of business on April ,
1997, there were outstanding 8,404,702 shares of Octagon Common Stock which are
entitled to vote at the Special Meeting. Each share of Octagon Common Stock is
entitled to one vote at the Special Meeting.
The presence either in person or by properly executed proxy of the holders
of a majority of the outstanding shares of Octagon Common Stock entitled to vote
at the Special Meeting is necessary to constitute a quorum at such meeting. If a
quorum is not present at the Special Meeting, the stockholders present, by vote
of a majority of the votes cast by stockholders entitled to vote thereon, may
adjourn the meeting, and at any such adjourned meeting at which a quorum is
present any business may be transacted which might have been transacted at the
meeting as originally held and proxies will be voted thereat as directed.
PROXIES AND REVOCATION OF PROXIES. The enclosed Octagon proxy card permits
each stockholder to vote "FOR" or "AGAINST" (or "ABSTAIN" from) approval and
adoption of the Merger Agreement and the Merger. If properly executed and
returned, such proxies will be voted in accordance with the choice specified.
Where a signed proxy card is returned, but no choice is specified, the shares
will be voted FOR approval and adoption of the Merger Agreement and the Merger.
A proxy relating to the Special Meeting may be revoked at any time before it
is exercised; however, mere attendance at the Special Meeting will not itself
have the effect of revoking the proxy. A stockholder may revoke a proxy by
filing with the Secretary of Octagon an instrument of revocation or duly
executed
5
<PAGE>
proxy bearing a later date. A stockholder may also revoke a proxy by
affirmatively electing to vote in person while attending the Special Meeting.
PURPOSE OF SPECIAL MEETING. At the Special Meeting, stockholders of Octagon
will be asked to consider and vote on a proposal to approve and adopt the Merger
Agreement and the Merger and such other matters as may be properly brought
before such special meeting.
VOTING AGREEMENTS. In connection with the execution of the Letter of Intent
entered into between Octagon and Conversion on August 13, 1996, relating to the
Merger (as amended, the "Letter of Intent"), and to facilitate the consummation
of the Merger, Conversion entered into Voting Agreements and Irrevocable Proxies
in August 1996, as amended (each, a "Voting Agreement" and, collectively, the
"Voting Agreements"), the form of which is attached as Exhibit D to this Proxy
Statement/Prospectus, with certain stockholders of Octagon (each, a
"Stockholder" and, collectively, the "Stockholders"), including William L. Amt,
the President and Chief Executive Officer of Octagon, and Harry O. Christenson,
the Chairman and Chief Financial Officer of Octagon. Approximately 52% of the
outstanding shares of Octagon Common Stock are represented by the Voting
Agreements, which percentage is sufficient to approve and adopt the Merger
Agreement and the Merger without the approval of any other stockholders of
Octagon. Each Stockholder agreed that at any meeting of the stockholders of
Octagon, and in any action by written consent of the stockholders of Octagon,
such Stockholder will vote all shares of Octagon Common Stock held by such
Stockholder (a) in favor of the Merger Agreement, the Merger and the other
transactions contemplated by the Merger Agreement and (b) against any other
merger, consolidation or similar transaction pursuant to which control of
Octagon would be transferred to any person other than Conversion or any sale or
other disposition of 50% or more of the assets of Octagon to any party other
than Conversion. Each Stockholder has also granted Conversion an irrevocable
proxy to vote his shares of Octagon Common Stock as specified above in the event
that such Stockholder fails to so vote such shares.
The Voting Agreements are intended to ensure that the Merger will be
consummated in accordance with the terms of the Merger Agreement. Consequently,
the Voting Agreements may have the effect of discouraging persons who now or
prior to the Effective Time might be interested in acquiring all or a
significant interest in Octagon from proposing or making such an acquisition,
even if such persons were prepared to pay a higher price per share for Octagon
Common Stock than the price per share implicit in the Merger. See "THE MERGER --
Voting Agreements".
OTHER MATTERS. Representatives of the independent auditors of Octagon are
expected to be present at the Special Meeting. See "INDEPENDENT ACCOUNTANTS".
REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding shares
of Octagon Common Stock is required to approve and adopt the Merger Agreement
and the Merger. Each share of Octagon Common Stock is entitled to one vote at
the Special Meeting. Certain stockholders of Octagon holding an aggregate of 52%
of the Octagon Common Stock have entered into the Voting Agreements with
Conversion agreeing to vote in favor of the Merger Agreement and the Merger.
Accordingly, approval and adoption of the Merger Agreement and the Merger
appears to be assured. See "THE SPECIAL MEETING" and "THE MERGER -- Voting
Agreements".
No vote of Conversion's stockholders is required for the approval and
adoption of the Merger Agreement or the consummation of the Merger.
RECOMMENDATION OF THE OCTAGON BOARD
The Octagon Board has approved the Merger Agreement and the Merger and
unanimously recommends that the Octagon stockholders vote "FOR" approval and
adoption of the Merger Agreement and
6
<PAGE>
the Merger. See "BACKGROUND OF THE MERGER" and "RECOMMENDATION OF THE OCTAGON
BOARD AND REASONS FOR THE MERGER". In considering the recommendation of the
Octagon Board with respect to the Merger Agreement and the Merger, Octagon
stockholders should be aware that certain directors and officers of Octagon have
interests in the Merger different from the interests of other Octagon
stockholders. See "THE MERGER -- Conflicts of Interest".
FAIRNESS OPINION WITH RESPECT TO THE MERGER
The Octagon Board has received opinions of Brooks, Houghton & Company, Inc.
("Brooks, Houghton"), Octagon's financial advisor in connection with the Merger,
that, as of the date of each such opinion, the consideration to be received by
holders of shares of Octagon Common Stock pursuant to the Merger is fair to such
stockholders from a financial point of view. Copies of such opinions are
attached as Exhibits B-1 and B-2 to this Proxy Statement/Prospectus.
THE MERGER
GENERAL. At the Effective Time, Sub will be merged with and into Octagon,
and Conversion will thereby acquire all of the issued and outstanding shares of
Octagon Common Stock. Sub will cease to exist as a separate corporation and
Octagon will be the surviving corporation in the Merger (the "Surviving
Corporation"). The Certificate of Incorporation (the "Octagon Certificate of
Incorporation") and the Bylaws (the "Octagon Bylaws") of Octagon as in effect at
the Effective Time will be the Certificate of Incorporation and the Bylaws of
the Surviving Corporation, except that the Octagon Certificate of Incorporation
shall be amended to decrease its authorized shares of Common Stock to 1,000
shares.
CONVERSION OF OCTAGON COMMON STOCK. At the Effective Time of the Merger,
each outstanding share of Octagon Common Stock, other than shares held by
holders who properly exercise their dissenters' rights under Delaware law, will
be converted into 0.10 (one-tenth) of a share of Conversion Common Stock (the
"Conversion Ratio"). The stockholders of Conversion will continue to hold their
shares of capital stock of Conversion without any change in number, designation,
terms or rights. For a summary of various differences between the rights of
Octagon stockholders and the rights of holders of Conversion Common Stock, see
"COMPARATIVE RIGHTS OF CONVERSION STOCKHOLDERS AND OCTAGON STOCKHOLDERS".
EFFECTIVE TIME OF THE MERGER. Subject to the terms and conditions of the
Merger Agreement, the Merger is expected to become effective as soon as
practicable after the Special Meeting. See "THE MERGER -- Conflicts of
Interest".
CONDITIONS TO THE MERGER. The obligations of Conversion and Octagon to
effect the Merger are subject to certain conditions, including, among other
things, approval and adoption of the Merger Agreement and the Merger by
Octagon's stockholders, the accuracy of representations and warranties included
in the Merger Agreement, the delivery of a tax opinion and other customary
conditions. Other than the required stockholder approval, substantially all of
the conditions to the obligation of Conversion or Octagon to consummate the
Merger may be waived or modified by the party that is, or whose stockholders
are, entitled to the benefits thereof.
AMENDMENT, TERMINATION AND WAIVER. The Merger Agreement may be amended at
any time, provided that, after the Merger Agreement has been approved and
adopted by Octagon's stockholders, it may be amended only as permitted by
applicable law. Under certain conditions, the Merger Agreement may be terminated
prior to the Effective Time, whether prior to or after approval by the Octagon
stockholders. The conditions under which the Merger Agreement may be terminated
include termination by mutual consent of Conversion and Octagon, termination by
either party if the Merger has not been consummated on or before June 30, 1997,
termination by either party upon the failure of Octagon to receive the requisite
stockholder approval, termination by either party if there has been a material
breach of any representation,
7
<PAGE>
warranty, covenant or agreement on the part of the other party that has not been
cured within the prescribed cure period, or termination by either party if a
final unappealable order to prevent the Merger is entered. The Merger may also
be terminated by Conversion if the recommendation of the Merger by the Octagon
Board is withdrawn or modified in a manner adverse to Conversion or if the
Octagon Board recommends certain other transactions to its stockholders. See
"THE MERGER -- Conditions to Consummation of the Merger", "THE MERGER --
Amendment of the Merger Agreement; Waiver of Conditions" and "THE MERGER --
Termination of the Merger Agreement".
EXPENSES; TERMINATION FEES. If the Merger Agreement is terminated, the
Merger Agreement provides, in certain specified circumstances, for the payment
by Octagon to Conversion of $200,000 plus fees and expenses. See "THE MERGER --
Fees and Expenses; Termination Fees".
SOLICITATION OF THIRD-PARTY OFFERS. In the Merger Agreement, Octagon has
agreed not to solicit, initiate or intentionally encourage proposals or offers,
or take certain other actions, relating to any merger, consolidation, share
exchange, purchase or other acquisition of all or (other than in the ordinary
course of business) any substantial portion of the assets or any substantial
equity interest in Octagon or any subsidiary of Octagon or any business
combination with Octagon or any subsidiary of Octagon, but is permitted to
supply information to third parties and cooperate or assist or engage in
discussions or negotiations with third parties relating to such merger and
acquisition transaction, or modify or withdraw its recommendation of the Merger,
if Octagon receives a bona fide offer on superior terms and if the Octagon Board
determines (after consultation with legal counsel) that such action is necessary
in order for it to act in accordance with its fiduciary obligations under
applicable law. See "THE MERGER -- Representations, Warranties and Covenants".
SURRENDER OF SHARE CERTIFICATES. After the Effective Time, each stockholder
of Octagon will be entitled to receive, upon surrender of certificates
previously representing shares of Octagon Common Stock, certificates
representing the number of full shares of Conversion Common Stock to which such
stockholder is entitled pursuant to the Merger Agreement. No fractional shares
of Conversion Common Stock will be issued, and holders of Octagon Common Stock
will be entitled to receive an amount in cash equal to the value of any such
fraction in the manner provided in the Merger Agreement. STOCKHOLDERS OF OCTAGON
SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE TRANSMITTAL
MATERIALS, WHICH WILL BE MAILED FOLLOWING THE EFFECTIVE TIME. See "THE MERGER --
Exchange of Shares".
ACCOUNTING TREATMENT. The Merger will be accounted for as a purchase for
accounting and financial reporting purposes. See "THE MERGER -- Accounting
Treatment of the Merger".
MANAGEMENT AFTER THE MERGER. After the Effective Time, the Conversion Board
will increase from eight to twelve members, and William L. Amt, Harry O.
Christenson, Patricia H. Engman and William V. Roberti, currently members of the
Octagon Board (and, in the case of Messrs. Amt and Christenson, significant
stockholders and executive officers of Octagon), will become directors of
Conversion. The Octagon Board will be composed of Mr. Amt and Eckardt C. Beck,
the Chairman of Conversion. The executive officers of Conversion after the
Effective Time are expected to be as follows: William L. Amt, President and
Chief Executive Officer; Harry O. Christenson, Chief Financial Officer; John C.
Kolojeski, Vice President--Regulatory Compliance; Jack D. Hays, Jr., Vice
President--Manufacturing and Operations; and William Gary Jellum, Vice
President--Human Resources. In addition, Eckardt C. Beck and Harvey Goldman will
continue to be Chairman and Vice-Chairman, respectively, of Conversion following
the Merger. See "THE MERGER -- Business and Management After the Merger;
Employment Agreements".
CONDUCT OF BUSINESS. Each of Octagon and Conversion has agreed to conduct
its business in the ordinary course and in accordance with certain covenants
prior to the Effective Time. See "THE MERGER -- Conduct of Business".
8
<PAGE>
RISK FACTORS
Ownership of Conversion Common Stock and the business to be conducted by
Conversion after the Merger involve certain substantial risks, including, but
not limited to, the uncertainty of future profitability, the need for additional
financing to achieve profitability, limited acceptance of products to date and
risks associated with combining the two companies. See "RISK FACTORS".
DISSENTERS' RIGHTS IN THE MERGER
Holders of record of shares of Octagon Common Stock will have appraisal
rights with respect to their shares. Such stockholders who do not vote to
approve and adopt the Merger Agreement and the Merger may elect to have the fair
value of their shares, based on all relevant factors and excluding any element
of value arising from the accomplishment or expectation of the Merger,
judicially appraised and paid to them in cash. Such stockholders must deliver a
written demand for such appraisal to Octagon prior to the taking of the vote on
the approval and adoption of the Merger Agreement and the Merger and comply with
the other requirements of Section 262 of the Delaware General Corporation Law
("DGCL"), the full text of which is attached to this Proxy Statement/Prospectus
as Appendix C. Voting for the approval and adoption of the Merger Agreement and
the Merger, or delivering a proxy in connection with the Special Meeting (unless
the proxy specifies a vote against, or expressly abstains from the vote on, the
approval and adoption of the Merger Agreement and the Merger), will constitute a
waiver of a stockholder's right to seek appraisal and will nullify any written
demand for appraisal submitted by such stockholder. Any deviation from the
requirements of Section 262 of the DGCL may result in a forfeiture of appraisal
rights. See "DISSENTERS' RIGHTS".
CONFLICTS OF INTEREST
In considering the recommendation of the Octagon Board to approve and adopt
the Merger Agreement and the Merger, Octagon stockholders should be aware that
the executive officers of Octagon, certain members of the Octagon Board and
certain former officers and directors who are currently principal stockholders
of Octagon have interests in the Merger that are in addition to the interests of
Octagon stockholders generally, and that the members of the Octagon Board having
such interests participated in the discussion, deliberation and voting of the
Octagon Board with respect to the Merger Agreement and the Merger. The Octagon
Board of Directors was aware of these interests, but did not believe that they
would affect the objectivity of any director's determination that the Merger was
in the best interests of Octagon's stockholders.
EMPLOYMENT AGREEMENTS. Each of William L. Amt, the President and Chief
Executive Officer and a director of Octagon, and Harry O. Christenson, the
Chairman and Chief Financial Officer of Octagon, has entered into an Employment
Agreement (collectively, the "Employment Agreements") with Conversion relating
to his continued employment with Conversion for the one-year period following
the Merger. Pursuant to the Employment Agreements, Mr. Amt and Mr. Christenson
will each receive a salary of $160,000 per year and will each be eligible to
receive additional incentive compensation, stock options and other benefits.
Upon consummation of the Merger, Mr. Amt and Mr. Christenson will also receive
options to purchase 250,000 shares and 150,000 shares, respectively, of
Conversion Common Stock at an exercise price equal to the fair market value
thereof on the date of grant. See "THE MERGER -- Business and Management After
the Merger; Employment Agreements".
ACCELERATION OF OPTIONS. The vesting of options held by William L. Amt, the
President and Chief Executive Officer and Harry O. Christenson, the Chairman and
Chief Financial Officer of Octagon, in each case, to purchase 800,000 shares of
Octagon Common Stock at an exercise price of $0.07 was accelerated by Octagon to
become exercisable, and all such options were exercised by Mr. Amt and Mr.
Christenson on August 26, 1996 through cashless exercise resulting in the
issuance to each of them of 650,667 shares of Octagon Common Stock. See "OCTAGON
EXECUTIVE COMPENSATION".
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<PAGE>
INDEMNIFICATION. Pursuant to the Employment Agreements, Conversion has
agreed that, until six years following the Effective Time, the Surviving
Corporation will maintain all rights to indemnification now existing in favor of
Mr. Amt and Mr. Christenson (the "Indemnified Parties") as provided in the
Octagon Certificate of Incorporation and the Octagon By-laws and as otherwise in
effect under any agreement or otherwise on the date of the Merger Agreement. See
"THE MERGER -- Business and Management After the Merger; Employment Agreements".
ELECTION TO CONVERSION BOARD OF DIRECTORS; ISSUANCE OF NON-EMPLOYEE DIRECTOR
OPTIONS. William L. Amt, Harry O. Christenson, Patricia H. Engman and William
V. Roberti, each currently an Octagon director, will be appointed to
Conversion's Board of Directors upon consummation of the Merger. In addition,
upon consummation of the Merger, Patricia H. Engman and William V. Roberti will
receive options to purchase 5,000 shares of Conversion Common Stock, at an
exercise price equal to the fair market value thereof, pursuant to Conversion's
1994 Stock Option Plan for Non-Employee Directors. See "THE MERGER -- Business
and Management After the Merger; Employment Agreements".
AGREEMENTS WITH CERTAIN PRINCIPAL STOCKHOLDERS WHO EXECUTED VOTING
AGREEMENTS; CONVERSION LOANS TO OCTAGON. In August 1996, Conversion and Octagon
entered into letter agreements with John T. Royall and Steven W. Koinis, each of
whom is a former executive officer and director of, and currently a principal
stockholder of, Octagon. Pursuant to the letter agreements, Octagon agreed to
reimburse certain legal fees incurred by Messrs. Royall and Koinis pursuant to
indemnification obligations as officers of Octagon and Conversion agreed to
guarantee such reimbursement obligation effective as of the consummation of the
Merger. The letter agreements also contain mutual releases, with certain
exceptions, from future claims. In accordance with the provisions of such letter
agreements, Messrs. Royall and Koinis entered into Voting Agreements with
Conversion obligating them to vote in favor of the Merger and against
acquisition proposals of any party other than Conversion.
In September 1996, Conversion and Octagon entered into a Loan and Security
Agreement, pursuant to which Conversion loaned to Octagon an aggregate of
$660,000 (the "Bridge Loan"), $55,000 of which Octagon has repaid to Conversion.
See "EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON". $60,000 of the
Bridge Loan was used to make reimbursements to Messrs. Royall and Koinis in
respect of legal fees in accordance with the terms of the letter agreements. See
"THE MERGER -- Voting Agreements".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
for Federal income tax purposes, so that no gain or loss will be recognized by
Octagon's stockholders on the exchange of Octagon Common Stock for Conversion
Common Stock. Octagon's stockholders are urged to consult their own tax advisors
regarding the tax consequences of the Merger. See "THE MERGER -- Federal Income
Tax Consequences".
COMPARATIVE RIGHTS OF OCTAGON STOCKHOLDERS BEFORE AND AFTER THE MERGER
There are various differences between the rights of Octagon stockholders and
the rights of Conversion stockholders. See "DESCRIPTION OF CONVERSION
SECURITIES" and "COMPARATIVE RIGHTS OF CONVERSION STOCKHOLDERS AND OCTAGON
STOCKHOLDERS".
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<PAGE>
MARKET PRICE AND DIVIDEND DATA
The shares of Conversion Common Stock are traded on the Nasdaq SmallCap
Market. The shares of Octagon Common Stock are traded over-the-counter. The
following table sets forth for the periods indicated the high and low bid prices
of Conversion Common Stock and Octagon Common Stock, as reported in published
financial sources. The quotations reflect intermediate prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
CONVERSION OCTAGON
COMMON STOCK(1) COMMON STOCK(2)
------------------ ------------------
<S> <C> <C> <C> <C> <C>
HIGH LOW HIGH LOW
------- ------- ------- -------
Calendar 1994
First Quarter..... -- -- 7 5 7/8
Second Quarter.... -- -- 8 3/8 6 5/8
Third Quarter..... -- -- 14 1/2 5 15/16
Fourth Quarter.... -- -- 6 7/8 1 1/2
Calendar 1995
First Quarter..... -- -- 2 3/16 15/32
Second Quarter.... -- -- 1/4 1/16
Third Quarter..... -- -- 3/8 1/16
Fourth Quarter.... -- -- 3/16 .02
Calendar 1996
First Quarter..... -- -- 1 1/16 .10
Second Quarter.... 5 1/4 5 9/16 5/16
Third Quarter..... 5 3 3/8 21/32 1/8
Fourth Quarter.... 3 3/8 2 1/4 .17 1/8
Calendar 1997
First Quarter..... 2 7/8 1 5/8 .19 1/8
Second Quarter
(through April
, 1997).......
</TABLE>
- ------------------------
(1) Conversion Common Stock began trading on the Nasdaq SmallCap Market in May
1996.
(2) Octagon Common Stock began trading on the Nasdaq National Market System (the
"NMS") in February 1994. In April 1995, Octagon's Common Stock was delisted
from the NMS, and began trading over-the-counter.
On August 12, 1996, the last trading day prior to the announcement of the
proposed Merger, the closing price per share of Conversion Common Stock on the
Nasdaq SmallCap Market was $4.00 and the bid price per share of Octagon Common
Stock in over-the-counter trading was $.3125. Based on the closing price per
share of Conversion Common Stock on August 12, 1996, the market value of 0.10
(one-tenth) of one share of Conversion Common Stock was $.40. The trading price
of Conversion Common Stock is subject to increase or decrease and, therefore, no
assurance can be given that the market value of 0.10 (one-tenth) of one share of
Conversion Common Stock will be $.40 at the Effective Time. On April , 1997,
the latest practicable trading date prior to the printing of this Proxy
Statement/Prospectus, the closing prices per share of Conversion Common Stock
and Octagon Common Stock were $ and $ , respectively. Octagon's
stockholders are advised to obtain current market quotations for Conversion
Common Stock and Octagon Common Stock.
As of the Record Date, there were record holders of Octagon Common
Stock.
Neither Conversion nor Octagon has ever paid a dividend on its Common Stock
and Conversion does not anticipate paying dividends on its Common Stock in the
foreseeable future.
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<PAGE>
HISTORICAL AND PRO FORMA PER SHARE DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED JUNE 30,
DECEMBER 31, 1996(2) 1996(2)
--------------------- ---------------
<S> <C> <C>
Conversion Common Stock
Loss per common share:
Historical............................................................. $ (0.67) $ (2.64)
Pro forma.............................................................. (0.80) (1.49)
Book value per common share at period end:
Historical............................................................. 0.65 --
Pro forma.............................................................. 1.04 --
Octagon Common Stock
Loss per common share:
Historical............................................................. (0.15) 0.09
Pro forma equivalent(3)................................................ (0.08) (0.15)
Book value per common share at period end:
Historical............................................................. 0.12 --
Pro forma equivalent(3)................................................ 0.10 --
</TABLE>
- ------------------------
(1) See "Unaudited Pro Forma Condensed Consolidated Financial Data" for a
description of the pro forma and historical amounts.
(2) Historical information for Octagon previously reported based on the calendar
years ended December 31, 1996 and 1995 has been adjusted to reflect a June
30 fiscal year consistent with Conversion.
(3) Equivalent pro forma per share data are computed by multiplying the pro
forma amounts by an exchange ratio of 0.1 (one-tenth) of a share of
Conversion Common Stock for each share of Octagon Common Stock.
RESALE OF OCTAGON COMMON STOCK BY AFFILIATES
The shares of Conversion Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued pursuant to the terms of the Merger
Agreement to any holder of Octagon Common Stock who may be deemed to be an
"affiliate" of Octagon for purposes of Rule 145 under the Securities Act ("Rule
145"). Such Octagon affiliates may not sell their shares of Conversion Common
Stock acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. Conversion has no obligation or present
intention to register any shares of Conversion Common Stock issued to Octagon
affiliates for resale. Octagon has agreed in the Merger Agreement to use its
best efforts to cause each director, executive officer and other person who may
be deemed an affiliate (for purposes of Rule 145) of Octagon to execute and
deliver a written agreement prior to the Effective Time intended to ensure
compliance with the Securities Act. See "THE MERGER -- Resale of Conversion
Common Stock by Affiliates".
NASDAQ LISTING
Conversion Common Stock is currently listed on the Nasdaq SmallCap Market.
Application will be made by Conversion to list the shares of Conversion Common
Stock to be issued in connection with the Merger for trading on the Nasdaq
SmallCap Market.
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<PAGE>
RISK FACTORS
EACH STOCKHOLDER OF OCTAGON SHOULD CAREFULLY CONSIDER AND EVALUATE THE
FOLLOWING FACTORS RELATING TO CONVERSION AND THE MERGER, AMONG OTHERS, BEFORE
VOTING ON THE MERGER AGREEMENT AND THE MERGER.
HISTORY OF OPERATING LOSSES. Conversion has experienced significant
operating losses since its inception. At December 31, 1996, the Company had an
accumulated deficit of approximately $(20,364,000). Conversion incurred an
operating loss of approximately $(3,231,000) for the fiscal year ended June 30,
1996, and incurred an operating loss of approximately $(2,687,000) for the six
months ended December 31, 1996. Such losses have resulted principally from
limited revenues from operations and costs associated with the development of
Conversion's technologies, general and administrative expenses and a one-time,
non-cash charge to operations of approximately $6.2 million relating to the
write-off of purchased research and development technologies in conjunction with
Conversion's acquisition of Dunkirk in August 1994. Conversion has recently
effected a number of cost-cutting initiatives in an effort to enable it to
continue to fund its operations from existing resources and to reduce the level
of revenue required to achieve cash flow break-even, although there can be no
assurance that such cost cutting initiatives will be sufficient or that
Conversion will ever achieve cash flow break-even. See "CONVERSION MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Octagon has also experienced significant operating losses. At December 31,
1996, Octagon had an accumulated deficit of approximately $(9,827,000). Octagon
incurred an operating loss of approximately $(392,000) for the fiscal year ended
December 31, 1995 and had an operating profit of approximately $319,000 for the
fiscal year ended December 31, 1996. See "OCTAGON MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
On a pro forma basis, the combined entity experienced an operating loss of
approximately $(2,264,000) for the fiscal year ended June 30, 1996 and an
operating loss of $(3,703,000) for the six-month period ended December 31, 1996.
See "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS." At
current operating expense levels, the combined entity will continue to
experience operating losses and will require significant growth in revenue in
order to achieve profitability. Although the combined entity's management team
believes such growth can be achieved, there can be no assurance that the
combined entity will ever become profitable.
LIMITED OPERATING HISTORY OF CONVERSION; NEW BUSINESS; LIMITED PRODUCT
SALES. Conversion has a limited operating history, having commenced CRT
recycling operations late in 1994 and production of ALUMAGLASS in the spring of
1995. In addition, Conversion has only recently commenced production of other
glass and fired ceramic substrates. Substantially all of Conversion's revenues
to date have been derived from recycling CRT glass. Conversion has generated
only minimal revenues to date from sales of ALUMAGLASS and other products. While
attempting to commercialize its products, Conversion is subject to risks
inherent in a new business. Such risks include marketing problems, unanticipated
problems relating to environmental regulatory compliance, manufacturing and the
competitive environment in which Conversion operates, and additional costs and
expenses may exceed current estimates. There can be no assurance that, even
after the expenditure of substantial funds and efforts, Conversion will ever
achieve or maintain a substantial level of sales of its products. See "--
Uncertain Market Acceptance of ALUMAGLASS" and "-- Conversion's Equipment
Failure; Limited Engineering, Design and Construction Experience; Limited
Manufacturing Experience".
LIMITED CASH RESOURCES; ADDITIONAL FINANCING; RISK OF FAILURE TO OBTAIN
REQUIRED FINANCING. As of December 31, 1996, Conversion had approximately
$1,764,000 in cash and marketable securities. Although Conversion has recently
effected a number of cost cutting initiatives, it will require additional
financing to fund its business and the combined entity after the Merger. In
April 1997, Conversion received a letter from a placement agent with respect to
its interest in acting as placement agent on a best efforts basis for a private
placement (the "Private Placement") of preferred stock (the "Premium Preferred
Stock") to be
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<PAGE>
issued by Conversion for aggregate gross proceeds of a minimum of $3 million and
a maximum of $5 million (plus an over-allotment option in the aggregate amount
of $2 million). Although such letter states that the placement agent is highly
confident of its ability to place such securities, the placement agent will
conduct such offering on a best efforts, rather than firm commitment, basis, and
there can be no assurance that such offering will be consummated. Except with
respect to the contemplated Private Placement, neither Conversion nor Octagon
has any commitments or other arrangements for any future financing and there can
be no assurance that any other debt or equity financing will be available on
acceptable terms or at all. Any equity financings, including the Private
Placement, will be dilutive to Conversion's stockholders and any debt financings
will likely contain restrictive covenants and additional debt service
requirements, which could adversely affect Conversion's operating results. See
"--Dilution from Private Placement; Restrictive Covenants". If the Private
Placement is not consummated and Conversion is unable to obtain other financing,
it will be required to significantly curtail its activities to achieve cash flow
break even or cease operations. See "CONVERSION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "DESCRIPTION OF CONVERSION SECURITIES".
DILUTION FROM PRIVATE PLACEMENT; RESTRICTIVE COVENANTS. The Private
Placement will result in significant dilution to Conversion's stockholders,
including Conversion stockholders who receive shares of Conversion Common Stock
in exchange for Octagon Common Stock upon consummation of the Merger. Each share
of Premium Preferred Stock will have a stated par value of $10 and will
initially be convertible into Conversion Common Stock at the lesser of (i) $2.00
per share and (ii) the average closing bid price of Conversion Common Stock for
the 30-trading-day period preceding the closing of the Private Placement (or, in
the case of multiple closings, preceding the closing date with the lowest such
average closing bid price). Such conversion price will be reset 12 months
following the closing of the Private Placement unless the Conversion Common
Stock has achieved an average closing price over the 20-trading-day period
preceding such 12 month anniversary (the "12 Month Price") of at least 135% of
the then applicable conversion price. If such an adjustment is required, the
adjusted conversion price will be equal to the greater of (i) the 12 Month Price
divided by 1.35 and (ii) 50% of the conversion price then in effect.
In the case of the minimum offering, assuming a $2.00 conversion price, the
Private Placement will result in the issuance of 1,650,000 common stock
equivalents (including the Premium Preferred Stock and warrants to be issued to
the placement agent) or 25.8% of the Conversion Common Stock to be outstanding
upon consummation of the Merger. In the case of the maximum offering, assuming a
$2.00 conversion price, the Private Placement will result in the issuance of
2,750,000 common stock equivalents (including the Premium Preferred Stock and
warrants to be issued to the placement agent) or 43.0% of the Conversion Common
Stock to be outstanding upon consummation of the Merger. If the placement
agent's over-allotment option is exercised in full, the Private Placement will
result in the issuance of 3,850,000 common stock equivalents (including the
Premium Preferred Stock and warrants to be issued to the placement agent), or
60.3% of the Conversion Common Stock to be outstanding following consummation of
the Merger.
The holders of Premium Preferred Stock will be entitled to that number of
votes as shall equal the number of shares of Conversion Common Stock into which
such shares of Premium Preferred Stock are convertible. In addition, the
affirmative vote of the holders of at least two-thirds of the Premium Preferred
Stock will be required for (i) the issuance of securities senior to or on a
parity with the Premium Preferred Stock with respect to dividends, voting or
liquidation, (ii) any alterations to the rights of the Premium Preferred Stock,
(iii) a liquidation, dissolution or sale of substantially all of the assets of
Conversion and (iv) the incurrence of over $100,000 of indebtedness (other than
borrowings under working capital lines of credit). The existence or exercise of
such rights could deter or prevent Conversion from taking certain actions deemed
to be in Conversion's best interests by the Conversion Board of Directors and
the other stockholders of Conversion, and could materially adversely affect
Conversion's ability to obtain additional equity financing.
14
<PAGE>
No assurance can be given that the Private Placement will be consummated on
the terms stated herein or at all. See "-- Limited Cash Resources; Additional
Financing; Risk of Failure to Obtain Required Financing".
SUBSTANTIAL INDEBTEDNESS; DEBT SERVICE REQUIREMENTS. At December 31, 1996,
Dunkirk had outstanding an aggregate of approximately $11,509,000 of long-term
indebtedness (excluding capital lease obligations), substantially all of which
is secured by the assets of Dunkirk and guaranteed by Conversion. Accordingly,
Conversion 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. Conversion will
require substantial cash flow to meet its debt service requirements relating to
its outstanding long-term indebtedness. 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 Conversion's ability to
borrow in the future. See "CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 3 of Notes to
Conversion's Consolidated Financial Statements for a discussion of the payments
due under Conversion's indebtedness.
In addition, a portion of Conversion'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,
Conversion and/or Dunkirk may lose all or a portion of its assets and Conversion
and/or Dunkirk may be forced to materially reduce its business activities or
cease its operations. Certain of the instruments governing Conversion's
indebtedness also contain default provisions relating to insolvency and the
inability to pay debts as they become due.
Conversion has been granted a deferral of all interest and principal
payments due under its $8 million Solid Waste Disposal Facility Bonds for the
two-year period commencing March 1, 1997 through and including March 1, 1999;
PROVIDED, HOWEVER, that such interest and principal payments will be made from
Conversion's debt service reserve funds until such reserve funds are depleted.
The total amount of deferred principal and interest payments is approximately
$2,386,000, of which approximately $870,000 will be from Conversion's debt
service reserve funds. Replenishment of the debt service reserve funds, plus
repayment of all additional deferred interest, will be due in 20 equal,
consecutive quarterly installments commencing on June 1, 1999. Repayment of the
deferred principal will be due on December 1, 2010. The continuing effect of
such deferral is conditioned upon the consummation of the Merger by May 15, 1997
and the consummation of a private placement resulting in aggregate gross
proceeds to Conversion of at least $2 million by May 31, 1997 and of at least an
additional $3 million by July 15, 1997. In addition, following consummation of
such private placement, Conversion will be subject to certain covenants,
including minimum net worth and working capital covenants.
In addition to Conversion's indebtedness, the combined entity will have to
service Octagon's indebtedness. Octagon is the borrower under a working capital
line of credit with an outstanding balance of approximately $2,641,000 as of
December 31, 1996. The amount outstanding under the working capital line of
credit is subject to fluctuation as a result of borrowings thereunder being made
on the basis of eligible accounts receivable. Such working capital line of
credit is secured by all of Octagon's accounts receivable, which constitute
substantially all of Octagon's assets. To the extent that substantially all of
Octagon's assets continue to be pledged, such assets will not be available to
secure additional indebtedness, which may adversely affect Conversion's ability
to borrow in the future. Octagon's working capital line of credit also contains
customary covenant and default provisions. See "OCTAGON MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 4 of
Notes to Octagon's Consolidated Financial Statements.
COMBINATION OF COMPANIES; UNCERTAINTY OF SUCCESS FOR NEW
INITIATIVES. Realization of the anticipated benefits of the Merger will depend
in part upon the successful combination of the senior management of the two
companies and the efficient and effective integration of the two companies'
operations. The inability to successfully combine such senior management or the
loss of the services of one or more key
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persons could have a material adverse effect on the combined companies. The
senior management of the combined companies also must continue to attract and
retain qualified management level employees and continue to motivate employees
in light of organizational changes resulting from the Merger. The integration of
the two companies will require the dedication of management resources which may
distract attention from the day-to-day operations of the combined company.
It is anticipated that the combined entity will pursue a number of strategic
initiatives that either have not been pursued or have not been fully
commercialized by Conversion or Octagon to date, including, among others, the
installation of on-site automated radiological control or "health physics"
systems, the bundling of Octagon's service capabilities with Conversion's
proprietary products and the construction of abrasives production facilities at
industrial customer locations. Neither Octagon nor Conversion has experience in
developing or implementing these initiatives and such initiatives will involve
the risks associated with new businesses generally, including, but not limited
to, risks associated with marketing and implementing such initiatives and
engineering, design and construction risks in constructing and operating new
facilities. See "THE MERGER--Business and Management After the Merger;
Employment Agreements".
AMORTIZATION OF GOODWILL. The Merger will be accounted for as a purchase by
Conversion. As a result, the excess of the value of the consideration to be
issued to Octagon's stockholders over the fair value of identifiable tangible
assets acquired, less the fair value of liabilities assumed, will be capitalized
by Conversion. The amount of goodwill will be determined based upon the market
value of Conversion Common Stock on August 13, 1996, the time of the
announcement of the Merger. Based on a closing price of $4.00 for Conversion
Common Stock on August 13, 1996, the amount of goodwill will be approximately
$3,152,000. The actual amount of goodwill will be amortized over a 10-year
period, resulting in an annual non-cash charge to earnings that will not be
deductible for income tax purposes. Based on the August 13, 1996 closing price
of $4.00 for Conversion Common Stock, such annual charge will be $315,241. See
"THE MERGER--Accounting Treatment of the Merger".
FIXED CONVERSION RATIO. As a result of the Merger, each outstanding share
of Octagon Common Stock, other than shares held by holders who properly exercise
their dissenters' rights under Delaware law, will be converted into 0.10
(one-tenth) of a share of Conversion Common Stock. The Conversion Ratio is
fixed, and will not be adjusted for any upward or downward movement in the
market price of Conversion Common Stock. The market price of Conversion Common
Stock is subject to increase or decrease and, therefore, no assurance can be
given that, at the Effective Time, the market value of 0.10 (one-tenth) of a
share of Conversion Common Stock will be $.40, the market price of 0.10
(one-tenth) of a share of Conversion Common Stock on the last trading day prior
to the announcement of the proposed Merger. As of April , 1997, the closing
price per share of the Conversion Common Stock on the Nasdaq SmallCap Market was
$ . See "SUMMARY--Market Price and Dividend Data".
UNCERTAIN MARKET ACCEPTANCE OF ALUMAGLASS. To date, Conversion has had only
minimal sales of ALUMAGLASS. There can be no assurance that significant sales
will occur or that ALUMAGLASS will obtain broad market acceptance. With respect
to abrasives, certain customers may choose the material primarily on the basis
of cost per pound and may not sufficiently value the overall cost savings
ALUMAGLASS often provides when taking into account factors such as reduced labor
costs resulting from a higher speed of cleaning and reduced energy costs
resulting from lower blasting pressures required for ALUMAGLASS. Performance
advantages may also not be deemed critical in certain applications where quality
of finish is not crucial. There can be no assurance that all customers will
experience the performance and cost advantages demonstrated in Conversion'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 abrasives or too soft for other applications,
such as etching titanium, in comparison to aluminum oxide. With respect to
ALUMAGLASS as an aggregate for flooring, roofing, plasters and other
construction materials, Conversion has made only limited sales in certain of
these markets to date, and there can be no assurance that ALUMAGLASS will ever
achieve
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broad market acceptance in these applications. If Conversion is not successful
in marketing ALUMAGLASS, it will focus its efforts on generating revenues from
operations of Octagon, its CRT glass recycling operations, sales of other glass
and fired ceramic substrates and other future products and services that may be
developed or otherwise obtained by Conversion, which may provide only limited
growth potential. See "-- Uncertain Market Acceptance of Other Products", "--
Limited Number of CRT Customers; Loss of Significant CRT Customers" and
"BUSINESS OF CONVERSION".
PURCHASE OF ALUMAGLASS REQUIRES EVALUATION OF POTENTIAL CHANGES IN EQUIPMENT
AND OPERATING PROCEDURES. The decision by a potential customer to utilize
ALUMAGLASS 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 Conversion'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 Conversion believes would range from
$20,000 to $50,000, depending on the size of the unit. Conversion estimates that
approximately 30% of the market for reclaimable abrasives is currently using
gravity separation equipment. 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. See "BUSINESS OF
CONVERSION--Markets for Products and Services--Abrasives and Aggregates".
UNCERTAIN MARKET ACCEPTANCE OF OTHER CONVERSION PRODUCTS. Conversion has
only recently commenced production of its other glass and fired ceramic
materials, and there can be no assurance that these products will obtain market
acceptance. These products will face competition from established abrasive and
construction material substrates, such as sand, aluminum oxide and mined
materials such as quartz and will have to be price- and performance-competitive
to achieve market share.
CONVERSION'S EQUIPMENT FAILURE; LIMITED ENGINEERING, DESIGN AND CONSTRUCTION
EXPERIENCE; LIMITED MANUFACTURING EXPERIENCE. Conversion has completed
construction of and operated since spring 1995 one 25-ton-per-day melter. From
time to time, Conversion has experienced mechanical or technical difficulties
with such melter, which has required repairs and maintenance that have
interrupted Conversion's ability to manufacture ALUMAGLASS. Unless other melting
sources are obtained, any such mechanical or technical difficulties with such
melter in the future could result in an interruption in Conversion's ability to
manufacture its abrasives. As a part of recent cost-cutting efforts initiated by
Conversion, Conversion has cooled and drained its melter. It is anticipated that
the melter will not be restarted until such time as current inventories of
ALUMAGLASS are reduced. See "BUSINESS OF CONVERSION -- Manufacturing, Recycling
and Conversion Processes -- Melting Process". If warranted by sufficient demand
for ALUMAGLASS, Conversion anticipates that it may, in the future, construct
melting operations at other industrial locations. Conversion may experience
problems associated with the engineering, construction, scale-up and operation
of such melters and any additional melters, including, without limitation, cost
overruns, start-up delays and technical or mechanical problems. To date,
Conversion has engaged in only limited manufacturing and there can be no
assurance that Conversion'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
Conversion's business and prospects. See
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"CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS OF CONVERSION".
LIMITED SALES AND MARKETING EXPERIENCE OF CONVERSION; TERMINATION OF VANGKOE
JOINT VENTURE AND LOSS OF GUARANTEED MINIMUM PURCHASE COMMITMENT. Conversion
has had limited experience in selling and marketing its products and its
recycling services. Furthermore, Conversion has assembled only a small sales and
marketing organization. There can be no assurance that Conversion 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, Conversion has relied on distributors for
primary marketing efforts, which has resulted in only limited sales of
ALUMAGLASS. In an effort to achieve further market acceptance of ALUMAGLASS,
Conversion may seek to enter into joint ventures, licensing or other
collaborative arrangements to sell and market its products.
Conversion previously entered into a joint venture with VANGKOE Industries,
Inc. ("VANGKOE"), pursuant to which the parties formed a joint venture company
for the purpose of manufacturing color coated particles for sale as construction
material aggregates. On February 14, 1997, following delays in start-up and
certain cost overruns, Conversion and VANGKOE entered into a letter agreement
setting forth the intent of the parties to terminate the joint venture. Pursuant
to such termination, Conversion will purchase VANGKOE's interest in the joint
venture company, as well as the proprietary color coating process, for an
aggregate of $165,000 in cash and will manufacture the color coated particles
for sale to VANGKOE. VANGKOE will purchase such particles from Conversion at a
fixed price and serve as an exclusive distributor of such particles for certain
markets. Although VANGKOE will be required to meet sales targets to be mutually
agreed upon in order to maintain its exclusivity, VANGKOE will be released from
its previous minimum purchase commitment of approximately $1.2 million of
ALUMAGLASS and other materials. VANGKOE is a new company without significant
assets or experience in marketing aggregates and, therefore, there can be no
assurance that it will be successful in marketing Conversion's products. In
addition, Conversion has no prior experience in operating a color coating
process and there can be no assurance that Conversion will not experience delays
or other problems in manufacturing the color coated particles. In the event that
the restructured arrangement is successful, Conversion believes that the sale of
substrates to VANGKOE will not adversely affect its sales efforts for ALUMAGLASS
and other products given that such products have not been sold into the markets
to be pursued by VANGKOE.
Any joint venture or other collaberative arrangements between Conversion and
a third party may result in lack of control by Conversion over the sales and
marketing of its products or result in lower revenues to Conversion than if it
marketed its products directly. There can be no assurance that any sales and
marketing or other efforts undertaken by Conversion or on behalf of Conversion
by others will be successful. See "BUSINESS OF CONVERSION -- Sales and
Marketing".
LIMITED NUMBER OF CRT CUSTOMERS; LOSS OF SIGNIFICANT CRT CUSTOMER. To date,
substantially all of Conversion's revenues have been derived from recycling CRT
glass used in the manufacture of televisions for a limited number of customers.
Certain of Conversion's contracts with its CRT customers contain minimum
Conversion purchase requirements and, in certain cases, minimum customer
purchase obligations. For the fiscal year ended June 30, 1996, three of
Conversion's CRT glass recycling customers, Techneglas, Inc. ("Techneglas"),
Thomson Consumer Electronics, Inc. ("Thomson") and Toshiba Display Devices,
Inc., each accounted for more than 10% of Conversion's revenues and, in the
aggregate, accounted for approximately 88% of Conversion's revenues. For the
three and six months ended December 31, 1996, two of these customers, Techneglas
and Thompson, each accounted for more than 10% of Conversion's revenues and, in
the aggregate, accounted for approximately 70% and 65% of Conversion's revenues,
respectively. In March 1997, Thomson ceased sending CRT glass to, or purchasing
recycled CRT glass from, Conversion. Thomson accounted for approximately 16.5%,
or $440,000, of Conversion's consolidated revenues for the fiscal year ended
June 30, 1996 and approximately 30.3%, or $207,000, of Conversion's consolidated
revenues for the six months ended December 31, 1996, in each case, when taking
into account sales of CRT glass supplied by Thomson to both Thomson and
customers other than
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Thomson. Although this lost revenue, based on current revenue levels, would have
represented less than 2% of Conversion's revenues after giving effect to the
Merger, there can be no assurance that the loss of Thomson will not adversely
affect Conversion's ability to attract new CRT customers or retain existing CRT
customers. In addition, to the extent the lost Thomson revenue cannot be
replaced by obtaining new CRT customers, additional shipments from existing CRT
customers or other sources of revenue, such lost business will result in a
proportionate reduction in earnings and/or in increased operating losses.
The loss of any one of Conversion's remaining current CRT customers could
have a material adverse effect on Conversion's financial condition and results
of operations. In addition, even assuming that Conversion's existing customers
continue to utilize Conversion's CRT glass recycling services, Conversion
believes that its CRT glass recycling operations will have limited growth
potential, unless additional sources of CRT glass are obtained. Conversion
currently obtains only waste CRT glass generated from manufacturers of
televisions located in the United States, and there are a limited number of such
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 Conversion can obtain
CRT glass on a cost-effective basis. Conversion believes that its ability to
achieve a significant increase in revenues from CRT glass recycling is dependent
on its ability to attract computer CRT glass and to obtain outlets for such
glass. See "BUSINESS OF CONVERSION -- Products and Services".
UNCERTAIN INDUSTRIAL WASTE SUPPLY. Conversion utilizes manufacturing
by-products and industrial wastes as raw materials for the production of its
products. In addition, Conversion 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 Conversion'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,
Conversion 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 OF CONVERSION -- Products and Services".
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Conversion intends to market
its products and services, including services to be provided through Octagon,
internationally and plans to seek opportunities overseas to construct and
operate additional ALUMAGLASS manufacturing facilities, which may include CRT
glass recycling operations, either independently or through joint ventures or
other collaborative arrangements with strategic partners. To date, Conversion
has made limited sales of its products to a limited number of distributors in
Europe, the Middle East and South Africa, but has not constructed any
manufacturing facilities overseas. To the extent that Conversion 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 Conversion's operations. Conversion is not currently aware
of any foreign regulations which would prohibit Conversion from its current or
planned marketing for project development efforts. See "BUSINESS OF CONVERSION"
and "BUSINESS OF OCTAGON".
COMPETITION OF CONVERSION. Conversion's manufactured abrasives and
aggregates 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 Conversion. Conversion's ability to effectively
compete may be adversely affected by the ability of these competitors to offer
their products at
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lower prices than the prices of Conversion's products and to devote greater
resources to the development and sales and marketing of their products than are
available to Conversion.
With respect to its industrial CRT glass recycling operations, Conversion
competes with several other companies who accept waste CRT glass for recycling
or other purposes, each of which may deal with customers of Conversion and
satisfy their recycling, beneficial use or disposal needs. Conversion has
recently experienced increased competition with respect to obtaining and
retaining CRT glass customers, with some of its competitors offering to take CRT
glass from sources free of charge. As discussed above, in March 1997, Thomson
ceased sending CRT glass to, and purchasing recycled CRT glass from, Conversion.
In general, historically, Conversion has received revenue both when it receives
and when it sells recycled CRT glass. There can be no assurance that Conversion
will be able to recycle CRT glass on a profitable basis if it is required to
eliminate the fee it receives upon receipt of such glass from customers in order
to maintain or attract additional sources of CRT glass. See "-- Limited Number
of CRT Customers; Loss of Significant CRT Customer".
In the market for the conversion of manufacturing by-products and industrial
wastes into glass and ceramic manufacturing raw materials, Conversion 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
competitors may develop technologies superior to those of Conversion. 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 Conversion. No assurance can be given that
Conversion will be able to compete effectively. See "BUSINESS OF CONVERSION --
Competition".
CONVERSION'S DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF
INFRINGEMENT OF THIRD-PARTY PATENTS. Conversion'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. Conversion has two issued U.S. patents and four U.S. 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 Conversion or not be challenged, invalidated, infringed or
circumvented or that any rights thereunder will afford competitive advantages to
Conversion. 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 Conversion's products and
technologies.
There can be no assurance that the validity of any patent issued to
Conversion would be upheld if challenged by others in litigation or that
Conversion's activities would not infringe patents owned by others. Conversion
could incur substantial costs in defending itself in suits brought against it,
or in suits in which Conversion seeks to enforce its patent rights against
others. Should Conversion's products or technologies be found to infringe
patents issued to third parties, Conversion would be required to cease the
manufacture, use and sale of Conversion's products and Conversion could be
required to pay substantial damages. In addition, Conversion 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 Conversion, or at all.
Conversion 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 Conversion will not otherwise become known or be independently
developed by competitors in a manner that would have a material adverse effect
on Conversion's business, financial condition and results of operations. See
"BUSINESS OF CONVERSION -- Intellectual Property".
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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 Conversion. 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, Conversion's ability to procure such by-products and wastes and
the demand for Conversion's services could be adversely affected, which could
have a material adverse effect on Conversion's business, financial condition and
results of operations. Any changes in these regulations which increase
compliance standards may require Conversion to change or improve its
manufacturing process. To the extent Conversion conducts its business overseas,
international environmental regulations will be applicable. Such regulations
vary by country and are subject to changes which may adversely affect
Conversion's operations. See "BUSINESS OF CONVERSION -- Environmental Matters".
REGULATORY STATUS OF CONVERSION'S OPERATIONS. Conversion 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 Conversion's manufacturing facilities
and may subject Conversion to Federal, state or locally-imposed penalties.
Conversion'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 interpreted or enforced differently,
Conversion or its customers may be required to obtain additional operating
permits, registrations, certifications, exemptions or approvals. There can be no
assurance that Conversion or its customers will meet all of the applicable
regulatory requirements. See "BUSINESS OF CONVERSION--Environmental Matters."
POTENTIAL ENVIRONMENTAL LIABILITY OF CONVERSION. Conversion'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, Conversion 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. Conversion 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.
Conversion may also be exposed to certain environmental risks resulting from
the actions of its CRT glass suppliers and other suppliers of industrial wastes.
Although Conversion maintains general liability insurance, this insurance is
subject to coverage limits and generally excludes coverage for losses or
liability related to environmental damage or pollution. Although Conversion
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, Conversion's business, financial condition and
results of operations could be materially adversely affected
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by an environmental claim that is not covered or only partially covered by
insurance or other available remedy.
In addition, although Conversion 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 OF CONVERSION -- Environmental Matters".
DEPENDENCE ON KEY PERSONNEL. Following the Merger, Conversion will be
dependent on its key management personnel, including, among others, William L.
Amt, who will be President and Chief Executive Officer, and Harry O.
Christenson, who will be Chief Financial Officer, of Conversion following the
Merger. The loss of one or more of these individuals could have a material
adverse effect on the business and operations of Conversion. In addition,
Conversion will need to attract and retain other qualified individuals to
satisfy its personnel needs. It is currently anticipated that none of
Conversion's executive officers will serve as an executive officer of Conversion
following the Merger. Although William L. Amt, Harry O. Christenson and certain
other individuals who will be officers of Conversion following the Merger have
experience in manufacturing operations, none has experience in the business
currently engaged in by Conversion. There can be no assurance that Conversion
will be successful in retaining its key management personnel or in attracting
and retaining new employees. See "THE MERGER -- Business and Management After
the Merger; Employment Agreements".
POTENTIAL CONFLICTS OF INTEREST ARISING FROM CERTAIN RELATED-PARTY
TRANSACTIONS OF CONVERSION. Conversion has entered into consulting agreements
with certain directors, principal stockholders and affiliates of certain
directors and principal stockholders of Conversion, 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. Conversion,
however, does not believe that the existence of such agreements will interfere
with the ability of Conversion's directors to discharge their fiduciary duties
to Conversion's stockholders. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF CONVERSION -- Consulting Agreements".
CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SECURITIES. Upon the
consummation of Conversion's initial public offering (the "Conversion IPO"),
740,559 shares (the "Escrow Shares") of Conversion Common Stock and options to
purchase 71,923 shares of Conversion Common Stock (the "Escrow Options" and,
together with the Escrow Shares, the "Escrow Securities") were deposited into
escrow by the holders thereof. The Escrow Securities are subject to cancellation
and will be contributed to the capital of Conversion if Conversion does not
attain certain earnings levels over the next two to four years or the market
price of the Conversion Common Stock does not achieve certain levels over the
next three years. The position of the SEC with respect to such escrow
arrangements provides that in the event any shares or options are released from
escrow to the stockholders of Conversion who are officers, directors, employees
or consultants of Conversion, a compensation expense will be recorded for
financial reporting purposes. Accordingly, Conversion will, in the event of the
release of any Escrow Securities to Conversion'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 Conversion'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 Conversion's securities. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION -- Escrow Securities".
Notwithstanding the foregoing discussion, there can be no assurance that the
Escrow Securities will be released from escrow.
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POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK. Conversion'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 of Conversion.
Accordingly, the Board of Directors of Conversion 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 Conversion.
Conversion intends to designate up to 770,000 shares of preferred stock as
Premium Preferred Stock proposed to be issued in the Private Placement. Although
Conversion has no present intention to issue any shares of preferred stock other
than the Premium Preferred Stock to be issued in the Private Placement, there
can be no assurance that Conversion will not do so in the future. See
"DESCRIPTION OF CONVERSION SECURITIES".
NO DIVIDENDS. Conversion 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, Conversion holds no significant
tangible assets other than its investments in and advances and loans to Dunkirk
and, following consummation of the Merger, its investment in and advances to
Octagon. Conversion's ability to make cash dividend payments to holders of the
Common Stock will be dependent upon the receipt of sufficient funds from Dunkirk
and/or Octagon. 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
Conversion under certain circumstances during any fiscal year in excess of 50%
of Dunkirk's net income for such fiscal year. Octagon's working capital line of
credit will also prohibit the payment of any dividend by Octagon to Conversion
following the Merger unless the consent of the lender is obtained. See
"CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources" and "OCTAGON
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
LIMITED MARKET FOR CONVERSION COMMON STOCK; POSSIBLE VOLATILITY OF MARKET
PRICE. Prior to the Conversion IPO, there was no market for any of Conversion's
securities and since the Conversion IPO, there has been very little trading
volume in Conversion's securities. There can be no assurance that an active
trading market will develop or be sustained. The market price of the Common
Stock could be subject to significant fluctuations in response to variations in
government regulations relating to Conversion'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
"SUMMARY-- Market Price and Dividend Data".
OUTSTANDING CONVERSION WARRANTS AND OPTIONS; EXERCISE OF REGISTRATION
RIGHTS. As of April 1, 1997, Conversion had outstanding (i) 4,639,550
Redeemable Class A Warrants to purchase an aggregate of 4,639,550 shares of
Common Stock and 4,639,550 Redeemable Class B Warrants at an exercise price of
$5.85 per share (all of Conversion's outstanding Redeemable Class A Warrants and
Redeemable Class B Warrants are referred to herein as the "Redeemable
Warrants"); (ii) 3,527,050 Redeemable Class B Warrants to purchase 3,527,050
shares of Common Stock at an exercise price of $7.80 per share; (iii) options
(the "Underwriter's Option") held by D.H. Blair Investment Banking Corp.
("Blair"), the underwriter of the Conversion IPO, to purchase an aggregate of
1,226,800 shares of Common Stock, assuming exercise of the underlying Warrants,
at a weighted average exercise price of approximately $6.94 per share; (iv)
options to purchase an aggregate of 264,236 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 at a weighted average exercise price of approximately
$4.16 per share; (v) non-qualified options to purchase 50,000 shares of Common
Stock issued to Harvey Goldman, the Vice-Chairman, President and Chief Executive
Officer of Conversion at an exercise price of $4.40 per share; and (vi) warrants
to purchase an aggregate of 319,204 shares of Common Stock at a weighted average
exercise price of approximately $4.90 per share issued prior to the Conversion
IPO. Conversion has reserved an aggregate of 510,400 shares of Common
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Stock for issuance under its stock option plans as of the date of this Proxy
Statement/Prospectus. Holders of such warrants and options are likely to
exercise them when, in all likelihood, Conversion could obtain additional
capital on terms more favorable than those provided by such warrants and
options. In addition, the exercise of such warrants and options could have a
material adverse effect on the market price of, and liquidity in the market for,
shares of Conversion Common Stock. Further, while these warrants and options are
outstanding, Conversion'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
Conversion IPO and the holders of warrants to purchase 319,204 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 Conversion. See "SECURITY OWNERSHIP OF CERTAIN OWNERS, DIRECTORS AND
MANAGEMENT OF CONVERSION" and "DESCRIPTION OF CONVERSION SECURITIES".
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CONVERSION WARRANTS. Commencing
May 1997, the Redeemable Warrants may be redeemed by Conversion at a redemption
price of $.05 per Warrant upon not less than 30 days' prior written notice if,
with respect to the Redeemable 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 Redeemable 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
Redeemable Warrants could force the holders (i) to exercise the Redeemable
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 Redeemable Warrants
at the then current market price when they might otherwise wish to hold the
Redeemable Warrants or (iii) to accept the nominal redemption price which, at
the time the Redeemable Warrants are called for redemption, is likely to be
substantially less than the market value of the Redeemable Warrants. See
"DESCRIPTION OF CONVERSION SECURITIES".
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF CONVERSION'S SECURITIES DUE TO THE
INVESTIGATION OF D.H. BLAIR INVESTMENT BANKING CORP. AND D.H. BLAIR & CO., INC.
BY THE SEC. The SEC is conducting an investigation concerning various business
activities of Blair and D.H. Blair & Co., Inc. ("Blair & Co."), a selling group
member which distributed substantially all of the securities offered in the
Conversion IPO. The investigation appears to be broad in scope, involving
numerous aspects of Blair'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 Blair or Blair & Co., or in which Blair and
Blair & Co. made over-the-counter markets, persons associated with Blair or
Blair & Co., such issuers and other persons. Conversion has been advised by
Blair that the investigation has been ongoing since at least 1989 and that it is
cooperating with the investigation. Blair cannot predict whether this
investigation will ever result in any type of formal enforcement action against
Blair or Blair & Co., or, if so, whether any such action might have an adverse
effect on Blair or the securities offered hereby. Blair & Co. makes a market in
Conversion's securities. An unfavorable resolution of the SEC's investigation
could have the effect of limiting such firm's ability to make a market in
Conversion's securities, which could adversely affect the liquidity or price of
such securities.
POSSIBLE ADVERSE EFFECTS OF OCTAGON'S CONSENT DECREE. On September 26,
1996, the SEC issued a cease and desist order (the "SEC Order") against Octagon.
Octagon consented to the entry of the SEC Order without admitting or denying the
matters set forth therein. The SEC Order related to actions taken by Octagon's
former principal officers and counsel in 1994. None of Octagon's former
management or counsel have an active role in the operation of Octagon today.
Octagon has made a number of changes, including the retention of new management,
the reconstitution of its Board of Directors and various internal controls in
order to assure compliance with SEC and financial reporting requirements.
Although Octagon has made the changes described above, there can be no assurance
that the SEC Order will not have a negative effect upon the combined entity's
ability to obtain additional debt or equity financing or attract new customers.
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POSSIBLE DELISTING OF CONVERSION SECURITIES FROM NASDAQ. While Conversion's
Common Stock is included on Nasdaq, there can be no assurance that Conversion
will meet the criteria for continued listing. Continued inclusion on Nasdaq
generally requires that (i) Conversion 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.
At the present time, Blair & Co., First United Equities Corp., Knight Securities
L.P. and Herzog, Heine, Geduld, Inc. make a market in Conversion's securities.
If Conversion is unable to satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Conversion Common Stock 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
Conversion's securities. Consequently, the liquidity of Conversion'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 Conversion and lower prices
for Conversion's securities that might otherwise be attained.
RISKS OF PENNY STOCK. If Conversion's securities were deleted from Nasdaq
(see "-- 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, such rule may adversely affect the ability of
broker-dealers to sell Conversion's securities and may adversely affect the
ability of the holders of Conversion's securities to sell in the secondary
market any of such securities.
SEC 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 SEC 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
Conversion'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 Conversion's securities will qualify for exemption from these
restrictions. In any event, even if Conversion's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the SEC 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 SEC finds that such a restriction would be in the public interest.
If Conversion's securities were subject to the rules on penny stocks, the market
liquidity for Conversion's securities could be severely adversely affected.
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THE SPECIAL MEETING
INTRODUCTION. This Proxy Statement/Prospectus is provided to the
stockholders of Octagon in connection with the Special Meeting to be held on May
14, 1997 and any adjournments or postponements thereof. The approximate date
this Proxy Statement/Prospectus is first being sent to Octagon stockholders is
April , 1997.
ACTION TO BE TAKEN AT THE SPECIAL MEETING. At the Special Meeting, the
Octagon stockholders will be asked to consider and vote on a proposal to approve
and adopt the Merger Agreement and the Merger and to transact any other business
that properly comes before the meeting. The Merger Agreement is attached as
Exhibit A to this Proxy Statement/Prospectus and is incorporated herein by
reference.
VOTING AT THE SPECIAL MEETING. Only stockholders of record at the close of
business on April 18, 1997 (the "Record Date") will be entitled to vote at the
Special Meeting. As of the close of business on the Record Date, 8,407,702
shares of Octagon Common Stock were outstanding and entitled to vote at the
Special Meeting.
Any person giving a proxy in the form accompanying this Proxy
Statement/Prospectus has the power to revoke it at any time before its exercise.
The proxy may be revoked by filing with the Secretary of Octagon an instrument
of revocation or a duly executed proxy bearing a later date. The proxy may also
be revoked by affirmatively electing to vote in person while attending the
Special Meeting. A stockholder who attends the meeting, however, need not revoke
the proxy and vote in person unless the stockholder wishes to do so. All valid,
unrevoked proxies will be voted at the Special Meeting in accordance with the
instructions given. IF THE SIGNED PROXY IS RETURNED WITHOUT INSTRUCTIONS, IT
WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
A majority of the shares of Octagon Common Stock entitled to vote, present in
person or represented by proxy, will constitute a quorum at the Special Meeting.
The affirmative vote of the holders of a majority of the shares of outstanding
Octagon Common Stock is required to approve and adopt the Merger Agreement and
the Merger. Abstentions have the same effect as "no" votes in determining
whether the proposal is approved. Broker non-votes are counted for purposes of
determining whether a quorum exists at the Special Meeting and have the same
effect as "no" votes in determining whether the proposal is approved. Although
the Notice of Special Meeting of Octagon Stockholders provides for transaction
of such other business as may properly come before the meeting, the Octagon
Board has no knowledge of any matters to be presented at the meeting other than
those referred to herein. The accompanying proxy, however, gives discretionary
authority to the proxy holders to vote in accordance with the recommendation of
management if any other matters are presented.
The holders of approximately 52% of Octagon's Common Stock, including, among
others, William L. Amt, the President and Chief Executive Officer of Octagon,
and Harry O. Christenson, the Chairman and Chief Financial Officer of Octagon,
have entered into agreements with Conversion agreeing to vote in favor of
approval and adoption of the Merger Agreement and the Merger. Accordingly, there
are sufficient votes in favor of the Merger to approve and adopt the Merger
Agreement and the Merger without the vote of any other stockholders of Octagon.
SOLICITATION OF PROXIES. A proxy in the form accompanying this Proxy
Statement/Prospectus is solicited on behalf of the Octagon Board. The cost of
preparing and printing the proxy, this Proxy Statement/ Prospectus and any other
material furnished to the stockholders of Octagon in connection with the Special
Meeting will be borne equally by Octagon and Conversion. Proxies will be
solicited by use of the mails, and officers and employees of Octagon may,
without additional compensation, also solicit proxies by telephone or personal
contacts. Copies of solicitation materials will be furnished to fiduciaries,
custodians and brokerage houses for forwarding to beneficial owners of Octagon
Common Stock held in their names and
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Octagon will, on request, reimburse such persons for their expenses in
forwarding proxies and accompanying materials and in obtaining authorization
from beneficial owners of Octagon Common Stock to execute proxies.
BACKGROUND OF THE MERGER
The terms and conditions of the Merger were determined through arm's-length
negotiations between the senior management and Boards of Directors of Conversion
and Octagon. In determining the form and amount of consideration to be paid in
the transaction, numerous factors were reviewed by the senior management and
Boards of Directors of Conversion and Octagon. See "RECOMMENDATION OF THE
OCTAGON BOARD AND REASONS FOR THE MERGER". The following is a brief discussion
of the contacts and negotiations that have occurred between the two companies.
In April 1995, the Octagon Board approved a significant management
reorganization and restructuring plan to address a number of litigation and
fiscal problems which had adversely affected Octagon in the previous eight
months. See "Octagon Management's Discussion and Analysis of Financial Condition
and Results of Operations". The plan addressed the need to recapitalize Octagon
and neutralize the disruption created by the then-pending litigation. At that
time, Octagon management and several directors entered into discussions with a
number of investment, merchant and commercial bankers seeking to resolve
Octagon's need to find additional working capital. During the period between
April 1995 and May 1996, more than 60 financial institutions, private investors
and potential merger partners were contacted and dialogues were established
concerning potential interest in recapitalizing Octagon, restructuring the
working capital line or merging Octagon with a financially sound strategic
partner.
On May 21, 1996, John C. Kolojeski, a director and executive officer of
Octagon, and William L. Amt, the President and Chief Executive Officer of
Octagon, met with Eckardt C. Beck, a director of Conversion. At that meeting,
Mr. Amt outlined the background of Octagon and its need to recapitalize and
sought Mr. Beck's advice and counsel. Mr. Beck said that he thought a potential
strategic alliance between Conversion and Octagon might be of benefit to both
corporations. Mr. Beck indicated that he would explore a potential alliance with
the Conversion Board of Directors.
Between May 21, 1996 and June 5, 1996, various discussions between Mr. Beck
and Harvey Goldman, the Chairman, Chief Executive Officer and President of
Conversion, and between Harvey Goldman and other members of Conversion's Board
occurred relating to the level of interest in exploring a potential transaction
with Octagon, and each company provided certain publicly-available documents to
the other.
On June 6, 1996, following a telephone conversation between Mr. Amt and Mr.
Goldman, Octagon and Conversion entered into a confidentiality agreement with
respect to information to be supplied by Octagon, allowing discussions to
further proceed.
On June 16, 1996, Mr. Kolojeski and Mr. Amt met Mr. Goldman and Mr. Beck at
the Conversion facility in Dunkirk, New York. On June 25 and 26, 1996, Harvey
Goldman and Perry Pappas, the Vice President and General Counsel of Conversion,
met with Mr. Amt and Harry O. Christenson, the Chairman and Chief Financial
Officer of Octagon, at Octagon to further discuss a potential alliance.
On June 27, 1996, Mr. Amt advised the Board of Directors of Octagon that he
and Mr. Kolojeski had initiated a dialogue with Conversion, at which time the
Octagon Board authorized Mr. Christenson and Mr. Amt to accelerate the dialogue
and evaluate the practicality of a merger. At that time, Mr. Amt discussed the
Conversion business as well as other factors discussed below under
"RECOMMENDATION OF THE OCTAGON BOARD; REASONS FOR THE MERGER". On June 28, 1996,
Octagon and Conversion entered into a confidentiality agreement with respect to
information to be supplied by Conversion.
Following the June 27 Board meeting, Mr. Amt and Mr. Christenson initiated a
number of meetings and telephone conversations for the balance of the month of
June and the first half of July with
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Mr. Goldman and Mr. Pappas. The discussions initially centered around the
potential synergies of a potential merger and certain legal due diligence issues
relating to prior litigation and SEC problems faced by Octagon. In mid-July,
Conversion management met with Octagon management in Orlando to begin the
process of exchanging information and data. In addition, Octagon engaged Brooks
Houghton, an investment banking firm familiar with Octagon, as its financial
advisor.
Throughout this period, the respective Boards of Directors of Octagon and
Conversion were informally apprised of the progress of the discussions between
the management teams. At the August 9, 1996 meeting of the Conversion Board of
Directors, Mr. Amt and Mr. Christenson addressed a number of questions
concerning a potential merger of the two companies and issues associated with
the management structure should a merger be consummated. Following the meeting,
a due diligence process was initiated by both companies.
On August 13, 1996, the Letter of Intent was prepared by Conversion
outlining the proposed transaction and listing a number of contingencies that
were to be mutually addressed by the management of Conversion and Octagon. Both
the Octagon and Conversion Boards reviewed the Letter of Intent and authorized
its execution. A combined press release was issued by the two companies to
advise the public of the intent to merge.
From August 13, 1996 to November 17, 1996, the management of each company
addressed the issues raised by the due diligence process and evaluated a joint
business strategy, concentrating on issues affecting liquidity, cash flow and
operating synergies. A formal review of the results of these studies and
analyses was presented to each of the Boards of Directors by their respective
managements. Additionally, the management of the two companies jointly addressed
the satisfaction of each of the contingencies noted in the Letter of Intent.
On November 12, 1996, Octagon received the oral opinion of Brooks, Houghton
that the Merger was on terms that were fair to Octagon's stockholders from a
financial point of view. On November 12, 1996, the Octagon Board approved and
adopted the Merger Agreement and the Merger. Octagon received the written
opinion of Brooks, Houghton on November 20, 1996.
On November 18, 1996, Octagon and Conversion entered into the Merger
Agreement and issued a press release informing the public.
On March 19, 1997, after reviewing, among other things, the terms of the
Merger and the operations of Octagon and Conversion and receiving oral
confirmation that the terms of the Merger (taking into account the
highly-confident letter with respect to the Private Placement and the two-year
moratorium on interest and principal debt payments granted by the holders of
Conversion's $8 million Solid Waste Disposal Facility Bonds) were fair to
Octagon's stockholders from a financial point of view, the Octagon Board
approved the Merger and consented to the Private Placement.
On March 26, 1997, Octagon received from Brooks, Houghton a written
confirmation of its November 20, 1996 opinion to the effect that, as of March
26, 1997, the Merger is fair to Octagon's stockholders from a financial point of
view.
RECOMMENDATION OF THE OCTAGON BOARD AND
THE REASONS FOR THE MERGER
Since August 1995, Octagon management had advised the Octagon Board of the
improbability of Octagon's raising the working capital necessary to support even
modest growth. In its efforts to seek partners for recapitalizing Octagon, one
or more of the following reasons inhibited such a transaction:
- The traditional investment banking community felt then outstanding
litigation, uncertainty with respect to the outcome and impact of the then
pending SEC investigation and the potential at such
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time of further stockholder litigation presented too great a risk for a
market maker or investor with respect to Octagon's Common Stock.
- The inability of Octagon to demonstrate the financial return necessary to
repay or service debt prevented management from securing a more
traditional, lower cost line of credit from a merchant or commercial
banker.
- Although a private placement to raise capital might have been possible,
stockholder dilution would have been excessive in the unlikely event that
an investor could have been found.
- Generation of sufficient working capital from operations was not feasible
because of the costs to support outstanding litigation, the high overhead
required to support public company costs and the high cost of Octagon's
present asset based working capital line of credit.
- The markets for Octagon's services and the lack of distinguishing skills,
systems or products are not attractive for venture capitalists who might
otherwise have an interest in Octagon.
- The notoriety and negative publicity associated with the Octagon and Power
Systems tradenames adversely affects sales and marketing substantially,
further deteriorating investor interest in Octagon.
During such period, discussions between Octagon and several other entities
proposing to invest in or acquire Octagon did not result in any offers being
made for Octagon that were on terms and conditions acceptable to the Octagon
Board.
The Merger reflects a current transaction value of approximately $1,381,000
based on market values as of March 19, 1997, and offers the Octagon stockholders
several other significant benefits:
- Conversion Common Stock is listed on the Nasdaq SmallCap Market and is
supported by a market maker, Blair & Co.
- Conversion has adequate working capital to support the combined company's
requirements for the next 12 months.
- There are adequate synergies between the two companies' markets and
services to rationalize an operating consolidation strategy and reduce
overhead expenses.
- Should the concepts supported by Conversion's patents and proprietary
technology be properly exploited, both the Octagon and Conversion
stockholders will have the opportunity for capital appreciation.
- The combined company resulting from the Merger should have easier access
to additional capital than either company on a stand-alone basis.
Management also identified for the Octagon Board several potentially
negative issues raised by the Conversion transaction.
- Conversion is a start-up company without demonstrated market acceptance or
significant sales of its key product, ALUMAGLASS.
- Conversion lacks an operating infrastructure and Octagon management will
not only have to focus on the daily direction of the services business but
be substantially involved in the direction of Conversion's business.
- Conversion is currently generating operating losses which will need to be
funded by the combined entity until Conversion's operations begin to
generate a profit.
Octagon management discussed the prospect of continuing on a stand-alone
basis and operating Octagon within the existing parameters of its present
limited working capital line of credit. Management
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informed the Octagon Board that, although recent developments had enhanced the
value of Octagon, such developments could not be exploited without additional
outside working capital.
Based on the above, the Octagon Board concluded that the opportunity to
merge with Conversion presented a reasonable, and possibly the only viable,
alternative to give the Octagon stockholders the opportunity for further capital
appreciation.
Octagon's Board was aware that the Voting Agreements had been entered into
by holders of approximately 52% of Octagon's Common Stock, including, among
others, Mr. Amt and Mr. Christenson, and that such Voting Agreements could be a
deterrent to other parties who might be interested in a business combination
with Octagon. However, such Voting Agreements were required by Conversion as a
condition to executing the Merger Agreement and, in light of the benefits of the
Merger described above and the lack of alternative strategic opportunities, the
Board determined it to be in the best interests of Octagon stockholders to
approve and adopt the Merger Agreement and the Merger and enter into the Merger
Agreement notwithstanding such Voting Agreements.
After taking into consideration all of the factors set forth above, the
Board of Directors of Octagon unanimously determined that the Merger was in the
best interests of Octagon and its stockholders, and that Octagon should proceed
with the Merger at this time. In view of the wide variety of factors considered,
both positive and negative, Octagon's Board did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered. However, all material factors considered by Octagon's Board of
Directors in reaching its decision to approve and adopt the Merger Agreement and
the Merger are described above.
THE OCTAGON BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT
AND THE MERGER AND HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF,
AND IS ON TERMS THAT ARE FAIR TO, OCTAGON AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT OCTAGON STOCKHOLDERS VOTE IN FAVOR OF THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT AND THE MERGER.
OPINION OF BROOKS, HOUGHTON
Octagon received the oral opinion of Brooks, Houghton on November 12, 1996
that the Merger was on terms that were fair to Octagon's stockholders from a
financial point of view. Brooks, Houghton's written opinion stating the same was
received by Octagon on November 20, 1996. Octagon received oral confirmation
from Brooks, Houghton stating that the Merger is fair to Octagon's stockholders
from a financial point of view on March 19, 1997, and Brooks, Houghton's written
opinion to such effect was delivered to Octagon on March 26, 1997. Copies of
Brooks, Houghton' s written opinions are attached as Exhibits B-1 and B-2 to
this Proxy Statement/Prospectus.
In arriving at its opinion, Brooks, Houghton examined, among other things,
(i) the Merger Agreement; (ii) historical financial information of Octagon and
Conversion; (iii) various filings with the SEC including Conversion's Prospectus
dated May 16, 1996 relating to the Conversion IPO, Conversion's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1996, Conversion's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1996 and
Conversion's Proxy Statement for its Annual Meeting of Stockholders held on
November 25, 1996; (iv) publicly available historical stock price and trading
volume information for Octagon and Conversion common stock and warrants; (v)
Octagon management's projected orderly liquidation value of Octagon; (vi) a
selected comparable analyses for Octagon and Conversion provided by the
management of Octagon; (vii) background information regarding products and
services provided by Conversion and Octagon; and (viii) an October 1, 1996
Octagon Board briefing package regarding the Merger, which was prepared by the
management of Octagon. Although Brooks, Houghton was provided with financial
projections prepared by Octagon and a nine-month sources and uses of funds
schedule prepared by Conversion, such information was not material to Brooks,
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Houghton's analysis because of the uncertainty associated with each company's
ability to predict accurately its future financial results due to the uncertain
nature of its respective business.
Brooks, Houghton also held discussions with the management of Octagon and
Conversion and met with VANGKOE, at their headquarters in St. Augustine,
Florida. A senior investment banker from Brooks, Houghton also toured
Conversion's facility in Dunkirk, New York. The discussions and meetings with
the management of these companies included, among other things, the following:
(i) past and present business operations; (ii) the background of and the
rationale for the proposed Merger; (iii) the future operating and financial
prospects of the companies on an independent and merged basis; and (iv) the
strategic plan for the merged company.
The opinion prepared by Brooks, Houghton was delivered to Octagon's Chairman
of the Board and its Chief Executive Officer for the use and consideration of
the Octagon Board. The opinion addresses only the fairness, from a financial
viewpoint, of the Conversion Ratio. The opinion neither addresses the value of a
share of Octagon's Common Stock nor the business decision to participate in the
Merger. The Conversion Ratio was determined pursuant to negotitations between
Octagon and Conversion. While Brooks, Houghton has consented to the use of its
opinion in this Proxy Statement/Prospectus, Brooks, Houghton does not admit that
it is an expert within the meaning of the term "expert" as used in the
Securities Act and the rules and regulations promulgated thereunder, nor that
its opinion constitutes a report or valuation within the meaning of Section 7 of
the Securities Act and the rules and regulations promulgated thereunder.
As noted in its opinion, Brooks, Houghton relied upon and assumed the
accuracy and completeness of the financial and other information provided to it
or publicly available and did not attempt to independently verify the same. With
respect to the financial forecasts provided by management of Octagon or
Conversion to Brooks, Houghton for purposes of its opinion, it was assumed that
such forecasts were reasonably prepared on a basis reflecting management's most
accurate estimates available and the judgment of the respective management of
Conversion and Octagon. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities made trade at any time in the future.
The financial estimates and related assumptions also assumed that the
proposed Merger will be treated as a tax-free reorganization pursuant to Section
368 of the Code. Neither Conversion nor Octagon publicly discloses internal
management forecasts of the type provided to Brooks, Houghton in connection with
its opinion. Such forecasts were not prepared with a view toward public
disclosure. Furthermore, such forecasts were based upon numerous variables and
assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such forecasts.
Brooks, Houghton has assumed no liability for such forecasts.
Based on management's assurances, Brooks, Houghton also assumed that there
were no material changes prior to the delivery of its opinion in Octagon's or
Conversion's assets, financial condition, results from operations, business or
prospects since the respective dates of the last financial statements and other
material made available to Brooks, Houghton. Brooks, Houghton assumed that the
Merger will be completed in a manner that complies in all respects with the
applicable provisions of the Securities Act and the Exchange Act and all other
applicable Federal and state statutes, rules and regulations. Brooks, Houghton
did not perform any appraisal or valuation of specific assets of Octagon or
Conversion and has not expressed any opinion regarding the liquidation value of
Octagon or Conversion.
It is Brooks, Houghton's belief that its analyses must be considered as a
whole and that selecting portions of its analyses without considering all
factors and analyses would create an incomplete and possibly misleading view of
the analyses and the related processes underlying its opinion. Any estimates
contained therein are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. No company or
transaction used as a comparison in the analyses is
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identical to Octagon or Conversion or to the combined entity resulting from the
Merger. Furthermore, estimates of value of the businesses do not purport to be
appraisals or necessarily reflective of the prices at which the businesses
actually may be sold. Because such estimates are inherently subject to
uncertainty, neither the Octagon Board, Brooks, Houghton nor any other person
assumes responsibility for the accuracy of such estimates.
Based on comparative information provided by the management of Octagon and
Conversion, in connection with rendering its opinion, Brooks, Houghton employed
a variety of financial and comparative analyses, including those summarized
below.
COMPARABLE M&A TRANSACTIONS
Brooks, Houghton analyzed selected comparable transactions. This analysis
included 17 completed transactions from August 22, 1989 through February 29,
1996. The analysis reviewed the following: the target company and its respective
industry; the acquirer and the ultimate parent company; the announced and
effective dates; the form of the acquisition and whether it was friendly or
hostile; the premiums paid; the margins in terms of earnings before interest and
taxes ("EBIT") and net income; and long-term valuation measures which included
equity value to tangible book value, equity value to net income aggregate value
of the transaction to sales, aggregate value of the transaction to earnings
before interest, taxes, depreciation and amortization ("EBITDA"), aggregate
value of the transaction to sales and aggregate value of the transaction to
EBIT. A mean as well as a high and low statistical analysis was included in the
analysis.
No other company or transaction used in the comparable transaction analysis
as a comparison is identical to Octagon, Conversion or the combined entity.
Therefore, an analysis of the results of the foregoing is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies to which Octagon and
the combined entity are being compared.
COMPARABLE COMPANY ANALYSIS
Brooks, Houghton analyzed selected companies in similar businesses to
Octagon and Conversion. Companies believed by management to be comparable to
Octagon were the following 17 selected environmental consulting
companies--Acurex Environmental Corp., Earth Technology Corp. USA, Eco-Systems,
Environmental Solutions, Inc., ERC Environmental & Energy Services, Geraghty &
Miller Inc., HazWaste Industries Inc., KRP Asia Pacific Group (JRP & Partners),
Nuclear Services Group, O'Brien-Kreitzberg & Associate, Organic Waste
Technologies Inc., Quadrex Corp., RETEC, Riedal Environmental Services, Rust
International Inc., Summit Environmental Group, Inc., Thermo Environmental Corp.
and Wehran Envirotech Inc. Companies believed by management to be comparable to
Conversion were the following five selected technology companies--Energy
Biosystems, Catalytica, Inc., GTS DuraTek, Inc., Molten Metals Technology and
Thermatrix. The analysis included a comparison of revenue, EBITDA, EBIT and net
income over a trailing 12-month period and published estimates for 1997 and
1998. Also included in the analysis were low, average and high implied equity
values for those time periods.
ORDERLY LIQUIDATION VALUE
Brooks, Houghton reviewed an analysis by the management of Octagon regarding
the estimated pre-tax cash flow that may be generated from the orderly
liquidation of Octagon's assets and certain contracts. Brooks, Houghton
calculated a present value of approximately $1,670,000 based on a discount rate
of 8.5% applied to Octagon management's estimated pre-tax cash flows.
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HISTORICAL STOCK PRICE AND VOLUME
Brooks, Houghton reviewed historical prices and trade volume of the common
stock of Octagon and Conversion for the period May 5, 1996 through November 11,
1996. Included in this review was: an analysis of the price of the common stock
and the respective trading volume over time for both Octagon and Conversion; the
volume of trading at various price levels; the ratio of the price of Conversion
common stock to the price of Octagon common stock for the period May 16, 1996
through August 20, 1996. The average of this ratio over that period was 9.74x,
the high was 17.57x and the low was 5.67x.
As compensation for its services Brooks, Houghton is to be paid by Octagon a
total fee of $50,000. Octagon also agreed to reimburse Brooks, Houghton for its
reasonable out-of-pocket expenses and to indemnify Brooks, Houghton against
certain liabilities, including liabilities under the Federal securities laws.
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THE MERGER
GENERAL
The respective Boards of Directors of Conversion and Octagon, meeting
separately, each approved and adopted the Merger Agreement and the Merger and
authorized the execution and performance of the Merger Agreement.
THE FOLLOWING SUMMARY OF THE MATERIAL TERMS OF THE MERGER AGREEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE MERGER
AGREEMENT, WHICH IS ATTACHED AS EXHIBIT A TO THIS PROXY STATEMENT/ PROSPECTUS
AND IS INCORPORATED HEREIN BY REFERENCE.
EFFECTIVE TIME AND EFFECT OF THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger and the Merger Agreement by Octagon's stockholders and the
satisfaction or waiver of the other conditions to the Merger, Sub will be merged
with and into Octagon, with Octagon continuing as the surviving corporation as a
wholly-owned subsidiary of Conversion.
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware or at such later time as
may be provided in the Certificate of Merger (the "Effective Time"). The
Effective Time is expected to occur as promptly as practicable after the
approval of the Merger Agreement and the Merger by the stockholders of Octagon
at the Special Meeting, subject to the conditions described under "-- Conditions
to Consummation of the Merger". The separate corporate existence of Sub will
terminate upon consummation of the Merger and, pursuant to the Merger Agreement
and applicable law, each issued and outstanding share of Octagon Common Stock
will be converted automatically into 0.10 (one-tenth) of a share of Conversion
Common Stock. The Conversion Ratio shall be appropriately adjusted to reflect
any stock split, stock dividend, recapitalization, exchange, subdivision,
combination or other similar change in Conversion Common Stock or Octagon Common
Stock prior to the Effective Time.
EXCHANGE OF SHARES
Instructions with regard to the surrender of Octagon Common Stock
certificates, together with a letter of transmittal to be used for this purpose,
will be mailed to Octagon stockholders as promptly as practicable after the
Effective Time. In order to receive certificates evidencing Conversion Common
Stock, each Octagon stockholder will be required to surrender his or her stock
certificate(s) after the Effective Time, together with a duly completed and
executed letter of transmittal, to American Stock Transfer & Trust Company,
which will act as Exchange Agent (the "Exchange Agent") in connection with the
Merger. Promptly after the Effective Time, Conversion will deposit in trust with
the Exchange Agent certificates representing the number of shares of Conversion
Common Stock which the holders of Octagon Common Stock are entitled to receive
in the Merger. Upon receipt of such stock certificates and letters of
transmittal, the Exchange Agent will issue stock certificates evidencing whole
shares of Conversion Common Stock to the registered holder or his or her
transferee for the number of shares of Conversion Common Stock each such person
is entitled to receive as a result of the Merger, together with cash in lieu of
any fractional shares. No interest will be paid or accrued on the amounts
payable upon the surrender of Octagon Common Stock certificates.
OCTAGON STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THE INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED.
If any certificate for Conversion Common Stock is to be issued or any cash
payment in lieu of a fractional share is to be made to a person other than the
person in whose name the certificate for the Octagon Common Stock surrendered in
exchange therefor is registered, it will be a condition of such issuance or
payment that the stock certificate so surrendered be properly endorsed and
otherwise in proper
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form for transfer, and that the person requesting such issuance or payment (i)
pay in advance any transfer or other taxes required by reason of the issuance of
a certificate for Conversion Common Stock or a check representing cash in lieu
of a fractional share to a person other than the registered holder of the
Octagon Common Stock certificate surrendered, or (ii) establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
After the Effective Time, there will be no further transfers on the stock
transfer books of Octagon of the shares of Octagon Common Stock that were
outstanding immediately prior to the Effective Time. If a certificate
representing such shares is presented for transfer, subject to compliance with
the requisite transmittal procedures, it will be cancelled and exchanged for the
applicable whole number of shares of Conversion Common Stock and cash in lieu of
any fractional share amount.
Each certificate representing Octagon Common Stock immediately prior to the
Effective Time will, at the Effective Time, be deemed for all purposes to
represent only the right to receive the number of whole shares of Conversion
Common Stock (and the right to receive cash in lieu of any fractional share of
Conversion Common Stock) into which the shares of Octagon Common Stock
represented by such certificate were converted in the Merger.
Until a certificate which formerly represented Octagon Common Stock is
actually surrendered for exchange and received by the Exchange Agent, the holder
thereof will not be entitled to receive any dividends or other distributions
with respect to Conversion Common Stock payable to holders of record after the
Effective Time. Subject to applicable law, upon such surrender of Octagon Common
Stock certificates, such dividends or other distributions will be remitted
(without interest) to the record holder of certificates for the shares of
Conversion Common Stock issued in exchange therefor.
Any certificates for the Conversion Common Stock and cash to pay for
fractional shares delivered to or held by the Exchange Agent and not exchanged
for Octagon Common Stock certificates within six months after the Effective Time
will be returned by the Exchange Agent to Conversion, which will thereafter act
as Exchange Agent. None of Conversion, Octagon or the Exchange Agent will be
liable to a holder of Octagon Common Stock for any of the Conversion Common
Stock, dividends or other distributions thereon, or cash in lieu of fractional
shares, delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
No fractional shares of Conversion Common Stock will be issued in connection
with the Merger. All fractional shares of Conversion Common Stock to which a
holder of Octagon Common Stock immediately prior to the Effective Time would
otherwise be entitled at the Effective Time will be aggregated. If a fractional
share results from such aggregation, the Octagon stockholder will be entitled to
receive from Conversion a cash payment in lieu thereof in the manner provided in
the Merger Agreement. Except for such payment, no Octagon stockholder will be
entitled to any dividends or other distributions or other rights of shareholders
with respect to any fractional interest.
The holders of Conversion Common Stock will continue to hold their shares
without any change in number, designation, terms or rights.
TREATMENT OF STOCK OPTIONS AND WARRANTS
At the Effective Time, each holder of vested options to purchase Octagon
Common Stock, in exchange for and satisfaction thereof, will receive from
Conversion that number of shares of Conversion Common Stock as shall equal (i)
the number of shares of Conversion Common Stock that the holder of such vested
options would have received in the Merger had such holder exercised such vested
options immediately prior to the Effective Time less (ii) the number of shares
of Conversion Common Stock as shall equal the quotient obtained by dividing the
aggregate exercise price for such vested options by $4.50.
All unvested options to purchase Octagon Common Stock outstanding at the
Effective Time shall be cancelled and no consideration shall be paid or given in
respect thereof. However, the Conversion Board
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of Directors has reserved an aggregate of 90,149 shares of Common Stock for
issuance upon the exercise of options to be granted to Octagon employees as soon
as practicable following the Effective Time pursuant to the terms of the Merger
Agreement.
At the Effective Time, each of Octagon's then outstanding warrants to
purchase Common Stock, by virtue of the Merger and without any further action on
the part of any holder thereof, shall be assumed by Conversion and automatically
converted, pursuant to its terms, into a warrant to purchase a number of shares
of Conversion Common Stock determined by multiplying the number of shares of
Octagon Common Stock by 0.10 (rounded up to the nearest whole number of shares)
at an exercise price equal to the exercise price in effect under such warrant
immediately prior to the Effective Time divided by 0.10 (rounded to the nearest
cent).
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of Conversion, Octagon and Sub to consummate the Merger are
subject to the satisfaction of certain conditions, including (i) the approval
and adoption of the Merger Agreement and the Merger by the stockholders of
Octagon, (ii) the receipt of all authorizations, permits, consents and approvals
of securities or "Blue Sky" commissions or agencies of any jurisdiction and of
other governmental bodies or agencies that may reasonably be deemed necessary so
that the consummation of the Merger and the other transactions contemplated by
the Merger Agreement will comply with applicable laws, (iii) the effectiveness
under the Securities Act of the Registration Statement (of which this Proxy
Statement/Prospectus constitutes a part) and the absence of any stop order
suspending the effectiveness of the Registration Statement or proceedings
seeking a stop order, (iv) no temporary restraining order, preliminary or
permanent injunction, or other order preventing the consummation of the Merger,
shall have been issued, nor shall any statute, rule or regulation have been
enacted prohibits, restricts or delays consummation of the Merger and (v) the
receipt by Octagon of the opinion of Greenberg, Traurig that the Merger will be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Code.
Additional conditions to the obligations of Conversion and Sub to consummate
the Merger include (i) the accuracy in all material respects of the
representations and warranties of Octagon, (ii) the performance, in all material
respects, of all of the obligations required to be performed by Octagon under
the Merger Agreement prior to the consummation of the Merger, (iii) all action
necessary to authorize the execution, delivery and performance of the Merger
Agreement and the consummation of the transactions contemplated thereby will
have been duly and validly taken by Octagon and Octagon and the stockholders of
Octagon shall have the full power and right to effect the Merger, (iv) the
receipt by Conversion of an opinion of Greenberg, Traurig, counsel to Octagon,
reasonably satisfactory in form and substance to Conversion, (v) the receipt by
the Board of Directors of Conversion from a financial advisor acceptable to it
of an opinion stating that the Merger is fair from a financial point of view to
Conversion's stockholders, (vi) the execution of an employment agreement between
Conversion and each of William L. Amt and Harry O. Christenson in the form
attached as an exhibit to the Merger Agreement, (vii) the receipt by Octagon of
all necessary consents, waivers and approvals required under Octagon's material
agreements, contracts and licenses, (viii) the holders of not more than 5% of
the issued and outstanding shares of Octagon Common Stock immediately prior to
the Effective Time shall have exercised their appraisal rights under the DGCL,
(ix) Octagon's Certificate of Incorporation shall have been amended to delete
therefrom provisions relating to the purchase price for Octagon Common Stock,
(x) Conversion shall have obtained directors' and officers' liability insurance
on satisfactory terms and conditions, (xi) releases shall have been obtained
from certain former executive officers and directors of Octagon with respect to
indemnification and (xii) a party to a pending litigation with Octagon shall not
have sought an order to enjoin the Merger.
Additional conditions to Octagon's obligation to consummate the Merger
include (i) the accuracy in all material respects of the representations and
warranties of Conversion and Sub and the performance, in all material respects,
of all the obligations required to be performed by Conversion and Sub under the
Merger Agreement prior to the consummation of the Merger, (ii) all action
necessary to authorize the
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execution, delivery and performance of the Merger Agreement and the consummation
of the transactions contemplated thereby will have been duly and validly taken
by Conversion and Sub, (iii) the receipt by Octagon of an opinion of O'Sullivan
Graev & Karabell, LLP, counsel to Conversion, in form and substance reasonably
satisfactory to Octagon, (iv) the receipt of an opinion from Greenberg, Traurig,
in form and substance reasonably satisfactory to Octagon, to the effect that the
Merger will be treated for Federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code, (v) all
consents, authorizations, orders or approvals, and filings or registrations
with, any governmental authority required in connection with the consummation of
the Merger by Conversion and Sub, (vi) the payment of certain expenses of
Octagon upon consummation of the Merger, (vii) Conversion shall have elected
William L. Amt, Harry O. Christenson, Patricia H. Engman and William V. Roberti
as directors of Conversion, effective upon consummation of the Merger and (viii)
the receipt of an opinion of Brooks, Houghton, financial advisor to Octagon,
that the Merger is fair to the stockholders of Octagon from a financial point of
view.
Under the terms of the Merger Agreement, Conversion and Sub have no
obligation to consummate the Merger if any condition to their obligations to
consummate the Merger is not satisfied on or prior to the closing date of the
Merger and Octagon has no obligation to consummate the Merger if any condition
to its obligation to consummate the Merger is not satisfied on or prior to the
closing date of the Merger. Any of the conditions to the obligations of
Conversion, Sub or Octagon to consummate the Merger (other than the required
stockholder approval) may be waived or modified by the party that is, or whose
shareholders are, entitled to the benefits thereof.
Reference is made to Article VI of the Merger Agreement for a complete
statement of the conditions precedent to the obligations of the respective
parties to consummate the Merger.
REPRESENTATIONS, WARRANTIES AND COVENANTS
In the Merger Agreement, Conversion, Sub and Octagon have made various
representations, warranties, covenants and agreements relating to, among other
things, their respective organization, capital structure, business and financial
condition and the satisfaction of certain legal requirements for the Merger.
The Merger Agreement provides that during the executory period of the Merger
Agreement and for 20 days thereafter, Octagon shall not, directly or indirectly,
(i) solicit, initiate or engage in discussions with any person other than
Conversion relating to the acquisition of Octagon, whether by way of merger,
purchase of stock, purchase of assets or otherwise (an "Acquisition
Transaction"), (ii) provide information to any person other than Conversion with
respect to a possible Acquisition Transaction, (iii) enter into an agreement
relating to an Acquisition Transaction with any person other than Conversion and
Sub, (iv) consummate an Acquisition Transaction with any person other than
Conversion or (v) make or authorize any statement, recommendation or
solicitation in support of a possible Acquisition Transaction with a party other
than Conversion; PROVIDED, HOWEVER, that Octagon may (i) furnish information to,
or enter into discussions or negotiations with, an unaffiliated third party with
respect to a proposed Acquisition Transaction that is not subject to conditions
relating to financing and offers Octagon's stockholders cash or marketable
securities having a value in excess of the shares of Conversion Common Stock to
be issued in the Merger (a "Superior Proposal") if the Board of Directors of
Octagon, based upon the written advice of counsel, determines in good faith that
such action is necessary to comply with its fiduciary duties to stockholders
under applicable law and (ii) fail to make or withdraw or modify its
recommendation to Octagon's stockholders to approve and adopt the Merger
Agreement and the Merger. Octagon has agreed to notify Conversion if it receives
any unsolicited offer or proposal relating to an Acquisition Transaction.
Under the Merger Agreement, each of Conversion and Octagon is generally
obligated prior to the Effective Time to carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, and to preserve intact its present business organization, the
services of
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the officers and employees and its relationships with suppliers, customers and
others. Octagon has agreed to notify Conversion of changes in the normal course
of its business and each of Octagon and Conversion has agreed to refrain from
taking certain actions without the prior written consent of the other.
VOTING AGREEMENTS
In connection with the execution of the Letter of Intent and to facilitate
the consummation of the Merger, Conversion entered into separate Voting
Agreements with certain stockholders of Octagon, including, among others,
William L. Amt, the President and Chief Executive Officer of Octagon, Harry O.
Christenson, the Chief Financial Officer of Octagon, John C. Kolojeski, a
director and Executive Vice President of Octagon, and John T. Royall and Stevan
W. Koinis, principal stockholders and former officers and directors of Octagon,
holding an aggregate of approximately 52% of the Octagon Common Stock, which
percentage is sufficient to approve the consummation of the Merger without the
approval of any other stockholder of Octagon. Each stockholder agreed that at
any meeting of the stockholders of Octagon, however called, and in any action by
written consent of the stockholders of Octagon, such stockholder will (a) vote
all of such shares of Octagon Common Stock in favor of the approval of the
Merger Agreement, and the transactions contemplated thereby, including the
Merger; and (b) until June 30, 1997, vote such shares of Octagon Common Stock
against any (i) merger, consolidation, share exchange, business combination or
other similar transaction pursuant to which control of Octagon would be
transferred to any person other than Conversion or (ii) sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 50% or more of the assets of
Octagon taken as a whole, in a single transaction or a series of transactions.
Each stockholder has also granted Conversion an irrevocable proxy to vote his
shares of Octagon Common Stock as specified above in the event that such
stockholder fails to so vote such shares.
The Voting Agreements will terminate on the earlier of (i) June 30, 1997 and
(ii) the termination of the Merger Agreement.
The Voting Agreements are intended to ensure that the Merger will be
consummated in accordance with the terms of the Merger Agreement. Consequently,
the Voting Agreements may have the effect of discouraging persons who might now
or prior to the Effective Time be interested in acquiring all or a significant
interest in Octagon from proposing or making such an acquisition, even if such
persons were prepared to pay a higher price per share for Octagon Common Stock
than the price per share implicit in the Merger Consideration.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after the approval by the Octagon
stockholders, (i) by mutual written consent of Conversion and Octagon, (ii) by
either Conversion or Octagon if the Merger has not been consummated by June 30,
1997, (iii) by Conversion or Octagon if any statute, rule, regulation or other
legislation is enacted which, in the reasonable good faith judgment of such
party materially adversely impairs the conduct or operation of the other party's
business, (iv) Octagon if it receives a Superior Proposal and, based upon
written advice of counsel, determines in good faith that accepting such proposal
is necessary for the Octagon Board of Directors to comply with its fiduciary
duties to stockholders under applicable law or (v) by Conversion if the Octagon
Board of Directors shall have (A) withdrawn, modified or amended in any adverse
respect its approval or recommendation of the Merger Agreement or the Merger,
(B) failed to include in this Proxy Statement/Prospectus the recommendation that
stockholders approve the Merger or (C) recommend to the stockholders an
Acquisition Transaction with a party other than Conversion.
FEES AND EXPENSES; TERMINATION FEES
Conversion and Octagon will each bear their own expenses in the event the
Merger is not consummated. If the Merger is consummated, Conversion shall bear
its expenses and the reasonable fees and
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expenses of Octagon's legal, accounting and financial advisors. In addition,
Octagon must pay Conversion a termination fee of $200,000 plus out-of-pocket
expenses if (i) Octagon terminates the Merger Agreement after receiving a
Superior Proposal and being advised by its legal counsel that accepting such
offer is necessary to comply with the fiduciary duty of the Octagon Board, (ii)
Conversion terminates the Merger Agreement after the Octagon Board withdraws,
modifies or amends in an adverse respect its approval and adoption of the Merger
Agreement and the Merger or recommends an Acquisition Proposal with respect to
any party other than Conversion or (iii) Octagon consummates an acquisition
transaction prior to June 30, 1997 with a party other than Conversion who made
an acquisition proposal to Octagon prior to the termination of the Merger
Agreement, or during the 20-day period following the termination of the Merger
Agreement.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER OF CONDITIONS
The respective Boards of Directors of Octagon, Conversion and Sub may, by
written agreement, at any time before or after the approval of the Merger and
the Merger Agreement by the Octagon stockholders, amend the Merger Agreement,
provided that after such approval by the Octagon stockholders no amendment or
modification may be made that would materially adversely affect the rights of
the Octagon stockholders without the further approval of such stockholders. Each
party to the Merger Agreement may, to the extent legally permitted, extend the
time for the performance of any of the obligations of any other party to the
Merger Agreement, waive any inaccuracies in the representations or warranties of
any other party contained in the Merger Agreement or waive compliance by any
other party with any of the agreements or conditions contained in the Merger
Agreement (other than the required stockholder approval).
CONFLICTS OF INTEREST
In considering the recommendation of the Octagon Board to approve and adopt
the Merger Agreement and the Merger, Octagon stockholders should be aware that
the executive officers of Octagon, certain members of the Octagon Board and
certain former officers and directors who are currently principal stockholders
of Octagon have interests in the Merger that are in addition to the interests of
Octagon stockholders generally, and that the members of the Octagon Board having
such interests participated in the discussion, deliberation and voting of the
Octagon Board with respect to the Merger Agreement and the Merger. The Octagon
Board of Directors was aware of these interests, but did not believe that they
would affect the objectivity of any director's determination that the Merger was
in the best interests of Octagon's stockholders.
EMPLOYMENT AGREEMENTS. Each of William L. Amt, the President and Chief
Executive Officer and a director of Octagon, and Harry O. Christenson, the
Chairman and Chief Financial Officer of Octagon, has entered into an Employment
Agreement (collectively, the "Employment Agreements") with Conversion relating
to his employment with Conversion for the one-year period following the Merger.
Pursuant to the Employment Agreements, Mr. Amt and Mr. Christenson will each
receive a salary of $160,000 per year and, upon consummation of the Merger,
options to purchase 250,000 shares and 150,000 shares, respectively, of
Conversion Common Stock at an exercise price equal to fair market value on the
date of grant, and will each be eligible to receive additional incentive
compensation and stock options and other benefits. See "-- Business and
Management After the Merger; Employment Agreements".
ACCELERATION OF OPTIONS. The vesting of options held by William L. Amt, the
President and Chief Executive Officer and Harry O. Christenson, the Chairman and
Chief Financial Officer of Octagon, in each case, to purchase 800,000 shares of
Octagon Common Stock at an exercise price of $0.07 was accelerated by Octagon to
become exercisable, and all such options were exercised by Mr. Amt and Mr.
Christenson on, August 26, 1996 through cashless exercise resulting in the
issuance to each of them of 650,667 shares of Octagon Common Stock. See "OCTAGON
EXECUTIVE COMPENSATION".
INDEMNIFICATION. Pursuant to the Employment Agreements, Conversion has
agreed that, until six years following the Effective Time, the Surviving
Corporation will maintain all rights to indemnification
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now existing in favor of Mr. Amt and Mr. Christenson (the "Indemnified Parties")
as provided in the Octagon Certificate of Incorporation and the Octagon By-laws
and as otherwise in effect under any agreement or otherwise on the date of the
Merger Agreement. See "-- Business and Management After the Merger; Employment
Agreements".
ELECTION TO CONVERSION BOARD OF DIRECTORS; ISSUANCE OF NON-EMPLOYEE DIRECTOR
OPTIONS. William L. Amt, Harry O. Christenson, Patricia H. Engman and William
V. Roberti, each currently an Octagon director, will be appointed to
Conversion's Board of Directors upon consummation of the Merger. In addition,
upon consummation of the Merger, Patricia H. Engman, Charles R. Henry and
William V. Roberti will receive options to purchase 5,000 shares of Conversion
Common Stock, at an exercise price equal to the fair market value thereof,
pursuant to Conversion's 1994 Stock Option Plan for Non-Employee Directors. See
"-- Business and Management After the Merger; Employment Agreements".
AGREEMENTS WITH CERTAIN PRINCIPAL STOCKHOLDERS WHO EXECUTED VOTING
AGREEMENTS; CONVERSION LOANS TO OCTAGON. In August 1996, Conversion and Octagon
entered into letter agreements with John T. Royall and Steven W. Koinis, each of
whom is a former executive officer and director of, and currently a principal
stockholder of, Octagon. Pursuant to the letter agreements, Octagon agreed to
reimburse certain legal fees incurred by Messrs. Royall and Koinis pursuant to
indemnification obligations as officers of Octagon and Conversion agreed to
guarantee such reimbursement obligation effective as of the consummation of the
Merger. The letter agreements also contain mutual releases, with certain
exceptions, from future claims. In accordance with the provisions of such letter
agreements, Messrs. Royall and Koinis entered into Voting Agreements with
Conversion obligating them to vote in favor of the Merger and against
acquisition proposals of any party other than Conversion.
In September 1996, Conversion and Octagon entered into a Loan and Security
Agreement, pursuant to which Conversion loaned to Octagon an aggregate of
$660,000, $55,000 of which Octagon has repaid to Conversion. See "EXISTING
RELATIONSHIP BETWEEN CONVERSION AND OCTAGON". $60,000 of the Bridge Loan was
used to make reimbursements to Messrs. Royall and Koinis in respect of legal
fees in accordance with the terms of the letter agreements. See "-- Voting
Agreements".
FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material Federal income tax
consequences of the Merger that are generally applicable to stockholders of
Octagon. The discussion summarizes the opinion of Octagon's counsel, Greenberg,
Traurig, filed as Exhibit 8.1 to the Registration Statement (the "Exhibit
Opinion"). The Exhibit Opinion is based on certain assumptions and subject to
certain limitations and qualifications set forth therein.
For Federal income tax purposes the merger of Sub with and into Octagon, in
accordance with the terms of the Merger Agreement, will qualify as a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Code, and
Conversion, Octagon and Sub will each be a party to a reorganization within the
meaning of Section 368(b) of the Code. Provided that the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Code, (i) no
gain or loss will be recognized by either Octagon or Conversion as a result of
the consummation of the Merger, (ii) no gain or loss will be recognized by a
stockholder of Octagon upon the receipt by such stockholder solely of shares of
Conversion Common Stock (including any fractional share interest treated as
received) in exchange for such stockholder's shares of Octagon Common Stock in
accordance with the terms of the Merger Agreement, (iii) the aggregate tax bases
of the shares of Conversion Common Stock received by a stockholder of Octagon
(including any fractional share interest treated as received) will be the same
as the aggregate tax bases of the shares of Octagon Common Stock surrendered in
exchange therefor decreased by the amount of any cash received and increased by
the amount of any gain recognized and (iv) the holding period of the shares of
Conversion Common Stock received by an Octagon stockholder (including any
fractional share interest treated as received) in exchange for shares of Octagon
Common Stock will include the period during which the shares of Octagon Common
Stock surrendered in exchange therefor were held, provided the shares of Octagon
Common Stock were held as capital assets at the Effective Time.
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An Octagon stockholder who receives cash in the Merger in lieu of a
fractional share interest in Conversion Common Stock will be treated as having
received and then redeemed such fractional share of Conversion Common Stock. The
tax treatment of such redemption will be governed by Section 302(a) of the Code.
Cash received for a fractional share by a minority stockholder who exercises no
control over the affairs of Conversion generally will be treated as received in
exchange for the fractional share of stock rather than as a dividend. Assuming
such treatment, an Octagon stockholder would recognize gain or loss measured by
the difference between the cash received and the portion of the stockholder's
adjusted tax basis in the shares of Octagon Common Stock allocable to the
fractional share. Any capital gain or loss recognized by an Octagon stockholder
will be long-term capital gain or loss if the stockholder has held such
stockholder's shares of Octagon Common Stock for longer than one year.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. OCTAGON STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS FOR MORE SPECIFIC AND DEFINITIVE ADVICE AS TO THE FEDERAL INCOME TAX
CONSEQUENCES TO THEM OF THE CONVERSION OF THEIR SHARES OF OCTAGON COMMON STOCK
PURSUANT TO THE MERGER, AS WELL AS ADVICE AS TO THE APPLICATION AND EFFECT OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS AND POSSIBLE AMENDMENTS TO
SUCH LAWS.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase by Conversion. As a result,
the excess of the value of the consideration to be issued to Octagon's
stockholders over the fair value of identifiable tangible assets acquired, less
the fair value of liabilities assumed, will be capitalized by Conversion. The
amount of goodwill will be determined based upon the market value of Conversion
Common Stock on August 13, 1996, the time of the announcement of the Merger.
Based on a closing price of $4.00 for Conversion Common Stock on August 13,
1996, the amount of goodwill will be approximately $3,152,000. The actual amount
of goodwill will be amortized over a 10-year period, resulting in an annual
non-cash charge to earnings that will not be deductible for income tax purposes.
Based on the August 13, 1996 closing price of $4.00 for Conversion Common Stock,
such annual charge will be $315,241.
RESALE OF CONVERSION COMMON STOCK BY AFFILIATES
The shares of Conversion Common Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued pursuant to the terms of the Merger
Agreement to any holder of Octagon Common Stock who may be deemed to be an
"affiliate" of Octagon for purposes of Rule 145 under the Securities Act or of
Conversion. Such affiliates may not sell their shares of Conversion Common Stock
acquired in connection with the Merger, except pursuant to an effective
registration statement under the Securities Act covering such shares, or in
compliance with Rule 145, Rule 144 or another applicable exemption from the
registration requirements of the Securities Act. Persons who may be deemed to be
affiliates of an entity generally include individuals or entities that control,
are controlled by or are under common control with such entity, and includes the
directors, the executive officers and the principal stockholders of such entity.
Octagon agreed in the Merger Agreement to use its best efforts to cause each
director, executive officer and other person who may be deemed an affiliate (for
purposes of Rule 145) of Octagon to execute and deliver a written agreement
intended to ensure compliance with the Securities Act.
This Proxy Statement/Prospectus cannot be used for resales of Conversion
Common Stock received by any person who may be deemed an affiliate of Octagon.
NASDAQ SMALLCAP LISTING
Shares of Conversion Common Stock are currently listed on the Nasdaq
SmallCap Market. Application will be made by Conversion to list the shares of
Conversion Common Stock to be issued in connection with the Merger on the Nasdaq
SmallCap Market.
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BUSINESS AND MANAGEMENT AFTER THE MERGER; EMPLOYMENT AGREEMENTS
Following the Merger, management of the combined entity will finalize and
implement operational strategies designed to maximize return on capital and
position the combined entity for growth. Management will also carefully review
the combined entity's operations to identify opportunities for eliminating
duplicative expenses and other operating expense reductions to facilitate
achieving cash flow break-even from operations on a combined basis. It is
anticipated that strategic initiatives will include, among others, (i)
increasing revenue and profit margins in radiological control and operations and
maintenance services through innovative, value-added offerings such as automated
radiological control systems and bundled product and service offerings which may
utilize substrates produced by Conversion, (ii) continuing to identify markets
for Conversion's abrasives and construction material aggregates and identifying
other products or materials with respect to which Conversion may obtain
marketing rights on a stand-alone or bundled basis, (iii) offering specialty
products and third-party services to others on a contract basis utilizing
Conversion's manufacturing facilities, (iv) pursuing construction and licensing
opportunities with respect to ALUMAGLASS or other glass products utilizing
melting technologies on-site at industrial customer locations and (v) growing
Conversion's CRT recycling business by entering markets for recycling end-of-
life computer CRT tubes or monitors through arrangements with computer
manufacturers and other large volume sources. No assurance can be given that any
of such initiatives will be successful or that the combined entity will achieve
profitability. See "RISK FACTORS".
The executive officers of Conversion after the Merger are expected to be as
follows: William L. Amt, President and Chief Executive Officer; Harry O.
Christenson, Chief Financial Officer; John C. Kolojeski, Vice
President--Regulatory Compliance; Jack D. Hays, Jr., Vice
President--Manufacturing and Operations; and William Gary Jellum, Vice
President--Human Resources. Such executive officers are currently executive
officers of Conversion or Octagon, with the exception of Mr. Hayes and Mr.
Jellum. The backgrounds of these individuals are set forth below. In addition,
Eckardt C. Beck and Harvey Goldman will continue to be Chairman and
Vice-Chairman, respectively, of Conversion following the Merger.
Jack D. Hays, Jr., 58, is currently an employee of Octagon, which he joined
in March 1997 in anticipation of the Merger. From July 1993 through June 1996,
Mr. Hays was a National Account Executive with the firm of Brown & Root, Inc.,
an engineering, construction and environmental consulting firm. From February
1992 through March 1993, Mr. Hays was Executive Vice President of Ford, Bacon &
Davis, an engineering and construction consulting firm. Prior to joining Ford,
Bacon & Davis, Mr. Hays was with PPG Industries, Inc., where he had over 30
years of experience in various operating and management positions. Mr. Hays also
performed consulting services for various entities throughout his career. Mr.
Hays received a B.S. and M.S. in Chemical Engineering from Louisiana State
University and a M.B.A from the University of Pittsburgh.
William Gary Jellum, 47, joined Octagon in December 1995 and is Octagon's
Vice President of Human Resources. Mr. Jellum has held various human resources
positions throughout his career. Prior to joining Octagon, Mr. Jellum was with
Trans Global Associates, a human resources consulting firm, which he joined in
January 1992. Mr. Jellum received his B.A. in Psychology and Economics from
Brock University of St. Catherine, Ontario.
Following the Merger, Conversion's Board of Directors shall be expanded from
eight to twelve directors and William L. Amt, Harry O. Christenson, Patricia H.
Engman and William V. Roberti will join Conversion's Board.
On November 18, 1996, simultaneously with the execution and delivery of the
Merger Agreement, William L. Amt and Harry O. Christenson each entered into an
Employment Agreement with Conversion relating to the employment of such
individuals with Conversion effective as of the consummation of the Merger. The
Employment Agreements contain non-competition and confidentiality provisions and
provide that Mr. Amt will be the President and Chief Operating Officer of
Conversion and that Mr. Christenson will be the Chief Financial Officer of
Conversion. Mr. Amt and Mr. Christenson will also serve as directors of
Conversion. Mr. Amt and Mr. Christenson will each receive a salary of $160,000
per annum and will receive annual or incentive bonuses if approved by
Conversion's Board. Mr. Amt and Mr. Christenson will be entitled to participate
in all benefit and stock option plans available to Conversion's employees and
executive officers and each will receive an automobile allowance of $600 per
month. Upon consummation
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of the Merger, Mr. Amt and Mr. Christenson will receive non- qualified stock
options to purchase 250,000 shares and 150,000 shares, respectively, of
Conversion's Common Stock at an exercise price equal to the fair market value
thereof on the date of grant. Subject to the vesting and other provisions to be
set forth in the non-qualified stock option agreements to be entered into with
respect to the options, 20% of such options will vest immediately and 20% of
such options shall vest on the first, second, third and fourth anniversaries,
respectively, of the date of grant.
Pursuant to the Employment Agreements, Mr. Amt and Mr. Christenson will each
place 34,560 shares of Conversion Common Stock that they will receive in the
Merger into escrow. Commencing six months following the consummation of the
Merger, one-sixth of such shares shall be released from escrow each month so
that all of such escrow shares shall be released on the one-year anniversary of
the Merger. In the event of termination by Conversion for "cause" or by the
employee without "good reason" (as defined in the Employment Agreements),
subject to certain exceptions, the shares then remaining in escrow, if any,
shall be cancelled and returned to Conversion. In the event of termination by
Conversion without cause, by the employee for good reason or as a result of
death or disability, the shares then remaining in escrow, if any, shall be
released to the employee. In addition, in the event of termination by Conversion
without cause, by the employee for good reason or as the result of death, the
employee or his estate will receive a lump sum payment equal to his annual
salary and will continue to participate in benefit and other plans for the
remaining term of the Employment Agreement.
The term of each Employment Agreement is one year from the consummation of
the Merger and will automatically renew for additional one-year periods, unless
six months' prior notice of non-renewal is given by either party. Conversion may
not terminate either Employment Agreement without cause during the first year of
the term.
Conversion is also a party to an Amended and Restated Employment Agreement
dated July 9, 1994, with Harvey Goldman, pursuant to which Mr. Goldman currently
serves as President and Chief Executive Officer of Conversion. See "CONVERSION
EXECUTIVE COMPENSATION -- Employment Agreements." Conversion and Mr. Goldman
amended the Amended and Restated Employment Agreement in January 1997 to reflect
that following the Merger, Mr. Goldman will continue to serve as an employee of
Conversion and, at the discretion of Conversion's Board of Directors, as
Chairman or Vice-Chairman of the Board and as a member of the Executive
Committee of the Board of Directors.
DISSENTERS' RIGHTS
Holders of record of shares of Octagon Common Stock will have appraisal
rights with respect to their shares. Such stockholders who do not vote to
approve and adopt the Merger Agreement and the Merger may elect to have the fair
value of their shares, based on all relevant factors and excluding any element
of value arising from the accomplishment or expectation of the Merger,
judicially appraised and paid to them in cash. Under Section 262 of the DGCL
("Section 262"), if the Merger is consummated, holders of record of shares of
Octagon Common Stock may exercise their appraisal rights by complying with the
provisions of Section 262. The following brief summary of Section 262 sets forth
the procedures for demanding statutory appraisal rights. This summary is
qualified in its entirety by reference to Section 262, a copy of which is
attached to this Proxy Statement/Prospectus as Exhibit C.
Stockholders of record who desire to exercise their appraisal rights must
fully satisfy all of the following conditions. A written demand for appraisal of
shares of Octagon Common Stock must be delivered to the Secretary of Octagon
before the taking of the vote on the approval and adoption of the Merger
Agreement and the Merger. This written demand for appraisal must be in addition
to and separate from any proxy or vote abstaining from or against the approval
and adoption of the Merger Agreement and the Merger. Neither voting against,
abstaining from voting, nor failing to vote on the Merger Agreement and the
Merger will constitute a demand for appraisal within the meaning of Section 262.
Any stockholder seeking appraisal rights must hold the shares of Octagon Common
Stock for which appraisal is sought on the date of the making of the demand,
continuously hold such shares through the Effective Time and otherwise comply
with the provisions of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for the approval and adoption of the Merger Agreement and the
Merger or consent thereto in writing. Voting in
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favor of the approval and adoption of the Merger Agreement and the Merger, or
delivering a proxy in connection with the Special Meeting (unless the proxy
votes against, or expressly abstains from the vote on, the approval and adoption
of the Merger Agreement and the Merger), will constitute a waiver of the
stockholder's right of appraisal and will nullify any written demand for
appraisal submitted by the stockholder.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on the stock
certificates. If shares of Octagon Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, such demand
must be executed by the fiduciary. If shares of Octagon Common Stock are owned
of record by more than one person, as in a joint tenancy or tenancy in common,
such demand must be executed by all joint owners. An authorized agent, including
an agent for two or more joint owners, may execute the demand for appraisal for
a stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, he is acting as
agent for the record owner.
A record owner, such as a broker, who holds shares of Octagon Common Stock
as a nominee for others, may exercise appraisal rights with respect to the
shares held for all or less than all beneficial owners of shares as to which the
holder is the record owner. In such case, the written demand must set forth the
number of shares of Octagon Common Stock covered by such demand. Where the
number of shares of Octagon Common Stock is not expressly stated, the demand
will be presumed to cover all shares outstanding in the name of such record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the exercise of appraisal rights before
the date of the Special Meeting.
Stockholders who elect to exercise appraisal rights must mail or deliver
their written demands to: Secretary, Octagon, Inc., 317 North Lake Boulevard,
Suite 1024, Altamonte Springs, Florida 32701. The written demand for appraisal
should specify the stockholder's name and mailing address, the number of shares
of Octagon Common Stock covered by the demand, and that the stockholder is
thereby demanding appraisal of such shares. Within 10 days after the Effective
Time, Octagon must provide notice of the Effective Time to all stockholders who
have complied with Section 262 and have not voted for approval and adoption of
the Merger Agreement and the Merger.
Within 120 days after the Effective Time, either Octagon or any stockholder
who has complied with the required conditions of Section 262 and who is
otherwise entitled to appraisal rights may file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of the shares of Octagon
Common Stock of the dissenting stockholders. If a petition for an appraisal is
timely filed, after a hearing on such petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and
thereafter will appraise the shares of Octagon Common Stock owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be the fair value. In determining fair value, the Delaware Court
of Chancery is to take into account all relevant factors. In WEINBERGER V. UOP,
INC., et al., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered and that "[f]air price obviously requires consideration of all
relevant factors involving the value of a company". The Delaware Supreme Court
stated that in making this determination of fair value, the court must consider
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which could be ascertained as
of the date of merger which throw any light on future prospects of the merged
corporation . . ." The Delaware Supreme Court has construed Section 262 to mean
that "elements of future value, including the nature of the enterprise, which
are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered". However, the court noted that
Section 262 provides that fair value is to be determined "exclusive of any
element of value arising from the accomplishment or expectation of the merger".
Stockholders considering seeking appraisal should keep in mind that the fair
value of their shares of Octagon Common Stock determined under Section 262 could
be more than, the same as or less than the
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value of the Merger Shares if they do not seek appraisal of their shares, and
that opinions of investment banking firms as to fairness from a financial point
of view are not necessarily opinions as to fair value under Section 262. The
cost of the appraisal proceeding may be determined by the Delaware Court of
Chancery and taxed upon the parties as the Delaware Court of Chancery deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Delaware Court of Chancery may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all
shares of Octagon Common Stock entitled to appraisal. In the absence of such a
determination or assessment, each party bears its own expenses.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote, for any purpose,
the shares of Octagon Common Stock subject to such demand or to receive payment
of dividends or other distributions on such shares, except for dividends or
other distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any former holder of
shares of Octagon Common Stock shall have the right to withdraw his or her
demand for appraisal and to accept the terms offered in the Merger. After this
period, such holder may withdraw his or her demand for appraisal only with the
consent of Octagon as the surviving corporation in the Merger. If no petition
for appraisal is filed with the Delaware Court of Chancery within 120 days after
the Effective Time, stockholders' rights to appraisal shall cease and all
stockholders shall be entitled to receive the consideration offered per share of
Octagon Common Stock provided for in the Merger Agreement. Inasmuch as Octagon
has no obligation to file such a petition, and has no present intention to do
so, any stockholder who desires such a petition to be filed is advised to file
it on a timely basis. However, no petition timely filed in the Delaware Court of
Chancery demanding appraisal shall be dismissed as to any stockholder without
the approval of the Delaware Court of Chancery, and such approval may be
conditioned upon such terms as the Delaware Court of Chancery deems just.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights. In view
of the complexity of these provisions of the DGCL, stockholders who are
considering exercising their appraisal rights under Section 262 should consult
their legal advisors.
EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON
On September 19, 1996, pursuant to the Letter of Intent, Conversion and
Octagon entered into a Loan and Security Agreement, pursuant to which Conversion
loaned to Octagon an aggregate of $660,000, $55,000 of which Octagon has repaid
to Conversion through the date of this Proxy Statement/Prospectus. Such loan was
used for general working capital purposes, including the payment to John Royall
and Steven Koinis, former officers and directors and current principal
stockholders of Octagon, of an aggregate of $60,000 in respect of certain
indemnification obligations of Octagon to such persons. See "THE MERGER --
Conflicts of Interest". The Bridge Loan bears interest at 8.25% and is due on
demand. The Bridge Loan may be prepaid by Octagon at any time without penalty
but must be prepaid in full if Octagon consummates an Acquisition Transaction
with any party other than Conversion. The Bridge Loan is secured by all of the
assets of Octagon. Such security interest is subordinated to the liens securing
Octagon's working capital line of credit. Default provisions under the Bridge
Loan include, among others, (i) the failure to pay principal or interest when
due, (ii) a material default or breach by Octagon under the Merger Agreement
unless cured (if curable) within 10 days following notice, (iii) a proceeding
filed or commenced by or against Octagon that is not dismissed within 30 days
and (iv) liens or judgments in excess of $10,000 on Octagon's assets unless
released within 10 days.
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UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet
includes Conversion's consolidated balance sheet as of December 31, 1996 and
Octagon's consolidated balance sheet as of that same date, giving effect to the
acquisition of the Octagon Common Stock in exchange for 850,000 shares of
Conversion Common Stock and approximately $250,000 in anticipated direct
acquisition and registration costs, as if such acquisition had occurred on
December 31, 1996. The unaudited pro forma condensed consolidated statements of
operations include Conversion's consolidated statements of operations for the
six months ended December 31, 1996 and the year ended June 30, 1996 and
Octagon's consolidated statements of operations for the same periods, giving
effect to the Merger as if it had occurred on July 1, 1995. The Merger has been
accounted for on the purchase basis in such pro forma statements. The historical
information of Conversion has been derived from the unaudited condensed
consolidated financial statements for the six months ended December 31, 1996 and
the audited consolidated financial statements for the year ended June 30, 1996
which are included herein and should be read in conjunction with such financial
statements and the notes thereto. The historical information of Octagon has been
derived from the audited consolidated financial statements for the year ended
December 31, 1996 and the unaudited consolidated financial statements for the
twelve months ended June 30, 1996 which are included herein and should be read
in conjunction with such financial statements and the notes thereto. In the
opinion of the managements of Conversion and Octagon, the above-mentioned
unaudited interim condensed consolidated financial statements of the respective
companies include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results for unaudited interim periods.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the consolidated financial position or
operating results that would have occurred had the Merger been consummated on
the dates specified, nor is it indicative of future operating results or
financial position. In the opinion of the managements of Conversion and Octagon,
all adjustments necessary to present fairly this unaudited pro forma information
have been made.
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CONVERSION AND OCTAGON
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA
--------------------------- ---------------------------
<CAPTION>
CONVERSION OCTAGON ADJUSTMENTS AS ADJUSTED
------------- ------------ ------------ -------------
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash................................................. $ 1,764,391 $ 2,098 $ -- $ 1,766,489
Notes receivable..................................... 416,761 -- (310,000 (1) 106,761
Accounts receivable, net............................. 240,216 4,545,038 -- 4,785,254
Unbilled accounts receivable......................... -- 878,073 -- 878,073
Inventories.......................................... 431,424 -- -- 431,424
Prepaid expenses and other current assets............ 294,051 105,759 (118,126 (2) 281,684
------------- ------------ ------------ -------------
Total current assets................................... 3,146,843 5,530,968 (428,126) 8,249,685
Property, plant and equipment.......................... 15,052,675 667,119 -- 15,719,794
Less accumulated depreciation.......................... (2,255,653) (355,991) -- (2,611,644)
------------- ------------ ------------ -------------
12,797,022 311,128 -- 13,108,150
Goodwill, net.......................................... -- 698,216 2,454,192(3) 3,152,408
Other assets........................................... 1,913,337 209,626 (178,780 (4) 1,944,173
------------- ------------ ------------ -------------
$ 17,857,202 $ 6,749,938 $ 1,847,276 $ 26,454,416
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities
Accounts payable..................................... $ 726,277 $ 548,678 - $ 1,274,955
Notes payable........................................ -- 2,950,605 (310,000 (1) 2,640,605
Advance billing on uncompleted contracts............. -- 968,016 -- 968,016
Other current liabilities............................ 2,423,470 1,043,199 131,874(2) 3,598,543
------------- ------------ ------------ -------------
Total current liabilities.............................. 3,149,747 5,510,498 (178,126) 8,482,119
Long-term debt and capital lease obligations........... 11,116,120 215,342 -- 11,331,462
Stockholders' equity (deficiency):
Par value of common stock............................ 1,385 84,047 (83,834 (5) 1,598
Other stockholders' equity........................... 3,589,950 940,051 2,109,236 )(6 6,639,237
------------- ------------ ------------ -------------
3,591,335 1,024,098 2,025,402 6,640,835
------------- ------------ ------------ -------------
$ 17,857,202 $ 6,749,938 $ 1,847,276 $ 26,454,416
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
- ------------------------
(1) Represents elimination in consolidation of promissory notes from Octagon to
Conversion. Excludes a $350,000 promissory note issued in March 1997.
(2) Includes $250,000 of costs of completing the Merger, of which $118,126 had
been incurred at December 31, 1996 and 131,874 is a pro forma accrual. These
costs reduce paid-in capital.
(3) Represents $3,152,408 of goodwill resulting from the Merger, calculated as
set forth below, less $698,216 of historical unamortized Octagon goodwill.
<TABLE>
<CAPTION>
Purchase price - 850,000 shares at $4.00/share (August 12, 1996 closing
price) $3,400,000
<S> <C>
Acquired value:
Octagon net worth at December 31, 1996 1,024,098
Add: Stock subscriptions receivable at December 31, 1996 100,500
Less: Write-off of Octagon deferred Merger costs (178,790)
Less: Octagon unamortized goodwill at December 31, 1996 (698,216)
---------
Total acquired value 247,592
Total goodwill resulting from the Merger $3,152,408
---------
---------
</TABLE>
47
<PAGE>
(4) Represents write-off of Octagon deferred Merger costs.
(5) Includes issuance of 850,000 shares of Common Stock, $213 par value, for (i)
8,404,702 shares of Octagon common stock, $84,047 par value, and (ii)
exercisable Octagon stock options.
(6) Includes $3,399,787 of paid-in capital resulting from issuance of 850,000
shares of Conversion Common Stock at the August 12, 1996 Nasdaq closing
price of $4.00, less par value, less Octagon's historical paid-in capital of
$10,867,201 and accumulated deficit of $9,826,650.
48
<PAGE>
CONVERSION AND OCTAGON
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA
---------------------------- --------------------------
<CAPTION>
CONVERSION OCTAGON ADJUSTMENTS AS ADJUSTED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue............................................ $ 684,158 $ 10,545,360 $ -- $ 11,229,518
Costs and expenses
Cost of goods sold............................... 2,163,041 $ 10,073,878 -- 12,236,919
Selling, general and administrative.............. 1,208,224 1,444,302 43,292(1) 2,695,818
------------- ------------- ----------- -------------
3,371,265 11,518,180 43,292 14,932,737
------------- ------------- ----------- -------------
Loss from operations............................... (2,687,107) (972,820) (43,292) (3,703,219)
Interest expense, net............................ 498,068 240,701 -- 738,769
Other expense, net............................... -- 40,598 -- 40,598
------------- ------------- ----------- -------------
Net loss before extraordinary item................. $ (3,185,175) $ (1,254,119) $ (43,292) $ (4,482,586)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Net loss per common share before extraordinary
item............................................. $ (0.67) $ (0.15)
------------- -------------
------------- -------------
Pro forma net loss per common share before
extraordinary item............................... $ (0.80)(2)
-------------
-------------
Weighted average common shares..................... 4,747,436 8,187,813 5,597,436
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Represents amortization of $3,152,408 of goodwill over 10 years, less
historical Octagon goodwill amortization of $114,328 for the period.
(2) Calculated using Conversion's historical weighted average shares of
4,747,436 (excluding Escrow Shares) for the six months ended December 31,
1996, plus 850,000 shares to be issued in connection with the Merger.
49
<PAGE>
CONVERSION AND OCTAGON
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA
---------------------------- --------------------------
<CAPTION>
CONVERSION OCTAGON ADJUSTMENTS AS ADJUSTED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue............................................. $ 2,679,987 $ 28,270,345 $ -- $ 30,950,332
Costs and expenses
Cost of goods sold................................ 3,093,560 24,198,307 -- 27,291,867
Selling, general and administrative............... 1,821,179 3,018,454 86,584(1) 4,926,217
Process development costs......................... 996,259 -- -- 996,259
------------- ------------- ----------- -------------
5,910,998 27,216,761 86,584 33,214,343
------------- ------------- ----------- -------------
(Loss) income from operations....................... (3,231,011) 1,053,584 (86,584) (2,264,011)
Interest expense, net............................. 961,751 518,891 -- 1,480,642
Other income, net................................. (81,811) (64,851) -- (146,662)
------------- ------------- ----------- -------------
Net (loss) income before extraordinary item......... $ (4,110,951) $ 599,544 $ (86,584) $ (3,597,991)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Net (loss) income per common share before
extraordinary item................................ $ (2.64) $ 0.09
------------- -------------
------------- -------------
Pro forma net loss per common share................. $ (1.49)(2)
-------------
-------------
Weighted average common shares...................... 1,559,908 6,658,478 2,409,908
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Represents amortization of $3,152,408 of goodwill over 10 years, less
historical Octagon goodwill amortization of $228,657 for the period.
(2) Calculated using Conversion's historical weighted average shares of
1,599,908 (excluding Escrow Shares) for the year ended June 30, 1996, plus
850,000 shares to be issued in connection with the Merger.
50
<PAGE>
BUSINESS OF CONVERSION
OVERVIEW
Conversion's business consists of (i) producing various substrates for use
as industrial abrasives for surface cleaning and surface preparation
applications and for use as aggregates for incorporation into non-skid flooring,
roofing shingles, plasters and other construction materials and (ii) recycling
CRT glass for sale to the manufacturers of such glass and others. Conversion's
abrasives and construction materials substrates include Conversion's initial
product, ALUMAGLASS, an alumino-silicate glass produced in a patented process
utilizing industrial waste streams and certain virgin materials, as well as
other glass and fired ceramic materials produced utilizing Conversion's
manufacturing equipment. See "--Manufacturing, Recycling and Mechanical
Conversion Processes" and "--Intellectual Property".
To date, substantially all of Conversion's revenues have been derived from
recycling CRT glass used in the manufacture of televisions. Conversion has
generated only limited sales of ALUMAGLASS and has only recently commenced
production of other substrates. Although Conversion is currently manufacturing
certain glass and fired ceramic substrates, Conversion is not currently
manufacturing ALUMAGLASS and is relying on its inventory to satisfy customer
demand for ALUMAGLASS.
Following consummation of the Merger, in addition to pursuing opportunities
presented by Octagon's business, Conversion plans to focus its efforts on
recycling CRT glass used in computers as well as televisions and producing
industrial abrasives and substrates for construction materials. Conversion will
also continue to pursue joint venture or other arrangements with third parties
to manufacture ALUMAGLASS or other glass products on-site at their facilities
for their own internal use or for resale on a cost-effective basis.
Conversion was incorporated in June 1993 for the purpose of acquiring its
wholly-owned subsidiary, Dunkirk, and conducted no business activities prior to
such acquisition. Dunkirk was acquired by Conversion in August 1994 pursuant to
a merger in which holders of Dunkirk Common Stock received Common Stock of
Conversion. Prior to such acquisition, Dunkirk was in the development stage,
principally engaged in the construction of its manufacturing facilities and
initial CRT glass recycling efforts.
In May 1996, Conversion consummated the Conversion IPO, consisting of
3,527,050 shares of Common Stock and an equal number of Class A Redeemable
Warrants and Class B Redeemable Warrants. The Common Stock was sold at $4.40 per
share and the Class A Redeemable Warrants and Class B Redeemable Warrants were
sold at $0.05 each. The Class A Redeemable Warrants and Class B Redeemable
Warrants have exercise prices of $5.85 and $7.80, respectively, per share, and
may be redeemed by Conversion at any time after the first anniversary of the
effective date of the Conversion IPO if the closing bid price of the Common
Stock averages in excess of $8.20 and $10.95, respectively, for 30 consecutive
trading days ending within 15 days of the notice of redemption.
In July 1996, Conversion entered into a joint venture with VANGKOE
Industries, Inc. of St. Augustine, Florida, to manufacture coated particles for
use as components in a variety of construction materials, including swimming
pool plasters, commercial flooring and roofing. In February 1997, Conversion
entered into a letter agreement with VANGKOE providing for the termination of
the joint venture. Pursuant to such termination, Conversion will purchase
VANGKOE's interest in the joint venture, including the proprietary color coating
technology to be applied to Conversion's substrates. Conversion will then
manufacture and sell such color coated particles at a fixed price to VANGKOE,
which in turn will be a distributor of such particles. Conversion has commenced
test runs of the product and VANGKOE has commenced customer sampling programs.
It is contemplated that commercial scale production will commence in the second
calendar quarter of 1997. VANGKOE is a newly organized company, formed by the
principals of Cytech Laboratories, Inc., a privately-held industrial products
and research corporation. See "RISK FACTORS--Limited Sales and Marketing
Experience of Conversion; Termination of VANGKOE Joint Venture and Loss of
Guaranteed Minimum Purchase Requirement."
51
<PAGE>
PRODUCTS AND SERVICES
ABRASIVES AND AGGREGATES
Conversion produces several products which can be used as industrial
abrasives and as aggregates for construction materials. These products currently
include ALUMAGLASS, and other glass formulation materials marketed as
VISIGRIT-TM- and fired ceramic particles marketed as GREAT WHITE-TM-. ALUMAGLASS
is manufactured in a patented process utilizing customized melting technology
and VISIGRIT and GREAT WHITE are manufactured with Conversion's proprietary
know-how and specialized processing equipment. See "--Intellectual Property." As
loose grain abrasives, ALUMAGLASS, VISIGRIT and GREAT WHITE can be applied with
blasting equipment for industrial cleaning and maintenance and manufacturing
operations. Potential purchasers 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, VISIGRIT and
GREAT WHITE can also be marketed as aggregates for direct incorporation into
products such as non-skid flooring, plasters, tiles and other construction
materials, either in manufactured form or following further processing, such as
the color coating process.
ALUMAGLASS, VISIGRIT and GREAT WHITE are manufactured from various
industrial manufacturing by-products and wastes. In many cases, Conversion is
paid to take the waste feedstocks or receives them at little or no cost.
Conversion has entered into supply agreements for certain of these materials and
obtains others on a purchase order basis. Conversion believes that adequate
supplies of such materials exist from multiple sources.
Conversion believes that the provision of wastes to Conversion is less
costly to its customers than other regulated waste disposal alternatives.
Conversion also believes that providing wastes to Conversion 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 Conversion as raw material. See
"-- Environmental Matters". In certain cases, Conversion's abrasives products
may also be capable of being reclaimed by Conversion after the product is used
by customers.
Conversion's manufacturing process gives it the flexibility to customize its
products to provide the various characteristics required for particular
applications. For example, with respect to ALUMAGLASS, by altering the batch mix
of raw material ingredients, Conversion can alter chemical composition to alter
performance characteristics. In addition, Conversion's mechanized finishing area
allows ALUMAGLASS, VISIGRIT and GREAT WHITE to be produced in coarse, medium or
fine particle or "grit" sizes and, with further processing, into micro grits.
Conversion expects fine to medium grit sizes 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. Conversion expects medium to coarse grit sizes to be suitable for use
in a variety of cabinet and blast room applications and as ingredients for
direct incorporation into construction materials. Conversion expects coarse grit
sizes to be suitable for cleaning structures or items having steel substrates
such as bridges, ships, rail cars, car carriers and cargo containers.
RECYCLING OF CRT GLASS
Conversion is also engaged in recycling CRT glass used in televisions and
plans to enter the market for recycling computer CRT tubes and monitors.
Conversion's current CRT glass recycling customers include electronics
manufacturers such as Techneglas, Toshiba Display Devices, Inc. and Hitachi
Electronic Devices, U.S.A., Inc. Thomson, which had been a significant CRT
customer of Conversion, ceased shipping CRT glass to, and purchasing recycled
CRT glass from, Conversion as of March 1997. See "RISK
52
<PAGE>
FACTORS -- Limited Number of CRT Customers; Loss of Significant CRT Customer".
In Conversion's CRT recycling operations, waste CRT glass, or "dirty cullet", is
shipped to Conversion by its customers pursuant to agreements with Conversion.
Conversion 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, used as a raw material by Conversion in the production
of ALUMAGLASS or further processed for sale as an aggregate for construction
materials.
CRT glass fragments received by Conversion of approximately one inch or less
in diameter are not currently recycled by Conversion due to limitations of its
X-ray fluorescence technology and processing equipment. Conversion has sold such
glass to certain customers from time to time and is currently evaluating
alternative means to sell or dispose of such glass. In the event Conversion is
unable to sell such glass, it can dispose of such glass by smelting at
prevailing rates. Conversion 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 or other disposal changes and management's determination of
the need for any such reserves based upon the proven salability or disposition
options for such materials.
In February 1997, Conversion commenced a pilot testing program, funded in
part by a grant awarded by the New York State Department of Economic
Development's Recycling Investment Program (the "Recycling Investment Program"),
to determine the viability of the full disassembly and beneficial reuse of
computer monitors. To date, IBM, Unisys and one other major computer
manufacturer have agreed to provide Conversion with monitors for evaluation. The
pilot program will assess the efficiencies and costs of various disassembly
processes and outlets for disassembled materials with an emphasis on
environmental and worker health and safety concerns. Conversion has already
begun to identify various outlets for the components of the monitors. Conversion
believes that it will be able to create saleable products from certain of the
components, such as construction materials made from plastic casings and certain
formulations of the CRT glass. Other materials can be sold to third parties
without further processing, including electronics recyclers, metal recovery
processors and, for certain other formulations of the computer CRT glass,
existing CRT customers of Conversion.
In addition to its computer monitor disassembly program, Conversion is
seeking customers for the recycling of whole, but not necessarily encased,
computer CRT tubes. Conversion intends to produce products from certain
formulations of the glass and sell other formulations of the glass to its CRT
customer base. Conversion believes that, with the addition of relatively
inexpensive equipment necessary to separate the panel from funnel glass in a
whole tube, its manufacturing processes are readily adaptable to process this
material.
Notwithstanding the foregoing, Conversion has not engaged in the commercial
scale recycling of computer CRT glass or monitors to date, and there can be no
assurance that it will successfully be able to do so. There can also be no
assurance that Conversion will be successful in obtaining computer CRT tubes or
monitors on acceptable terms or that it will develop outlets for the recycled
components on acceptable terms or at all.
POTENTIAL FUTURE PRODUCTS
Future products Conversion may develop include the following:
- GLASS BEADS FOR HIGHWAY SIGNAGE AND PAVEMENT MARKING MADE FROM CRT PANEL
GLASS--Conversion has filed a patent application related to this product
and has had small quantity samples of the product manufactured for
testing. Conversion has been pursuing potential commercial arrangements
with glass bead manufacturers and believes that the product may offer
improved retroreflectivity characteristics compared to current soda-lime
glass bead formulations.
53
<PAGE>
- SPECIALTY GLASSES, SUCH AS ELECTRICAL RESISTANCE GLASS, RADIOACTIVE
SHIELDING GLASS AND HIGH DENSITY GLASS--Conversion believes that certain
specialty glass applications may be developed from the funnel glass
component of CRT glass. While Conversion has discussed with others the
possibility of manufacturing prototype products, no such prototypes have
been produced.
- OTHER ABRASIVE PRODUCTS MADE FROM MATERIALS RECEIVED BY CONVERSION,
WHETHER BLENDED WITH ALUMAGLASS OR OTHER PRODUCTS OR AS A SINGLE
CONSTITUENT PRODUCT.
No assurances can be given that Conversion will be successful in developing any
future products, that such product applications will prove commercially viable
or that Conversion will be able to access feedstock materials or produce such
products on commercially viable terms, if at all.
MANUFACTURING, RECYCLING AND CONVERSION PROCESSES
ALUMAGLASS MANUFACTURING PROCESS
ALUMAGLASS has been manufactured by Conversion in a three-step process: (i)
pre-melting and batching, (ii) melting and (iii) post-melting and finishing.
PRE-MELTING, BATCHING PROCESS. The pre-melting, batching process includes
the collection and intake of materials such as post-consumer bottle glass, waste
ceramics and other manufacturing by-products and industrial wastes, as well as
certain virgin materials, to be used as raw materials for ALUMAGLASS. 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 Conversion as product
ingredients for its manufacturing processes. Conversion 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. Conversion's procedures to secure
wastes for beneficially utilized production ingredients in its manufacturing
process has been determined to be exempt from RCRA regulation, enabling
Conversion to utilize these materials without subjecting itself to the financial
and operational constraints typically imposed on waste management facilities.
See "-- 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 Conversion 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 Conversion's melter for the next phase of manufacture.
MELTING PROCESS. Each mixed batch of raw material is loaded into
Conversion's melter in order to produce the alumino-silicate glass comprising
ALUMAGLASS. Conversion'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. From time to time, Conversion has experienced
mechanical or technical difficulties with such melter which have required
repairs and maintenance that have interrupted Conversion's ability to
manufacture its abrasives. Conversion 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
Conversion's ability to manufacture its abrasives. The failure of
54
<PAGE>
Conversion 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 Conversion.
As part of recent cost-cutting initiatives, Conversion has cooled and
drained its melter. It is anticipated that the melter will not be restarted
until such time as current inventories of ALUMAGLASS are reduced. Conversion
will restart the melter when inventories are reduced, unless more cost-effective
opportunities to manufacture ALUMAGLASS (such as on-site at other industrial
locations) become available. See "CONVERSION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
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 100 tons per day for coarse grit and medium grit sizes. Conversion
anticipates that the excess capacity of the finishing area will be available to
finish raw ALUMAGLASS frit produced at off-site manufacturing locations and
additional frit that may be produced at Dunkirk in the event that demand
warrants additional melting capacity at the Dunkirk facility.
CRT GLASS RECYCLING PROCESS
The first step in the recycling of CRT glass is the inspection of the glass
received by Conversion to assure that it complies with requirements set forth in
purchase and supply agreements between Conversion 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 Conversion'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 an X-ray fluorescence technology, for which Conversion has
jointly filed for a patent, and batching the funnel glass and panel glass for
resale back to customers. This process is repeated for CRT glass fragments too
small for Conversion's primary cullet line by identical processing through
Conversion's "secondary" cullet line. CRT glass fragments received by Conversion
of approximately one inch or less in diameter are not currently recycled by
Conversion due to limitations of its X-ray fluorescence technology.
MECHANICAL CONVERSION PROCESS
Conversion has identified several waste streams which it receives, including
post-consumer bottle glass, waste ceramics and CRT panel glass, as materials
which, if converted from the form in which they are received by Conversion into
a form suitable to be used as a manufacturing raw material, become valuable
materials independent of Conversion's recycling or abrasives manufacturing
operations, including Conversion's VISIGRIT and GREAT WHITE products. Conversion
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, Conversion
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.
Conversion also has the ability to make composite materials, if requested,
by mixing the waste material being converted with other waste or virgin
materials. Conversion also uses its equipment to mechanically convert these
materials into a form suitable for use as a raw material in its abrasives
production.
55
<PAGE>
POTENTIAL FUTURE OFF-SITE PRODUCTION FACILITIES AND SERVICES
Conversion's current manufacturing facilities consist of its Dunkirk, New
York plant and, subject to consummation of the restructuring of its joint
venture with VANGKOE, its color coating facility in St. Augustine, Florida.
Conversion may, however, seek to develop "closed-loop" abrasive manufacturing
facilities through which customized abrasive products may be formulated and
manufactured for certain large volume users, such as shipyards, with the spent
abrasive and the associated blasting residuals taken back to the manufacturing
facility for treatment, processing and selective use of the materials as
ingredients for re-manufacturing or manufacturing new abrasive supply for the
user. Conversion has signed a teaming agreement with a third party to explore
the viability of creating such a facility, using a melting technology to be
provided by such entity, for a dry-dock operation in the Middle East. There can
be no assurance that such a project may prove viable, or if viable, that
Conversion and such entity can successfully negotiate and implement a viable
commercial project.
RESEARCH AND DEVELOPMENT
Conversion's research and development efforts are conducted principally
through Conversion's internal staff, the Center for Advanced Ceramic Technology
("CACT") at Alfred University and Conversion's Scientific Advisory Board.
Conversion currently employs five individuals principally devoted to research
and development, and maintains an on-site laboratory at its Dunkirk facility
where various analyses, tests and other research and development activities are
conducted. CACT is Conversion's primary outside research and development
partner, and works on various matters from time to time as directed by
Conversion. Conversion 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.
MARKETS FOR PRODUCTS AND SERVICES
ABRASIVES AND AGGREGATES
Conversion has identified two broad markets for its products. The first is
as an abrasive for numerous surface preparation and cleaning applications. The
second is as an aggregate for various construction materials such as flooring,
plasters, roofing materials and tiles.
A variety of media and methodologies have traditionally 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, Conversion believes that
non-reclaimable abrasives, such as sand and metal slags, 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 cause silicosis, and,
depending on the application, can be recycled by Conversion at its Dunkirk
facility rather than disposed of after use. Other approaches such as high
pressure water and dry ice blasting are also gaining acceptance.
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 surface substrates. Potential
purchasers of ALUMAGLASS, VISIGRIT and GREAT WHITE as an abrasive include
utilities, military and defense agencies, entities engaged in the electronics,
aerospace,
56
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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.
ALUMAGLASS, VISIGRIT and GREAT WHITE can also be directly incorporated into
other products such as non-skid flooring, roofing materials, plasters, tiles,
grouts and other construction materials. Certain of Conversion's abrasives can
also be used for applications such as softening leather, stonewashing denim and
shot peening to prevent metal fatigue in aircraft parts.
To date, Conversion has made only limited sales of ALUMAGLASS and has only
recently commenced production of VISIGRIT and GREAT WHITE and there can be no
assurance that such products will ever achieve broad market acceptance. With
respect to abrasives, certain customers may choose the material primarily on the
basis of cost per pound and may not sufficiently value the overall cost savings
ALUMAGLASS often provides when taking into account factors such as reduced labor
costs resulting from a higher speed of cleaning and reduced energy savings
resulting from lower blast pressures compared to many abrasives or the
performance advantages of ALUMAGLASS. In addition, the decision by a potential
customer to utilize Conversion'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 Conversion'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 Conversion believes would range from $20,000 to $50,000, depending on the
size of the unit. Conversion estimates that approximately 30% of the market for
reclaimable abrasives is currently using gravity separation equipment. 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. With respect to ALUMAGLASS as an aggregate for flooring, roofing,
plasters and other construction materials, Conversion has made only limited
sales in certain of these markets to date and there can be no assurance
ALUMAGLASS will ever achieve broad market acceptance in these applications.
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CRT GLASS RECYCLING
Conversion currently recycles waste CRT glass generated by television
manufacturers located in the United States. Conversion's potential sales revenue
from such customers is therefore 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, which such
manufacturers continually strive to reduce further, and shipping costs
associated with doing business with manufacturers located at significant
distances from Conversion. In addition, Conversion has recently exprienced
increased competition with respect to CRT glass recycling services. See "--
Competition". Thomson, historically a significant CRT customer, ceased doing
business with Conversion in March 1997. See "RISK FACTORS -- Limited Number of
CRT Customers; Loss of Significant CRT Customer".
Although Conversion will continue to solicit new and existing television CRT
manufacturers for increased shipments of CRT glass, Conversion 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 computer disassembly. Although Conversion does not currently
have commitments to take such glass in large volumes, Conversion has begun to
receive such glass on a pilot basis and has obtained the regulatory exemptions
for such recycling. See "-- Products and Services -- Recycling of CRT Glass". No
assurance can be given, however, that Conversion will be able to enter this
market on commercially acceptable terms.
MECHANICAL CONVERSION
Conversion believes that demand for Conversion's waste conversion services
as part of its manufacturing process will be driven by industries' needs to
reduce the costs of waste management and remove and manage manufacturing
by-products and industrial wastes in compliance with various Federal, state and
local environmental statutes and regulations. Other industrialized countries
around the world are also proposing or enforcing similar and, in some cases,
more stringent environmental legislation. Consequently, Conversion believes that
demand for Conversion'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. Conversion'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 by providing the beneficial
reuse of such waste.
DEPENDENCE ON CERTAIN CUSTOMERS
For the fiscal year ended June 30, 1996, three of Conversion's CRT glass
recycling customers, Techneglas, Thomson and Toshiba Display Devices, Inc., each
accounted for more than 10% of Conversion's revenues and, in the aggregate,
accounted for approximately 88% of Conversion's revenues. Thomson ceased
shipping CRT glass to, and purchasing recycled CRT glass from, Conversion as of
March 1997. See "RISK FACTORS -- Limited Number of CRT Customers; Loss of
Significant CRT Customer". Conversion is currently dependent on its CRT
customers for substantially all of its revenues.
SALES AND MARKETING
To date, Conversion's products have been marketed and distributed in the
United States primarily through distributors and limited direct sales efforts by
Conversion and only limited sales have been achieved. N.T. Ruddock & Company,
Fusco Abrasive Systems, Inc. and Omni Finishing Systems, Inc. are initial
regional distributors of the Company's abrasives and are large-volume
distributors of loose grain abrasives in the United States. Other distributors
include Porter Warner Industries, Inc., Standard 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
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among the regional sub-distributors served by N.T. Ruddock & Company. Conversion
has also established relationships with distributors in the United Kingdom,
Canada, Mexico, China and Israel. Conversion'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.
To date, Conversion's efforts through distributors have failed to generate
significant sales of ALUMAGLASS. Accordingly, Conversion plans to explore joint
ventures and other corporate teaming efforts to increase outlets for its
products, which may include product bundling or composite production. Conversion
will also review and evaluate its distributor relationships and incentives as
well as its direct sales initiatives. There can be no assurance, however, that
its joint venture or other efforts will be successful.
Conversion previously entered into a joint venture with VANGKOE Industries,
Inc. of St. Augustine, Florida, pursuant to which the parties formed a joint
venture company for the purpose of manufacturing color coated particles for sale
as construction material aggregates. On February 14, 1997, following delays in
start-up and certain cost overruns, Conversion and VANGKOE entered into a letter
agreement setting forth the intent of the parties to terminate the joint
venture. Pursuant to such termination, Conversion will purchase VANGKOE's
interest in the joint venture company, as well as the proprietary color coating
process, for an aggregate of $165,000 in cash and will manufacture the color
coated particles for sale to VANGKOE. VANGKOE will purchase such particles from
Conversion at a fixed price and serve as an exclusive distributor of such
particles for certain markets. Although VANGKOE will be required to meet sales
targets to be mutually agreed upon in order to maintain its exclusivity. VANGKOE
will be released from its previous minimum purchase commitment of approximately
$1.2 million of ALUMAGLASS and other materials. VANGKOE is a new company without
significant assets or experience in marketing aggregates and, therefore, there
can be no assurance that it will be successful in marketing Conversion's
products. In addition, Conversion has no prior experience in operating a color
coating process and there can be no assurance that Conversion will not
experience delays or other problems in manufacturing the color coated particles.
In the event that the restructured arrangement is successful, Conversion
believes that the sale of substrates to VANGKOE will not adversely affect its
sales efforts for ALUMAGLASS and other products given that such products have
not been sold into the markets to be pursued by VANGKOE.
Conversion currently has six individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.
INTELLECTUAL PROPERTY
Conversion has been awarded two United States patents. The first patent was
issued in December 1993 and relates to Conversion'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 monitor 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 Conversion's abrasives. In addition, Conversion has filed
jointly with another party an application for a U.S. patent on the X-ray
fluorescence technology used in Conversion's CRT glass recycling operations.
Conversion has three additional patent applications on file. One relates to
ALUMAGLASS, one relates to Conversion's planned glass bead product and one
relates to the use of Conversion's products as aggregates in construction
materials.
Conversion'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
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operate without infringing the proprietary rights of third parties. There can be
no assurance that any of Conversion's patent applications will result in issued
patents, that any issued patents will afford adequate protection to Conversion
or not be challenged, invalidated, infringed or circumvented or that any rights
thereunder will afford competitive advantages to Conversion. 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 Conversion's products and technologies. There can be no assurance that
the validity of any patent issued to Conversion would be upheld if challenged by
others in litigation or that Conversion's activities would not infringe patents
owned by others. Conversion could incur substantial costs in defending itself in
suits brought against it, or in suits in which Conversion seeks to enforce its
patent rights against others. Should Conversion's products or technologies be
found to infringe patents issued to third parties, Conversion would be required
to cease the manufacture, use and sale of Conversion's products and Conversion
could be required to pay substantial damages. In addition, Conversion 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 Conversion, or at all.
Conversion 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 Conversion will not otherwise become known or be independently
developed by competitors in a manner that would have a material adverse effect
on Conversion's business, financial condition and results of operations.
Conversion's logo and ALUMAGLASS are registered trademarks.
COMPETITION
Conversion's products and services are subject to substantial competition.
Conversion's abrasives compete with product offerings of other companies,
principally aluminum oxide, glass beads, plastic abrasives, gamet, 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 Conversion. 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. Conversion'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 Conversion's products
and to devote greater resources to the marketing and promotion of their products
than are available to Conversion.
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.
Conversion believes that ALUMAGLASS provides users with superior performance and
lower total cost of usage in many blasting applications.
With respect to ALUMAGLASS used as a blast abrasive, Conversion faces a
potential competitive disadvantage in that the decision to purchase ALUMAGLASS
may require 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 Conversion'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
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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 Conversion believes would range from $20,000 to $50,000 depending on the
size of the unit. Conversion estimates that approximately 30% of the market for
reclaimable abrasives is currently using gravity separation equipment. 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.
As a construction material, ALUMAGLASS, VISIGRIT and GREAT WHITE will
compete with various mined and manufactured substances such as quartz, sand and
aluminum oxide. Producers of such materials include the competitors named above,
as well as 3M Corporation and privately-held entities.
Conversion 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 that 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 Conversion 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 Conversion 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 Conversion's customers and
potential customers alternative and less costly means to dispose of their
wastes. Conversion'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, Conversion
competes with several other companies who accept waste CRT glass for recycling
or other purposes, each of which may deal with customers of Conversion 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. Conversion has recently experienced increased
competition with respect to proposals to new potential CRT glass customers, with
some of the competitors offering to take CRT glass from sources free of charge.
In general, historically, Conversion has received revenue both when it receives
and when it sells recycled CRT glass. There can be no assurance that Conversion
will be able to recycle CRT glass on a profitable basis if it is required to
eliminate the fee it receives upon receipt of such glass from customers in order
to maintain or attract additional sources of CRT glass. In addition, Thomson,
historically a significant CRT recycling customer, ceased doing business with
Conversion as of March 1997. There can be no assurance that Conversion will be
able to replace the lost Thomson revenue with new CRT customers. See "-- Market
Overview" and "RISK FACTORS -- Limited Number of CRT Customers; Loss of
Significant CRT Customer".
ENVIRONMENTAL MATTERS
The Federal environmental legislation and policies that Conversion 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.
Conversion 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
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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 Environmental Protection Agency (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 Conversion's manufacturing technology,
Conversion 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, Conversion uses
materials that are not solid wastes and are not subject to RCRA permitting
requirements (for example, reclaimed characteristically hazardous by-products or
sludges). Conversion handles 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 Conversion stores 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 Conversion to obtain regulatory
exemptions and/or beneficial use determinations for each hazardous waste
material it accepts for recycling purposes. Without these regulatory exemptions
and/or beneficial use determinations, Conversion would be required to obtain a
state RCRA permit to operate its facility, and would become subject to onerous
RCRA regulatory requirements.
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Conversion presently has obtained both regulatory determinations and
beneficial use determinations from NYSDEC concluding that the materials and
processes that it uses and the products that it produces at its Dunkirk facility
are not subject to permits under the New York State solid and hazardous waste
laws. Furthermore, because the materials currently processed at Conversion's
Dunkirk facility are not considered solid wastes under New York State
regulations for recycling, Conversion is not required to meet BDAT standards for
its products. The facility would be required to meet BDAT standards for any
hazardous waste that it generates and ships off-site for land disposal.
Currently, Conversion does not generate any such wastes. 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 assurance that any or all
of Conversion'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 Conversion 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 the 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,
Conversion 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, Conversion 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, Conversion plans
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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
Conversion'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.
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. Conversion 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.
Conversion 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 by-products 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
Conversion is a party to litigation, CONVERSION TECHNOLOGIES INTERNATIONAL,
INC. V. R.E. WILLIAMS AND COMPANY, INC., commenced by Conversion on October 26,
1995, in the Supreme Court of New York, County of Chautauqua, against a general
contractor hired to construct the improved abrasives finishing area at the
Dunkirk facility. 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 Conversion over the scope of the work
to be performed by the contractor. Conversion 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. The contractor has
counterclaimed damages of approximately $483,000, and has filed a mechanic's
lien with respect to such claim. The case is currently in the discovery phase.
Conversion does not believe that an adverse outcome in this dispute would have a
material adverse effect on Conversion. Conversion is not involved in any other
material legal proceedings.
EMPLOYEES
At March 1, 1996, Conversion had approximately 55 full-time employees,
including approximately 36 in manufacturing, approximately 5 in research and
product applications development, approximately 6 in sales and marketing and
approximately 6 in finance and administration. As of such date, Conversion also
had one part-time employee. From time to time, Conversion utilizes temporary
employees. Conversion has used up to 20 temporary employees to meet its
requirements. Conversion believes that additional permanent and temporary
employees can be hired on satisfactory terms. None of Conversion's employees is
subject to a collective bargaining agreement. Conversion has not experienced any
work stoppages and Conversion considers its relations with its employees to be
satisfactory.
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PROPERTIES
Conversion 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 $320,721
principal amount was outstanding at December 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 $303,387 principal amount was outstanding on
December 31, 1996. See "CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources".
Conversion leases approximately 3,000 square feet of executive office space
in Hazlet, New Jersey, pursuant to a lease expiring December 31, 1997.
Conversion is in the process of negotiating a lease for approximately 10,000
square feet of manufacturing space in St. Augustine, Florida. The lease will
expire in April 2000.
Conversion believes that such facilities are adequate to meet its current
and currently foreseeable requirements.
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CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since inception through December 31, 1996, Conversion has sustained
cumulative losses of approximately $(20,364,000). Such amount includes (i) a
one-time, non-cash charge to operations relating to the write-off in conjunction
with the Dunkirk acquisition 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 $2,528,000 expensed as process development costs related to
research and development of Conversion's CRT glass processing and ALUMAGLASS
product line and (iii) other expenses, net of revenue, of approximately
$11,604,000. Conversion will continue to incur losses until such time as
revenues are sufficient to fund its continuing operations.
The Conversion IPO resulted in net cash proceeds to Conversion of
approximately $13,500,000 (after deducting underwriters' discounts and
commissions and offering expenses). Following the closing of the Conversion IPO,
through December 31, 1996, Conversion spent approximately $2,324,000 on
repayment of bridge notes placed through the underwriter of the Conversion IPO
(the "Bridge Notes"), approximately $1,752,000 on the repayment of other
indebtedness, approximately $2,515,000 on the repayment of past due accounts
payable, approximately $1,111,000 in capital expenditures and approximately
$4,034,000 for general working capital purposes.
Conversion has continued to experience significant negative cash flow from
operations since the Conversion IPO. Conversion experienced negative cash flow
from operations of approximately $(3,359,000) for the six months ended December
31, 1996. This level of negative cash flow resulted principally from decreased
revenues for the period in comparison to the year ended June 30, 1996 and
increased production efforts to build ALUMAGLASS inventories that had been
curtailed prior to the Conversion IPO due to cash constraints. Such revenue
decrease was primarily due to reduced inventory of unprocessed CRT glass,
improvements in CRT manufacturing processes which have resulted in lower levels
of glass breakage at Conversion's CRT customers' facilities and increased
competition from CRT glass recycling vendors. In September and October 1996,
Conversion effected a number of cost-cutting initiatives in an effort to enable
it to continue to fund its operations from existing resources and to reduce the
level of revenue required to achieve cash flow break-even, although there can be
no assurance that such efforts will be successful or that Conversion will ever
achieve cash flow break-even. See "-- Liquidity and Capital Resources".
Since the Conversion IPO, Conversion has substantially completed its capital
expenditure program, demonstrated the commercial-scale production of ALUMAGLASS
and built inventory of product. Conversion has also commenced production of its
VISIGRIT and GREAT WHITE products. In an effort to increase product sales,
Conversion will review its marketing efforts, including its distribution
relationships. Conversion is also continuing product testing efforts with
certain potential large volume users and recently received initial orders from
new customers and new distributors following successful testing.
With respect to CRT glass recycling, Conversion faces substantial
competition in obtaining television CRT glass which has resulted in increased
difficulty in obtaining new customers and maintaining existing customers and
exerts downward pressure on the fees Conversion charges to accept such glass. In
March 1997, Thomson ceased sending CRT glass to, and purchasing recycled CRT
glass from, Conversion. See "RISK FACTORS -- Limited CRT Customers; Loss of
Significant CRT Customer". Conversion has begun to accept computer CRT glass on
a pilot basis, funded in part by a grant from the New York State Department of
Economic Development's Recycling Incentive Program, and has taken other steps to
increase its CRT glass recycling revenues, although there can be no assurance
that Conversion will be successful in obtaining such increased revenue.
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Following the Merger, Conversion will finalize and implement operational
strategies designed to maximize return on capital and position Conversion for
growth. Conversion will focus on both the Octagon and Conversion businesses with
an emphasis on growing the radiological control and operations and maintenance
businesses through value-added offerings which will include bundled product and
service offerings, recycling computer CRT glass, providing abrasives and
aggregates and the implementation of construction and licensing opportunities to
establish ALUMAGLASS production facilities on site at customer locations.
Conversion will also attempt to leverage the Dunkirk facility's capabilities by
offering specialized services or products to others on a contract basis. See
"THE MERGER -- Business and Management After the Merger; Employment Agreements".
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties, including those set forth herein under the
caption "RISK FACTORS". Conversion's actual results could differ materially from
the results anticipated in such forward-looking statements.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Consolidated revenues for the six months ended December 31, 1996 were
approximately $684,000, consisting primarily of CRT glass recycling fees and
approximately $110,000 of ALUMAGLASS sales. For the same six-month period of
1995, Conversion's consolidated revenues were approximately $1,631,000, of which
approximately $65,000 was from sales of ALUMAGLASS and the remainder was CRT
recycling fees. The decrease in revenues primarily reflects a significant
accumulation at June 30, 1995 of unprocessed CRT glass inventory that was
processed during the succeding six-month period, improvements in CRT
manufacturing processes which has resulted in lower levels of glass breakage at
the Company's CRT customers' facilities and increased competition in the form of
additional CRT glass recycling vendors, in each case, as compared to the prior
year period.
The net change in cost of goods sold for the six months ended December 31,
1996 versus the same prior year period, an increase of approximately $854,000
despite lower sales volume, reflects a number of factors, including (i) an
approximately $525,000 net increase in the non-cash charge associated with the
reserve for potential disposal costs of raw materials (an approximately $54,000
increase in the reserve for the six months ended December 31, 1996 as a result
of a modest increase in certain raw material inventories compared with a
$471,000 decrease in the reserve for the six months ended December 31, 1995,
during which such inventories decreased significantly); (ii) a portion of the
six months ended December 31, 1995 process development costs, which were fixed
in nature, are now included in cost of goods sold because the specific processes
have since become operational; (iii) an increase of $313,000 in the non-cash
charge for depreciation, reflecting completion of the major components of the
abrasives finishing area; (iv) approximately $71,000 in non-recurring
engineering charges relating to potential underground fuel tank removal and an
abandoned capital expenditure project; and (v) the expensing of production
inefficiencies incurred during modifications to the abrasives and other
processing systems during the six months ended December 31, 1996. Partially
offsetting these cost increases was a $239,000 reduction in freight costs,
reflecting the May 1996 change in product pricing policy under which customers
now pay outgoing freight.
The reserve for disposal relates to raw materials received for CRT glass
recycling, which are accepted by Conversion at no cost or upon receipt of a fee
paid by the supplier, and are consequently assigned no value in inventory upon
receipt. The reserve represents the cost that Conversion estimates it would
incur should it become necessary to dispose of the materials. The reserve
increases or decreases with the level of unvalued CRT glass on hand to be
recycled, which does not necessarily fluctuate in line with raw materials for
ALUMAGLASS and in-process and finished CRT glass and ALUMAGLASS, which are
reported on the balance sheet. The substantial decrease in the reserve during
the six months ended December 31, 1995 reflects an accumulation of CRT glass at
June 30, 1995 in anticipation of completing the processing line, which glass was
subsequently consumed by the additional production which resulted from such
completion.
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As a consequence of the above revenue and cost changes, Conversion's gross
margin declined to a loss of approximately $1,479,000 for the six months ended
December 31, 1996, from a profit of approximately $322,000 for the same period
of 1995.
Selling, general and administrative expenses of approximately $1,208,000 for
the six months ended December 31, 1996 compare with approximately $777,000 for
the same 1995 period. This increase includes approximately $104,000 higher
personnel costs, approximately $124,000 higher consulting costs and
approximately $75,000 of added costs primarily for directors' and officers'
insurance and investor relations, together with a $99,000 settlement received in
the six months ended December 31, 1995 from a former officer of Dunkirk.
During the six months ended December 31, 1995, Conversion incurred process
development costs of approximately $463,000, representing development activity,
completed during the fiscal year ended June 30, 1996, which was directed at
Conversion's ALUMAGLASS abrasives product and its CRT glass recycling operation.
No such costs were incurred during the comparable period ended December 31,
1996.
Net interest expense increased to approximately $498,000 for the six months
ended December 31, 1996 from approximately $408,000 for the same prior year
period. This cost increase reflects capitalized interest of approximately
$245,000 during the six months ended December 31, 1995, partially offset by an
approximately $113,000 increase in interest income on cash received from the
Conversion IPO, and lower interest paid as a result of reductions in debt
principals.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Conversion's consolidated results of operations for the fiscal year ended
June 30, 1995 ("fiscal 1995") include only 10 months of Dunkirk operations since
the Dunkirk merger occurred effective August 31, 1994. However, for purposes of
the following presentation, Conversion's results of operations for fiscal 1995
include the operations of Dunkirk for both the ten-month period following the
effective date of the Dunkirk merger and the two-month period immediately
preceding the effective date of the Dunkirk merger.
Consolidated revenues for the year ended June 30, 1996 ("fiscal 1996") were
approximately $2,680,000, consisting primarily of CRT glass recycling fees and
approximately $214,000 of ALUMAGLASS sales. For fiscal 1995, Conversion had
consolidated revenues of approximately $1,236,000, of which approximately
$78,000 was from sales of ALUMAGLASS and the remainder was CRT recycling fees.
This increase in revenue during fiscal 1996 primarily reflects completion of
Conversion's CRT glass recycling operations and the corresponding increase in
Conversion's CRT glass recycling capacity.
Cost of goods sold was approximately $3,094,000 for fiscal 1996, as compared
to approximately $3,168,000 for the prior fiscal year. This decrease reflects a
$623,000 reduction in Conversion's reserve for potential disposal costs of raw
materials as a result of a decrease in Conversion's raw materials inventory as
compared to a $1,070,000 increase in the reserve for fiscal 1995 The substantial
decrease in the reserve during the year ended June 30, 1996 reflects an
accumulation of CRT glass at June 30, 1995 in anticipation of completing the
processing line, which glass was subsequently consumed by the additional
production which resulted from such completion. Excluding the effect of the
change in Conversion's reserve for disposal during fiscal 1996 and fiscal 1995,
cost of goods sold increased approximately $1,619,000 in fiscal 1996 versus
fiscal 1995. This adjusted cost increase reflects higher depreciation costs due
to increased equipment purchases and higher personnel, energy, repairs and
maintenance and freight costs, all of which are attributable to increased
production during fiscal 1996.
Conversion's gross loss on sales of approximately $(414,000) during fiscal
1996 compares with a loss of approximately $(1,933,000) for the prior fiscal
year. The increase in revenues allowed for better overall utilization of
production capacity and resulted in attendant economies of scale.
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Selling, general and administrative expenses for fiscal 1996 decreased to
approximately $1,821,000 from $2,827,000 for fiscal 1995. This decrease resulted
from substantially lower legal, consulting and travel costs, together with a
$99,000 settlement received from a former officer of Dunkirk during fiscal 1996.
Conversion incurred process development costs of approximately $996,000 for
fiscal 1996 as compared with approximately $1,614,000 for fiscal 1995. A
decrease in developmental activity directed at Conversion's ALUMAGLASS abrasives
product during the last half of fiscal 1996 and the completion of Conversion's
CRT glass recycling operation accounted for this entire cost reduction.
During fiscal 1995, Conversion 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 Dunkirk merger that had not reached technological feasibility and, in the
opinion of management, had no alternative use.
Net interest expense increased to approximately $962,000 for fiscal 1996
from approximately $387,000 for fiscal 1995, reflecting increased indebtedness
of Conversion, partially offset by capitalized interest costs of $439,932 and
$63,499 for fiscal 1996 and fiscal 1995, respectively.
The fiscal 1996 Statement of Operations includes an extraordinary item
amounting to $442,000. This charge includes underwriting, debt discount, legal
and accounting costs relating to Bridge Notes issued in December 1995 to provide
interim working capital until the Conversion IPO could be closed.
LIQUIDITY AND CAPITAL RESOURCES
Conversion's business is capital intensive. Conversion has funded its
operations principally from debt financing, the private placement of preferred
stock (subsequently converted into Common Stock) and the proceeds of the
Conversion IPO. At December 31, 1996, Conversion had approximately $11,509,000
in principal amount of long-term indebtedness (excluding capital lease
obligations) and approximately zero net working capital.
At March 1, 1997, Conversion had approximately $1,000,000 in available cash
and marketable securities. In late September and October, 1996, Conversion
effected a number of cost-saving measures to enable it to continue to fund its
operations from its existing resources, and to reduce the revenue required to
achieve break-even cash flow, although there can be no assurance that Conversion
will achieve such break-even cash flow. Such measures included cooling and
draining Dunkirk's melter and curtailing certain other operations since
inventories of ALUMAGLASS have reached satisfactory levels, making reductions in
overhead and other operating expenses and refraining from making discretionary
capital expenditures. Conversion's capital expenditure program is now
substantially complete. Conversion estimates that it will require modest
near-term capital expenditures at its facility, principally to complete certain
elements of its mechanical conversion area and computer recycling operations,
although additional discretionary expenditures could be made if additional
financing or cash from operations becomes available. Conversion anticipates
remaining equipment expenditures of approximately $84,000 in connection with the
color coating facility it will operate as a result of the termination of its
joint venture with VANGKOE.
In April 1997, Conversion received a letter from a placement agent with
respect to its interest in acting as placement agent on a best efforts basis for
the Private Placement of Premium Preferred Stock to be issued by Conversion for
aggregate gross proceeds of a minimum of $3 million and a maximum of $5 million,
plus an over-allotment option in the aggregate amount of $2 million. Such letter
further states that the placement agent is highly confident of its ability to
consummate the offering. See "Description of Conversion Securities" for a
description of the terms of the Premium Preferred Stock. The Private Placement
will be made to accredited investors and will consist of a minimum of 300,000
and a maximum of 500,000 shares of Premium Preferred Stock (to be sold in units
of 10,000 shares each) (plus up to an additional 200,000 shares subject to the
over-allotment option) at a stated par value of $10 per share. The Private
Placement is conditioned upon the holders of more than 50% of Octagon's Common
Stock entering into irrevocable voting proxies with respect to the Merger and
consummation of the Merger.
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Conversion has agreed to file a "shelf" registration statement within 45 days
following the final closing date of the Private Placement with respect to the
Common Stock issuable upon conversion of the Premium Preferred Stock and upon
exercise of warrants to be issued to the placement agent. In consideration for
its services, the placement agent will receive a cash commission equal to 9% of
the total proceeds of the Private Placement and a non-accountable expense
allowance equal to 4% of the total proceeds of the Private Placement. The
placement agent will also receive warrants to purchase that number of shares of
Premium Preferred Stock as shall equal 10% of the total number of shares of
Premium Preferred Stock sold in the Private Placement at an exercise price equal
to 110% of the offering price of such shares. No assurance can be given that the
Private Placement will be consummated on the terms stated herein or at all. See
"RISK FACTORS--Limited Cash Resources; Additional Financing; Risk of Failure to
Obtain Required Financing".
Conversion has been granted a deferral of all interest and principal
payments due under its $8 million Solid Waste Disposal Facility Bonds for the
two-year period commencing March 1, 1997 through and including March 1, 1999;
PROVIDED, HOWEVER, that all such interest and principal payments will be made
from Conversion's debt service reserve funds until such reserve funds are
depleted. The total amount of deferred principal and interest payments is
approximately $2,386,000, of which approximately $870,000 will be made from
Conversion's debt service reserve funds. Replenishment of the debt service
reserve funds, plus repayment of all additional deferred interest, will be due
in 20 equal, consecutive quarterly installments commencing on June 1, 1999.
Repayment of the deferred principal will be due on December 1, 2010. The
continuing effect of such deferral is conditioned upon the consummation of the
merger by May 15, 1997 and the consummation of a private placement resulting in
aggregate gross proceeds to Conversion of at least $2 million by May 31, 1997
and of at least an additional $3 million by July 15, 1997. In addition,
following consummation of such private placement, Conversion will be subject to
certain covenants, including minimum net worth and working capital covenants.
Deferred revenue decreased to approximately $558,000 at June 30, 1996 from
approximately $944,000 at June 30, 1995. Deferred revenue relates to raw
materials received for CRT glass recycling, which are accepted by Conversion
upon receipt of a fee paid by the supplier. The materials in inventory are
assigned no value; also, the recycling fees received on the raw stock on hand
are not recognized as revenue until the materials are put through the recycling
process. The amount of such fee received at any point in time is deferred
revenue. The substantial decrease during the year ended June 30, 1996 reflects
an accumulation of CRT glass at June 30, 1995 in anticipation of completing the
processing line, which glass was subsequently consumed by the additional
production which resulted from the completion of the processing line.
Accrued expenses decreased to approximately $778,000 at June 30, 1996 from
approximately $1,169,000 at June 30, 1995. Legal expenses and related settlement
costs accrued at June 30, 1995 were paid during fiscal 1996.
Conversion's long-term indebtedness consists principally of (i) $8 million
outstanding principal amount of industrial development bonds issued through the
Chautauqua County Industrial Development Agency, which bear interest at 11.5%
with principal repayments commencing in 1998 over a 12-year period, (ii)
$2,109,230 outstanding principal amount under term loans provided by Key Bank of
New York and guaranteed by the New York Job Development Authority, which loans
bear interest at the prime rate and are payable in monthly installments through
January 2002, and (iii) various mortgage loans and subordinated indebtedness
from certain of Conversion's CRT glass customers who provided financial and
technical assistance to Conversion during its start-up phase. Conversion's debt
service requirements are currently approximately $412,000 per quarter (excluding
capital lease obligations). Conversion's long-term indebtedness is secured by
liens on substantially all of its fixed assets. Conversion's long-term
indebtedness has been used to finance its facility, equipment and related
capital expenditures. Certain of the agreements related to such long-term
indebtedness contain a limited number of customary covenants and default
provisions.
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Conversion's capital lease payments were approximately $115,000 for the year
ended June 30, 1996 and are estimated to be approximately $84,000, $41,000 and
$27,000 for the fiscal years ending June 30, 1997, 1998 and 1999, respectively,
under current commitments. Conversion's utility expenses averaged approximately
$70,000 per month at its level of operations prior to cooling and draining the
melter as part of its recent cost-cutting initiatives.
Conversion's base annual fixed expenses include approximately $427,000 in
aggregate annual base compensation for the current executive officers of
Conversion and debt service obligations relating to Conversion's outstanding
indebtedness, which are estimated to aggregate approximately $1,647,000 for
fiscal 1997 (excluding capital lease obligations).
To date, Conversion has provided an aggregate of $660,000 in working capital
loans to Octagon, $55,000 of which Octagon has repaid to Conversion. See
"EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON".
Following the Merger, on a consolidated basis, Conversion will also have the
liability of Octagon's working capital line of credit. See "OCTAGON MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"RISK FACTORS -- Substantial Indebtedness; Debt Service Requirements".
Conversion has Federal net operating loss carryforwards that amounted to
approximately $11.5 million at June 30, 1996 which expire between 2006 and 2001.
Pursuant to Section 382 of the Code, utilization of net operating loss
carryforwards is limited if there has been a change in control (ownership) of
Conversion. Although a comprehensive evaluation has not yet been performed, it
appears that upon the merger with Dunkirk, effective August 31, 1994, and upon
the Conversion IPO, effective May 16, 1996, such changes in control (ownership)
had occurred. As a result of such changes, it appears that Conversion's ability
to utilize its net operating loss carryforwards generated by Dunkirk prior to
August 31, 1994 (approximately $1.5 million) is limited by Section 382 and is
further limited to the use of these loss carryforwards against future Dunkirk
earnings only. In addition, the consolidated losses incurred through the
effective date of the Conversion IPO (approximately $8.2 million) may be limited
to as low as approximately $1 million on an annual basis.
The foregoing discussion contains certain forward-looking statements which
involves risks and uncertainties, including those set forth herein under the
caption "RISK FACTORS". Conversion's actual results could differ materially from
the results anticipated in such forward-looking statements.
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MANAGEMENT OF CONVERSION
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of Conversion:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Eckardt C. Beck (1)(2)................. 53 Chairman
Harvey Goldman (1)..................... 50 Vice-Chairman, Chief Executive Officer, President and Director
Robert Dejaiffe........................ 58 Vice President -- Technology
Perry A. Pappas........................ 35 Vice President, General Counsel and Secretary
Catherine Susan Kirby.................. 37 Vice President
Norman L. Christensen, Jr., Ph.D....... 49 Director
Peter H. Gardner (1)(3)(4)............. 30 Director
Alexander P. Haig...................... 44 Director
Scott A. Katzmann (1)(3)(4)............ 40 Director
Donald R. Kendall, Jr.................. 44 Director
Irwin M. Rosenthal..................... 67 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee.
(2) Although Mr. Beck is not an employee of Conversion, he has entered into a
Consulting Agreement with Conversion pursuant to which, among other things,
Mr. Beck will assist Conversion in strategic planning, business development,
investor relations and fund raising activities. Mr. Beck is currently
spending substantially all of his working time and efforts on matters for
Conversion, although such time commitment is expected to decrease over the
first several months following consummation of the Merger. See "CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF CONVERSION--Consulting
Agreements."
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
ECKARDT C. BECK has been a director of Conversion since February 1995 and
Chairman of the Board since February 1997. 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.
HARVEY GOLDMAN joined Conversion in March 1994 as President and Chief
Executive Officer and has been Vice Chairman of the Board since February 1997.
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 Conversion'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
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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 Conversion, 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 an
M.B.A. from Syracuse University.
PERRY A. PAPPAS is Vice President, General Counsel and Secretary of
Conversion. Mr. Pappas joined Conversion in September 1995. Prior to joining
Conversion, 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.
CATHERINE SUSAN KIRBY is a Vice President of Conversion. 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 introduction and product innovations. Ms. Kirby then worked on a
consulting basis for various clients including divisions of AT&T, until joining
Conversion 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.
NORMAN L. CHRISTENSEN, JR., PH.D. has been a director of Conversion 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.
PETER H. GARDNER was elected a director of Conversion 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 Conversion. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OF CONVERSION". 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 of UCLA.
ALEXANDER P. HAIG was appointed as a director of Conversion 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.
SCOTT A. KATZMANN has been a director of Conversion since October 1994. Mr.
Katzmann is a Managing Director and the Head of Capital Markets at Paramount
Capital, Inc., the placement agent for Conversion's Series A Preferred Stock.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION". 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
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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.
DONALD R. KENDALL, JR. has been a director of Conversion 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, Symbollon
Corporation, a publicly-traded chemical and medical technology company, Life
Medical Sciences, Inc., a publicly-traded medical technology company, and
Echocath, Inc., a publicly-traded medical technolkogy 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 Conversion Board of Directors has a Compensation Committee, an Audit
Committee and an Executive Committee. The Compensation Committee makes
recommendations to the Conversion Board concerning salaries and incentive
compensation for officers and employees of Conversion and administers
Conversion's Employee Stock Option Plan. The Audit Committee 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 DGCL.
The Board will establish a Nominating Committee and a Fairness Committee
effective upon the closing of the Merger. It is anticipated that at least one
director from Octagon will serve on each such committee.
Mr. Gardner serves as the designee of Technology Funding Inc., the Managing
General Partner of two investment funds that are stockholders of Conversion. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION" and "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT OF CONVERSION".
DIRECTORS' COMPENSATION
Directors who are full-time employees of Conversion receive no additional
compensation for services rendered as members of the Conversion Board or
committees thereof. Directors who are not full-time employees of Conversion
receive reimbursement of out-of-pocket expenses for attendance at Conversion
Board meetings. Conversion maintains a Stock Option Plan for Non-Employee
Directors, pursuant to which options to purchase an aggregate of 1,217 shares of
Conversion Common Stock were issued during fiscal year 1996. Such options vest
one year from the date of grant and have an exercise price of $4.40 per share.
On July 1, 1996, each director of Conversion received an option to purchase
121 shares of Conversion Common Stock pursuant to an automatic grant under
Conversion's Stock Option Plan for Non-Employee Directors. Such options have an
exercise price of $5.00 per share and vest one year from the date of grant.
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On October 15, 1996, the Conversion Board of Directors granted options to
its non-employee directors pursuant to the Stock Option Plan for Non-Employee
Directors to purchase an aggregate of 50,000 shares of Conversion Common Stock.
Such options have an exercise price of $3.125 per share and vest one year from
the date of grant.
Conversion entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997 in connection with Mr. Beck's election
as Chairman. Pursuant to the Consulting Agreement, Mr. Beck will, among other
things, assist Conversion in strategic planning, business development, investor
relations, fund raising and such other activities as shall be reasonably
requested by the Board and within Mr. Beck's areas of expertise. Mr. Beck will
receive a monthly consulting fee of $6,000 pursuant to the Consulting Agreement
until the expiration of the agreement in February 2000. Upon consummation of the
Merger, Mr. Beck will also receive non-qualified options to purchase 200,000
shares of Conversion Common Stock at an exercise price equal to the fair market
value of the Conversion Common Stock on the date of grant. Of such options, 20%
will vest immediately and 20% will vest on each of the first, second, third and
fourth anniversaries of the date of grant as long as Mr. Beck shall remain as
Chairman (unless removed other than as the result of breach of fiduciary duty,
conviction of a felony or breach of the Consulting Agreement).
SCIENTIFIC ADVISORY BOARD
Since Conversion's inception, Conversion has sought the advisory services of
a number of scientists, researchers and clinicians with extensive experience in
Conversion's fields of interest (the "Scientific Advisors"). Conversion has
established a Scientific Advisory Board whose members assist Conversion 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 Conversion, some of which may conflict or
compete with Conversion, and they are expected to devote only a small portion of
their time to Conversion. They are not expected to actively participate in
Conversion'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 Conversion but will remain
the property of such persons or of such persons' full-time employers.
Conversion's Scientific Advisory Board presently consists of the following
individuals:
RICHARD M. SPRIGGS, PH.D., Chairman of the Scientific Advisory Board, is the
Executive Director of the MUS 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 Profession 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
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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 10 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 DGCL 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. Conversion'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.
Conversion believes that it is the position of the SEC 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 rescission.
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CONVERSION EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by
Harvey Goldman, Conversion's Vice-Chairman, President and Chief Executive
Officer, and Perry A. Pappas, Conversion's Vice President and General Counsel
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to Conversion during Conversion's fiscal years ended June 30, 1995
and 1996. No other executive officer of Conversion received salary and bonus
compensation in excess of $100,000 during fiscal year 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARDS
ANNUAL COMPENSATION -------------
SECURITIES
--------------------- UNDERLYING
SALARY OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) (#)
- ----------------------------------------------------------------------------------- --------- ---------- -------------
<S> <C> <C> <C>
Harvey Goldman..................................................................... 1995 $ 180,000 --
Vice-Chairman, President and Chief Executive Officer 1996 $ 180,000 50,000(1)
Perry A. Pappas.................................................................... 1995 -- --
Vice President, General Counsel and Secretary (2) 1996 $ 104,167 21,923(3)
</TABLE>
- ------------------------
(1) Non-qualified options to purchase Conversion Common Stock issued outside of
Conversion's Employee Stock Option Plan. Such options have an exercise price
of $4.40 per share and vest over three years. All of such options are Escrow
Options.
(2) Mr. Pappas joined Conversion on September 1, 1995. Mr. Pappas' current
annual salary is $125,000.
(3) Incentive Stock Options to purchase Conversion Common Stock issued pursuant
to Conversion's Employee Stock Option Plan. Such options have an exercise
price of $4.40 per share and vest over three years. All of such options are
Escrow Options.
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth the number of individual stock option grants
made to each Named Executive Officer during fiscal year 1996.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) (1) FISCAL YEAR (2) ($/SH) EXPIRATION DATE
- --------------------------------------------------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Harvey Goldman........................................... 50,000(3) 56.5% $ 4.40 5/16/03
Perry A. Pappas.......................................... 7,307(4) 8.2% $ 4.40 9/01/02
14,616(4) 16.5% $ 4.40 9/19/92
</TABLE>
- ------------------------
(1) All options vest in three equal annual installments, and have a term of
seven years.
(2) Conversion granted options to purchase an aggregate of $8,424 shares of
Conversion Common Stock during fiscal year 1996.
(3) Non-qualified Options granted outside of Conversion's Employee Stock Option
Plan.
(4) Incentive Stock Options granted pursuant to Conversion's Employee Stock
Option Plan.
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None of the Named Executive Officers exercised options in fiscal year 1996. As
of the end of fiscal year 1996, none of the options held by the Named Executive
Officers were in-the-money.
EMPLOYMENT AGREEMENTS
Harvey Goldman is employed with Conversion 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 Conversion
Board of Directors. Pursuant to the employment agreement, Mr. Goldman was issued
27,194 shares of Conversion Common Stock at a price of $.002 per share as
additional compensation. Mr. Goldman is also eligible to receive an annual bonus
at the discretion of the Compensation Committee. Both Conversion 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 Conversion without cause,
Mr. Goldman is entitled to receive a one-time severance payment equal to three
times his then effective base salary. The Employment Agreement was amended in
January 1997 to reflect that Mr. Goldman will cease to be President and Chief
Executive Officer of Conversion upon consummation of the Merger.
Perry A. Pappas is employed with Conversion 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 Conversion
Board of Directors. In addition, options to purchase 7,307 shares of Conversion
Common Stock at an exercise price of $4.40 per share were issued to Mr. Pappas.
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 Conversion to terminate the employment
agreement by providing written notice to the other party. If the termination is
initiated by Conversion 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.
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CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS OF CONVERSION
EMPLOYMENT AGREEMENTS
Conversion has entered into employment agreements with Harvey Goldman, the
Vice-Chairman, President and Chief Executive Officer of Conversion, and Perry A.
Pappas, Vice President, General Counsel and Secretary of Conversion. In
addition, Conversion has entered into Employment Agreements with William L. Amt
and Harry O. Christenson, the President and Chief Executive Officer and Chairman
and Chief Financial Officer, respectively, of Octagon, with respect to their
employment by Conversion upon consummation of the Merger. Conversion is party to
a Consulting Agreement with Eckardt C. Beck, the Chairman of Conversion. See
"CONVERSION EXECUTIVE COMPENSATION" and "THE MERGER -- Business and Management
After the Merger; Employment Agreements".
CONSULTING AGREEMENTS
In April 1995, Conversion entered into a Project Development Assistance
Agreement (the "Paramount Assistance Agreement") with Paramount Capital, Inc.,
the placement agent for Series A Preferred Stock issued by Conversion which was
converted into Common Stock at the closing of the Conversion IPO. Pursuant to
the Paramount Assistance Agreement, principals of Paramount having experience in
foreign project development will, among other things, introduce Conversion to
potential strategic partners, assist in obtaining requisite regulatory approvals
and otherwise facilitate project development activities. Conversion 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 Conversion by a foreign
partner introduced by Paramount (together with warrants to purchase that number
of shares of Common Stock of Conversion as is equal to 5% of the amount invested
divided by the Conversion Common Stock share purchase price, at an exercise
price equal to 110% of such Conversion Common Stock purchase price). The term of
the Paramount Assistance Agreement is one year, subject to renewal, cancellable
by either party upon 30 days' prior written notice. Scott A. Katzmann, a
director of Conversion, is a Managing Director of Paramount.
In May 1995, Conversion 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 collectively hold 276,727 shares of Conversion Common Stock.
Pursuant to the TFI Consulting Agreement, the consultants will, among other
things, introduce Conversion to strategic partners and potential customers,
provide strategic marketing advice, identify complementary technologies with
strategic synergies, and identify and assist in procuring appropriate media
channels for Conversion's products. As compensation for their services, the
consultants received warrants which were amended as of the effective date of the
Conversion IPO to become warrants to purchase 69,177 shares of Conversion Common
Stock, at an exercise price of $5.28 per share. Peter H. Gardner, a director of
Conversion, 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 Conversion.
In July 1995, Conversion 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 Conversion 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. Conversion will pay to TFI or its
designess a success fee of $75,000 for completed projects and a fee of 7% on any
funds invested in Conversion by a strategic partner introduced by TFI (together
with warrants to purchase that number of shares of Conversion Common Stock as is
equal to 5% of the amount invested divided by the Conversion Common Stock share
purchase price, at an exercise price equal to 110% of such purchase
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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, Conversion entered into a Consulting Agreement with Palmetto
Partners, Ltd. ("Palmetto"), a stockholder of Conversion and an affilaite of
Donald R. Kendall, Jr., a director and stockholder of Conversion. Pursuant to
the Consulting Agreement, Palmetto, among other things, will provide assistance
in identifying and developing project finance opportunities for new facilities
in the United States and abroad, present Conversion'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 Conversion Common Stock subject to vesting over a three-year period. The
price of such warrants was amended, effective as of the effective date of the
Conversion IPO, to be $5.28 per share.
Conversion entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997 in connection with Mr. Beck's election
as Chairman. Pursuant to the Consulting Agreement, Mr. Beck will, among other
things, assist Conversion in strategic planning, business development, investor
relations, fund raising and such other activities as shall be reasonably
requested by the Board and within Mr. Beck's areas of expertise. Mr. Beck will
receive a monthly salary of $6,000 pursuant to the Consulting Agreement until
the expiration of the agreement in February 2000. Upon consummation of the
Merger, Mr. Beck will also receive non-qualified options to purchase 200,000
shares of Conversion Common Stock at an exercise price equal to the fair market
value of the Conversion Common Stock on the date of grant. Of such options, 20%
will vest immediately and 20% will vest on each of the first, second, third and
fourth anniversaries of the date of grant as long as Mr. Beck shall remain as
Chairman of the Board (unless removed other than as the result of breach of
fidicuiary duty, conviction of a felony or breach of the Consulting Agreement).
In September, October and November 1995, Conversion borrowed an aggregate of
$650,000 from stockholders of Conversion 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, the Chairman of Paramount, 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 1995 Bridge
Financing (as defined below) for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Conversion Common Stock (which warrants
were exchanged automatically on the closing of the Conversion IPO for Redeemable
Class A Warrants to purchase 325,000 shares of Conversion Common Stock). Such
warrants were registered for resale pursuant to the Registration Statement
relating to the Conversion IPO. The notes received by such stockholders were
repaid at the closing of the Conversion IPO.
In December 1995, Conversion completed a bridge financing (the "1995 Bridge
Financing"), placed through Blair, of an aggregate of $2,225,000 principal
amount of notes and 1,112,500 warrants in which it received net proceeds of
approximately $1,849,750 (after expenses of such offering). The notes, together
with interest at the rate of 10% per annum, were repaid upon the closing of the
Conversion IPO. The warrants were exchanged automatically on the closing of the
Conversion IPO for Redeemable Class A Warrants. Such warrants were registered
for resale pursuant to the Registration Statement relating to the Conversion
IPO.
In March 1996, Conversion borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum, payable on the
earlier of the closing of the Conversion IPO and September 1996. Of such amount,
Dr. Rosenwald provided $150,000, Scott A. Katzmann and Peter Kash each provided
$18,750 and Harvey Goldman provided $12,500. Such notes were repaid at the
closing of the Conversion IPO.
In May 1996, Conversion borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the Conversion IPO.
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INDEMNIFICATION OF FORMER OFFICER; NON-COMPETE
In December 1995, Conversion agreed to indemnify and hold harmless Gerald P.
Balcar, a founder of Dunkirk, a former officer of Dunkirk and Conversion and a
stockholder of Conversion, with respect to guarantees made by Mr. Balcar and his
wife of obligations of Dunkirk. Mr. Balcar has agreed not to compete with
Conversion for a two-year period ending August 31, 1997.
ISSUANCES OF SECURITIES TO EXECUTIVE OFFICERS AND DIRECTORS
From the period from inception (June 23, 1993) to December 1995, Conversion
granted options to purchase an aggregate of 48,891 shares of Conversion Common
Stock to executive officers and directors of Conversion with exercise prices
ranging from $13.55 to $20.53 per share. Such options were repriced as of the
effective date of the Conversion IPO at $4.40 per share.
In February, April and June 1994, Conversion issued 98,837 shares of
Conversion Common Stock to Harvey Goldman, the Chairman, Chief Executive Officer
and President of Conversion, at a price of $.002 per share.
In April 1994, in connection with a bridge financing, Conversion issued to
Mr. Goldman warrants to purchase 1,845 shares of Conversion Common Stock at an
exercise price of $13.55 per share. Such warrants were amended and restated
effective as of the effective date of the Conversion IPO to become warrants to
purchase 5,239 shares of Conversion Common Stock at an exercise price of $4.77
per share.
In April 1994, in connection with a bridge financing, Conversion issued
warrants to purchase 3,691 shares of Conversion Common Stock to Donald R.
Kendall, Jr., a director of Conversion, at an exercise price of $13.55 per
share. Such warrants were amended and restated effective as of the effective
date of the Conversion IPO to become warrants to purchase 10,482 shares of
Conversion Common Stock at an exercise price of $4.77 per share.
In April 1994, for services rendered in connection with a bridge financing,
Conversion issued warrants to purchase 1,644 shares of Conversion Common Stock
to Scott A. Katzmann, a director of Conversion, at an exercise price of $13.55
per share. Such warrants were amended and restated effective as of the effective
date of the Conversion IPO to become warrants to purchase 4,669 shares of
Conversion Common Stock at an exercise price of $4.77 per share.
In August 1994, Conversion issued 2,455 shares of Conversion Common Stock to
Robert Dejaiffe, Vice President--Technology of Conversion, in exchange for his
shares of common stock of Dunkirk.
In August 1994, Conversion issued 1,888 shares of Conversion Common Stock to
Mr. Goldman upon conversion of $25,000 principal amount of notes issued to Mr.
Goldman in April 1994.
In August 1994, Conversion issued 3,775 shares of Conversion Common Stock to
Mr. Kendall upon conversion of $50,000 principal amount of notes issued to Mr.
Kendall in April 1994.
In February 1995, Conversion issued 40,000 shares of Series A Preferred
Stock to Mr. Eckardt C. Beck, the Chairman of Conversion, for $100,000. Such
shares converted upon the closing of the Conversion IPO into 13,833 shares of
Conversion Common Stock.
In March 1995, Conversion issued 10,000 shares of Series A Preferred Stock
to Mr. Kendall for $25,000. Such shares converted upon the closing of the
Conversion IPO into 3,456 shares of Conversion Common Stock.
In May 1995, Conversion issued warrants to purchase 54,250 shares of Series
A Preferred Stock to Scott A. Katzmann, a director of Conversion, at an exercise
price of $2.75 per share. Such warrants were amended and restated effective as
of the effective date of the Conversion IPO to become warrants to purchase
18,764 shares of Conversion Common Stock at an exercise price of $4.84 per
share.
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In April 1996, Conversion issued non-qualified stock options outside of
Conversion's Employee Stock Option Plan, all of which are Escrow Options, to Mr.
Goldman, to purchase 50,000 shares of Conversion Common Stock. Such options have
an exercise price of $4.40 per share and vest ratably over three years on an
annual basis.
On July 1, 1996, each director received an option to purchase 121 shares of
Conversion Common Stock pursuant to an automatic grant under Conversion's Stock
Option Plan for Non-Employee Directors. Such options have an exercise price of
$5.00 per share and vest one year from the date of grant.
On October 11, 1996, Mr. Goldman and Mr. Pappas purchased 80,000 and 10,000
shares, respectively, of Conversion Common Stock for a purchase price of $.00025
per share, pursuant to restricted stock grant awards under Conversion's 1996
Employee Incentive Plan. Such shares vest in January 1998.
On October 15, 1996, the Conversion Board of Directors granted options to
its non-employee directors pursuant to Conversion Stock Option Plan for
Non-Employee Directors to purchase an aggregate of 50,000 shares of Conversion
Common Stock. Such options have an exercise price of $3.125 per share and vest
one year from the date of grant.
Upon consummation of the Merger, Eckardt C. Beck, the Chairman of
Conversion, will receive non-qualified options to purchase 200,000 shares of
Conversion Common Stock at an exercise price equal to the fair market value on
the date of grant.
BOARD DESIGNEE AND OTHER TFI COVENANTS
Conversion, 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 Conversion will (i) use its best efforts to nominate a designee of
TFI to the Board of Directors of Conversion 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
terminate upon the earlier of (a) May 1999 and (b) such time as TFP III and TFVP
V cease to hold approximately 18,270 shares of Conversion Common Stock in the
aggregate.
The terms of the transactions described above were negotiated by the parties
thereto, and Conversion believes that such transactions were on terms no less
favorable to Conversion than could have been obtained from unaffiliated third
parties. All future transactions between Conversion 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.
ESCROW SECURITIES
In connection with the Conversion IPO, 740,559 Escrow Shares and 71,923
Escrow Options were deposited into escrow by the holders thereof. The Escrow
Shares include shares held by Harvey Goldman (100,725) and Scott A. Katzmann
(12,179 shares). The Escrow Options include options held by Harvey Goldman
(50,000) and Perry Pappas (21,923). 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) Conversion'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
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by Conversion'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 Conversion Common Stock
averages in excess of $11.25 per share for 60 consecutive business days
during the 18-month period commencing on the effective date of the
Conversion IPO;
(e) the Closing Price of the Conversion 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 effective date of the Conversion IPO;
or
(f) during the periods specified in (d) or (e) above, Conversion 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
Conversion 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 Conversion Common Stock
or securities convertible into, exchangeable for or exercisable into Conversion
Common Stock are issued after completion of the Conversion IPO. 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 Conversion, 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 Conversion. Conversion expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of Conversion 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 Conversion'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
Conversion will not affect Conversion's total stockholders' equity, it may have
a negative effect on the market price of Conversion's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between Conversion and Blair and should not be
construed to imply or predict any future earnings by Conversion or any increase
in the market price of its securities.
83
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT OF CONVERSION
The following table sets forth information with respect to the beneficial
ownership of the Conversion Common Stock as of March 1, 1997, by (i) each person
known by Conversion to own beneficially more than 5% of the outstanding
Conversion Common Stock, (ii) each of Conversion's directors and nominees for
director and the Named Executive Officers and (iii) all directors and executive
officers of Conversion as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER (1) (2) PERCENTAGE
- ------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Harvey Goldman (3)(4).......................................................... 202,630 3.6%
Eckardt C. Beck (5)............................................................ 55,050 *
Norman L. Christensen, Jr. (6)................................................. 2,615 *
Peter H. Gardner (7)........................................................... 460,901 8.1
Alexander P. Haig (8).......................................................... 4,871 *
Scott A. Katzmann (3)(9)....................................................... 36,829 *
Donald R. Kendall, Jr. (10).................................................... 175,953 3.1
Irwin M. Rosenthal (11)........................................................ -- --
Perry A. Pappas (12)........................................................... 18,931 *
Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (13).... 460,901 8.1
All officers and directors as a group (10 persons)............................. 965,917 16.2
</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 Conversion Common Stock beneficially owned by such
stockholder. Unless otherwise indicated, the address of each stockholder is
c/o Conversion, Bethany Crossing Office Center, 82 Bethany Road, Hazlet, New
Jersey 07730.
(2) Applicable percentage of ownership is based on 5,539,745 shares of
Conversion Common Stock outstanding as of March 1, 1997, together with
applicable options for such stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of Conversion
Common Stock subject to options that are presently exercisable or
exercisable within 60 days are deemed to be beneficially owned by the person
holding such options for the purpose of computing the percentage of
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage of any other person.
(3) Includes 100,725 Escrow Shares beneficially owned by Harvey Goldman and
12,179 Escrow Shares beneficially owned by Scott A. Katzmann.
(4) Includes currently exercisable warrants to purchase 5,239 shares of
Conversion Common Stock, and currently exercisable Escrow Options to
purchase 16,666 shares of Conversion Common Stock. Also includes 80,000
shares of restricted Conversion Common Stock granted pursuant to the 1996
Employee Incentive Plan in October 1996, which vest in January 1998.
Excludes options to purchase 73,334 shares of Conversion Common Stock which
are not exercisable within 60 days, 33,334 of which options are Escrow
Options.
(5) Includes currently exercisable options to purchase 1,217 shares of
Conversion Common Stock. Also includes options to be granted effective upon
consummation of the Merger to purchase 40,000 shares of Conversion Common
Stock. Excludes options to purchase 10,121 shares of Conversion Common Stock
which are not exercisable within 60 days. Also excludes options to be
granted effective upon the
84
<PAGE>
consummation of the Merger to purchase 160,000 shares of Conversion Common
Stock. The address of such stockholder is 6345 NW 26th Terrace, Boca Raton,
Florida 33496.
(6) Includes currently exercisable options to purchase 2,615 shares of
Conversion Common Stock. Excludes options to purchase 5,121 shares of
Conversion Common Stock which are not exercisable within 60 days. The
address of such stockholder is Nicholas School of the Environment, Duke
University, Box 90328, Durham, North Carolina 27708-0328.
(7) 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 Conversion owned by TFP III and TFVP V. Includes currently
exercisable options to purchase 1,217 shares of Conversion Common Stock.
Excludes options to purchase 10,121 shares of Conversion 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.
(8) Excludes options to purchase 5,121 shares of Conversion Common Stock which
are not exercisable within 60 days.
(9) Includes currently exercisable options and warrants to purchase 24,650
shares of Conversion Common Stock. Excludes options to purchase 10,121
shares of Conversion Common Stock which are not exercisable within 60 days.
The address of such stockholder is c/o Paramount Capital, Inc., 375 Park
Avenue, Suite 1501, New York, New York 10152.
(10) Includes currently exercisable options and warrants to purchase 11,699
shares of Conversion Common Stock. Also includes 51,588 shares of Conversion
Common Stock and warrants, exercisable within 60 days, to purchase an
aggregate of 105,435 shares of Conversion Common Stock owned by Palmetto
Partners Ltd., of which Mr. Kendall is Chairman and Chief Executive Officer.
Excludes warrants to purchase an aggregate of 608 shares of Conversion
Common Stock owned by Palmetto Partners, Ltd., which are not exercisable
within 60 days. Mr. Kendall disclaims beneficial ownership of all securities
of Conversion owned by Palmetto Partners, Ltd., other than 30,000 shares of
Conversion Common Stock issuable upon exercise of warrants held by Palmetto
Partners, Ltd. in which Mr. Kendall has a pecuniary interest. Excludes
options to purchase 5,121 shares of Conversion Common Stock which are not
exercisable within 60 days. The address of such stockholder is c/o Palmetto
Partners, Ltd., 1600 Smith Street, 50th Floor, Houston, Texas 77002.
(11) Excludes options to purchase 5,121 shares of Conversion Common Stock which
are not exercisable within 60 days.
(12) Includes currently exercisable options to purchase 8,931 shares of
Conversion Common Stock which are Escrow Options. Also includes 10,000
shares of restricted Conversion Common Stock granted pursuant to the 1996
Employee Incentive Plan in October 1996, which vest in January 1998.
Excludes options to purchase an additional 27,992 shares of Conversion
Common Stock which are not exercisable within 60 days, 12,992 of which
options are Escrow Options.
(13) Includes (i) 207,547 shares of Conversion Common Stock, (ii) warrants,
exercisable within 60 days, to purchase 137,206 shares of Conversion Common
Stock, (iii) 69,180 shares of Conversion Common Stock held by TFP III and
(iv) warrants, exercisable within 60 days, to purchase 45,751 shares of
Conversion Common Stock. Includes currently exercisable options issued to
Peter Gardner to purchase 1,217 shares of Conversion Common Stock. Excludes
options issued to Peter Gardner to purchase 10,121 shares of Conversion
Common Stock which are not exercisable within 60 days. Excludes warrants to
purchase (i) 8,388 shares of Conversion Common Stock held by TFVP V and (ii)
2,792 shares of Conversion Common Stock held by TFP III, in each case, which
are not exercisable within 60 days.
85
<PAGE>
BUSINESS OF OCTAGON
OVERVIEW
Octagon is a technical services contractor serving electric utilities,
Federal agencies, municipalities and selected industrial chemical producers.
Octagon specifically prepares management plans to identify, handle, transport,
decontaminate and dispose hazardous, toxic and nuclear materials. It oversees
and audits large labor forces during the planning, performance and close-out of
decontamination and decommissioning projects in nuclear, toxic and hazardous
facilities. Octagon mobilizes large teams of specialized engineers and radiation
protection technicians to operate, manage and maintain facilities and equipment
involved with these environmental market segments. Finally, Octagon provides
outsourcing services to a number of Federal government agencies and
municipalities supporting logistics, military telecommunications and complex
LAN/WAN information processing facilities and systems. Octagon markets its
services to substantial and growing segments of the overall environment and
information technology services markets. Octagon's services are provided on a
defined task basis as well as a staff augmentation basis.
NUCLEAR HEALTH AND SAFETY
Octagon provides radiation protection and decontamination services, nuclear
engineering and monitoring technology. It designs combinations of outsourced
services, professional assistance and technological solutions to help clients
accomplish their objectives while at the same time complying with all applicable
statutes, regulations and industry standards. Octagon draws from its nationwide,
skilled personnel pool of over 10,000 qualified managers, engineers, supervisors
and technicians to staff outsourced requirements. Octagon's automated personnel
database makes rapid access and selection of qualified staff possible. The
process is capable of putting a substantial number of technicians on-site
immediately in emergencies and more than 100 qualified, clearable technicians at
a plant for a schedule outage. Specialty personnel of all categories are also
available to perform tasks or to augment customer staff. Octagon designs
apprentice programs to help clients meet local community employment goals.
PRODUCT AND SERVICES AUTOMATION
Octagon offers and supports several automation products for continuous or
periodic remote monitoring of process variables and environmental
characteristics, for real-time analysis of data and for storing and transmitting
information for immediate or on-demand display by authorized networked
personnel. The products incorporate photographs, layout diagrams and video clips
that can be used for data and trend displays in context or for facility tours
and training. Octagon's Visual Survey Data System, Graphic Electronic Dosimetry
Display Systems and Interactive Video Tour Systems support the nuclear health
and safety programs discussed above.
RANGE AND LOGISTICS SERVICES AND FACILITY MANAGEMENT
Octagon offers strategic outsourcing and privatization that ensures
reliable, efficient performance, allowing management to focus on its core
functions and responsibilities, reducing corporate or mission risk by providing
full service support for the operation and management of government and
commercial facilities and activities. These services include the following:
operation and maintenance of electronic and conventional ranges; management
solutions for uninterrupted service; range environmental services such as UXO
disposal; sophisticated information and communications systems; value-added
privatization and outsourcing services; quality assurance and quality control
programs; and logistic services integrating. Octagon through its highly trained
team can provide staff to meet any requirement including network, electronics,
explosive ordnance disposal and hazardous material certifications.
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<PAGE>
ENVIRONMENTAL SERVICES
Octagon can provide professionals to perform environmental audits, site
investigations, risk assessments, remediation designs and management and
technical services for private and governmental sites subject to major
regulatory programs. This includes assessments and plans for waste
transportation and remediation and disposal throughout North America, Europe and
the Far East, and audits and investigations of waste disposal and regulatory
compliance to identify environmental liabilities and provide the baseline for
site remediation, risk-reduction planning and related permitting. Octagon can
provide expert testimony regarding hazardous pollutants as well as uncategorized
toxins.
INFORMATION TECHNOLOGY
Octagon has an experienced and trained staff in computers, networks,
telecommunications, automated task support, remote monitoring and logistics
management. This includes the latest technologies in worldwide
telecommunications, information management and inventory and logistic planning
and control. Octagon operates and maintains mainframes and minicomputers,
designs, installs and maintains LANs/ WANs, provides user support and training
to develop systems and applications software and documentation, and provides
systems integration, work process engineering and imaging solutions.
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<PAGE>
OCTAGON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues for the year ended December 31, 1996 were
approximately $24,992,000 compared to approximately $28,779,000 for the year
ended December 31, 1995.
The following table shows the approximate distribution of Octagon's revenues
for these comparative periods grouped between commercial contract revenues and
government contract revenues. Octagon provides highly-skilled personnel to
perform various contract labor services for customers in various industries.
Octagon's contract revenues are primarily labor and labor-related cost
intensive. Octagon provides a wide array of services and typically provides
multiple services to a customer pursuant to a single contract. Accordingly,
Octagon does not, and cannot reasonably be expected to, account for revenues and
operating income by the various types of services it provides. In making
strategic decisions, management reviews the profitability of its contracts as a
whole, rather than the profitability of individual services to be provided under
a contract.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
CONTRACT REVENUES 1996 1995 1996/1995
- ------------------------------------------------------------------- ------------- ------------- --------------
Commercial......................................................... $ 16,812,000 $ 17,779,000 $ (967,000)
Government......................................................... $ 8,180,000 $ 11,000,000 $ (2,820,000)
------------- ------------- --------------
$ 24,992,000 $ 28,779,000 $ (3,787,000)
</TABLE>
The major cause of the reduction of governmental contract revenues was due
to the transition of Octagon from being the prime contractor on certain
contracts to participating as a subscontractor when the contracts were rebid at
their termination. One of these contracts renewed for a five-year term during
1994, and Octagon transitioned from the prime to the sub contractor in 1995,
which represented approximately $2,037,000 (or 72%) of this reduction.
During 1995, as a result of the management reorganization and restructuring
of Octagon, discussed further below, certain commercial contract business under
development was discontinued. Although this new business only contributed
approximately $448,000 of revenues during the year ended December 31, 1995, it
accounts for the reduction in the year ended December 31, 1996.
Direct costs of revenues for the year ended December 31, 1996 were
approximately $19,637,000 or 79% of revenues compared to approximately
$21,797,000 or 76% of revenues for the year ended December 31, 1996. This $2.2
million reduction in direct costs reflects the reductions in revenues discussed
earlier; however, since the direct costs component of governmental contract
revenues is lower than for commercial contracts, Octagon experienced an overall
reduction in gross contribution margins after direct costs of approximately 3%
in the twelve-month period of 1996 compared to the same period in 1995.
The combined costs of indirect costs and selling, general and administrative
expenses were reduced in the year ended December 31, 1996, by nearly $2.5
million from the year ended December 31, 1995 as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1996 1995 1996/1995
------------ ------------ --------------
Indirect costs........................................................ $ 2,118,000 $ 3,333,000 $ (1,215,000)
Selling, general and administrative................................... $ 2,442,000 $ 3,721,000 $ (1,279,000)
------------ ------------ --------------
$ 4,560,000 $ 7,054,000 $ (2,494,000)
</TABLE>
88
<PAGE>
Starting in July of 1995, Octagon under the control of a new management team
began a major effort to restructure its operations and reorganize its business
focus in an effort to recover from the significant and expensive disruptions of
several major litigation actions, including a class action lawsuit brought on
behalf of its stockholders, a suit by a former officer and director and an
investigation by the SEC. See Note 7 of Notes to Octagon's financial statements
for the years ended December 31, 1995 and 1996 respectively, included herein.
The efforts to reduce costs and expenses included closing Octagon's
corporate offices in Reston, Virginia and consolidating the overhead support
staffing for both the government contracts business and commercial contracts
business in Altamonte Springs, Florida. Additionally, all operational and new
business development costs and expenses related to the startup of Octagon's
commercial telecommunications business (Octacom) were discontinued and the
January 1995 investment in Allink network management was abandoned. The
collective effect of these actions saved Octagon approximately $300,000 per
month in operating costs accounting for approximately $2.1 million of the
reductions in indirect overhead and selling, general and administrative costs in
the year ended December 31, 1996, as compared to the year ended December 31,
1995.
Other income for the year ended December 31, 1996 was approximately $50,000
compared to the approximately $749,000 for 1995. In 1995, approximately $410,000
was collected in connection with a favorable judgment awarded to Octagon in its
lawsuit over a fraudulent contract and $230,000 was recovered for legal costs
under an insurance policy in 1995. In 1996, there were no significant items.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues for the year ended December 31, 1995 were
approximately $28,779,000 compared to approximately $31,756,000 for the year
ended December 31, 1994.
The following table shows the approximate distribution of Octagon's revenues
for these comparative periods grouped between commercial contract revenues and
government contract revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C>
CONTRACT REVENUES 1995 1994 1995/1994
- ------------------------------------------------------------------- ------------- ------------- --------------
Commercial......................................................... $ 17,331,000 $ 18,690,000 $ (1,359,000)
Government......................................................... $ 11,448,000 $ 13,066,000 $ (1,618,000)
------------- ------------- --------------
$ 28,779,000 $ 31,756,000 $ (2,977,000)
</TABLE>
Octagon acquired Power Systems in March 1994, which accounts for
substantially all the commercial contracts revenues during these periods.
Commrcial contract revenues for 1994 represent only nine months of operations
for the Power Systems subsidiary as compared to a full year's operating activity
in 1995. Although not determinable, for comparative purposes this reduction in
revenues would have been greater had 1994 been a full year of operations within
Octagon. The reported decrease of approximately $1,359,000 in commercial
contract revenue resulted from the combined impact of approximately $1,130,000
reduction in revenues for staff augmentation from ABB and its subsidiaries, the
company from which Octagon purchased Power Systems. This customer base, although
reduced from the historical levels, continues to represent approximately 14% of
Octagon's commercial contracts revenues.
The $1,618,000 reduction in government contract revenues for the year ended
December 31, 1995 compared to the year ended December 31, 1994 is due primarily
to reduced operations for the Department of Energy previously handled in
Octagon's Ohio office.
Direct costs of sales as of December 31, 1995 were approximately
$21,797,000, a decrease of approximately $2,678,000 or 11% from 1994. The
changes in direct costs correspond to the same business changes as those
affecting revenues.
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<PAGE>
Combined indirect costs, other operating expenses and selling, general and
administrative expenses for the year ended December 31, 1995 were approximately
$7,054,000 compared to approximately $12,378,000 for the year ended December 31,
1994. As stated earlier, Octagon experienced an operational reorganization and
restructure of its business in mid-year 1995. The reduction in these costs of
approximately $5,324,000 is a result of eliminating the 1994 costs build up for
additional marketing expenses to increase business and backlog, the costs
incurred in investigating potential acquisitions, recruiting senior managers and
start-up costs for Octacom.
Additionally, unusual non-recurring items of approximately $3,964,000
incurred in the year ended December 31, 1994 for reserves against the recovery
of the performance deposit in a litigation, settlement on the stockholders'
class action lawsuit and assorted legal costs were one-time costs and not
repeated in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since the reorganization that began in July 1995, Octagon has been able to
stabilize its financial condition. Liquidity to manage the working capital
requirements of operations and contract performance is currently being provided
under a $5 million line of credit. This line was renewed in February 1996 when
it was increased from $3 million and at that time was extended for a two-year
term. This line is secured by the assets of Octagon and provides borrowings
based a pre-determined formula to the extent that eligible collateral in the
form of accounts receivables is available. In addition, this line provides
access to borrowing of up to $1 million, within the $5 million maximum, for the
funding of contract startup when working capital is needed prior to actual
accounts receivable being generated. To date, Octagon has not needed to use this
provision of the credit line.
Even though Octagon has experienced financial stability from operations it
continues to struggle due to lack of capital to fund growth beyond current
business levels.
Early in 1995, Octagon management formalized its efforts to recapitalize
Octagon to finance the necessary investment in marketing, as well as the
development of innovative technologies that may bring value to specific customer
requirements and ultimately may be brought to entire market segments.
Unfortunately, there remain certain obstacles to recapitalization. See
"RECOMMENDATION OF THE OCTAGON BOARD AND THE REASONS FOR THE MERGER".
At December 31, 1996, the combined balances of billed and unbilled accounts
receivable were approximately $1,273,000 higher than they were at December 31,
1995 primarily due to the recognition of revenues from completed audits of
government contracts by the Defense Contract Audit Agency. See Note 7 of Notes
to Octagon's consolidated financial statements for the years ended December 31,
1995 and 1996, respectively, included elsewhere in this Proxy
Statement/Prospectus.
During 1996 and 1997, in order to support the costs and expenses related to
merger activities and other working capital needs, it was necessary for Octagon
to borrow $660,000 from Conversion. See "EXISTING RELATIONSHIP BETWEEN
CONVERSION AND OCTAGON".
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MANAGEMENT OF OCTAGON
The current executive officers and directors of Octagon are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William L. Amt (4)................................... 55 President, Chief Executive Officer and Director
Harry O. Christenson................................. 52 Chairman of the Board and Chief Financial Officer
John C. Kolojeski.................................... 52 Executive Vice President and Director
Patricia Hanahan Engman (2)(3)(4).................... 54 Director
Charles R. Henry (1)(2)(3)(4)........................ 59 Director
Henry St. John Fitzgerald (3)........................ 66 Director
William V. Roberti (1)(2)(3)......................... 50 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Fairness Committee.
(4) Member of Nominating Committee.
The principal occupation and business experience of each executive officer
and director of Octagon for at least the last five years are as follows:
WILLIAM L. AMT joined Octagon in October 1993 and has served in various
positions since that date. From October 1993 until June 1994, he served as the
Vice President of Marketing and Sales. From June 1994 to June 1995, he served as
the President of Power Systems and as the Vice President of the Environmental
Group. Mr. Amt was elected President and Chief Executive Officer in May 1995.
Mr. Amt became a director in June 1995. From 1991 to November 1993, Mr. Amt was
both the Vice President International and the Vice President of the Chemicals
Business Unit for Ford Bacon & Davis, Incorporated, a multinational engineering
and consulting firm serving the chemical and hydrocarbon industry. Prior to
that, from 1988 to 1991, Mr. Amt was Director of Marketing and Business
Development Manager for Simons Eastern Consultants, Inc., a major international
design and engineering firm. Mr. Amt is a registered professional engineer and
holds a B.S. Degree from Purdue University.
HARRY O. CHRISTENSON joined Octagon in February 1995 as Chief Financial
Officer and was elected Chairman of the Board in December 1995. From 1993 to
February 1995, Mr. Christenson was a senior partner in the firm of CFO Support
Services, a consulting firm that developed strategic reorganization and
restructuring plans for both public and private companies. Prior to that, from
1979 to 1994, Mr. Christenson held positions with Penril Datacom Networks, Inc.
as Corporate Controller, Vice President of Finance and Chief Operating Officer.
Mr. Christenson holds a B.S. Degree from Fairfield University and an M.B.A. from
the University of New Haven.
JOHN C. KOLOJESKI joined Octagon in November 1993 and (except for one period
of five months) has served in various positions with Octagon since that date.
Mr. Kolojeski served as a Vice President of Octagon from December 1993 until
April 1994. Mr. Kolojeski left Octagon in April 1994 and served as the Vice
President of Environmental Sciences Group, Inc. for five months. In December
1994, Mr. Kolojeski returned to Octagon and has served as an Executive Vice
President since that date. Prior to joining Octagon, from 1990 to 1993, Mr.
Kolojeski served as the Vice President of Technology Science Group, Inc.
PATRICIA HANAHAN ENGMAN has been a director of Octagon since April 1996.
Mrs. Engman is Executive Director of the Business Roundtable. From 1974 to 1984,
Mrs. Engman was Counsel for Legislative and Administrative Affairs for
Bristol-Myers Company. From 1971 to 1973, she was a Congressional Liaison
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<PAGE>
Officer for the Federal Trade Commission. Ms. Engman received her A.B., cum
laude, from Coker College and a J.D. from the University of Florida.
CHARLES R. HENRY has been a director of Octagon since March 1996. Mr. Henry
is a consultant to Scientific Application International Corporation and other
small companies. From January 1993 to January 1996, Mr. Henry was President of
Allied Research Corporation Services. Prior to 1993, Mr. Henry, a retired Major
General (US Army) held the position of Chief Executive Officer of Defense
Contracts Management Command from 1990 to 1992. From 1988 to 1992, Mr. Henry was
Deputy Director, Defense Logistics Agency. Mr. Henry has a B.S. from Middle
Tennessee State University and a J.D. from Woodrow Wilson Law School and an
L.L.M. from Woodrow Wilson Law School.
WILLIAM V. ROBERTI was elected to the Octagon Board in June 1996. In May
1995, Mr. Roberti was hired to be the President and Chief Executive Officer of
the Plaid Clothing Group, Inc. One of Mr. Roberti's chief responsibilities in
this position was to lead the Plaid Clothing Group, Inc. through a
reorganization. On July 17, 1995, the Plaid Clothing Group filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. On November 26, 1996,
the Plaid Clothing Group, Inc. was sold to the Hartmarx Corporation of Chicago,
Illinois. Mr. Roberti will continue to act as the President and Chief Executive
Officer of the Plaid Clothing Group, Inc. From 1987 to 1994, Mr. Roberti spent
seven years as the President and Chief Executive Officer of Brooks Brothers,
Inc., a division of Marks & Spencer. Mr. Roberti has a B.A. from Sacred Heart
University and an M.B.A. from Southern Methodist University.
HENRY ST. JOHN FITZGERALD was appointed to the Octagon Board in January
1995. For the past five years, Mr. Fitzgerald has been an attorney in the
private practice of law. Mr. Fitzgerald also served as an Assistant United
States Attorney. Mr. Fitzgerald has a J.D. and an L.L.M. from Georgetown
University.
The current executive officers and directors of Octagon listed above were
all serving in their respective positions with Octagon when the SEC issued a
cease and desist order against Octagon on September 26, 1996. However, the cease
and desist order involved claims against the former management and the former
counsel of Octagon regarding actions which occurred in the summer of 1994. None
of Octagon's current executive officers or directors served on the Octagon Board
during the time period relevant to the SEC's order.
BOARD COMMITTEES
The Octagon Board has a Compensation Committee, an Audit Committee, a
Fairness Committee and a Nominating Committee. The Compensation Committee makes
recommendations to the Octagon Board concerning salaries and incentive
compensation for officers and employees of Octagon and administers Octagon's
incentive compensation plan. The Audit Committee reviews the results and scope
of the audit and other accounting related matters and is responsible for
selecting and overseeing Octagon's outside legal counsel and independent
auditing firm. The Fairness Committee reviews any transactions involving an
officer, director or other person deemed to be an "insider" for the purpose of
ensuring that such transaction is fair to Octagon and its stockholders. The
Nominating Committee recommends directors for election to the Octagon Board.
DIRECTORS' COMPENSATION
Directors who are full-time employees of Octagon receive no additional
compensation for services rendered as members of the Octagon Board or any
committee thereof. Directors who are not full-time employees of Octagon receive
$1,000 for each Octagon Board meeting attended in person and $500 for each
Octagon Board meeting attended telephonically.
In addition, directors who are not employees of Octagon are eligible to
receive non-qualified stock options pursuant to Octagon's 1995 Long-Term
Incentive Plan (the "Octagon Stock Option Plan"). Upon joining the Octagon
Board, each non-employee director has been granted options to purchase 40,000
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shares of Octagon Common Stock at an exercise price equal to the fair market
value of the Octagon Common Stock on the date of grant.
LIMITATION OF LIABILITY
The DGCL 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. Octagon'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.
Octagon believes that it is the position of the SEC 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 rescission.
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OCTAGON EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by
William L. Amt, Octagon's Chairman, President and Chief Executive Officer, Harry
O. Christenson, Octagon's Chief Financial Officer, and John C. Kolojeski,
Executive Vice President--Head of Environmental Regulatory Division
(collectively, the "Octagon Named Executive Officers") for services rendered to
Octagon during Octagon's fiscal years ended December 31, 1994, 1995 and 1996. No
other executive officers of Octagon received salary and bonus compensation in
excess of $100,000 during fiscal year 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------- NUMBER OF
NAME AND OTHER ANNUAL OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY COMPENSATION SARS COMPENSATION
- ------------------------------------------------- --------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William L. Amt................................... 1994 $ 150,000 -- -- --
Chief Executive Officer 1995 $ 150,000 -- 800,000(2) --
1996 $ 150,000 14,000(1) -- $ 247,150(3)
Harry O. Christenson............................. 1994 -- -- -- --
Chairman of the Board and Chief Financial 1995 $ 116,628(4) 14,000(1) 800,000(2) --
Officer 1996 $ 150,000 -- -- $ 246,760(5)
John C. Kolojeski................................ 1994 $ 48,125(6) -- -- --
Executive Vice President 1995 $ 90,000 -- -- $ 26,000(7)
1996 $ 110,000 -- -- --
</TABLE>
- ------------------------
(1) Represents the fair market value of 200,000 shares of Octagon Common Stock
awarded to each of Mr. Amt and Mr. Christenson on November 29, 1995. The
fair market value of the stock on the date of grant was $.09 per share.
(2) Represents a grant of non-qualified options to purchase Octagon Common Stock
issued pursuant to Octagon's Stock Option Plan on November 29, 1995 at an
exercise price of $.07 per share with an expiration date of January 2006.
One-third of the options vested immediately and one-half of the remaining
options will be exercisable on each of the two successive anniversaries of
the date of grant.
(3) Represents the net value of stock options exercised during 1996 equal to
$244,000 and a car allowance of $3,150. See footnote (1) to the table below
under the caption "-- Aggregated Option/SAR Exercises in the Last Fiscal
Year and FY-End Option/SAR Values".
(4) Mr. Christenson joined Octagon in February 1995. Mr. Christenson's annual
salary is $150,000.
(5) Represents the net value of stock options exercised during 1996 equal to
$244,000 and a car allowance of $2,760. See footnote (1) to the table below
under the caption "-- Aggregated Option/SAR Exercises in the Last Fiscal
Year at FY-End Option Values".
(6) Mr. Kolojeski left Octagon for a period of five months in 1994.
(7) Represents a settlement with the former management of Octagon to recover
salary and reimbursement of expenses after Mr. Kolojeski's dismissal in
1994. Includes $15,000 in legal expenses incurred in a suit to recover such
payments.
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<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information concerning options granted during
the fiscal year ended December 31, 1996 to the Octagon Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR (2) ($ PER SHARE) DATE
- --------------------------------------------------- --------------- ------------------- --------------- -----------
<S> <C> <C> <C> <C>
John C. Kolojeski.................................. 50,000(1) 9.16% $ 0.25 2/12/06
</TABLE>
- ------------------------
(1) This represents stock options granted pursuant to Octagon's Stock Option
Plan on February 12, 1996. One-third of the options are exercisable
immediately and one-half of the remaining shares will be exercisable on each
of the two successive anniversaries of the date of grant. For a discussion
of how Mr. Kolojeski's stock options will be treated upon consummation of
the Merger, please see "THE MERGER -- Treatment of Stock Options and
Warrants".
(2) Octagon granted options to purchase an aggregate of 546,000 shares of
Octagon Common Stock during fiscal 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
On August 26, 1996, William Amt and Harry Christenson each exercised their
stock options (the "Stock Options") to acquire 800,000 shares of Octagon Common
Stock at an exercise price of $.07 per share. Mr. Amt and Mr. Christenson each
exercised their Stock Options through cashless exercise by delivering 149,333
shares of Octagon's common stock valued in the aggregate at $56,000 (each share
of Common Stock was valued at $0.375 per share, at the closing price on August
23, 1996) to Octagon. As a result of such exercise, Octagon issued 650,667
shares of Octagon Common Stock to each of Mr. Amt and Mr. Christenson. On August
26, 1996, Octagon's Board had voted to accelerate the vesting schedule of the
Stock Options, so that all 800,000 options granted pursuant to the Stock Options
would be exercisable immediately. Prior to the Octagon Board's action on August
26, 1996, one-third of the options had vested, one-third were scheduled to vest
on March 31, 1997 and the remaining one-third were scheduled to vest on March
31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------- ----------- ------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
William L. Amt..................... 650,667(1) $ 244,000(2) 0/0 0/0
Harry O. Christenson............... 650,667(1) $ 244,000(2) 0/0 0/0
</TABLE>
- ------------------------
(1) On August 26, 1996, through cashless exercise Mr. Amt and Mr. Christenson
each exercised their respective options to acquire 800,000 shares by
delivery of 149,333 shares of Octagon Common Stock, valued at a closing
price of $0.375 on August 23, 1996. As a result of such exercise, Octagon
issued 650,667 shares of Octagon Common Stock to each of Mr. Amt and Mr.
Christenson.
(2) Value is based on the difference between the closing price of the Octagon
Common Stock on August 26, 1996, the date on which the option was exercised
($0.375) and the option exercise price ($0.07) times the number of options
exercised (800,000).
95
<PAGE>
EMPLOYMENT AGREEMENTS
Octagon has entered into employment agreements having a term of one year
with Messrs. Amt and Christenson as of December 1, 1995. The agreements provide
for automatic annual renewals unless contrary notice is given by either party.
Messrs. Amt and Christenson's current annual salaries under the agreements are
$150,000 and $150,000, respectively. The salaries of Messrs. Amt and Christenson
under the agreements may be increased to reflect annual cost of living increases
and may be supplemented by discretionary merit and performance increases as
determined by the Octagon Board. Such employment agreements terminate effective
upon consummation of the Merger pursuant to the Employment Agreements entered
into between Conversion and such officers. See "THE MERGER -- Business and
Management After the Merger; Employment Agreements".
Octagon is also a party to an Employment Agreement dated November 1, 1995,
with Steven Koinis, a former officer and director of Octagon. Pursuant to the
Employment Agreement, Mr. Koinis receives a salary of $150,000 per annum and
agreed to assist Octagon in mergers and acquisitions, creditor arrangements and
other specified tasks. Pursuant to a letter agreement entered into among
Conversion, Octagon and Mr. Koinis, Mr. Koinis agreed to terminate the
Employment Agreement and has released Octagon from any claims thereunder
effective upon consummation of the Merger. See "THE MERGER -- Conflicts of
Interest".
96
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF OCTAGON
During 1995, Octagon paid $208,960 to Henry St. John Fitzgerald, a director
of Octagon for legal services rendered in 1994 and the first eight months of
1995. Octagon and Mr. Fitzgerald are presently negotiating Mr. Fitzgerald's bill
for legal services rendered during September through December 1995.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT OF OCTAGON
The following table sets forth information with respect to the beneficial
ownership of the Octagon Common Stock as of March 21, 1997, by (i) each person
known by Octagon to own beneficially more than 5% of the outstanding Octagon
Common Stock, (ii) each of Octagon's directors and the Octagon Named Executive
Officers and (iii) all directors and executive officers of Octagon as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME OF BENEFICIAL OWNER (1) OWNED PERCENTAGE
- ---------------------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
William L. Amt.................................................................... 850,667 10.12%
Harry O. Christenson.............................................................. 850,667 10.12%
John C. Kolojeski (2)(3).......................................................... 100,000 1.19%
Patricia H. Engman (2)............................................................ -- *
Charles R. Henry (2).............................................................. 3,000 *
William V. Roberti (2)............................................................ -- *
Henry St. John Fitzgerald (2)..................................................... -- *
John S. Royall (4)................................................................ 1,125,750 13.40%
Steven W. Koinis (5).............................................................. 1,125,750 13.40%
All officers and directors as a group (7 persons)................................. 1,804,334 21.47%
</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 Octagon Common Stock beneficially owned by such stockholder.
Unless otherwise indicated, the address of each stockholder is c/o Octagon,
317 S. North Lake Road, Suite 1024, Altamonte Springs, Florida 32701.
(2) The amount shown for each of Mr. Kolojeski, Ms. Engman, Mr. Henry, Mr.
Roberti and Mr. Fitzgerald excludes options to acquire 40,000 shares of
Octagon Common Stock granted to each non-employee director upon joining the
Octagon Board. The options were granted pursuant to Octagon's Stock Option
Plan and have exercise prices ranging from $.25 to $.28 per share, the fair
market value of the stock on the date of grant. These options are not yet
exercisable and will not become exercisable within the next 60 days.
(3) Mr. Kolojeski owns his shares jointly with his wife, Carol K. Kolojeski.
(4) The address for John S. Royall is c/o Digital Commerce Corporation, 11180
Sunrise Valley Drive, Reston, Virginia 20191.
(5) The address for Steven W. Koinis is 11050 Bale Road, Oakton, Virginia 22124.
97
<PAGE>
DESCRIPTION OF CONVERSION SECURITIES
The following description of Conversion's securities does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of Conversion's Amended and Restated Certificate of Incorporation, as
amended, and By-laws, the Warrant Agreement among Conversion, Blair and American
Stock Transfer & Trust Company, as warrant agent, pursuant to which the
Redeemable Warrants were issued and the Underwriting Agreement between
Conversion and, copies of all of which have been filed with the SEC as exhibits
to the Registration Statement of which this Proxy Statement/ Prospectus is a
part.
GENERAL
Conversion's authorized capital stock consists of 25,000,000 shares of
Conversion Common Stock, $.00025 par value, and 15,000,000 shares of preferred
stock, $.001 par value ("Preferred Stock"), of which 12,042,000 are "blank
check" or subject to designation by the Board. See "-- Premium Preferred Stock".
COMMON STOCK
Conversion currently has outstanding 5,539,745 shares of Conversion Common
Stock. Holders of Conversion 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
Conversion 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 Conversion'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 Conversion's
Certificate of Incorporation.
Holders of Conversion Common Stock are entitled to receive dividends PRO
RATA based on the number of shares held, when, as and if declared by the
Conversion 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 Conversion, all assets
and funds of Conversion 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 Conversion
Common Stock. Holders of Conversion Common Stock are not entitled to preemptive
or subscription or conversion rights, and there are no redemption or sinking
fund provisions applicable to the Conversion Common Stock. All outstanding
shares of Conversion Common Stock are, and the shares of Conversion Common Stock
offered hereby will be when issued, fully paid and non-assessable.
PREMIUM PREFERRED STOCK
Prior to consummation of the Merger, Conversion will file a Certificate of
Designation designating 770,000 shares of authorized but undesignated shares of
Preferred Stock as "Premium Preferred Stock" to be issued as soon as possible
following consummation of the Merger pursuant to the Private Placement. The
Premium Preferred Stock will have a stated par value of $10 per share and will
be immediately convertible at the option of the holder into Conversion Common
Stock at the lesser of (i) $2.00 per share and (ii) the average closing bid
price of the Conversion Common Stock for the 30-trading-day period preceding the
closing of the Private Placement (or, in the case of more than one closing date,
preceding the closing date with the lowest such average closing bid price). In
addition, the conversion price will be reset 12 months following the final
closing date of the Private Placement if the average closing price for the
Common Stock over the 20 trading days preceding such date is less than 135% of
the then applicable conversion price. In such event, the adjusted conversion
price will be reduced to be equal to the greater of (i) the 12 Month Price
divided by 1.35 and (ii) 50% of the conversion price then in effect. The
conversion price of the Premium Preferred Stock will also be subject to
adjustment to reflect stock splits, stock
98
<PAGE>
dividends, mergers, consolidations, reorganizations and issuances of securities
at prices below the then applicable conversion price. Unless converted earlier,
at any time after 12 months following the final closing date of the Private
Placement, Conversion can cause the Premium Preferred Stock to be converted into
Common Stock if the closing price of the Common Stock shall have exceeded 200%
of the then applicable conversion price for at least 20 trading days in any
30-consecutive-trading-day period. The Premium Preferred Stock will have a
liquidation preference equal to 135% of its stated value, plus accrued but
unpaid dividends.
Commencing 12 months from the final closing date of the Private Placement,
the holders of the Premium Preferred Stock will be entitled to receive
dividends, payable in cash or, at the option of Conversion, in kind, at the rate
of 10% per annum. The Premium Preferred Stock will entitle the holder to a
number of votes as shall be equal to the number of shares of Common Stock into
which such shares shall be convertible. In addition, the vote of two-thirds of
the Premium Preferred Stock shall be required for (i) the issuance of securities
senior to or on a parity with the Premium Preferred Stock with respect to
dividends, voting or liquidation, (ii) any alteration of the rights of the
Premium Preferred Stock, (iii) a liquidation, dissolution or sale of the assets
of Conversion and (iv) the incurrence of over $100,000 of indebtedness (other
than borrowings under working capital lines of credit).
REDEEMABLE WARRANTS
REDEEMABLE CLASS A WARRANTS. Each Redeemable Class A Warrant entitles the
registered holder to purchase one share of Conversion Common Stock and one Class
B Warrant at an exercise price of $5.85 at any time until 5:00 P.M., New York
City time, on May 15, 2001. Commencing May 1997, the Redeemable Class A Warrants
are redeemable by Conversion on 30 days' written notice at a redemption price of
$.05 per Redeemable Class A Warrant if the "closing price" of the Conversion
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 Redeemable Class A Warrants must
be redeemed if any are redeemed.
REDEEMABLE CLASS B WARRANTS. Each Redeemable Class B Warrant entitles the
registered holder to purchase one share of Conversion Common Stock at an
exercise price of $7.80 at any time after issuance until 5:00 P.M. New York City
time, on May 15, 2001. Commencing one year from the effective date of the
Conversion IPO, the Class B Warrants are redeemable by Conversion on 30 days'
written notice at a redemption price of $.05 per Class B Warrant, if the closing
price (as defined above) of the Conversion 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 Redeemable Class B Warrants must be redeemed if
any are redeemed.
GENERAL. The Redeemable Class A Warrants and Redeemable Class B Warrants
were pursuant to a warrant agreement (the "Warrant Agreement") among Conversion,
Blair and American Stock Transfer & Trust Company, New York, New York, as
warrant agent (the "Warrant Agent"), and are evidenced by warrant certificates
in registered form. The Redeemable 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 Conversion Common Stock or upon
issuance of shares of Conversion Common Stock at prices lower than the market
price of the Conversion Common Stock, with certain exceptions.
The exercise prices of the Redeemable Warrants were determined by
negotiation between Conversion and Blair and should not be construed to be
predictive of or to imply that any price increases in Conversion's securities
will occur.
Conversion has reserved from its authorized but unissued shares a sufficient
number of shares of Conversion Common Stock for issuance upon the exercise of
the Redeemable Class A Warrants and the
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<PAGE>
Redeemable Class B Warrants. The holders of the Redeemable Warrants might be
expected to exercise them at a time when Conversion 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 Redeemable Warrants.
The Redeemable Warrants do not confer upon the Warrantholder any voting or
other rights of a stockholder of Conversion. Upon notice to the Warrantholders,
Conversion has the right to reduce the exercise price or extend the expiration
date of the Redeemable Warrants.
UNDERWRITER'S OPTIONS
Conversion granted Blair or its designees the Underwriter's Options to
purchase up to 306,700 shares of Conversion Common Stock and/or 306,700
Redeemable Class A Warrants and/or 306,700 Redeemable Class B Warrants. These
securities will be identical to the securities offered in the Conversion IPO
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 Conversion
until the Underwriter's Options have been exercised and the underlying warrants
are outstanding. The Underwriter's Options cannot be transferred, sold, assigned
or hypothecated for two years from the effective date of the Conversion IPO,
except to any officer of Blair 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 effective date of the Conversion IPO at an
exercise price of $6.16 per share of Conversion 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.
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Conversion Common Stock and Warrant Agent for
the Redeemable Warrants.
BUSINESS COMBINATION PROVISIONS
Conversion 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. Conversion has not sought to "elect
out" of the statute and, therefore the restrictions imposed by such statute
apply to Conversion.
REGISTRATION RIGHTS
Conversion has granted certain demand and piggy-back registration rights to
holders of 1,023,054 shares of Conversion Common Stock issued upon conversion of
the Series A Preferred Stock at the closing of the Conversion IPO.
Conversion has granted certain demand and piggy-back registration rights to
holders of 45,304 shares of Conversion Common Stock issued in connection with a
1994 financing.
Conversion has granted certain piggy-back registration rights to holders of
257,808 shares of Conversion Common Stock issued in connection with the
acquisition of Dunkirk.
Conversion has granted certain demand and piggy-back registration rights to
the holders of warrants to purchase 293,365 shares of Conversion Common Stock
and the holders of the Conversion Common Stock issued or issuable upon exercise
thereof.
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<PAGE>
All of the above described registration rights have been waived until June
1997.
The holders of the Underwriter's Options have demand and piggy-back
registration rights relating to such options and the underlying securities.
Conversion will file a "shelf" registration statement within 45 days
following the final closing date of the Private Placement with respect to the
Common Stock issuable upon conversion of the Premium Preferred Stock to be sold
pursuant to the Private Placement.
COMPARATIVE RIGHTS OF CONVERSION
STOCKHOLDERS AND OCTAGON STOCKHOLDERS
Octagon's stockholders should be aware of the following differences in
rights attendent to Conversion Common Stock and Octagon Common Stock pursuant to
their respective certificates of incorporation and by-laws.
Conversion's 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 of
Conversion. Accordingly, the Board of Directors of Conversion 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 Conversion Common Stock. The
preferred stock could be utilized to discourage, delay or prevent a change in
control of Conversion. Octagon's Certificate of Incorporation does not authorize
preferred stock for issuance by the Octagon Board.
Octagon's Certificate of Incorporation contains a fair price provision
restricting the transferability of Octagon Common Stock by Octagon's
stockholders. Such provision states that the price to be paid for Octagon Common
Stock shall be "the fair market value" thereof, or, if there is no established
market value, the book value thereof ("book value" being the appraised value of
all corporate assets and liabilities as of the date of the last balance sheet),
or at a price not exceeding the amount offered in writing by a bona fide offer
to purchase said shares, whichever shall be higher. Inasmuch as this provision
purports to prohibit Octagon stockholders from selling Octagon Common Stock
below certain prices, it could operate to prevent certain sales of Octagon
Common Stock. Pursuant to the Merger Agreement, Octagon is required to amend its
Certificate of Incorporation to delete this provision as a condition to
consummation of the Merger. Such deletion could remove a potential deterrent to
the consummation of the Merger if, at the time of the consummation of the
Merger, Octagon Common Stock is trading at a price greater than 10% of the
trading price of Conversion Common Stock. Such deletion could also remove a
deterrent to other potential bidders for Octagon or serve to facilitate lower
bids from other potential bidders. Octagon stockholders should be aware that
Conversion's Certificate of Incorporation does not contain any fair price
provisions.
Octagon's by-laws state that vacancies created on the Octagon Board
resulting from the removal of a director by Octagon's stockholders can only be
filled by the vote of the holders of a majority of Octagon's stockholders. This
provision operates to assure that Octagon's stockholders will have the power to
remove directors and replace them with their choice. Conversion's by-laws
provide that vacancies occurring on Conversion's Board may be filled by
Conversion's stockholders or by Conversion's Board. Accordingly, Conversion's
stockholders are not afforded this protection.
LEGAL MATTERS
The validity of the securities to be issued in the Merger will be passed
upon for Conversion by O'Sullivan Graev & Karabell, LLP, New York, New York. The
statements relating to United States patent rights and Federal government
environmental regulations concerning the business of Conversion have
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<PAGE>
been passed upon by Collier, Shannon, Rill & Scott, Washington, DC. Certain tax
consequences of the Merger will be passed upon by Greenberg, Traurig, outside
counsel for Octagon.
EXPERTS
The consolidated financial statements of Conversion at June 30, 1996 and
1995 and for the years then ended and the financial statements of Dunkirk at
August 31, 1994 and for the two months then ended appearing in this Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement of which this Proxy Statement/Prospectus forms a
part, and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The consolidated balance sheet of Octagon at December 31, 1996 and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1996 and December 31, 1995 have been audited by BDO
Seidman, LLP, independent auditors, in each case as set forth in its report
thereon appearing elsewhere herein and in the Registration Statement of which
this Proxy Statement/ Prospectus forms a part, and, in each case, are included
in reliance on such report given upon the authority of such firm as experts in
accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of BDO Seidman LLP are expected to be present at the Special
Meeting and will have the opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions.
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INDEX TO FINANCIAL STATEMENTS
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets of Conversion Technologies International, Inc. and
Subsidiary as of December 31, 1996 (unaudited) and June 30, 1996 and 1995.......... F-3
Consolidated Statements of Operations of Conversion Technologies International, Inc.
and Subsidiary for the six months ended December 31, 1996 and 1995 (unaudited) and
the years ended June 30, 1996 and 1995 and Statement of Operations of Dunkirk
International Glass and Ceramics Corporation (Predecessor) for the two months ended
August 31, 1994.................................................................... F-4
Consolidated Statements of Stockholders' Equity of Conversion Technologies
International, Inc. and Subsidiary for the years ended June 30, 1995 and 1996 and
the six months ended December 31, 1996 (unaudited)................................. F-5
Statement of Stockholders' Deficiency of Dunkirk International Glass and Ceramics
Corporation (Predecessor) for the two months ended August 31, 1994................. F-6
Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
and Subsidiary for the six months ended December 31, 1996 and 1995 (unaudited) and
the years ended June 30, 1996 and 1995 and Statement of Cash Flows of Dunkirk
International Glass and Ceramics Corporation (Predecessor) for the two months ended
August 31, 1994.................................................................... F-7
Notes to Consolidated Financial Statements........................................... F-9
OCTAGON, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Report of Independent Certified Public Accountants................................... F-24
Financial statements:
Consolidated balance sheet as of December 31, 1996................................. F-25
Consolidated statements of operations for the years ended December 31, 1996 and
December 31, 1995................................................................ F-26
Consolidated statements of stockholders' equity for the years ended December 31,
1996 and December 31, 1995....................................................... F-27
Consolidated statements of cash flows for the years ended December 31, 1996 and
December 31, 1995................................................................ F-28
Summary of accounting policies..................................................... F-29
Notes to consolidated financial statements......................................... F-32
</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 sheets of Conversion
Technologies International, Inc. and Subsidiary (Company) at June 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. We have also audited the
accompanying statements of operations, stockholders' deficiency and cash flows
of Dunkirk International Glass and Ceramics Corporation (Predecessor) for 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, 1996 and 1995, and
the consolidated results of their operations and cash flows for the years then
ended and Dunkirk International Glass and Ceramics Corporation's results of
operations and cash flows for the two months ended August 31, 1994 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Metro Park, New Jersey
August 13, 1996, except for Note 9, as to
which the date is September 20, 1996
F-2
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ----------------------------
1996 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents............................................ $ 1,764,391 $ 4,539,464 $ 733,843
Marketable securities................................................ -- 2,009,632 --
Notes receivable..................................................... 416,761 -- --
Accounts receivable, less allowance for doubtful accounts of $18,000
at December 31, 1996, $25,000 at June 30, 1996, and $0 at June 30,
1995............................................................... 240,216 343,214 283,571
Inventories.......................................................... 431,424 337,736 227,724
Prepaid expenses and other current assets............................ 294,051 205,984 133,032
------------- ------------- -------------
Total current assets................................................. 3,146,843 7,436,030 1,378,170
Property, plant and equipment:
Land............................................................... 75,000 75,000 75,000
Building and improvements.......................................... 1,609,832 1,609,832 1,184,344
Machinery and equipment............................................ 11,720,714 11,573,933 6,298,912
Construction in progress........................................... 1,647,129 1,008,480 2,393,829
------------- ------------- -------------
15,052,675 14,267,245 9,952,085
Less accumulated depreciation...................................... (2,255,653) (1,630,639) (824,632)
------------- ------------- -------------
12,797,022 12,636,606 9,127,453
Deferred finance charges, less accumulated amortization of $108,529,
$81,272 and $26,970 at December 31, 1996,
June 30, 1996 and June 30, 1995, respectively...................... 467,586 494,843 508,718
Other noncurrent assets.............................................. 144,716 38,304 31,266
Restricted assets
Project fund....................................................... 156 72,859 78,772
Debt service reserve funds......................................... 1,300,879 1,268,457 915,136
------------- ------------- -------------
$ 17,857,202 $ 21,947,099 $ 12,039,515
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Notes payable........................................................ $ -- $ -- $ 386,500
Accounts payable..................................................... 726,277 1,279,280 1,077,714
Deferred revenue..................................................... 582,072 557,907 944,230
Reserve for disposal................................................. 790,900 737,000 1,360,000
Accrued expenses..................................................... 563,905 778,306 1,168,696
Current portion of capital lease obligations......................... 40,201 72,914 94,130
Current portion of long-term debt.................................... 446,392 437,285 404,387
------------- ------------- -------------
Total current liabilities............................................ 3,149,747 3,862,692 5,435,657
Capital lease obligations, less current portion...................... 53,509 74,693 147,227
Long-term debt, less current portion................................. 11,062,611 11,281,715 8,657,582
Stockholders' equity (deficiency):
Preferred stock, $.001 par value, authorized 15,000,000 shares,
issued and outstanding 0 at December 31, 1996 and June 30, 1996,
and 2,958,000 shares at June 30, 1995............................ -- -- 2,958
Class A common stock, $.00025 par value, authorized 25,000,000
shares, issued and outstanding 5,539,745 at December 31, 1996,
5,449,745 at June 30, 1996, and 909,404 shares at June 30,
1995............................................................. 1,385 1,362 227
Additional paid-in capital......................................... 24,186,932 23,905,705 10,421,981
Unearned stock compensation........................................ (232,739) -- --
Accumulated deficit................................................ (20,364,243) (17,179,068) (12,626,117)
------------- ------------- -------------
Total stockholders' equity (deficiency).............................. 3,591,335 6,727,999 (2,200,951)
------------- ------------- -------------
------------- ------------- -------------
$ 17,857,202 $ 21,947,099 $ 12,039,515
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------------------------- COMPANY
-----------
SIX MONTHS ENDED TWO MONTHS
DECEMBER 31, YEAR ENDED JUNE 30, ENDED
---------------------------- ----------------------------- AUGUST 31,
1996 1995 1996 1995 1994
------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue................................ $ 684,158 $ 1,630,933 $ 2,679,987 $ 1,173,264 $ 62,452
Cost of goods sold..................... 2,163,041 1,309,330 3,093,560 2,788,599 379,661
------------- ------------- ------------- -------------- -----------
Gross profit (loss) on sales........... (1,478,883) 321,603 (413,573) (1,615,335) (317,209)
Selling, general and administrative.... 1,208,224 777,293 1,821,179 2,529,263 297,792
Process development costs.............. -- 463,068 996,259 1,531,955 82,427
Write-off of in-process technology..... -- -- -- 6,232,459 --
------------- ------------- ------------- -------------- -----------
Loss from operations................... (2,687,107) (918,758) (3,231,011) (11,909,012) (697,428)
Interest expense, net.................. 498,068 408,415 961,751 345,690 40,999
Other income........................... -- -- 81,811 -- --
------------- ------------- ------------- -------------- -----------
Loss before extraordinary item......... (3,185,175) (1,327,173) (4,110,951) (12,254,702) (738,427)
Extraordinary item..................... -- -- 442,000 -- --
------------- ------------- ------------- -------------- -----------
Net loss............................... $ (3,185,175) $ (1,327,173) $ (4,552,951) $ (12,254,702) $(738,427)
------------- ------------- ------------- -------------- -----------
------------- ------------- ------------- -------------- -----------
Net loss per common share before
extraordinary item................... $ (0.67) $ (1.12) $ (2.64) $ (16.68)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Net loss per common share.............. $ (0.67) $ (1.12) $ (2.92) $ (16.68)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND THE SIX MONTHS ENDED DECEMBER
31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK CLASS A COMMON STOCK
----------------------------------- -----------------------------------------------------
ADDITIONAL ADDITIONAL
NUMBER PAID-IN NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT SUBSCRIPTIONS CAPITAL
--------- ----------- ----------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994.................... -- -- -- 586,246 $ 147 $ (131) $ 6,055
Issuance of Class A
common stock.......... 323,158 80 4,421,655
Issuance of preferred
stock................. 2,958,000 $ 2,958 $5,994,271
Payment received for
Class A common stock
subscriptions......... 131
Net Loss................
--------- ----------- ----------- ----------- ----------- ----- ----------
Balance at June 30,
1995.................... 2,958,000 2,958 5,994,271 909,404 227 -- 4,427,710
Issuance of Class A
common stock.......... 3,527,050 882 13,526,159
Converted to common
stock................. (2,958,000) (2,958) (5,994,271) 1,023,054 255 5,996,974
Surrendered and
canceled.............. (7,308) (1) (98,999)
Repurchased and
canceled.............. (2,455) (1) (12,889)
Debt discount on bridge
notes................. 66,750
Net Loss................
--------- ----------- ----------- ----------- ----------- ----- ----------
Balance at June 30,
1996.................... -- -- -- 5,449,745 1,362 -- 23,905,705
Issuance of Class A
common stock.......... 90,000 23
Stock compensation...... 281,227
Net loss................
--------- ----------- ----------- ----------- ----------- ----- ----------
Balance at December 31,
1996.................... -- $ -- $ -- 5,539,745 $ 1,385 -- $24,186,932
--------- ----------- ----------- ----------- ----------- ----- ----------
--------- ----------- ----------- ----------- ----------- ----- ----------
<CAPTION>
TOTAL
UNEARNED STOCKHOLDERS'
STOCK ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIENCY)
------------- ------------ ------------
<S> <C> <C> <C>
Balance at June 30,
1994.................... -- $ (371,415) $ (365,344)
Issuance of Class A
common stock.......... 4,421,735
Issuance of preferred
stock................. 5,997,229
Payment received for
Class A common stock
subscriptions......... 131
Net Loss................ (12,254,702) (12,254,702)
------------- ------------ ------------
Balance at June 30,
1995.................... -- (12,626,117) (2,200,951)
Issuance of Class A
common stock.......... 13,527,041
Converted to common
stock................. --
Surrendered and
canceled.............. (99,000)
Repurchased and
canceled.............. (12,890)
Debt discount on bridge
notes................. 66,750
Net Loss................ (4,552,951) (4,552,951)
------------- ------------ ------------
Balance at June 30,
1996.................... -- (17,179,068) 6,727,999
Issuance of Class A
common stock.......... 23
Stock compensation...... (232,739) -- 48,488
Net loss................ (3,185,175) (3,185,175)
------------- ------------ ------------
Balance at December 31,
1996.................... (232,739) ($20,364,243) $3,591,335
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
DUNKIRK INTERNATIONAL GLASS AND CERAMICS CORPORATION
(PREDECESSOR COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE TWO MONTHS ENDED AUGUST 31, 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------- ------------------------ ADDITIONAL
NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT
------------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994.............. 35 $ -- 5,250 $ 5 $ 105,055 $ (2,106,546)
Capital contribution of parent
company upon merger at August 31,
1994.............................. -- -- -- 1,500,000 --
Cancellation of preferred stock upon
merger............................ (35) -- -- -- -- --
Net loss............................ -- -- -- -- -- (738,427)
--
--- ----- --- ------------ -------------
Balance at August 31, 1994............ -- $ -- 5,250 $ 5 $ 1,605,055 $ (2,844,973)
--
--
--- ----- --- ------------ -------------
--- ----- --- ------------ -------------
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIENCY
-------------
<S> <C>
Balance at June 30, 1994.............. $ (2,001,486)
Capital contribution of parent
company upon merger at August 31,
1994.............................. 1,500,000
Cancellation of preferred stock upon
merger............................ --
Net loss............................ (738,427)
-------------
Balance at August 31, 1994............ $ (1,239,913)
-------------
-------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDESSOR
------------------------------------------------- COMPANY
-----------
SIX MONTHS ENDED TWO MONTHS
DECEMBER 31, YEAR ENDED JUNE 30, ENDED
------------------------ ----------------------- AUGUST 31,
1996 1995 1996 1995 1994
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss........................................ ($3,185,175) ($1,327,173) $(4,552,951) $(12,254,702) $(738,427)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation expense........................ 625,014 428,720 886,863 742,090 33,607
Amortization of deferred financing and
patent costs.............................. 27,257 27,044 54,302 39,568 --
Interest expense converted to equity........ -- -- -- 13,767 --
Write-off of in-process technology.......... -- -- -- 6,232,459 --
Settlement with former officer.............. -- (99,000) (99,000) -- --
Stock compensation expense.................. 48,488 -- -- -- --
Debt discount on Bridge Notes............... -- -- 66,750 -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable.............................. 102,998 (19,126) (59,643) (115,478) (48,299)
Increase in inventories................... (93,688) (105,222) (110,012) (227,724) --
(Increase) decrease in prepaid expenses
and other current assets................ (88,067) (2,737) (72,952) 173,623 44
Increase in other noncurrent assets....... (106,412) (7,038) (7,038) (29,165) --
Increase (decrease) in deferred revenue... 24,165 (278,929) (386,323) 504,010 136,754
Increase (decrease) in accounts payable,
reserve for disposal and other accrued
expenses................................ (713,504) (27,202) (811,824) 1,418,150 (314,051)
----------- ----------- ---------- ----------- -----------
Net cash used in operating activities........... (3,358,924) (1,410,663) (5,091,828) (3,503,402) (930,372)
INVESTING ACTIVITIES
Sale of marketable securities................... 2,009,632 -- -- -- --
Issuance of notes receivable.................... (416,761) -- -- -- --
Purchase of marketable securities............... -- -- (2,009,632) -- --
Capital expenditures............................ (785,430) (3,106,384) (4,396,016) (6,986,377) (559,149)
Net cash impact from acquistion of Dunkirk
International Glass and Ceramics
Corporation................................... -- -- -- (1,328,338) --
----------- ----------- ---------- ----------- -----------
Net cash provided by (used in) investing
activities.................................... 807,441 (3,106,384) (6,405,648) (8,314,715) (559,149)
FINANCING ACTIVITIES
Due to Conversion Technologies International,
Inc........................................... -- -- -- -- 9,670
Increase in deferred finance and registration
costs......................................... -- (393,746) (40,427) (424,228) (30,425)
Issuance of notes payable....................... -- 2,225,000 2,675,000 320,000 --
Payment of notes payable........................ -- -- (3,061,500) (195,430) --
Issuance of long-term debt...................... 8,282 3,033,049 3,056,476 7,938,455 191,193
Decrease (increase) in restricted assets........ 40,281 (20,656) (347,408) (993,908) --
Principal payments on long-term debt............ (218,279) (184,805) (399,445) (259,476) (6,397)
Principal payments under capital lease
obligations................................... (53,897) (48,326) (93,750) (81,690) (23,794)
Issuance of common stock........................ 23 -- 13,514,151 7,631 --
Issuance of preferred stock..................... -- -- -- 5,997,229 --
Capital contribution............................ -- -- -- -- 1,500,000
----------- ----------- ---------- ----------- -----------
Net cash (used in) provided by financing
activities.................................... (223,590) 4,610,516 15,303,097 12,308,583 1,640,247
----------- ----------- ---------- ----------- -----------
(Decrease) increase in cash and cash
equivalents................................... (2,775,073) 93,469 3,805,621 490,466 150,726
Cash and cash equivalents at beginning of
period........................................ 4,539,464 733,843 733,843 243,377 20,935
----------- ----------- ---------- ----------- -----------
Cash and cash equivalents at end of period...... $1,764,391 $ 827,312 $4,539,464 $ 733,843 $ 171,661
</TABLE>
F-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PREDESSOR
------------------------------------------------- COMPANY
-----------
SIX MONTHS ENDED TWO MONTHS
DECEMBER 31, YEAR ENDED JUNE 30, ENDED
------------------------ ----------------------- AUGUST 31,
1996 1995 1996 1995 1994
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of amount capitalized........ $ 725,583 $ 468,409 $1,009,746 $ 470,765 $ 12,040
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Tax refund...................................... -- -- $ (81,628) -- --
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
Supplemental disclosure of non cash transactions
Purchase of equipment through capital lease
agreements.................................... -- -- -- $ 129,791 $ 16,220
Debt assumed by Conversion Technologies Interna-
tional, Inc................................... -- -- -- -- 270,028
Common stock/paid-in capital
Debt converted to common stock
Long term debt.............................. -- -- -- 969,928 --
Interest expense on long term debt.......... -- -- -- 13,767 --
Accounts payable............................ -- -- -- 31,225 --
Write-off of investment in Dunkirk
International Glass and Ceramics
Corporation................................. -- -- -- (5,040) --
Issuance of shares to stockholders of Dunkirk
International Glass and Ceramics
Corporation................................. -- -- -- 3,492,547 --
Write-off of deferred finance costs, net of
amortization................................ -- -- -- (88,192) --
Surrender and cancellation of Common Stock...... -- $ (99,000) $ (99,000) -- --
Issuance of warrants in connection with bridge
notes......................................... -- 66,750 66,750 -- --
Accrued deferred finance and registration
costs......................................... -- 201,190 -- -- --
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
1. ORGANIZATION
Conversion Technologies International, Inc. (the "Company" or "CTI") 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.
Effective August 31, 1994, Conversion Technologies International, Inc. and
Dunkirk International Glass and Ceramics Corporation ("Dunkirk") 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 CTI).
Prior to this transaction, Conversion Technologies International, Inc. had owned
35 shares of Dunkirk's Convertible Series A Preferred Stock, which were canceled
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 an
exercise price of $20.32 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 developmental
stage. Dunkirk was incorporated on July 3, 1990, for the purpose of recycling
and beneficially reusing industrial waste cathode ray tube (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.
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.
F-9
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
1. ORGANIZATION (CONTINUED)
On May 16, 1996 the Company completed its initial public offering ("IPO").
The funds generated by this offering became available at the closing on May 21,
1996, and included the proceeds from 3,067,000 shares of common stock sold at
$4.40 per share, 3,067,000 Class A Warrants sold at $0.05 each and 3,067,000
Class B Warrants sold at $0.05 each. On June 7, the Company closed on the
underwriter's over-allotment option for sales of 460,050 of each of the
foregoing securities at identical pricing. (See Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and 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 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements and related notes thereto as of
December 31, 1996 and 1995 and for the six months ended December 31, 1996 and
1995 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.
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, 1996, 87.5% of the Company's revenue was derived
from three major customers. Revenue generated from each of these customers
amounted to $1,395,568, $677,648 and $273,709 which represents 52.1%, 25.3% and
10.2% of total revenue, respectively. 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.
For the three months ended December 31, 1996, 69.7% of the Company's revenue
was derived from two major customers. Revenue generated from each of these
customers amounted to $145,197 and $91,838, which represents 42.7% and 27.0% of
total revenue, respectively. For the three months ended December 31, 1995, 84.6%
of the Company's revenue was derived from the same two major customers.
F-10
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue generated from each of these customers amounted to $553,567 and
$155,868, which represents 66.0% and 18.6% of total revenue, respectively.
For the six months ended December 31, 1996, 65.5% of the Company's revenue
was derived from two major customers. Revenue generated from each of these
customers amounted to $290,540 and $153,877, which represents 42.5% and 22.5% of
total revenue, respectively. For the six months ended December 31, 1995, 83.3%
of the Company's revenue was derived from the same two major customers. Revenue
generated from each of these customers amounted to $994,697 and $413,966 which
represents 57.9% and 25.4% of total revenue, respectively.
One such major customer has notified the Company that it will cease to send
CRT glass to, and purchase recycled CRT glass from, the Company as of March
1997.
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 two months
ended August 31, 1994, Dunkirk recorded additions of $135,000 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 June 30, 1996, the
Company reduced the reserve by approximately $623,000. From July 1, 1996 to
December 31, 1996 the Company increased the reserve by approximately $54,000.
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. Because these waste materials are
received by the Company from suppliers at either no cost or for receipt of a
fee, they are assigned no value in inventory until they are put through the
recycling process.
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,
DECEMBER 31, ----------------------
1996 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Raw materials......................................... $ 93,332 $ 79,237 $ 48,015
Work-in-process....................................... 138,090 135,536 109,168
Finished goods........................................ 200,002 122,963 70,541
------------- ---------- ----------
$ 431,424 $ 337,736 $ 227,724
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
F-11
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The Company capitalized
interest costs of $439,932 in the year ended June 30, 1996 and $63,499 in the
year ended June 30, 1995 with respect 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 on 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.
MARKETABLE SECURITIES
The Company considers all marketable securities to be available for sale.
These securities are carried at cost which approximated fair value at June 30,
1996.
DEFERRED FINANCING COSTS
Deferred costs include costs related to obtaining debt financing, and are
being amortized under the interest method of accounting.
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 ALUMAGLASS-TM- product lines
(technologies) since the date of the merger transaction.
EXTRAORDINARY ITEM
The consolidated statement of operations for the fiscal year ended June 30,
1996 includes an extraordinary charge of $442,000, representing the costs of
obtaining bridge financing in the form of Bridge Notes totaling $2,225,000 (see
Note 4).
F-12
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
The net loss per common share is based on the net loss for the period,
divided by the weighted average number of common shares outstanding during the
year (excluding the common shares that were deposited into escrow in connection
with the Company's initial public offering-see Note 7). 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, the Company's Series A Preferred Stock was converted
into 1,023,054 shares of common stock (see Note 7). The weighted average number
of these converted shares, at June 30, 1996 and 1995 were 1,023,054 and 587,742
respectively, and they have been included in the related net loss per common
share calculation. Therefore, the weighted average number of common shares
outstanding at December 31, 1996 and 1995, and June 30, 1996 and 1995 were
4,747,436, 1,185,797, 1,559,908 and 734,754, respectively.
EMPLOYEE STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals or is greater
than the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
PENDING ACCOUNTING PRONOUNCEMENTS
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 beginning fiscal 1997. Management believes this standard will have no
impact on the Company.
3. DEBT
Long-term debt consists of the following obligations as of June 30, 1996 and
1995:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Dunkirk--Chautauqua Region Industrial Development Corporation (CRIDA) mortgage note
(collaterized by a mortgage on real property having a carrying value of
approximately $1,593,500 at June 30, 1996) payable in monthly installments of
$4,285 including interest at a variable rate (6% at June 30, 1996) through October
1, 2004............................................................................ $ 336,529 $ 366,762
Dunkirk--Term loans with a bank payable in 84 monthly installments of $40,944
including principal and interest at the prime rate (8.25% at June 30, 1996) through
December 27, 2001. Collateral for this loan is a first purchase money lien on the
Company's machinery and equipment, and
</TABLE>
F-13
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
3. DEBT (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
------------- ------------
repayment is guaranteed by the former Dunkirk president and the New York State Job
Development Authority (JDA)........................................................ 2,192,379 2,492,767
<S> <C> <C>
Dunkirk--Subordinated mortgage note (collateralized by a mortgage on real property
having a carrying value of approximately $1,593,500 at June 30, 1996) payable in
monthly installments of $4,956 including interest at 10% through January 21,
2004............................................................................... 317,517 343,806
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
$11,683,500........................................................................ 49,295 64,295
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 $11,683,500............. 59,974 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 $11,683,500..................... 67,799 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 $325,000 to $1,025,000 are payable with
interest continuing to be paid quarterly. The bond security agreement contains
various restrictive covenants and is collateralized by a security interest in the
equipment acquired with the proceeds (see Note 5, Restricted Assets)............... 8,000,000 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
</TABLE>
F-14
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
3. DEBT (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
------------- ------------
at prime plus 2% (10.25% at June 30, 1996) 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 with the final subordinate debt issue 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, 1996) 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............................................................................... 695,507 639,030
<S> <C> <C>
------------- ------------
Total Debt........................................................................... 11,719,000 9,061,969
Less current maturities.............................................................. 437,285 404,387
------------- ------------
$ 11,281,715 $ 8,657,582
------------- ------------
------------- ------------
</TABLE>
The Company has agreed to idemnify and hold harmless the former Dunkirk
president with respect to guarantees made by him for obligations of Dunkirk. In
addition, the Company has agreed to use its reasonable efforts to cause the
release of such guarantees.
Maturities on long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
June 30,
<S> <C>
1997........................................................... $ 437,285
1998........................................................... 511,964
1999........................................................... 1,044,540
2000........................................................... 1,109,491
2001........................................................... 993,617
Thereafter..................................................... 7,622,103
----------
$11,719,000
----------
----------
</TABLE>
F-15
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
3. DEBT (CONTINUED)
The carrying amounts and fair values of long-term borrowings consisted of
the following at June 30, 1996:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
---------------- -------------
<S> <C> <C>
5% subordinated note......................................... $ 67,799 $ 62,370
6% mortgage note............................................. 336,529 287,336
7% subordinated note......................................... 49,295 46,942
8% subordinated note......................................... 59,974 56,771
8.25% secured bank loan...................................... 2,192,379 2,192,379
10% subordinated mortgage note............................... 317,517 314,882
Variable rate debt........................................... 695,507 695,507
11.5% solid waste disposal bonds............................. 8,000,000 8,000,000
---------------- -------------
Total Long-Term Borrowings............................. $ 11,719,000 $ 11,656,187
---------------- -------------
---------------- -------------
</TABLE>
The fair values of fixed long-term borrowings were calculated as the present
value of future cash flows discounted at the Company's estimated current
borrowing rate of the respective issues ranging from prime plus 2% to prime plus
3.25%.
4. NOTES PAYABLE
During fiscal 1996 Dunkirk repaid a $262,500 balance plus accrued interest
to close a $300,000 line of credit arrangement with a bank.
In June, 1996 Dunkirk repaid a $124,000 demand note plus accrued interest
payable to a bank. The balance outstanding on this note was $124,000 at June 30,
1995.
During 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 was repaid during the year (see
below).
During 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
IPO. This bridge loan was 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.
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 security holders which bore 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.
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
4. NOTES PAYABLE (CONTINUED)
All of the outstanding bridge notes and promissory notes were repaid at the
closing of the IPO from the proceeds thereof. Concurrent with the closing of the
offering, the common stock warrants issued to the bridge note holders were
converted into an equivalent number (1,112,500) of Class A warrants, each of
which 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. Each Class B
warrant entitles the holder to purchase one share of common stock at an exercise
price, subject to adjustment, of $7.80 (see Note 7).
5. RESTRICTED ASSETS
Dunkirk has $156, $72,859 and $78,772 of project funds available at December
31, 1996, June 30, 1996 and June 30, 1995, 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 ($862,422 at December 31, 1996, $840,442 at June 30, 1996 and $508,291 at
June 30, 1995), and may be released under certain conditions.
Dunkirk also has a debt service reserve fund of $438,457 at December 31,
1996, $428,015 at June 30, 1996 and $406,845 at June 30, 1995, including
interest, deposited in escrow as required by the JDA for payment of the final
installments due on the related debt.
6. COMMITMENTS AND CONTINGENCIES
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 a 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. 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.
The contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest. The case is
currently in the discovery phase.
The Company does not believe that an adverse outcome in the foregoing
dispute would have a material adverse effect on the Company.
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, included in property,
plant and equipment, is as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Machinery and equipment............................................... $ 354,352 $ 351,224
Less accumulated amortization......................................... 217,375 116,844
---------- ----------
$ 136,977 $ 234,380
---------- ----------
---------- ----------
</TABLE>
Lease amortization of $101,531 and $80,424 for the years ended June 30, 1996
and 1995, respectively, is included in cost of goods sold. Lease amortization of
$12,414 is included in cost of goods sold of Dunkirk for the two months ended
August 31, 1994.
Future minimum lease payments under capitalized leases together with the
present value of the net minimum lease payments as of June 30, 1996 is as
follows:
<TABLE>
<CAPTION>
June 30,
<S> <C>
1997.......................................................... $ 84,051
1998.......................................................... 40,973
1999.......................................................... 27,179
2000.......................................................... 15,879
2001.......................................................... --
---------
Total net minimum lease payments.................................. 168,082
Less amount representing interest................................. 20,475
---------
Present value of net minimum lease payments....................... $ 147,607
---------
---------
</TABLE>
Total rent expense of the Company for the periods ended June 30, 1996 and
1995 was $99,530 and $76,886, respectively. All non-cancelable operating lease
agreements expire during fiscal 1997.
F-18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
7. 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 an approximate 0.1218-to-one basis subject to certain
anti-dilution provisions.
As part of the merger transaction described in Note 1, 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.
On May 16, 1996, the Company completed an initial public offering of the
Company's common stock, Class A warrants and Class B warrants. Concurrent with
the closing of the IPO, the Series A Preferred Stock was converted into
1,023,054 shares of common stock as a result of the restatement of the Company's
Certificate of Incorporation which adjusted the Series A Preferred Stock
conversion ratio due to anti-dilution provisions. In addition, preferred stock
warrants became exercisable for common stock (adjusted for a 0.1218-for-one
reverse common stock split-see Note 1) and the number of common shares into
which certain common stock warrants and all preferred stock warrants are
convertible increased by a factor of approximately 2.84 upon the effective date
of the IPO due to the fact that those warrants had protection against the
dilutive effect of the valuation placed on the Company upon the IPO. Also, upon
the effective date of the IPO, the Company adjusted the exercise price of all
the options and warrants outstanding prior to the IPO to $4.40 with some
warrants having an exercise price equal to $4.40 plus a premium in certain
circumstances. All amounts disclosed related to options and warrants have been
restated to reflect the adjusted exercise prices.
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") were
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. The
release of any Escrow Securities to officers, directors, employees and
consultants will result in a charge to the Company equal to the fair value of
such securities on the date of release.
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
F-19
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
7. CAPITAL STOCK (CONTINUED)
following common stock purchase warrants, all of which expire between the fifth
and seventh anniversary of the date of grant:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
----------- -----------
<S> <C> <C>
Outstanding at June 30, 1994....................................... 146,536 $ 4.77
Granted October 19, 1994 through June 30, 1995................... 173,158 4.40-5.28
Exercised........................................................ (608) 20.53
Canceled......................................................... (2,315) 4.40
-----------
Outstanding at June 30, 1995....................................... 316,771 4.77-5.28
Granted July 21, 1995 through December 15, 1995.................. 1,114,933 4.00-4.40
Canceled......................................................... (1,112,500) 4.00
-----------
Outstanding at June 30, 1996....................................... 319,204 4.40-5.28
-----------
-----------
</TABLE>
In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------- -----------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995........................................ -- -- -- --
Issued May 16, 1996 and June 7, 1996................................ 4,639,550 $ 5.85 3,527,050 $ 7.80
---------- ----------
Outstanding at June 30, 1996........................................ 4,639,550 3,527,050
---------- ----------
---------- ----------
</TABLE>
Commencing May 1997, the Class A and Class B warrants are redeemable by the
Company on 30 days' written notice at a redemption price of $.05 per Class A and
Class B warrant if the closing price of the Company's common stock for any 30
consecutive trading days averages in excess of $8.20 and $10.95 per share,
respectively.
The Company maintains 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 440,000 and 70,400 shares of its common stock for issuance upon the
exercise of options granted under the Employee and Non-Employee Plans,
respectively. 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.
On April 21, 1996, the Company granted, effective as of the effective date
of the IPO, non-qualified options to purchase 50,000 shares of its common stock
at an exercise price of $4.40 per share to an executive officer and director.
These options are not part of the Employee Plan and Non-Employee Plan.
F-20
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
7. CAPITAL STOCK (CONTINUED)
The following table summarizes the activity in options under the Employee
and Non-Employee Plans, plus options granted on a non-qualified basis:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
----------- -----------
<S> <C> <C>
EMPLOYEE PLAN OPTIONS
Outstanding at June 30, 1994............................................. 3,896 $ 4.40
Granted................................................................ 39,630 4.40
Canceled............................................................... (5,443) 4.40
-----------
Outstanding at June 30, 1995............................................. 38,083 4.40
Granted................................................................ 38,424 4.40
Canceled and expired................................................... (6,884) 4.40
-----------
Outstanding at June 30, 1996............................................. 69,623 4.40
-----------
-----------
NON-EMPLOYEE PLAN OPTIONS
Outstanding at June 30, 1994............................................. 1,397 4.40
Granted................................................................ 4,869 4.40
-----------
Outstanding at June 30, 1995............................................. 6,266 4.40
Granted................................................................ 1,217 4.40
-----------
Outstanding at June 30, 1996............................................. 7,483 4.40
-----------
-----------
NON-QUALIFIED OPTIONS
Outstanding at June 30, 1995............................................. -- --
Granted................................................................ 50,000 4.40
-----------
Outstanding at June 30, 1996............................................. 50,000 4.40
-----------
-----------
</TABLE>
8. INCOME TAXES
There was no income tax expense/benefit for the Company for the years ended
June 30, 1996 and 1995. Nor was there any tax expense/benefit for Dunkirk for
the two months ended August 31, 1994.
F-21
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
8. INCOME TAXES (CONTINUED)
Following is a reconciliation of income tax expense (credit) to the amount
based on the U.S. statutory rate of 34% for the years ended June 30, 1996 and
1995:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
---------------------------- --------------
TWO MONTHS
FOR THE YEAR ENDED JUNE 30, ENDED
---------------------------- AUGUST 31,
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Income tax benefit based on U.S. statutory rate.............. $ (1,548,003) $ (4,166,599) $ (251,065)
Write-off of in-process technology with no tax deduction..... 2,119,036
Valuation allowance for losses............................... 1,548,003 2,047,563 251,065
------------- ------------- --------------
$ -- $ -- $ --
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue................................................ $ 223,163 $ 377,692
Reserve for disposal............................................ 294,800 544,000
Start-up costs.................................................. 86,000 114,667
Tax loss carryforward........................................... 4,584,808 2,351,232
------------ ------------
Total deferred tax assets......................................... 5,188,771 3,387,591
Valuation allowance............................................... 5,188,771 3,387,591
------------ ------------
Net deferred tax assets........................................... $ -- $ --
------------ ------------
------------ ------------
</TABLE>
The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.
At June 30, 1996, the Company has approximately $11.5 million of tax loss
carryforwards available to offset future taxable income, which expire between
2006 and 2011. The Tax Reform Act of 1986 enacted a complex set of rules
(Section 382) limiting the potential utilization of net operating loss
carryforwards 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. Although a comprehensive evaluation has not yet
been performed, it appears that on August 31, 1994 (Dunkirk merger) and May 16,
1996 (completion of IPO) such changes in ownership had occurred. As a result of
such changes, it appears the Company's ability to utilize its net operating loss
carryforwards generated by Dunkirk prior to August 31, 1994 (approximately $1.5
million) is limited by Section 382, and is further limited to the use of these
loss carryforwards against future Dunkirk earnings only. In addition,
F-22
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
8. INCOME TAXES (CONTINUED)
the consolidated losses incurred through the IPO date (approximately $8.2
million) may be limited to as low as approximately $1 million on an annual
basis.
9. SUBSEQUENT EVENTS
On August 26, 1996, the Company announced that they had entered into a
Letter of Intent relating to a merger of Conversion Technologies International,
Inc. and Octagon, Inc., a technical services firm providing radiological control
and operations and maintenance services to nuclear utilities and the Departments
of Energy and Defense. An Agreement and Plan of Reorganization relating to the
merger was signed on November 18, 1996 by the Company, a newly-formed subsidiary
of the Company and Octagon. Octagon Inc.'s revenue and net income was
$24,991,505 and $28,500, respectively, for the year ended December 31, 1996.
Under the terms of the proposed merger, the holders of Octagon Inc. common
stock will receive one share of the Company's stock for every ten shares of
Octagon Inc. common stock, and Octagon Inc. will become a wholly-owned
subsidiary of the Company.
Effective as of August 26, 1996 ("Effective Date"), the Company approved and
adopted the 1996 Long-Term Employee Incentive Plan (the "Plan"). Under the Plan,
payment of awards may be in cash or the common stock of the Company or a
combination of both, at the option of the Company. The maximum number of shares
of the Company's common stock available for awards under the Plan is 200,000,
subject to adjustments as provided in the Plan. The Plan will terminate without
further action of the board of directors on the tenth anniversary of the
Effective Date. In October 1996, the Company issued a total of 90,000 shares to
two officers of the Company under the Plan, which shares vest January 1, 1998.
On September 20, 1996, December 11, 1996 and March 26, 1997, the Company
advanced $250,000, $60,000 and $350,000, respectively, to Octagon Inc. under
secured promissory notes. The notes are secured by a second lien on Octagon
Inc.'s assets and interest is charged at 8.25%. The notes are due on demand on
or after February 13, 1997.
In April 1997, the Company received a letter from a placement agent with
respect to its interest in acting as placement agent on a best efforts basis for
a private placement of the Company's Preferred Stock. The private placement
would consist of a minimum of 300,000 and a maximum of 500,000 shares of
Preferred Stock (to be sold in units of 10,000 each) (plus an over-allotment
option with respect to an additional 200,000 shares) at a stated par value of
$10 per share. The Preferred Shares would be immediately convertible at the
option of the holder into the Company's common stock based upon a specified
price per share. Commencing 12 months from the final closing of the private
placement, the holders of the Preferred Stock would be entitled to receive
dividends, payable in cash or, at the option of the Company, in additional
shares of Preferred Stock, at the rate of 10% per annum. The Preferred Stock
would entitle the holder to the number of votes equal to the number of shares of
the Company's common stock into which the Preferred Stock is convertible. In
consideration for the private placement, the placement agent would receive a
cash commission of 9% and a non-accountable expense allowance of 4% of the total
proceeds. The placement agent would also receive warrants to purchase shares of
the
F-23
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR DECEMBER 31, 1996
AND 1995 ARE UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
Company's Preferred Stock equal to 10% of the total number of shares of
Preferred Stock issued in the private placement at an exercise price equal to
110% of the offering price of such shares.
The Company has been granted a deferral of all interest and principal
payments due under its $8 million Solid Waste Disposal Facility Bonds (see Note
3) for the two-year period commencing March 1, 1997 through and including March
1, 1999; PROVIDED, HOWEVER, that all such interest and principal payments will
be made from the Company's debt service reserve funds until such reserve funds
are depleted. The total amount of deferred principal and interest payments is
approximately $2,386,000, of which approximately $870,000 will be made from the
Company's debt service reserve funds. Replenishment of the debt service reserve
funds, plus repayment of all additional deferred interest will be due in 20
equal, consecutive quarterly installments commencing on June 1, 1999. Repayment
of the deferred principal will be due on December 1, 2010. The continuing effect
of such deferral is conditioned upon the consummation of the Octagon acquisition
by May 15, 1997 and the completion of a private placement of at least $2 million
by May 31, 1997 and of at least an additional $3 million by July 15, 1997. In
addition, following consummation of the private placement, the Company will be
subject to certain covenants, including minimum net worth and working capital
covenants.
F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Octagon, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Octagon, Inc.
(a Delaware corporation) and Subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Octagon, Inc. and Subsidiaries as of December 31, 1996 and the consolidated
results of their operations and their cash flows each of the two years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Certified Public Accountants
Orlando, Florida
March 21, 1997
F-25
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
ASSETS (NOTE 3)
Current assets:
Cash............................................................................................. $ 2,098
Accounts receivable, less allowance for doubtful accounts of $34,000 (Notes 1 and 3)............. 4,545,038
Unbilled accounts receivable..................................................................... 878,073
Prepaid expenses and other....................................................................... 105,759
-------------
Total current assets......................................................................... 5,530,968
-------------
Property and equipment, less accumulated depreciation of $355,991.................................. 311,128
-------------
Other assets:
Goodwill, less accumulated amortization of $750,319.............................................. 698,216
Deferred merger costs............................................................................ 178,790
Noncompete agreements, less accumulated amortization of $18,417.................................. 6,139
Deposits and other............................................................................... 24,697
-------------
907,842
-------------
Total assets................................................................................. $ 6,749,938
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 3)........................................................................... $ 2,950,605
Accounts payable--trade.......................................................................... 548,678
Accrued salaries and payroll taxes............................................................... 379,481
Accrued vacation leave........................................................................... 235,087
Other accrued expenses........................................................................... 249,384
Long-term debt--current portion (Note 4)......................................................... 179,247
Advance billings on uncompleted contracts........................................................ 968,016
-------------
Total current liabilities.................................................................... 5,510,498
-------------
Long-term debt--noncurrent portion (Note 4) 215,342
-------------
Total liabilities............................................................................ 5,725,840
-------------
Commitments and contingencies (Note 7)
Stockholders' Equity (Note 9)
Common Stock, $.01 par value, 25,000,000 shares authorized, issued and outstanding 8,404,702..... 84,047
Additional paid in capital....................................................................... 10,867,201
Less stock subscriptions receivable.............................................................. (100,500)
Accumulated deficit.............................................................................. (9,826,650)
-------------
1,024,098
-------------
Total Liabilities and Stockholders' Equity................................................... $ 6,749,938
-------------
-------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-26
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C>
1996 1995
------------- -------------
Contract revenue................................................................... $ 24,991,505 $ 28,779,075
Cost of revenue production
Direct costs..................................................................... 19,637,004 21,796,720
Indirect costs................................................................... 2,117,955 3,332,916
Amortization of goodwill and noncompete agreements............................... 297,987 320,376
Selling, general and administrative.............................................. 2,619,699 3,720,757
------------- -------------
24,672,645 29,170,769
------------- -------------
Income (loss) from operations................................................ 318,860 (391,694)
Interest expense................................................................... (512,987) (448,546)
Other income (Note 10)............................................................. 49,528 748,667
Other expenses (Note 10)........................................................... - (436,195)
------------- -------------
(463,459) (136,074)
------------- -------------
Net loss before extraordinary item................................................. (144,599) (527,768)
------------- -------------
Extraordinary item (Note 12)....................................................... 173,099 --
------------- -------------
Net income (loss).................................................................. $ 28,500 $ (527,768)
------------- -------------
------------- -------------
Income (loss) per common share:
Before extraordinary item........................................................ (0.02) (0.08)
Extraordinary item............................................................... 0.02 --
------------- -------------
Net income (loss)............................................................ -- (0.08)
------------- -------------
------------- -------------
Weighted average shares outstanding................................................ 7,503,679 6,602,833
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-27
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL STOCK TOTAL
NUMBER OF PAR PAID-IN SUBSCRIPTIONS TREASURY ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL RECEIVABLE STOCK DEFICIT EQUITY
----------- --------- ------------ ------------ --------- ------------ ------------
Balance at January 1, 1995....... 6,450,000 $ 64,500 $ 10,058,073 $ (100,500) $ -- $(9,327,382) $ 694,691
Issuance of common stock....... 24,500 245 (245) -- -- -- --
Issuance of common stock
warrants as settlement of
litigation (Note 7).......... -- -- 560,000 -- -- -- 560,000
Acquisition of Allink (Note
2)........................... 95,000 950 152,175 -- -- -- 153,125
Stock compensation (Note 7).... 400,000 4,000 24,000 -- -- -- 28,000
Net loss....................... -- -- -- -- -- (527,768) (527,768)
----------- --------- ------------ ------------ --------- ------------ ------------
Balance at December 31, 1995..... 6,969,500 69,695 10,794,003 (100,500) -- (9,855,150) 908,048
Issuance of common stock for
exercise of stock options
(Note 9)..................... 1,600,000 16,000 96,000 -- -- -- 112,000
Issuance of common stock-
settlement of accounts
payable--trade (Note 9)...... 133,868 1,339 86,211 -- -- -- 87,550
Treasury stock purchased....... -- -- -- -- (112,000) -- (112,000)
Treasury stock retired......... (298,666) (2,987) (109,013) -- 112,000 -- --
Net income .................... -- -- -- -- -- 28,500 28,500
----------- --------- ------------ ------------ --------- ------------ ------------
Balance, December 31, 1996 ...... 8,404,702 $ 84,047 $ 10,867,201 $ (100,500) $ -- $(9,826,650) $1,024,098
----------- --------- ------------ ------------ --------- ------------ ------------
----------- --------- ------------ ------------ --------- ------------ ------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-28
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ 28,500 $(527,768)
Adjustments to reconcile net income (loss) to net cash used for operating
activities:
Allowance for doubtful accounts................................................... 35,185 273,470
Stock compensation................................................................ -- 28,000
Deferred rent..................................................................... -- (64,740)
Loss on abandonment of investment in Allink....................................... -- 153,125
(Gain) Loss on disposal of fixed assets........................................... (26,778) 137,065
Depreciation ..................................................................... 116,116 162,520
Amortization...................................................................... 297,987 295,820
Write-off of notes receivable..................................................... 22,990 --
Changes in assets and liabilities, net of effects of
acquisition in 1995:
Accounts receivable............................................................. (1,307,948) 1,339,124
Prepaid expenses and other...................................................... 69,400 84,839
Accounts payable................................................................ (507,545) (813,470)
Accrued salaries and payroll taxes.............................................. (26,972) (554,031)
Accrued vacation leave.......................................................... 30,565 (22,297)
Accrued other expenses.......................................................... (98,663) --
Income tax receivable........................................................... -- 6,139
Advance billings on uncompleted contracts....................................... (220,409) (759,417)
------------- -----------
Net cash used for operating activities................................................ (1,587,572) (261,621)
Cash flows from investing activities:
Decrease (increase) in notes receivable............................................. 62,704 (35,694)
Release of deposit for injunction bond.............................................. -- 500,000
Proceeds from disposal of property and equipment.................................... 93,416 45,953
Purchase of property and equipment.................................................. (38,291) (278,469)
Loans to officers and stockholders.................................................. -- 75,000
Decrease (increase) in deposits..................................................... (16,081) 109,817
------------- -----------
Net cash provided by investing activities............................................. 101,748 416,607
Cash flows from financing activities:
Net proceeds from notes payable..................................................... 1,556,470 340,023
Payments on long-term debt.......................................................... (52,251) (497,074)
Increase in deferred merger costs................................................... (178,790) --
------------- -----------
Net cash provided by (used for) financing activities.................................. 1,325,429 (157,051)
------------- -----------
Net decrease in cash.................................................................. (160,395) (2,065)
Cash, beginning of year............................................................... 162,493 164,558
------------- -----------
Cash, end of year..................................................................... $ 2,098 $ 162,493
------------- -----------
------------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-29
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
<TABLE>
<S> <C>
Principles of The accompanying consolidated financial statements include
Consolidation.............. the accounts of Octagon, Inc. and its wholly-owned
subsidiaries ("the Company"). All significant intercompany
accounts and transactions are eliminated in consolidation.
Business..................... During 1995, the Company completed a reorganization of its
business operations, focusing its efforts as a supplier of
technical support services and proprietary technology in the
field of regulatory compliance, outsourcing and project
management. These services are currently directed towards
supporting client compliance in a cross section of
environmental, nuclear, health and process safety
regulations, as well as providing staff augmentation,
consulting, outsourcing and project management services.
On November 18, 1996, the Company entered into a merger
agreement, subject to certain conditions with Conversion
Technologies International, Inc. (Conversion). Pursuant to
the merger agreement each issued and outstanding share of
the Company's common stock will be converted into 0.10 (one
tenth) of a share of Conversion's common stock, resulting in
the Company continuing as a surviving corporation as a
wholly-owned subsidiary of Conversion. The merger agreement
may be terminated if the merger has not been consummated by
June 30, 1997 or by other conditions set forth in the
agreement.
Recognition of Revenue....... The Company, which operates under the trade names "Octagon"
and "Power Systems Energy Services" (PSESI), recognizes
revenue under cost-type and fixed-price contracts with the
United States government and commercial customers using the
percentage-of-completion method whereby progress towards
completion is measured based on a ratio of total costs
incurred compared with total expected contract costs.
Periodically, total expected contract costs are reviewed,
and revenue accrual rates are revised as necessary. The
Company recognizes the full income effect of such changes in
the accounting periods in which the changes are determined.
Estimated losses on all contracts are recorded in full when
identified.
The Company also performs services under cost-type and
fixed-price per unit of service contracts. Revenue on
cost-type contracts is recognized by adding direct costs
consisting principally of labor to indirect costs associated
with the contract and negotiated profit. Revenue on
fixed-price per unit contracts is computed by applying
negotiated billing rates to hours worked or tasks completed
on the contract. Estimated losses on all contracts are
recorded in full when identified.
</TABLE>
F-30
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C>
Revenue from contracts with the United States government
comprised approximately 33% and 35% of revenue in 1996 and
1995, respectively. Revenue from export sales is not
material. Approximately 41%, of revenue was derived from one
customer in 1996 and approximately 26%, 18% and 10% of
revenue was derived from three customers in 1995, other than
the U.S. government.
Advance billings on uncompleted contracts in the
accompanying balance sheets represent amounts due to United
States government agencies. Such amounts arise from billings
on contracts exceeding amounts recognized as revenue.
Indirect costs associated with revenue in the accompanying
statement of operations represent operational overhead costs
allocable to more than one contract.
Property and Equipment....... Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on a
straight-line basis (over five to seven years) for financial
reporting purposes.
Intangible Assets............ Goodwill reported in the accompanying balance sheet arose
from the acquisition of Executive Resource Associates
("ERA"), the Company's predecessor, in September 1993 and
from the acquisition of PSESI in 1994 and represents the
amount by which the cost of the businesses purchased
exceeded the fair value of the net assets acquired. Goodwill
is being amortized under the straight-line method over
periods ranging from five to 20 years. Management
continually monitors the realizability of goodwill by
comparing current and estimated future earnings from
acquired businesses to the carrying value of the goodwill in
relation to the estimated useful lives used in computing
annual amortization.
The costs of noncompete agreements are amortized over the
life of the agreements (two to three years) on a
straight-line basis.
Concentration of Credit All of Octagon's accounts receivable represent amounts due
Risk....................... directly from United States government customers under prime
contracts or subcontracts with prime contractors to the U.S.
government. A substantial portion of PSESI's accounts
receivable (55% of total accounts receivable at December 31,
1996) are concentrated within the major utilities located in
the United States and with a major multinational
corporation. Consequently, management believes credit risk
is insignificant. In addition, for instances where
collection of accounts receivable appears doubtful,
management believes allowances for doubtful accounts are
adequate to absorb estimated losses as of December 31, 1996.
</TABLE>
F-31
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C>
Taxes on Income.............. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires
recognition of estimated income taxes payable or refundable
on income tax returns for the current year and for the
estimated future tax effect attributable to temporary
differences and carryforwards. Measurement of deferred
income tax is based on enacted tax laws including tax rates,
with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be
realized.
Earnings per Share........... Earnings per share is based on the weighted average number
of shares and, if dilutive, common equivalent shares
outstanding during the year. Stock options and warrants
outstanding were not considered in the computation since the
effect of their inclusion would be antidilutive.
Fair Value of Financial
Instruments................ Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein
are based upon certain market assumptions and pertinent
information available to management as of December 31, 1996.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash, trade receivables,
accounts payable, accrued expenses and advanced billings on
uncompleted contracts. Fair values were assumed to
approximate carrying values for these financial instruments
since they are short term in nature and their carrying
amounts approximate fair values or they are receivable or
payable on demand. The fair value of the Company's long-term
debt is estimated based upon the quoted market prices for
the same or similar issues or on the current rates offered
to the Company for debt of the same remaining maturities.
Use of Estimates............. The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities, including litigation (see
Note 7) at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassification Certain items in the 1995 financial statement have been
reclassified to conform to 1996 presentation.
</TABLE>
F-32
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTS RECEIVABLE
Unbilled accounts receivable can be invoiced upon attaining respective
milestones under certain fixed-price contracts and upon completion of federal
government overhead audits for various projects and cost-type contracts.
Management anticipates unbilled amounts as of December 31, 1996 will be billed
and collected in 1997 and thereafter. Such amounts have been classified as
current assets in accordance with industry practice. Certain of the Company's
billed accounts receivable are assigned as collateral for borrowings under a
bank line of credit (see Note 3).
2. ACQUISITIONS
In January 1995, the Company acquired all of the outstanding common stock of
Allink Network Management Company ("Allink") and its parent holding company,
Spiratek, Inc. The Company accounted for the transaction as a purchase. In
connection with the acquisition, the Company issued 95,000 shares of common
stock (see Note 9), promissory notes of $30,000 and granted stock options to
purchase 30,000 shares of Company common stock. The Company subsequently
abandoned its investment in Allink and deconsolidated the assets, liabilities
and operations of the subsidiary on its financial statements. As a result, the
Company wrote off its investment in Allink and all related liabilities incurred
in connection with the acquisition. The loss resulting from the abandonment of
the investment was not material to the Company's financial statements. The
financial position and results of operations of Allink for the year ended
December 31, 1995 were not material to the Company's consolidated financial
statements. The Company has no additional material contingent liabilities
related to Allink.
3. NOTES PAYABLE
The Company has a credit facility agreement with Foothill Capital
Corporation which allows the Company to borrow the lesser of $5,000,000 or 50%
of certain accounts receivable at 3% over prime rate. The credit agreement is
collateralized by substantially all of the Company's assets and matures February
27, 1998. Interest payments on the note are due monthly. The balance at December
31, 1996 under this agreement was $2,640,605.
During 1996, the Company issued notes payable to Conversion Technologies
International, Inc. for $310,000. The note bears interest at 8.25% and is
payable upon demand on or after February 13, 1997. The notes are collateralized
primarily by property and equipment.
F-33
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Unsecured note payable bearing interest at 7.5%, principal and
interest of $6,847 due monthly through January, 2000............. $ 208,533
Various unsecured notes payable bearing interest at 7%, principal
and interest of $2,844 due monthly through January, 2000......... 92,120
Unsecured note payable for litigation settlement (see Note 7),
bearing interest at 10%, currently due........................... 45,000
Unsecured note payable, bearing interest at 7%, principal and
interest due August 1997......................................... 35,000
Other note payable for equipment purchase......................... 13,936
---------
394,589
Less current maturities........................................... 179,247
---------
Total long-term debt.............................................. $ 215,342
---------
---------
</TABLE>
The aggregate amount of long-term debt maturing in future years is as
follows as of December 31, 1996:
<TABLE>
<S> <C>
Year Ended:
1997............................................................. $ 179,247
1998............................................................. 106,715
1999............................................................. 107,568
2000............................................................. 1,059
---------
Total........................................................ $ 394,589
---------
---------
</TABLE>
5. RELATED PARTIES
During the year ended December 31, 1995, the Company paid $208,960 to an
attorney who was a director of the Company for legal services rendered.
6. TAXES ON INCOME
The components of deferred income tax assets and liabilities consist of the
following as of December 31, 1996:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carryforwards.............................. $2,948,000
Accruals...................................................... 331,000
Amortization.................................................. 127,000
Merger costs.................................................. 67,000
Bad debts..................................................... 13,000
Other......................................................... 6,000
----------
Gross deferred income tax assets................................ 3,492,000
----------
</TABLE>
F-34
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME (CONTINUED)
<TABLE>
<S> <C>
Deferred income tax liabilities:
Unbilled revenue.............................................. (330,000)
Depreciation.................................................. (31,000)
----------
Gross deferred income tax liabilities........................... (361,000)
----------
Total net deferred income tax assets............................ 3,131,000
Valuation allowance............................................. (3,131,000)
----------
$ --
----------
----------
</TABLE>
The change in the valuation allowance for deferred tax assets was a decrease
of $713,000 during 1995.
The following summary reconciles differences from taxes at the federal
statutory rate with the effective rate:
<TABLE>
<CAPTION>
Year Ended December 31,: 1996 1995
<S> <C> <C>
Federal income taxes at statutory rates..................... 34.0% (34.0%)
Utilization of unused net operating loss carryforwards...... (19.0) --
Other....................................................... (15.0) --
Losses without tax benefits................................. -- 34.0%
--------- ---------
Income taxes at effective rates -- --
--------- ---------
--------- ---------
</TABLE>
The Company has a net operating loss carryforward expiring in 2010 of
approximately $6,899,000 as of December 31, 1996 available to offset taxable
income. In the event of a change in control of the Company as defined by the
Internal Revenue Code, use of net operating losses could be limited in the
future.
The tax benefit of these losses of approximately $2,948,000 has been offset
by a valuation allowance due to it being more likely than not that the deferred
tax assets will not be realized.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its current office facilities, certain office equipment
and certain data processing equipment and vehicles under long-term,
noncancelable lease agreements expiring at various times through 1999. Rental
expense was approximately $303,000 and $473,000 for the years ended December 31,
1996 and 1995, respectively.
The Company's minimum future annual rental commitments under the leases are
as follows:
<TABLE>
<S> <C>
Year ended December 31,
1997.............................................................. $ 128,000
1998.............................................................. 87,000
1999.............................................................. 2,000
---------
$ 217,000
---------
---------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain
officers and directors of the Company which require salary commitments totaling
$450,000 during the year ending December 31,
F-35
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
1997. In addition, upon execution of the agreements, two of the officers were
awarded 200,000 shares of common stock each (see Note. 9).
CONTRACT COSTS AND SALES TAX AUDIT
Audits of the Company's costs charged to government contracts have been
completed by the Defense Contract Audit Agency (DCAA) through December 31, 1994.
Revenue of approximately $1,742,000 resulting from the audits was reflected in
the Company's results of operations for the year ended December 31, 1996.
Subsequent years are subject to DCAA audit. The Company believes that any audit
adjustments for the periods subsequent to December 31, 1994 would not have a
material adverse effect on the financial position or results of operations of
the Company.
The State of Virginia has issued a sales tax deficiency notice for the
period January 1992 through December 1994. The Company plans to protest any
proposed assessments for deficiencies and believes that any adjustments which
may result from this examination will not have a material effect on the
Company's financial position or results of operations. The Company accrued
$60,000 for the deficiency during 1996.
SELF-INSURANCE
Until September 30, 1996, the Company maintained a self-insurance program
for that portion of health care costs not covered by insurance. The Company was
liable for claims up to $50,000 per employee annually. Liabilities under the
plan were satisfied at December 31, 1996.
LITIGATION:
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On September 30, 1996, the Company agreed with an Administrative Proceeding
from the Securities and Exchange Commission (SEC) instituting a cease and desist
proceeding pursuant to Section 21c of the Securities Act of 1934. In agreeing,
the Company neither admitted nor denied noncompliance with certain disclosure
provisions of section 21c of the Securities Act of 1934 and agreed to remain in
compliance with these regulations in the future.
This Administrative Proceeding was the result of the U.S. Securities and
Exchange Commission, on September 1, 1994, entering a Formal Order of
Investigation directing its staff to determine whether certain acts and
practices relating to the Company violated certain anti-fraud and corporate
reporting provisions of federal securities laws. The SEC alleged violations of
reporting requirements and violations which address related party transactions
and the timeliness of the disclosure of the MacKenzie agreement (discussed
below). The acts and practices appeared to have related to the Company's first
and second quarter reports of Form 10Q of 1994.
There was no financial impact as a result of the conclusion of this
investigation.
ACQUISITION OF PSESI
The Company is a co-defendant in litigation involving the purchase of PSESI,
a wholly-owned subsidiary which currently represents 67% of the Company's
revenues. The plaintiff asserted the seller breached a contract to sell PSESI to
the plaintiff, which contract pre-existed the Company's purchase agreement. The
Company believes it has valid defenses which includes the seller's
representation at closing
F-36
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
that the PSESI stock was free of any claims against it. The seller further
indemnified the Company for any claims made as a result of any
misrepresentations.
On January 23, 1997, the Company received a summary judgment in its favor.
This judgment may be subject to appeal. Accordingly, the Company believes that
it will not have any ultimate liability in this matter.
OCTAGON, INC. VERSUS JAMES MACKENZIE INTERNATIONAL TRADING PLC. JAMES KHAN
AND THE
KHAN FAMILY TRUST
During 1995, the Company was awarded a summary judgment in its legal
proceedings that were initiated in 1994 in the United Kingdom and Virginia
against James MacKenzie International Trading PLC ("MacKenzie"), a London-based
company, and its managing director, James Khan. Earlier, the Company had entered
into an agreement with MacKenzie to deliver telecommunications products to a
third party. The Company provided MacKenzie a cash deposit of $1,265,000 in lieu
of the issuance of a performance bond. Such payment was to be applied by
MacKenzie exclusively for obtaining a letter of credit required by the
agreement.
During 1994, MacKenzie breached the agreement, and the Company recorded a
charge against earnings of $1,265,000 to fully reserve for the deposit. The
Company also paid $500,000 as collateral for an injunction bond.
In addition to the summary judgment, the defendants were ordered to defend
themselves upon the condition that they deposit into the Court by May 3, 1995
the sum of $1,315,600, which they failed to comply with. The Company was awarded
a judgment for $1,265,000 plus damages, of which approximately $410,000 was
received during the year. In addition, the collateral posted for the injunction
bond of $500,000 was returned to the Company. The Company intends to continue
its efforts to recover the remainder of the judgment. However, the outcome of
this recovery effort is uncertain at this time.
CLASS ACTION LITIGATION
On February 17, 1995, the Company settled a class action suit that was
brought against the Company and two officers in 1994, alleging violations of the
Securities Exchange Act of 1934 and claiming the Company and its officers misled
investors regarding events surrounding a contract with MacKenzie to deliver
telecommunications products to a third party. The Company believes the claims
made were without merit but concluded it was in its best interest to settle the
matter to avoid expenses and risks of continued litigation. Under the terms of
the settlement, an insurance company which had provided liability coverage for
officers and directors paid $1,050,000 to the class of shareholders represented
in the suit. The Company paid $50,000 in cash and issued a promissory note for
$90,000 (see Note 4). The Company also issued $1,100,000 Class A warrants for
the purchase of Octagon stock under the terms of the settlement in complete
satisfaction of its remaining $560,000 obligation (see Note 9). In addition,
during 1995, the Company received $230,000 representing the reimbursement of
various professional fees incurred during the litigation.
LITIGATION WITH FORMER OFFICER
In January 1996, the Company settled a suit brought by a former officer and
director who commenced litigation in March 1995 against the Company and an
officer alleging, among other things, that the employment of the former officer
and director was not properly terminated for cause and defamation. The complaint
sought damages of approximately $1,650,000 with respect to employment agreement
claims,
F-37
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$10,000,000 of compensatory damages and $350,000 of punitive damages with
respect to his defamation claim. The suit was settled in January 1996 for
approximately $103,000, which included a payment to the officer of approximately
$40,000.
8. RETIREMENT PLAN
The Company has established two 401(k) defined contribution plans covering
substantially all employees meeting certain minimum age and service
requirements. The Company matches certain percentages of employees'
contributions to the plans as determined by the Board of Directors. Employer
contributions and administrative costs of the plans were approximately $148,000
and $150,000, for the years ended December 31, 1996 and 1995, respectively.
9. STOCKHOLDER'S EQUITY
At December 31, 1996 the Company has a 1995 long-term incentive stock option
plan, has issued non-plan options and has 4,550,000 common stock warrants
outstanding. The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the options and
warrants. Under APB Opinion 25, if options and warrants are granted or extended
at exercise prices less than fair market value, compensation expense is recorded
for the differences between the grant price and the fair market value. Warrants
issued to persons other than employees are recorded at fair value as determined
by the Black-Scholes or comparable method and compensation expense is recorded
if applicable.
Under the Company's 1995 long-term incentive stock plan (the "Plan"), a
maximum of 3,500,000 option shares of the Company's common stock may be granted
with exercise prices equal to the fair market value of the stock at the date of
grant.
In addition, the plan provides for the granting of stock appreciation rights
and other performance awards subject to certain conditions and limitations. No
stock appreciation rights or performance awards have been granted under the
plan. The plan shall terminate without further action of the Board during
November 2005.
Statement of Financial Accounting Standards No. 123 (FAS 123) "Accounting
for Stock-Based Compensation," requires the Company to provide pro forma
information regarding net income and earnings per share as if compensation cost
for the Company's stock options and warrants had been determined in accordance
with the fair value based method prescribed in FAS 123. The Company estimates
the fair value of each stock option and warrant at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: no dividend yield,
volatility of 110% and 154%, risk-free interest rates ranging from 5.2% to 6.6%
and 5.5% to 7.5% and expected lives ranging from one to five years.
F-38
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDER'S EQUITY (CONTINUED)
Under the accounting provisions of FAS 123, the Company's net income (loss)
and earnings (loss) per share would have been changed to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Net Income (Loss)
As Reported........................................................ $ 28,500 $ (527,768)
Pro Forma.......................................................... (83,795) (807,068)
Earnings (Loss) per Share
As Reported........................................................ $-- $(0.08)
Pro Forma.......................................................... (0.01) (0.12)
</TABLE>
Changes in options outstanding are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE FAIR
AVERAGE VALUE OF
EXERCISE PRICE OPTIONS
SHARES (PER SHARE) GRANTED
------------ --------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... -- $ -- $ --
Granted-equal to market value....................... 1,600,000 .07 .03
Granted-above market value.......................... 30,000 2.00 .71
------------ ----- ---
Balance December 31, 1995........................... 1,630,000 $ .74 $ --
Granted-equal to market value....................... 546,000 .25 .23
Exercised........................................... (1,600,000) .07 --
Forfeited........................................... (79,500) .25 --
Balance, December 31, 1996.......................... 496,500 $ .84 $ --
</TABLE>
During 1995, options were granted to two company officers to purchase
1,600,000 shares of common stock. The original vesting plan for these options
called for 533,333 options to vest each year after the grant date beginning
March 31, 1996. In August, 1996 the Board of Directors accelerated the vesting
period for the balance of the options and agreed to accept shares of Company
common stock owned by the officers as payment of the exercise price of the
options. The pro forma disclosures reflect the effect of the acceleration of the
vesting of the options. In August, 1996 the officers exercised the 1,600,000
options by exchanging 298,666 shares of Company common stock held by them in
excess of six months. The number of shares exchanged for the exercisable price
was based on the market value of the common stock at the exercise date and were
recorded as treasury stock. Immediately subsequent to the option exercise, the
Board of Directors agreed to retire the treasury shares.
Changes in warrants outstanding are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE FAIR
AVERAGE VALUE OF
EXERCISE PRICE WARRANTS
SHARES (PER SHARE) GRANTED
------------ --------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... 3,450,000 $ 4.00 $ --
Granted-above market value.......................... 1,100,000 4.00 .70
------------ ----- ---
Balance, December 31, 1995 and 1996................. 4,550,000 $ 4.00 $ --
------------ ----- ---
------------ ----- ---
</TABLE>
F-39
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDER'S EQUITY (CONTINUED)
At December 31, 1996, all outstanding warrants and a total of 128,834 of the
outstanding options were exercisable with a weighted-average exercise price of
$1.49.
The following table summarizes information about fixed stock options and
warrants at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCIABLE AVERAGE
AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
EXERCISE PRICE 31,1996 LIFE PRICE 31, 1996 PRICE
- -------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 0.25-0.27 466,500 9.3 years $ 0.25 98,834 $ 0.25
$ 2.00 30,000 .1 years $ 2.00 30,000 $ 2.00
$ 4.00 4,550,000 3.2 years $ 4.00 4,550,000 $ 4.00
~ 5,046,500 4,678,834
</TABLE>
COMMON STOCK WARRANTS ISSUED-LITIGATION
In connection with the settlement of the class action litigation (see Note
7), the Company agreed to issue 1,100,000 warrants to purchase common stock. The
warrants expire February 28, 2000 and carry an exercise price of $4.00 per
share. The warrants are redeemable upon certain conditions.
COMMON STOCK AND OPTIONS ISSUED--ACQUISITIONS
In connection with the acquisition of Allink (see Note 2), the Company
issued 95,000 shares of common stock and granted options to purchase 30,000
shares of common stock at $2 per share. The options expire January 18, 1997.
COMMON STOCK ISSUED--COMPENSATION
In connection with certain employment agreements and the long-term incentive
plan, the Company awarded 400,000 shares of common stock (see Note 7).
Compensation expense was recorded related to such awards based on the trading
price of the Company's stock at that date ($0.07 per share).
During 1994, the Company awarded 24,500 shares of common stock to four
former employees of the Company. The shares were issued during 1995, and as a
result, $245 was reclassified from additional paid-in capital to common stock.
COMMON STOCK ISSUED--ACCOUNTS PAYABLE TRADE SETTLEMENT
During 1996, the Company issued 133,868 shares of common stock in settlement
of accounts payable trade amounting to $87,550.
SHARES RESERVED
At December 31, 1996, the Company has reserved common stock for the
following purposes:
<TABLE>
<CAPTION>
Employee stock option plan....................................................... 1,500,000
<S> <C>
Non-plan stock options........................................................... 30,000
Stock warrants................................................................... 4,550,000
---------
Total shares reserved............................................................ 6,080,000
---------
---------
</TABLE>
F-40
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. OTHER INCOME AND EXPENSES
For the years ended December 31, 1996 and 1995, other income and expenses
were comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
OTHER INCOME
Collection of MacKenzie judgment...................................... $ -- $ 410,321
Reimbursement of professional fees.................................... -- 230,000
Other................................................................. 49,528 108,346
---------- ----------
Total............................................................... $ 49,528 $ 748,667
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
OTHER EXPENSES
1996 1995
--------- ---------
Settlement of litigation with former officer............ $ -- $ 103,455
<S> <C> <C>
Abandonment of investment in Allink..................... -- 145,156
Other................................................... -- 187,584
--------- ---------
Total................................................. $ -- $ 436,195
--------- ---------
--------- ---------
</TABLE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH PAID FOR INTEREST:............................................... $ 496,787 $ 417,321
NON CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of notes payable to settle accounts payable-trade............ $ 335,651 $ --
Issuance of common stock to settle accounts payable-trade............. 87,550 --
Sale of equipment through acceptance of note receivable............... -- $ 50,000
Issuance of common stock warrants to settle litigation................ -- 560,000
Issuance of notes payable to settle litigation........................ -- 90,000
Issuance of common stock in connection with acquisition of Allink..... -- 153,125
</TABLE>
12. EXTRAORDINARY ITEM
During 1996, the Company initiated various settlements with certain of its
vendors. The settlements resulted in the vendors forgiving $173,099 of accounts
payable-trade outstanding as of December 31, 1995. In addition, several vendors
agreed to convert $335,652 of their accounts payable-trade balances into
interest bearing notes payable.
F-41
<PAGE>
EXHIBIT A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF
NOVEMBER 18, 1996,
AS AMENDED,
AMONG
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.,
CTI ACQSUB-II, INC.
AND
OCTAGON, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C> <C>
ARTICLE I GENERAL.......................................................................... A-1
1.1. The Merger....................................................................... A-1
1.2. The Effective Time of the Merger................................................. A-1
1.3. Effect of Merger................................................................. A-1
1.4. Charter and By-Laws of Surviving Corporation..................................... A-1
1.5. Taking of Necessary Action....................................................... A-2
1.6. Tax-Free Reorganization.......................................................... A-2
1.7. Closing.......................................................................... A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES.........................................................
A-2
2.1. Effect on Capital Stock.......................................................... A-2
(a) Capital Stock of Acquisition Sub...................................... A-2
(b) Cancellation of Certain Shares of Company Common Stock................ A-2
(c) Exchange Ratio for Company Common Stock............................... A-2
(d) Shares of Dissenting Stockholders..................................... A-2
(e) Adjustments for Capital Changes....................................... A-3
2.2. Escrow Deposit; Exchange of Certificates......................................... A-3
(a) Procedure for Exchange................................................ A-3
(b) Distributions with Respect to Unsurrendered Certificates.............. A-3
(c) No Further Ownership Rights in Company Common Stock................... A-4
(d) No Issuance of Fractional Shares...................................... A-4
(e) Termination of Exchange Fund and Common Shares Trust.................. A-5
(f) No Liability.......................................................... A-5
2.3. Company Options.................................................................. A-5
2.4. Company Warrants................................................................. A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES................................................... A-6
3.1. Representations and Warranties of the Company.................................... A-6
(a) Organization; Good Standing; Qualification and Power.................. A-6
(b) Equity Investments.................................................... A-6
(c) Capital Stock; Securities............................................. A-6
(d) Authority; No Consents................................................ A-7
(e) Financial Information................................................. A-7
(f) Absence of Undisclosed Liabilities.................................... A-8
(g) Absence of Changes.................................................... A-8
(h) Tax Matters........................................................... A-9
(i) Title to Assets, Properties and Rights and Related Matters............ A-10
(j) Real Property-Owned or Leased......................................... A-10
(k) Intellectual Property................................................. A-10
(l) Agreements, Etc....................................................... A-10
(m) No Defaults, Etc...................................................... A-11
(n) Litigation, Etc....................................................... A-11
(o) Compliance; Governmental Authorizations............................... A-11
(p) Labor Relations; Employees............................................ A-12
(q) Employee Benefit Plans and Contracts.................................. A-12
(r) Certain Agreements.................................................... A-13
(s) Insurance............................................................. A-13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C> <C>
(t) Brokers............................................................... A-14
(u) Related Transactions.................................................. A-14
(v) Board Approval........................................................ A-14
(w) Vote Required......................................................... A-14
(x) Information Supplied.................................................. A-14
(y) Company Not an Interested Stockholder................................. A-14
(z) Disclosure............................................................ A-14
(aa) Knowledge Definition.................................................. A-15
(ab) Company Reference Includes Company Subs............................... A-15
3.2. Representations and Warranties of Parent and Acquisition Sub..................... A-15
(a) Organization; Good Standing; Qualification and Power.................. A-15
(b) Capital Stock......................................................... A-15
(c) Equity Investments.................................................... A-15
(d) Authority............................................................. A-15
(e) SEC Documents......................................................... A-16
(f) Financial Statements.................................................. A-16
(g) Absence of Undisclosed Liabilities.................................... A-17
(h) Absence of Changes.................................................... A-17
(i) Title to Assets, Properties and Rights and Related Matters............ A-17
(j) Intellectual Property................................................. A-17
(k) Brokers............................................................... A-18
(l) Information Supplied.................................................. A-18
(m) No Defaults, Etc...................................................... A-18
(n) Litigation, Etc....................................................... A-18
(o) Compliance; Governmental Authorizations............................... A-18
(p) Insurance............................................................. A-18
(q) Disclosure............................................................ A-19
(r) Knowledge Definition.................................................. A-19
(s) Parent Reference Includes Dunkirk..................................... A-19
ARTICLE IV RELATED AGREEMENTS............................................................... A-19
4.1 Voting Agreements................................................................ A-19
4.2 Affiliate Agreements............................................................. A-19
ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; ADDITIONAL AGREEMENTS..........
A-20
5.1. Access to Records and Properties of Each Party; Confidentiality.................. A-20
5.2. Operation of Business of the Company............................................. A-20
5.3. Operation of Business of Parent.................................................. A-20
5.4. Negotiation With Others.......................................................... A-20
5.5. Dissenting Stockholders.......................................................... A-21
5.6. Preparation of S-4; Other Filings................................................ A-21
5.7. Advice of Changes................................................................ A-22
5.8. Letter of the Company's Accountants.............................................. A-22
5.9. Letter of Parent's Accountants................................................... A-22
5.10. Stockholders' Approval........................................................... A-22
5.11. Legal Conditions to Merger....................................................... A-23
5.12. Consents......................................................................... A-23
5.13. Efforts to Consummate............................................................ A-23
5.14. Notice of Prospective Breach..................................................... A-23
5.15. Public Announcements............................................................. A-23
5.16. Affiliates....................................................................... A-23
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C> <C>
ARTICLE VI CONDITIONS PRECEDENT............................................................. A-24
6.1. Conditions to Each Party's Obligations........................................... A-24
(a) Stockholder Approval; Agreement of Merger............................. A-24
(b) Approvals............................................................. A-24
(c) Legal Action.......................................................... A-24
(d) S-4................................................................... A-24
(e) Legislation........................................................... A-24
6.2. Conditions to Obligations of Parent and Acquisition Sub.......................... A-24
(a) Representations and Warranties........................................ A-24
(b) Performance of Obligations of the Company............................. A-24
(c) Authorization of Merger............................................... A-24
(d) Opinion of the Company's Counsel...................................... A-24
(e) Acceptance by Counsel to Parent and Acquisition Sub................... A-25
(f) Consents and Approvals................................................ A-25
(g) Government Consents, Authorizations, Etc.............................. A-25
(h) Related Agreements.................................................... A-25
(i) Dissenters............................................................ A-25
(j) Employment Agreements................................................. A-25
(k) Releases.............................................................. A-25
(l) Amendment to Koinis Employment Agreement.............................. A-25
(m) Amendment to Octagon Charter.......................................... A-25
(n) Fairness Opinion...................................................... A-25
(o) D&O Insurance......................................................... A-25
(p) NMC................................................................... A-25
6.3. Conditions to Obligations of the Company......................................... A-25
(a) Representations and Warranties........................................ A-26
(b) Performance of Obligations of Parent and Acquisition Sub.............. A-26
(c) Authorization of Merger............................................... A-26
(d) Opinion of Counsel to Parent and Acquisition Sub...................... A-26
(e) Tax Opinion........................................................... A-26
(f) Acceptance by Counsel to the Company.................................. A-26
(g) Government Consents, Authorizations, Etc.............................. A-26
(h) Payment of Expenses................................................... A-26
(i) Appointment of Directors.............................................. A-26
(j) Fairness Opinion...................................................... A-26
ARTICLE VII RELATED TRANSACTIONS TO BE EFFECTED AT THE CLOSING...............................
A-27
7.1. Payment of Certain Fees and Expenses............................................. A-27
7.2. Bridge Indebtedness.............................................................. A-27
ARTICLE VIII TERMINATION; AMENDMENT, MODIFICATION AND WAIVER.................................. A-27
8.1. Termination...................................................................... A-27
8.2. Effect of Termination............................................................ A-28
ARTICLE IX MISCELLANEOUS.................................................................... A-28
9.1. Expenses......................................................................... A-28
9.2. Entire Agreement................................................................. A-29
9.3. Descriptive Headings............................................................. A-29
9.4. Notices.......................................................................... A-29
9.5. Counterparts..................................................................... A-30
9.6. Governing Law.................................................................... A-30
9.7. Benefits of Agreement............................................................ A-30
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C> <C>
9.8. Pronouns......................................................................... A-30
9.9. Amendment, Modification and Waiver............................................... A-30
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C> <C>
Schedule 2.3(c) -- Persons to Whom Options to Purchase Parent Common Stock Will Be Granted
Schedule 4.1 -- Persons Subject to Voting Agreement
Schedule 4.2 -- Rule 145 Affiliates
EXHIBITS
Exhibit A -- Form of Agreement of Merger
Exhibit B -- Form of Voting Agreement
Exhibit C -- Form of Affiliate Agreements
Exhibit D -- Form of Employment Agreement
</TABLE>
iv
<PAGE>
GLOSSARY
The following terms used in this Agreement are defined in the following
Sections:
<TABLE>
<CAPTION>
SECTION OR
TERM OTHER LOCATION
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Acquisition Sub................................................................................ Preamble
Actions........................................................................................ 3.1(n)
Affiliate Agreements........................................................................... 4.1(b)
Agreement...................................................................................... First paragraph
Agreement of Merger............................................................................ First paragraph
Benefit Arrangements........................................................................... 3.1(t)(iv)
Break-up Fee................................................................................... 7.1(b)
Business Day................................................................................... 1.7
Charter........................................................................................ 3.1(a)
Closing........................................................................................ 1.7
Closing Date................................................................................... 1.7
Code........................................................................................... 1.6
Common Shares Trust............................................................................ 2.2(e)
Company........................................................................................ Preamble
Company Affiliate Agreement.................................................................... 4.1(b)
Company Affiliate Tax Agreement................................................................ 4.1(b)
Company Common Stock........................................................................... First paragraph
Company Disclosure Schedule.................................................................... 3.1
Company Expenses............................................................................... 10.1
Company Financial Statements................................................................... 3.1(e)
Company Interim Balance Sheet.................................................................. 3.1(e)(i)(A)
Company Interim Financial Statements........................................................... 3.1(e)(i)(A)
Company Option................................................................................. 2.3(b)
Company Returns................................................................................ 3.1(h)
Company Subs................................................................................... 3.1(a)
Company Warrants............................................................................... 3.1(c)
Constituent Corporations....................................................................... 1.1
Delaware Statute............................................................................... First paragraph
Dissenting Stockholders........................................................................ 5.5
Dunkirk........................................................................................ 3.2(c)
Effective Time................................................................................. 1.2
Employee....................................................................................... 3.1(q)(i)
Employee Plans................................................................................. 3.1(t)(i)
Encumbrances................................................................................... 3.1(i)
ERISA.......................................................................................... 3.1(q)(i)
ERISA Affiliate................................................................................ 3.1(q)(i)
Excess Shares.................................................................................. 2.2(d)
Exchange Act................................................................................... 3.2(c)
Exchange Agent................................................................................. 2.2(b)
Exchange Fund.................................................................................. 2.2(b)
Executory Period............................................................................... 5.1(a)
FAS No. 5...................................................................................... 3.1(f)
GAAP........................................................................................... 3.1(e)(ii)
Governmental Authority......................................................................... 3.1(n)
GT............................................................................................. 6.2(d)
Intellectual Property Rights................................................................... 3.1(k)
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
SECTION OR
TERM OTHER LOCATION
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Koinis......................................................................................... 6.2(k)
Liability...................................................................................... 3.1(f)
Losses......................................................................................... 8.1(d)
Material Adverse Effect........................................................................ 3.1(a)
Merger......................................................................................... 1.1
Merger Shares.................................................................................. 2.1(c)
Multiemployer Plan............................................................................. 3.1(t)(iii)
OG&K........................................................................................... 6.2(e)
Old Certificate................................................................................ 2.2(b)
Other Filings.................................................................................. 5.6
Parent......................................................................................... Preamble
Parent Common Stock............................................................................ First paragraph
Parent Disclosure Schedule..................................................................... 3.2
Parent Financial Statements.................................................................... 3.2(f)
Parent SEC Documents........................................................................... 3.2(e)
Party.......................................................................................... 5.1(a)
Pension Plans.................................................................................. 3.1(q)(i)
Prospectus..................................................................................... 3.2(b)
Related Agreements............................................................................. 4.1
Rule 145....................................................................................... 4.1(b)
Rule 145 Affiliate............................................................................. 4.1(b)
S-4............................................................................................ 5.6
SEC............................................................................................ 3.1 (x)
Stockholder Action............................................................................. 5.10
Stockholder Statement.......................................................................... 5.10
Stockholders................................................................................... 2.2(a)
Stockholders' Materials........................................................................ 5.10
Stockholders' Meeting.......................................................................... 5.10
Subsidiary..................................................................................... 2.1(b)
Superior Proposal.............................................................................. 5.4
Surviving Corporation.......................................................................... 1.1
Tax............................................................................................ 3.1(h)
Taxes.......................................................................................... 3.1(h)
Transaction Costs.............................................................................. 10.1
Unvested Company Option........................................................................ 2.3(b)
Vested Company Option.......................................................................... 2.3(b)
Voting Agreements.............................................................................. 4.1(a)
</TABLE>
vi
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION dated as of November 18, 1996, as
amended, among CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a Delaware
corporation ("Parent"), CTI ACQSUB-II, INC., a Delaware corporation and
wholly-owned subsidiary of Parent ("Acquisition Sub"), and OCTAGON, INC., a
Delaware corporation (the "Company").
The Boards of Directors of Parent, Acquisition Sub and the Company have each
duly approved and adopted this Agreement and Plan of Reorganization (this
"Agreement"), the Agreement of Merger in substantially the form of Exhibit A
attached hereto (the "Agreement of Merger") and the proposed merger of
Acquisition Sub with and into the Company in accordance with this Agreement, the
Agreement of Merger and the Delaware General Corporation Law (the "Delaware
Statute"), whereby, among other things, the issued and outstanding shares of
common stock, $.01 par value, of the Company (the "Company Common Stock") (other
than shares held by Dissenting Stockholders, if any), will be exchanged and
converted into shares of common stock, $.00025 par value, of Parent (the "Parent
Common Stock") in the manner set forth in Article II hereof and in the Agreement
of Merger, upon the terms and subject to the conditions set forth in this
Agreement and the Agreement of Merger.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement and the Agreement of Merger and the representations, warranties,
covenants, agreements, conditions and promises contained herein and therein, the
parties hereby agree as follows:
ARTICLE I
GENERAL
1.1 THE MERGER. In accordance with the provisions of this Agreement, the
Agreement of Merger and the Delaware Statute, Acquisition Sub shall be merged
with and into the Company (the "Merger"), which at and after the Effective Time
shall be, and is sometimes herein referred to as, the "Surviving Corporation".
Acquisition Sub and the Company are sometimes referred to as the "Constituent
Corporations".
1.2 THE EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement, the Agreement of Merger shall be executed, delivered and filed with
the Secretary of State of the State of Delaware by each of the Constituent
Corporations on the Closing Date in the manner provided under Section 251 of the
Delaware Statute. The Merger shall become effective (the "Effective Time") upon
the filing of the Agreement of Merger with the Secretary of State of the State
of Delaware.
1.3 EFFECT OF MERGER. At the Effective Time the separate existence of
Acquisition Sub shall cease and Acquisition Sub shall be merged with and into
the Surviving Corporation, and the Surviving Corporation shall possess all of
the rights, privileges, powers and franchises as well of a public as of a
private nature, and be subject to all the restrictions, disabilities and duties
of each of the Constituent Corporations, as provided in Section 259 of the
Delaware Statute.
1.4 CHARTER AND BY-LAWS OF SURVIVING CORPORATION. From and after the
Effective Time, (i) the Charter of the Company shall be amended so that Article
Fourth of the Company's Certificate of Incorporation shall read in its entirety
as follows: "The total number of shares of all classes of stock which the
corporation shall have authority to issue is 1,000, all of which shall consist
of Common Stock, $.01 par value per share.", and, as so amended, shall be the
Charter of the Surviving Corporation, unless and until altered, amended or
repealed as provided in the Delaware Statute, (ii) the by-laws of Acquisition
Sub shall be the by-laws of the Surviving Corporation, unless and until altered,
amended or repealed as provided in the Delaware Statute, the Charter or such
by-laws, (iii) the directors of Acquisition Sub shall be the directors of the
Surviving Corporation, unless and until removed, or until their respective terms
of office shall have expired, in accordance with the Delaware Statute, the
Charter and the by-laws of the Surviving Corporation, as applicable, and (iv)
the officers of the Company shall be the officers of the Surviving
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Corporation, unless and until removed, or until their terms of office shall have
expired, in accordance with the Delaware Statute, the Charter and the by-laws of
the Surviving Corporation, as applicable.
1.5 TAKING OF NECESSARY ACTION. Prior to the Effective Time, the parties
hereto shall do or cause to be done all such acts and things as may be necessary
or appropriate in order to effectuate the Merger as expeditiously as reasonably
practicable, in accordance with this Agreement, the Agreement of Merger and the
Delaware Statute.
1.6 TAX-FREE REORGANIZATION. For Federal income tax purposes, the parties
intend that the Merger be treated as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended
(the "Code"), by reason of Section 368(a)(2)(E) of the Code.
1.7 CLOSING. Unless this Agreement shall have been terminated and the
transactions contemplated by this Agreement abandoned pursuant to the provisions
of Article VIII, and subject to the provisions of Article VI, the closing of the
Merger (the "Closing") will take place at 10:00 a.m. (New York time) on a date
(the "Closing Date") to be mutually agreed upon by the parties, which date shall
be not later than the third Business Day after all the conditions set forth in
Article VI shall have been satisfied (or waived in accordance with Section 10.9,
to the extent the same may be waived), unless another date is agreed to in
writing by the parties. The Closing shall take place at the offices of
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York
10112, unless another place is agreed to in writing by the parties. As used
herein, the term "Business Day" shall mean any day other than a Saturday, Sunday
or day on which banks are permitted to close in the City and State of New York.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, subject and pursuant
to the terms and conditions of this Agreement and the Agreement of Merger, by
virtue of the Merger and without any action on the part of the Constituent
Corporations or the holders of the capital stock of the Constituent
Corporations:
(1) CAPITAL STOCK OF ACQUISITION SUB. Each issued and outstanding share of
common stock, par value $.01 per share, of Acquisition Sub shall be converted
into one share of common stock, par value $.01 per share, of the Surviving
Corporation.
(2) CANCELLATION OF CERTAIN SHARES OF COMPANY COMMON STOCK. Each share of
Company Common Stock that is (i) owned by the Company as treasury stock, (ii)
authorized but unissued, (iii) owned by any subsidiary of the Company or (iv)
owned by Parent or any subsidiary of Parent, shall be cancelled and no Parent
Common Stock or other consideration shall be delivered in exchange therefor. As
used herein, a "subsidiary" of any corporation means another corporation an
amount of whose voting securities sufficient to elect at least a majority of its
Board of Directors is owned directly or indirectly by such corporation.
(3) EXCHANGE RATIO FOR COMPANY COMMON STOCK. Subject to Section 2.2, each
share of Company Common Stock issued and outstanding at the Effective Time
(other than shares cancelled pursuant to Section 2.1(b) and shares held by
Dissenting Stockholders, if any) shall be exchanged and converted into the right
to receive 0.1 (one-tenth) of a share of Parent Common Stock in accordance with
Section 2.2. For convenience of reference, the shares of Parent Common Stock to
be issued upon the exchange and conversion of Company Common Stock in accordance
with this Section 2.1(c) are sometimes hereinafter collectively referred to as
the "Merger Shares".
(d) SHARES OF DISSENTING STOCKHOLDERS. Each issued and outstanding share
of Company Common Stock held by a Dissenting Stockholder, if any, shall not be
exchanged and converted as described in Section 2.1(c) but shall become the
right to receive such consideration as may be determined to be due to such
Dissenting Stockholder pursuant to the Delaware Statute; provided, however, that
each share of
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Company Common Stock issued and outstanding at the Effective Time and held by a
Dissenting Stockholder who or which shall, after the Effective Time, withdraw
his or its demand for appraisal or lose or fail to perfect his or its right of
appraisal as provided in the Delaware Statute shall be deemed, as of the
Effective Time, to be exchanged and converted into Parent Common Stock as
provided in Section 2.1(c), without interest. After the Effective Time, as
provided in the Delaware Statute, no Dissenting Stockholder will be entitled to
vote the shares of Company Common Stock subject to such Dissenting Stockholder's
demand for appraisal for any purpose or be entitled to the payment of dividends
or other distributions on such shares.
(e) ADJUSTMENTS FOR CAPITAL CHANGES. If, prior to the Effective Time,
Parent or the Company recapitalizes through a subdivision of its outstanding
shares into a greater number of shares, or a combination of its outstanding
shares into a lesser number of shares, or reorganizes, reclassifies or otherwise
changes its outstanding shares into the same or a different number of shares or
other classes, or declares a dividend on its outstanding shares payable in
shares of its capital stock or securities convertible into shares of its capital
stock, then the applicable exchange ratio for Company Common Stock will be
adjusted appropriately so as to maintain the relative proportionate interests of
the holders of shares of Company Common Stock and the holders of shares of
Parent Common Stock.
2.2 EXCHANGE OF CERTIFICATES.
(a) PROCEDURE FOR EXCHANGE. Prior to the Closing Date, Parent shall select
an exchange agent (the "Exchange Agent") to act in such capacity in connection
with the Merger. Promptly after the Effective Time, Parent shall deposit with
the Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article II and the Agreement of
Merger, certificates representing the Merger Shares (which shares of Parent
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund"). As soon as practicable
after the Effective Time, the Exchange Agent shall mail to each holder of
record, other than Parent, any subsidiary of Parent, the Company and any
subsidiary of the Company, of a certificate or certificates which immediately
before the Effective Time represented issued and outstanding shares of Company
Common Stock (collectively, the "Old Certificates"), (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Old Certificates shall pass, only upon delivery of the Old Certificates
to the Exchange Agent and shall be in such form and have such other provisions
as Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of Old Certificates in exchange for certificates representing Merger
Shares. Upon surrender of an Old Certificate for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such other
documents as may be reasonably required by the Exchange Agent, the holder of
such Old Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Parent Common Stock
which such holder has the right to receive pursuant to the provisions of this
Article II and the Agreement of Merger and the Old Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of shares
of Company Common Stock which is not registered on the transfer records of the
Company, a certificate representing the proper number of shares of Parent Common
Stock may be issued to a transferee if the Old Certificate representing such
Company Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2(a) and the Agreement of Merger, each Old
Certificate shall be deemed, on and after the Effective Time, to represent only
the right to receive upon such surrender the certificate representing shares of
Parent Common Stock and cash in lieu of fractional shares of Parent Common Stock
as contemplated by this Article II and the Agreement of Merger.
(b) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES. No dividends
or other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Old Certificate with respect to the shares of
Parent Common Stock represented thereby and no cash payment in lieu of
fractional shares shall
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<PAGE>
be paid to any such holder pursuant to Section 2.2(d) or the Agreement of Merger
until the holder of record of such Old Certificate shall surrender such Old
Certificate. Subject to the effect of applicable laws, following surrender of
any such Old Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of any
cash payable in lieu of a fractional share of Parent Common Stock to which such
holder is entitled pursuant to Section 2.2(d) and the Agreement of Merger and
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock.
(c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms of this Article II and the Agreement
of Merger (including any cash paid pursuant to Section 2.2(b) or 2.2(d)) shall
be deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock and there shall be no further registration
or transfers on the stock transfer books of the Surviving Corporation of the
shares of Company Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, any Old Certificate is presented
to the Surviving Corporation for any reason, such Old Certificate shall be
cancelled and exchanged as provided in this Article II and the Agreement of
Merger.
(d) NO ISSUANCE OF FRACTIONAL SHARES. (i) No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Old Certificates, and such fractional share interests
shall not entitle the owner thereof to vote or to any rights of a stockholder of
Parent.
(ii) As promptly as practicable following the Effective Time, the
Exchange Agent shall determine the excess of (x) the number of full shares
of Parent Common Stock delivered to the Exchange Agent by Parent pursuant to
Section 2.2(a) over (y) the aggregate number of full shares of Parent Common
Stock to be distributed to holders of Company Common Stock pursuant to
Section 2.2(a) (such excess being herein called the "Excess Shares"). As
soon after the Effective Time as practicable, the Exchange Agent, as agent
for the holders of Company Common Stock, shall sell the Excess Shares at
then prevailing prices in the over-the-counter market, all in the manner
provided in paragraph (iii) of this Section 2.2(d).
(iii) The sale of the Excess Shares by the Exchange Agent shall be
executed in the over-the-counter market through one or more member firms of
the National Association of Securities Dealers, Inc. and shall be executed
in round lots to the extent practicable. Until the net proceeds of such sale
or sales have been distributed to the holders of Company Common Stock, the
Exchange Agent shall hold such proceeds in trust for the holders of Company
Common Stock (the "Common Shares Trust"). Parent shall pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the
expenses and compensation of the Exchange Agent, incurred in connection with
such sale of the Excess Shares. The Exchange Agent shall determine the
portion of the Common Shares Trust to which each holder of Company Common
Stock shall be entitled, if any, by multiplying the amount of the aggregate
net proceeds comprising the Common Shares Trust by a fraction, the numerator
of which is the amount of the fractional share interest to which such holder
of Company Common Stock is entitled and the denominator of which is the
aggregate amount of fractional share interests to which all holders of
Company Common Stock are entitled.
(iv) As soon as practicable after the determination of the amount of
cash, if any, to be paid to the holders of Company Common Stock in lieu of
any fractional share interests, the Exchange Agent shall make available such
amounts to such holders of Company Common Stock.
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(e) TERMINATION OF EXCHANGE FUND AND COMMON SHARES TRUST. Any portion of
the Exchange Fund and Common Shares Trust which remains undistributed to the
stockholders of the Company for six months after the Effective Time shall be
delivered to Parent, upon demand, and any former stockholders of the Company who
have not theretofore complied with this Article II and the Agreement of Merger
shall thereafter look only to Parent for payment of their claim for Parent
Common Stock, any cash in lieu of fractional shares of Parent Common Stock and
any dividends or distributions with respect to Parent Common Stock.
(f) NO LIABILITY. Neither the Exchange Agent, Parent, Acquisition Sub nor
the Company shall be liable to any holder of shares of Company Common Stock or
Parent Common Stock, as the case may be, for shares (or dividends or
distributions with respect thereto) of Parent Stock to be issued in exchange for
Company Common Stock pursuant to this Section 2.2, if, on or after the
expiration of six months following the Effective Date, such shares are delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
2.3 COMPANY OPTIONS. (a) At the Effective Time, each holder of a Vested
Company Option shall, in exchange for and satisfaction thereof, receive from
Parent a number of shares of Parent Common Stock as shall equal (i) the number
of shares of Parent Common Stock that the holder of such Vested Company Option
would have received pursuant to this Article II and the Agreement of Merger had
such holder exercised such Vested Company Option immediately prior to the
Effective Time less (ii) the number of shares of Parent Common Stock as shall
equal the quotient obtained by dividing the aggregate exercise price for such
Vested Company Option by $4.50. All Unvested Company Options shall be cancelled
at the Effective Time, and no consideration shall be payable in respect thereof
(the parties acknowledge, however, that there will be new issuances pursuant to
paragraph (c) below). Prior to the Effective Time, the Company shall use its
reasonable efforts to obtain all necessary consents and releases from holders of
Company Options and take any such other action as may be reasonably necessary to
give effect to the transactions contemplated by this Section 2.3 and to
otherwise cause each Company Option to be surrendered and cancelled at the
Effective Time.
(b) As used herein, the following terms shall have the following meanings:
(a) "Company Option" shall mean and include any Unvested Company Option
and any Vested Company Option.
(b) "Unvested Company Option" shall mean each of the Company's options
to purchase Company Common Stock that is outstanding at the Effective Time,
which is not exercisable immediately prior to the Effective Time pursuant to
its terms in effect as of the date hereof.
(c) "Vested Company Option" shall mean each of the Company's options to
purchase Company Common Stock that is outstanding at the Effective Time,
which is exercisable immediately prior to the Effective Time pursuant to its
terms in effect as of the date hereof.
(c) Promptly after the Effective Time, Parent shall grant options to
purchase an aggregate of 90,149 shares of Parent Common Stock to those persons
listed on Schedule 2.3(c), which schedule shall be agreed upon by the parties
and attached hereto prior to the Closing, in the amounts set forth on such
Schedule, at an exercise price per share equal to the fair market value of a
share of Parent Common Stock on the date of grant, determined in the manner
provided in the Employee Stock Option Plan of Parent, which options shall vest
over a three-year period beginning on the date of grant and otherwise be subject
to the terms and conditions of such Employee Stock Option Plan and the option
agreements evidencing options granted pursuant thereto.
2.4 COMPANY WARRANTS. At the Effective Time, each of the Company's then
outstanding Company Warrants, by virtue of the Merger and without any further
action on the part of any holder thereof, shall be assumed by Parent and
automatically converted, pursuant to its terms, into a warrant to purchase a
number of shares of Parent Common Stock determined by multiplying the number of
shares of Company Common
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Stock covered by such Company Warrant immediately prior to the Effective Time by
0.1 (one-tenth) (rounded up to the nearest whole number of shares), at an
exercise price per share of Parent Common Stock equal to the exercise price in
effect under such Company Warrant immediately prior to the Effective Time
divided by 0.1 (one-tenth) (rounded up to the nearest cent).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Parent and Acquisition Sub that, except as disclosed in the
disclosure schedule dated the date hereof, certified by the Chief Executive
Officer of the Company and delivered by the Company to Parent and Acquisition
Sub simultaneously herewith (which disclosure schedule shall contain specific
references to the representations and warranties to which the disclosures
contained therein relate) (the "Company Disclosure Schedule"):
(a) ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER. Each of the
Company and the wholly-owned subsidiaries of the Company set forth in the
Company Disclosure Schedule (the "Company Subs"), (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, (ii) has all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as now being
conducted and as currently proposed to be conducted and (iii) is duly qualified
and in good standing to do business in all jurisdictions in which the failure to
be so qualified and in good standing could reasonably be expected to have a
material adverse effect on the business, properties, Liabilities, assets,
operations, results of operations, condition (financial or otherwise), prospects
or affairs (a "Material Adverse Effect") of the Company. The Company has all
requisite corporate power and authority to enter into this Agreement and the
Agreement of Merger and each of the Related Agreements to which it is a party,
to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The Company has delivered to
Parent true and complete copies of the Charter and by-laws of the Company and
each Company Sub, respectively, in each case as amended to the date hereof. As
used herein, "Charter" shall mean, with respect to any corporation, those
instruments that at the time constitute its corporate charter as filed or
recorded under the general corporation law of the jurisdiction of its
incorporation, including the articles or certificate of incorporation or
organization, and any amendments thereto, as the same may have been restated,
and any amendments thereto (including any articles or certificates of merger or
consolidation or certificates of designation or similar instruments which effect
any such amendment) which became effective after the most recent such
restatement.
(b) EQUITY INVESTMENTS. Other than the Company Subs, the Company does not
currently have any subsidiaries, nor does it currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity. The Company owns
100% of the issued and outstanding capital stock of each Company Sub, free and
clear of all Encumbrances. Except for the Company Options and the Company
Warrants, there are no options, warrants, rights, calls, commitments or
agreements of any character to which the Company or any Company Sub is a party
or by which the Company or any Company Sub is bound calling for the issuance of
shares of capital stock of the Company or any Company Sub or any securities
convertible into or exercisable or exchangeable for, or representing the right
to purchase or otherwise receive, any such capital stock, or other arrangement
to acquire, at any time or under any circumstance, capital stock of the Company
or any such other securities of the Company or any Company Sub.
(c) CAPITAL STOCK; SECURITIES. The authorized capital stock of the Company
consists of 25,000,000 shares of Company Common Stock, of which 8,404,702 shares
are outstanding. The Company has reserved (x) 4,580,000 shares of Company Common
Stock for issuance upon exercise of outstanding warrants (collectively, the
"Company Warrants") and (y) 499,167 shares of Company Common Stock for issuance
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upon the exercise of Company Options, of which 114,834 are Vested Company
Options and 384,333 are Unvested Company Options. All outstanding shares of
Company Common Stock are validly issued and outstanding, fully paid and
non-assessable and not subject to preemptive rights. Except as set forth in the
Company Disclosure Schedule, there are no voting trusts, voting agreements
(except in favor of the Merger), proxies (except as a part of voting agreements
in favor of the Merger), first refusal rights, first offer rights, co-sale
rights, transfer restrictions (other than restrictions imposed by federal or
state securities laws) or other agreements, instruments or understandings
(whether written or oral, formal or informal) with respect to the voting,
transfer or disposition of Company Common Stock to which the Company is a party
or by which it is bound, or, to the best knowledge of the Company, among or
between any persons other than the Company.
(d) AUTHORITY; NO CONSENTS. The execution, delivery and performance by the
Company of this Agreement and the Agreement of Merger and the Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action on the part of the Company; and this Agreement and the Related
Agreements to which it is a party have been, and the Agreement of Merger when
executed and delivered by the Company will be, duly and validly executed and
delivered by the Company, and this Agreement and the Related Agreements to which
it is a party are, and the Agreement of Merger when executed and delivered by
the parties thereto will be, the valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms.
Neither the execution, delivery and performance of this Agreement, the Related
Agreements to which it is a party or the Agreement of Merger nor the
consummation by the Company of the transactions contemplated hereby or thereby
nor compliance by the Company with any provision hereof or thereof will (A)
conflict with, (B) result in any violations of, (C) cause a default under (with
or without due notice, lapse of time or both), (D) give rise to any right of
termination, amendment, cancellation or acceleration of any obligation contained
in or the loss of any material benefit under or (E) result in the creation of
any Encumbrance on or against any assets, right or property of the Company under
any term, condition or provision of (x) any instrument or agreement to which the
Company is a party, or, to the best knowledge of the Company, by which the
Company or any of its properties, assets or rights may be bound (except as shall
been waived or with respect to which consent shall have been obtained prior to
the Closing), (y) any law, statute, rule, regulation, order, writ, injunction,
decree, permit, concession, license or franchise of any Governmental Authority
applicable to the Company or any of its properties, assets or rights or (z) the
Company's Charter or by-laws. Except as contemplated by this Agreement or the
Agreement of Merger, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any Governmental Authority is required in
connection with the execution, delivery and performance by the Company of this
Agreement or the Agreement of Merger or the consummation of the transactions
contemplated hereby or thereby, except for (i) the distribution of the
Stockholders' Materials with respect to the adoption by the Stockholders of this
Agreement and the Agreement of Merger, (ii) the filing of the Agreement of
Merger and the related officer's certificates with the Secretary of State of the
State of Delaware and appropriate documents with the relevant authorities of
other states in which the Company is qualified to do business and (iii) such
other consents, waivers, authorizations, filings, approvals and registrations
which if not obtained or made would not have a Material Adverse Effect on the
Company or materially impair the ability of the Company and the Stockholders to
consummate the transactions contemplated by this Agreement or the Agreement of
Merger, including, without limitation, the Merger.
(e) FINANCIAL INFORMATION. (i) The Company has previously delivered to
Parent the following financial statements (collectively, the "Company Financial
Statements"):
(i) the unaudited consolidated balance sheet of the Company as at
September 30, 1996 (the "Company Interim Balance Sheet"), and the related
consolidated statements of income, cash flow and stockholders' equity for
the eight-month period then ended, prepared by the Company (the "Company
Interim Financial Statements"); and
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(ii) the audited consolidated balance sheets of the Company as at
December 31, 1995, 1994 and 1993 and the related audited consolidated
statements of income, cash flow and stockholders' equity for the years then
ended (including complete footnotes thereto), certified by the Company's
independent public accountants, and accompanied by a copy of such auditor's
report.
(ii) The Company Financial Statements (A) are in accordance with the books
and records of the Company, (B) fairly present the financial condition of the
Company on a consolidated basis as at the respective dates indicated and the
results of operations of the Company on a consolidated basis for the respective
periods indicated and (C) have been prepared in accordance with generally
accepted accounting principles consistently applied ("GAAP"), except as
indicated therein and, in the case of the Company Interim Financial Statements,
for the absence of complete footnote disclosure as required by GAAP and subject,
in the case of the Company Interim Financial Statements, to changes resulting
from normal year-end audit adjustments, which adjustments shall not in any event
result in a material adverse change to any item of revenue or expense.
(f) ABSENCE OF UNDISCLOSED LIABILITIES. At September 30, 1996, (i) the
Company had no liability or obligation of any nature (whether known or unknown,
matured or unmatured, fixed or contingent ("Liability")), which was not provided
for or disclosed on the Company Interim Balance Sheet and (ii) all liability
reserves established by the Company and set forth on the Company Interim Balance
Sheet were adequate, in the good faith judgement of the Company, for all such
Liabilities at the date thereof. There were no material loss contingencies (as
such term is used in Statement of Financial Accounting Standards No. 5 issued by
the Financial Accounting Standards Board in March 1975 ("FAS No. 5")) which were
not adequately provided for on the Company Interim Balance Sheet as required by
FAS No. 5.
(g) ABSENCE OF CHANGES. Since September 30, 1996, the Company has been
operated in the ordinary course, consistent with past practice, and there has
not been:
(i) to the best knowledge of the Company, any damage, destruction or
loss, whether or not covered by insurance, having or which could reasonbly
be expected to have a Material Adverse Effect;
(ii) to the best knowledge of the Company, any Liability created,
assumed, guaranteed or incurred, or any material transaction, contract or
commitment entered into, by the Company, other than the license, sale or
transfer of the Company's products to customers in the ordinary course of
business;
(iii) any declaration, setting aside or payment of any dividend or other
distribution of any assets of any kind whatsoever with respect to any shares
of the capital stock of the Company, or any direct or indirect redemption,
purchase or other acquisition of any such shares of the capital stock of the
Company;
(iv) any payment, discharge or satisfaction of any material Encumbrance
or Liability or any cancellation by the Company of any material debts or
claims or any amendment, termination or waiver of any right of material
value to the Company, except for the Bridge Indebtedness which will be
contributed by the Parent to the Company at the Closing pursuant to Section
7.2;
(v) any stock split, reverse stock split, combination, reclassification
or recapitalization of any Company Common Stock, or any issuance of any
other security in respect of or in exchange for, any shares of Company
Common Stock;
(vi) any issuance by the Company of any shares of its capital stock or
any debt security or securities, rights, options or warrants convertible
into or exercisable or exchangeable for any shares of its capital stock or
debt security (other than shares of Company Common Stock issued upon
exercise of Company Options in accordance with the present terms thereof);
(vii) any termination of, or, to the best knowledge of the Company,
indication of an intention to terminate or not renew, any material contract,
license, commitment or other agreement between the
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Company and any other person, or the assignment by the Company of any
interest in any contract to which the Company is a party;
(viii) any material write-down or write-up of the value of any asset of
the Company, or any material write-off of any accounts receivable or notes
receivable of the Company or any portion thereof;
(ix) any increase in or modification or acceleration of compensation or
benefits payable or to become payable to any officer, employee, consultant
or agent of the Company other than in the ordinary course, or the entering
into of any employment contract with any officer or employee;
(x) the making of any loan, advance or capital contribution to or
investment in any person or the engagement in any transaction with any
employee, officer, director or stockholder of the Company, other than
advances to employees in the ordinary course of business for travel and
similar business expenses;
(xi) any change in the accounting methods or practices followed by the
Company, any change in depreciation or amortization policies or rates
theretofore adopted by the Company, whether or not as a result of any
Defense Contract Audit Agency review;
(xii) any termination of employment of any officer or key employee of the
Company or, to the best knowledge of the Company, any expression of
intention by any officer or key employee of the Company to terminate such
office or employment with the Company;
(xiii) any amendments or changes in the Company's Charter or by-laws;
(xiv) to the best knowledge of the Company, the commencement of any
litigation or other action by or against the Company; or
(xv) any agreement, understanding, authorization or proposal, whether in
writing or otherwise, for the Company to take any of the actions specified
in items (i) through (xiv) above.
(h) TAX MATTERS. The Company and each other corporation included in any
consolidated or combined tax return in which the Company has been included (i)
have filed and will file, in a timely and proper manner, consistent with
applicable laws, all Federal, state and local Tax returns and Tax reports
required to be filed by them through the Closing Date (the "Company Returns")
with the appropriate governmental agencies in all jurisdictions in which Company
Returns are required to be filed and have paid or will pay all amounts shown
thereon to be due; and (ii) have paid and shall timely pay all Taxes required to
have been paid on or before the Closing Date. All Taxes attributable to all
taxable periods ending on or before the Closing Date, to the extent not required
to have been previously paid have been adequately provided for on the Company
Interim Balance Sheet and the Company will not accrue a Tax liability from the
date of the Company Interim Balance Sheet up to and including the Closing Date,
other than a Tax liability accrued in the ordinary course of business. The
Company has not been notified by the Internal Revenue Service or any state,
local or foreign taxing authority that any issues have been raised (and are
currently pending) in connection with any Company Return, and no waivers of
statutes of limitations have been given or requested with respect to the
Company. Except as contested in good faith and disclosed in the Company
Disclosure Schedule, any deficiencies asserted or assessments (including
interest and penalties) made as a result of any examination by the Internal
Revenue Service or by any other taxing authorities of any Company Return have
been fully paid or are adequately provided for on the Company Interim Balance
Sheet and no proposed additional Taxes have been asserted. The Company (i) has
not made an election to be treated as a "consenting corporation" under Section
341(f) of the Code nor (ii) is it a "personal holding company" within the
meaning of Section 542 of the Code. The Company has not agreed to, nor is
required to make any adjustment under Section 481(a) of the Code by reason of a
change in accounting method or otherwise. The Company will not incur a Tax
liability resulting from the Company ceasing to be a member of a consolidated or
combined group that had previously filed
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consolidated, combined or unitary Tax returns. As used in this Agreement, "Tax"
means any of the Taxes and "Taxes" means, with respect to any entity, (A) all
income taxes (including any tax on or based upon net income, gross income,
income as specially defined, earnings, profits or selected items of income,
earnings or profits) and all gross receipts, sales, use, ad valorem, transfer,
franchise, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or windfall profits taxes, alternative or add-on
minimum taxes, customs duties and other taxes, fees, assessments or charges of
any kind whatsoever, together with all interest and penalties, additions to tax
and other additional amounts imposed by any taxing authority (domestic or
foreign) on such entity and (B) any liability for the payment of any amount of
the type described in the immediately preceding clause (A) as a result of (i)
being a "transferee" (within the meaning of Section 6901 of the Code or any
other applicable law) of another entity, (ii) being a member of an affiliated or
combined group or (iii) any contractual obligations or otherwise.
(i) TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. The
Company has good and marketable title to all assets, properties and interests in
properties, real, personal or mixed, reflected on the Company Interim Balance
Sheet or acquired after September 30, 1996, except for (i) those Encumbrances
set forth in the Company Disclosure Schedule, (ii) liens for current taxes not
yet due and payable, (iii) statutory mechanics and materialmen's liens and (iv)
utility easements. As used herein, the term "Encumbrances" shall mean and
include security interests, mortgages, liens, pledges, guarantees, charges,
easements, reservations, restrictions, clouds, equities, rights of way, options,
rights of first refusal and all other encumbrances, whether or not relating to
the extension of credit or the borrowing of money.
(j) REAL PROPERTY-OWNED OR LEASED. The Company does not currently own, nor
has it or any of its predecessors ever owned, any real property. The Company
Disclosure Schedule contains a list of all real property leased by the Company
and any requirement of consent of the lessor to the Merger (including any
requirement of consent to assignment by way of change of control). The Company
is the owner and holder of all the leasehold estates purported to be granted by
each lease to which it is a party and all leases are in full force and effect
and constitute valid and binding obligations of the Company. The Company has
made available to Parent true and complete copies of all such leases.
(k) INTELLECTUAL PROPERTY. The Company Disclosure schedule sets forth a
list of all patents, copyrights, trademarks, tradenames and service marks and
any licensed intellectual property rights (other than commercial or
"shrink-wrap" licenses covering software generally available to the public on a
retail basis) (collectively, "Intellectual Property Rights") of the Company. To
the best knowledge of the Company, the ownership or use of such Intellectual
Property Rights by the Company does not infringe on the intellectual property
rights of others (and the Company has not received notice alleging any such
infringement), and, to the best of the Company's knowledge, no third party is
infringing on the Intellectual Property Rights of the Company. Except as set
forth on the Disclosure Schedule, the Company is not obligated to pay any third
party any royalty or fee for the use of the Intellectual Property Rights used in
its business.
(l) AGREEMENTS, ETC. The Company Disclosure Schedule sets forth a true and
complete list of all written or oral contracts, agreements and other instruments
not made in the ordinary course of business to which the Company is a party, or
made in the ordinary course of business and referred to in clauses (i) through
(ix) of this Section 3.2(l). The Company is not a party to any agreement,
arrangement or understanding, whether written or oral, formal or informal,
relating to:
(i) any joint venture, partnership or other agreement or arrangement for
the sharing of profits;
(ii) any collective bargaining contract or other contract with or
commitment to any labor union;
(iii) the future purchase, sale or license of products, material,
supplies, equipment or services requiring payments to or from the Company in
an amount in excess of $50,000 per annum, which agreement, arrangement or
understanding is not terminable on 30 days' notice without cost or other
liability at or at any time after the Effective Time, or in which the
Company has granted or received
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manufacturing rights, most favored nations pricing provisions or exclusive
marketing or other rights relating to any product, group of products,
services, technology, assets or territory;
(iv) the employment of any officer, employee, consultant or agent or any
other type of contract, commitment or understanding with any officer,
employee, consultant or agent which (except as otherwise generally provided
by applicable law) is not immediately terminable without cost or other
liability at or at any time after the Effective Time;
(v) indenture, mortgage, promissory note, loan agreement, guarantee or
other agreement or commitment for the borrowing of money, for a line of
credit or, if involving payments in excess of $50,000 per annum, for a
leasing transaction of a type required to be capitalized in accordance with
Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board;
(vi) contract or commitment for capital expenditures individually in
excess of $50,000;
(vii) any agreement or contract with a "disqualified individual" (as
defined in Section 280G(c) of the Code), which could result in a
disallowance of the deduction for any "excess parachute payment" (as defined
in Section 280G(b)(i) of the Code) under Section 280G of the Code;
(viii) agreement or arrangement for the sale of any assets, properties or
rights having a value in excess of $50,000; or
(ix) agreement which restricts the Company from engaging in any aspect
of its business or competing in any line of business in any geographic area.
The Company has furnished to Parent true and complete copies of all such
agreements listed in the Company Disclosure Schedule and each such agreement (A)
is the legal, valid and binding obligation of the Company and, to the best
knowledge of the Company, the legal, valid and binding obligation of each other
party thereto, in each case enforceable in accordance with its terms, (B) is in
full force and effect and (C) to the best knowledge of the Company, the other
party or parties thereto is or are not in material default thereunder.
(m) NO DEFAULTS, ETC. The Company has in all material respects performed
all the obligations required to be performed by it to date and is not in
material default or, to the best knowledge of the Company, alleged to be in
material default under (i) its Charter or by-laws or (ii) any material
agreement, lease, contract, commitment, instrument or obligation to which the
Company is a party or by which any of its properties, assets or rights are or
may be bound or affected, and, to the best knowledge of the Company, there
exists no event, condition or occurrence which, with or without due notice or
lapse of time, or both, would constitute such a default by it of any of the
foregoing. To the best knowledge of the Company, no current customer has
notified, or expressed an intention to notify, the Company that such customer
will materially reduce the dollar amount of business it will do with the Company
or cease doing business with the Company.
(n) LITIGATION, ETC. Except as otherwise set forth in the Company
Disclosure Letter, there are no (i) actions, suits, claims, investigations or
legal or administrative or arbitration proceedings (collectively, "Actions")
pending, or to the best knowledge of the Company, threatened against the
Company, whether at law or in equity, or before or by any Federal, state,
municipal, foreign or other governmental court, department, commission, board,
bureau, agency or instrumentality ("Governmental Authority"), (ii) judgments,
decrees, injunctions or orders of any Governmental Authority or arbitrator
against the Company or (iii) to the best knowledge of the Company, material
disputes with customers or vendors.
(o) COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS. Except as otherwise set forth
in the Company Disclosure Letter, the Company has complied and is presently in
compliance in all material respects with all material Federal, state, local or
foreign laws, ordinances, regulations and orders applicable to it or its
business, including, without limitation, all Federal and state securities or
"blue sky" laws and all laws and regulations relating to occupational safety and
health and the environment. The Company has all material
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Federal, state, local and foreign governmental authorizations, security
clearances, consents, approvals, licenses and permits necessary in the conduct
of its business as presently conducted and as currently proposed to be
conducted, such authorizations, consents, approvals, licenses and permits are in
full force and effect, no material violations are or have been recorded in
respect of any thereof and no proceeding is pending or, to the best knowledge of
the Company, threatened to revoke or limit any thereof. All of the Company's
full-time and temporary personnel who provide services in a manner or of the
type that require specific certifications or clearances have provided such
services at all times while having such certifications or clearances in full
force and effect. Neither the Company nor, to the best knowledge of the Company,
any of its full-time or part-time personnel has been cited or alleged by the
Nuclear Regulatory Commission or other regulatory authority as failing to comply
with regulatory requirements or guidelines in the performance of services.
(p) LABOR RELATIONS; EMPLOYEES. The Company Disclosure Schedule sets forth
the number of full-time and part-time employees of the Company and the primary
locations at which such employees provide their services as of the date hereof.
Except as set forth in the Company Disclosure Schedule, (A) the Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to date or amounts required to be reimbursed to such employees, (B) upon
termination of the employment of any such employees, neither the Company,
Parent, Acquisition Sub nor the Surviving Corporation will by reason of anything
done prior to the Closing be liable to any of such employees for severance pay
or any other payments, (C) to the best knowledge of the Company, the Company is
in compliance in all material respects with all material Federal, state, local
and foreign laws and regulations respecting labor, employment and employment
practices, terms and conditions of employment and wages and hours, and (D) there
is no unfair labor practice, sexual harassment or other employment-related
complaint pending or, to the best knowledge of the Company, threatened against
the Company or any employee of the Company. To the best knowledge of the
Company, no employee of the Company is in material violation of any term of any
employment contract, confidentiality agreement or any other contract or
agreement relating to the relationship of such employee with the Company or any
other party because of the nature of the business conducted or proposed to be
conducted by the Company or the execution and delivery of such agreement or
contract by such employee.
(q) EMPLOYEE BENEFIT PLANS AND CONTRACTS
(i) The Company Disclosure Schedule identifies each "employee benefit
plan", as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and all other material written or formal plans or
agreements involving direct or indirect compensation (including any employment
agreements entered into between the Company and any Employee of the Company, but
excluding workers' compensation, unemployment compensation, other
government-mandated programs and the Company's salary and wage arrangements)
currently or previously maintained, contributed to or entered into by the
Company or any ERISA Affiliate thereof for the benefit of any Employee or former
Employee under which the Company or any ERISA Affiliate thereof has any present
or future obligation or liability (the "Employee Plans"). The Company has
provided to Parent true and complete copies of all Employee Plans (and, if
applicable, related trust agreements) and all amendments thereto and written
interpretations thereof. For purposes of the preceding sentence, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations", as defined in Section 414(b) of the Code, (B) a group of entities
under "common control", as defined in Section 414(c) of the Code or (C) an
"affiliated service group", as defined in Section 414(m) of the Code or treasury
regulations promulgated under Section 414(o) of the Code, any of which includes
the Company. Any Employee Plans which individually or collectively would
constitute an "employee pension benefit plan", as defined in Section 3(2) of
ERISA, but which are not Multiemployer Plans (collectively, the "Pension
Plans"), are identified as such in the Company Disclosure Schedule. For purposes
of this Section 3.1(t), "Employee" means any common law employee, consultant or
director of the Company.
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(ii) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
from its adoption to the date hereof, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. The Company has provided
Parent with copies of the most recent Internal Revenue Service determination
letters with respect to any such Employee Plans. Each Employee Plan has been
maintained substantially in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations, including,
without limitation, ERISA and the Code, which are applicable to such Employee
Plans.
(iii) Except as set forth in the Company Disclosure Schedule, no Employee
Plan constitutes or since the enactment of ERISA has constituted a
"multiemployer plan", as defined in Section 3(37) of ERISA (a "Multiemployer
Plan"). The Company has not within the past five years incurred any material
liability under Title IV of ERISA arising in connection with the termination of
any Pension Plan or the complete or partial withdrawal from any Multiemployer
Plan. Except as disclosed in the Company Disclosure Schedule, if a "complete
withdrawal" by the Company were to occur as of the Closing with respect to all
Multiemployer Plans, the Company would not incur any withdrawal liability under
Title IV of ERISA.
(iv) The Company Disclosure Schedule lists each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not an Employee Plan, (B) is
entered into, maintained or contributed to, as the case may be, by the Company,
(C) covers any Employee or former Employee and (D) under which the Company has
any present or future obligation or liability (excluding workers' compensation,
unemployment compensation or other government-mandated programs and the
Company's salary and wage arrangements). Such contracts, plans and arrangements
as are described above are hereinafter referred to collectively as the "Benefit
Arrangements". Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
material laws, statutes, rules, regulations, orders and judgments which are
applicable to such Benefit Arrangements.
(v) The Company has provided, or will have provided, to individuals entitled
thereto who are current or former Employees of the Company all required notices
within the applicable time period and coverage pursuant to Section 4980B of the
Code with respect to any "qualifying event" (as defined in Section 4980B(f)(3)
of the Code) occurring prior to and including the Closing Date, and no tax
payable on account of Section 4980B of the Code has been incurred with respect
to any current or former Employees of the Company.
(r) CERTAIN AGREEMENTS. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i)
result in any payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any director
or employee of the Company from the Company, under any Employee Plan, Benefit
Arrangement or otherwise, (ii) materially increase any benefits otherwise
payable under any Employee Plan or the Benefit Arrangement or (iii) result in
the acceleration of the time of payment or vesting of any such benefits.
(s) INSURANCE. The Company maintains policies of liability, theft,
fidelity, fire, product liability, workmen's compensation, indemnification of
directors and officers and other similar forms of insurance. The Company
Disclosure Schedule sets forth a history of all claims in excess of $50,000 made
by the Company thereunder and the status thereof. All such policies of insurance
are in full force and effect and all premiums with respect thereto are currently
paid and, to the best knowledge of the Company, no basis exists for termination
of any thereof on the part of the insurer. The amounts of coverage under such
policies conform to the requirements set forth in the Company's customer
contracts. The Company has not, during the last three fiscal years, been denied
or had revoked or rescinded any policy of insurance.
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(t) BROKERS. The Company has not, nor have any of its officers, directors,
stockholders or employees, employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby.
(u) RELATED TRANSACTIONS. Except as otherwise set forth in the Company
Disclosure Letter and for compensation to regular employees of the Company, no
current or former director, officer or stockholder that is an affiliate of the
Company or any associate (as defined in the rules promulgated under the Exchange
Act) thereof, is now, or has been during the last five fiscal years, (i) a party
to any transaction with the Company (including, but not limited to, any
contract, agreement or other arrangement providing for the furnishing of
services by, or rental of real or personal property from, or borrowing money
from, or otherwise requiring payments to, any such director, officer or
affiliated stockholder of the Company or associate thereof), or (ii) the direct
or indirect owner of an interest in any corporation, firm, association or
business organization which is a present or potential competitor, supplier or
customer of the Company (other than non-affiliated holdings in publicly-held
companies), nor does any such person receive income from any source other than
the Company which relates to the business of, or should properly accrue to, the
Company.
(v) BOARD APPROVAL. The Board of Directors of the Company has unanimously
(i) approved this Agreement, the Agreement of Merger and each of the Related
Agreements to which the Company is a party and the transactions contemplated
hereby and thereby, (ii) determined that the Merger is in the best interests of
the Stockholders of the Company and is on terms that are fair to such
Stockholders and (iii) recommended that the Stockholders of the Company approve
the Merger in accordance with the Agreement of Merger and the Delaware Statute.
(w) VOTE REQUIRED. The affirmative vote of a majority of the outstanding
shares of the Company Common Stock approving the Merger, this Agreement, the
Agreement of Merger, each of the Related Agreements to which the Company is a
party and the material transactions contemplated hereby and thereby are the only
votes of the holders of any class or series of the Company's capital stock
necessary to approve this Agreement, the Agreement of Merger and each of the
Related Agreements to which the Company is a party and the transactions
contemplated hereby and thereby.
(x) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company or any Stockholder for inclusion in (i) the S-4 will, at
the time that the S-4 is filed with the SEC and at the time that the S-4 becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, and (ii) the
Stockholders' Materials will, at the dates mailed to the Stockholders and at the
effective date of the Stockholder Action, 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, in light of the circumstances under
which they are made, not misleading. The Stockholders' Materials will comply as
to form in all material respects with the provisions of all applicable laws,
rules and regulations of all Governmental Authorities.
(y) COMPANY NOT AN INTERESTED STOCKHOLDER. As of the date of this
Agreement, neither the Company nor, to the best of the Company's knowledge, any
of its Affiliates is an "Interested Stockholder" of Parent as such term is
defined in Section 203 of the Delaware Statute.
(z) DISCLOSURE. Neither Section 3.1 of this Agreement (including the
Company Disclosure Schedule) nor any document, written information, statement,
financial statement, certificate or exhibit furnished or to be furnished to
Parent or Acquisition Sub by or on behalf of the Company or any Stockholder
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements or
facts contained herein and therein not misleading in light of the circumstances
under which they were made.
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(aa) KNOWLEDGE DEFINITION. As used herein, "to the best knowledge of the
Company" and like phrases shall mean and include (i) actual knowledge and (ii)
that knowledge which a prudent businessperson (including the officers, directors
and other key employees of the Company) would have obtained in the management of
his or her business affairs after making due inquiry and exercising reasonable
diligence with respect thereto. In connection therewith, the knowledge (both
actual and constructive) of any officer, director or other key employee of the
Company shall be imputed to be the knowledge of the Company.
(ab) COMPANY REFERENCE INCLUDES COMPANY SUBS. Each reference to the
Company in this Section 3.1 shall be deemed to be a reference to the Company and
each Company Sub, unless the context requires otherwise. Accordingly, the
Company Disclosure Schedule shall include disclosures with respect to each
Company Sub, as well as the Company, in response to the representations and
warranties set forth in this Section 3.1, as applicable.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION SUB. Parent
and Acquisition Sub represent and warrant to the Company, except as disclosed in
the SEC Documents (as defined below) or the disclosure schedule dated the date
hereof, certified by the Chief Executive Officer of Parent and delivered by
Parent to the Company simultaneously herewith (which disclosure schedule shall
contain specific references to the representations and warranties to which the
disclosures contained therein relate) (the "Parent Disclosure Schedule"):
(a) ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER. Each of Parent
and Acquisition Sub (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) has all requisite
corporate power and authority to own, lease and operate its properties and
assets and to carry on its business as now being conducted and as currently
proposed to be conducted, to enter into this Agreement, the Agreement of Merger
(in the case of Acquisition Sub) and each of the Related Agreements to which it
is a party, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby and (iii) is duly
qualified and in good standing in all jurisdictions in which the failure to be
so qualified and in good standing could reasonbly be expected to have a Material
Adverse Effect on the Parent or Acquisition Sub. Parent has delivered to the
Company true and complete copies of the Charter and by-laws of each of Parent
and Acquisition Sub.
(b) CAPITAL STOCK. Parent's definitive Prospectus dated May 16, 1996,
filed with the SEC with respect to Parent's initial public offering (the
"Prospectus"), sets forth a true and complete description of the authorized and
outstanding shares of capital stock of Parent as of the dates referred to
therein. All outstanding shares of Parent Common Stock are validly issued, fully
paid and non-assessable and not subject to preemptive rights. Parent has duly
authorized and reserved for issuance the Merger Shares, and, when issued in
accordance with the terms of Article II and the Agreement of Merger, the Merger
Shares will be validly issued, fully paid and nonassessable and free of
preemptive rights. Parent owns all the outstanding shares of capital stock of
Acquisition Sub, and all of such shares are validly issued, fully paid and
nonassessable and not subject to preemptive rights.
(c) EQUITY INVESTMENTS. Other than Dunkirk International Glass and
Ceramics Corporation ("Dunkirk") and Acquisition Sub, the Company does not
currently have any subsidiaries, nor does it currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity. The Company owns
100% of the issued and outstanding capital stock of Dunkirk and Acquisition Sub
free and clear of all Encumbrances.
(d) AUTHORITY. The execution, delivery and performance of this Agreement
and each of the Related Agreements by Parent and the execution, delivery and
performance of this Agreement and the Agreement of Merger by Acquisition Sub and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Parent and
Acquisition Sub. This Agreement and each of the Related Agreements are valid and
binding obligations of Parent, enforceable against Parent in accordance with
their respective terms; and this Agreement is, and the Agreement of Merger when
executed and delivered by Acquisition Sub, as contemplated hereby, will be,
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the valid and binding obligations of Acquisition Sub, enforceable against
Acquisition Sub in accordance with their respective terms. Neither the
execution, delivery and performance of this Agreement and the Related Agreements
by Parent, the execution, delivery and performance of this Agreement and the
Agreement of Merger by Acquisition Sub, nor the consummation of the transactions
contemplated hereby or thereby, will (A) conflict with, (B) result in any
violations of, (C) cause a default under (with or without due notice, lapse of
time or both), (D) give rise to any right of termination, amendment,
cancellation or acceleration of any obligation contained in or the loss of any
material benefit under, (E) result in the creation of any Encumbrance on or
against any assets, rights or property of Parent or Acquisition Sub, as the case
may be, under any term, condition or provision of (x) any instrument or
agreement to which Parent or Acquisition Sub is a party, or, to the best
knowledge of Parent, by which Parent or Acquisition Sub or any of their
respective properties, assets or rights may be bound (except as shall have been
waived or with respect to which consent shall have been obtained prior to the
Closing), (y) any law, statute, rule, regulation, order, writ, injunction,
decree, permit, concession, license or franchise of any Governmental Authority
applicable to Parent or Acquisition Sub or any of their respective properties,
assets or rights or (z) Parent's or Acquisition Sub's Charter or by-laws, as
amended through the date hereof, respectively, which conflict, breach, default,
violation or other event would prevent the consummation of the transactions
contemplated by this Agreement, the Agreement of Merger or any Related Agreement
to which Parent or the Acquisition Sub is a party. Except as contemplated by
this Agreement or the Agreement of Merger, no permit, authorization, consent or
approval of or by, or any notification of or filing with, any Governmental
Authority is required in connection with the execution, delivery and performance
by Parent or Acquisition Sub of this Agreement, the Agreement of Merger or the
Related Agreements to which they are party or the consummation of the
transactions contemplated hereby or thereby, except for (i) the filing with the
SEC of (A) the S-4 and (B) such reports and information under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated by the SEC thereunder, as may be required in connection
with this Agreement and the Agreement of Merger and the transactions
contemplated hereby and thereby, (ii) such filings as may be required by the
Nasdaq SmallCap Market with respect to Parent Common Stock to be issued in
connection with the Merger and the Company Warrants to be assumed by Parent in
the Merger, (iii) the filing of such documents with, and the obtaining of such
orders from, various state securities and blue-sky authorities as are required
in connection with the transactions contemplated hereby, (iv) the filing of the
Agreement of Merger and the related officer's certificate with the Secretary of
State of the State of Delaware and (v) such other consents, waivers,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a Material Adverse Effect on Parent or materially impair the
ability of Parent or Acquisition Sub to consummate the transactions contemplated
by this Agreement and the Agreement of Merger, including, without limitation,
the Merger.
(e) SEC DOCUMENTS. Parent has furnished the Company with a correct and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed by Parent with the SEC on or after January 1, 1996 (the
"Parent SEC Documents"), which are all the documents (other than preliminary
material) that Parent was required to file (or otherwise did file) with the SEC
on or after January 1, 1996. As of their respective dates, none of the Parent
SEC Documents (including all exhibits and schedules thereto and documents
incorporated by reference therein) contained any untrue statement of a material
fact or omitted to state 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, and the Parent SEC Documents
complied when filed in all material respects with the then applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations promulgated by the SEC thereunder.
(f) FINANCIAL STATEMENTS. The financial statements of Parent included in
the Parent SEC Documents (the "Parent Financial Statements") (A) complied as to
form in all material respects with the then applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP, consistently applied (except as may have been
indicated
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in the notes thereto or, in the case of the unaudited statements, as permitted
by Form 10-QSB promulgated by the SEC) (B) were in accordance with the books and
records of Parent and (C) fairly present (subject, in the case of the unaudited
statements, to normal, nonrecurring audit adjustments) the consolidated
financial position of Parent and its consolidated subsidiaries as at the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended.
(g) ABSENCE OF UNDISCLOSED LIABILITIES. At September 30, 1996, (i) Parent
had no Liability which was not provided for or disclosed on the Parent Financial
Statements for September 30, 1996 and (ii) all liability reserves established by
Parent and set forth thereon were adequate, in the good faith judgement of
Parent, for all such Liabilities at the date thereof. There were no material
loss contingencies (as such term is used in FAS No. 5) which were not adequately
provided on the Parent Financial Statements for September 30, 1996 as required
by FAS No. 5.
(h) ABSENCE OF CHANGES. Since September 30, 1996, Parent has been operated
in the ordinary course, consistent with past practice, and there has not been:
(i) to the best knowledge of Parent, any damage, destruction or loss,
whether or not covered by insurance, having or which could reasonably be
expected to have a Material Adverse Effect;
(ii) to the best knowledge of Parent, any Liability created, assumed,
guaranteed or incurred, or any material transaction, contract or commitment
entered into, by Parent, other than the license, sale or transfer of
Parent's products to customers in the ordinary course of business;
(iii) any declaration, setting aside or payment of any dividend or other
distribution of any assets of any kind whatsoever with respect to any shares
of the capital stock of Parent, or any direct or indirect redemption,
purchase or other acquisition of any such shares of the capital stock of
Parent;
(iv) any stock split, reverse stock split, combination, reclassification
or recapitalization of any Company Common Stock, or any issuance of any
other security in respect of or in exchange for, any shares of Parent Common
Stock;
(v) any issuance by Parent of any shares of its capital stock or any
debt security or securities, rights, options or warrants convertible into or
exercisable or exchangeable for any shares of its capital stock or debt
security;
(vi) any termination of, or, to the best knowledge of Parent, indication
of an intention to terminate or not renew, any material contract, license,
commitment or other agreement between Parent and any other person, or the
assignment by Parent of any interest in any contract to which Parent is a
party;
(vii) any material write-down or write-up of the value of any asset of
Parent, or any material write-off of any accounts receivable or notes
receivable of Parent or any portion thereof;
(viii) any amendments or changes in Parent's Charter or by-laws;
(ix) to the best knowledge of Parent, the commencement of any litigation
or other action by or against Parent; or
(x) any agreement, understanding, authorization or proposal, whether in
writing or otherwise, for Parent to take any of the actions specified in
items (i) through (ix) above.
(i) TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. Parent has
good and marketable title to all assets, properties and interests in properties,
real, personal or mixed, reflected on its balance sheet for June 30, 1996
included in the SEC Documents or acquired after June 30, 1996, except for (i)
those Encumbrances set forth in the Parent Disclosure Schedule, (ii) liens for
current taxes not yet due and payable and (iii) statutory mechanics and
materialmen's liens.
(j) INTELLECTUAL PROPERTY. The Parent Disclosure schedule sets forth a
list of all Intellectual Property Rights of Parent. To the best knowledge of
Parent, the ownership or use of such Intellectual Property
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Rights by Parent does not infringe on the intellectual property rights of others
(and Parent has not received notice alleging any such infringement), and, to the
best of Parent's knowledge, no third party is infringing on the Intellectual
Property Rights of Parent. Except as set forth on the Disclosure Schedule,
Parent is not obligated to pay any third party any royalty or fee for the use of
the Intellectual Property Rights used in its business.
(k) BROKERS. Neither Parent, Acquisition Sub, nor any of their respective
officers, directors or employees have employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby.
(l) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Parent or Acquisition Sub for inclusion or incorporation by
reference in (i) the S-4 will, at the time the S-4 is filed with the SEC and at
the time the S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, and (ii) the Stockholders' Materials will, at the date mailed to the
Stockholders and at the effective date of the Stockholder Action, not 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, in
light of the circumstances under which they are made, not misleading.
(m) NO DEFAULTS, ETC. Parent has in all material respects performed all
the obligations required to be performed by it to date and is not in material
default or, to the best knowledge of Parent, alleged to be in material default
under (i) its Charter or by-laws or (ii) any material agreement, lease,
contract, commitment, instrument or obligation to which Parent is a party or by
which any of its properties, assets or rights are or may be bound or affected,
and, to the best knowledge of Parent, there exists no event, condition or
occurrence which, with or without due notice or lapse of time, or both, would
constitute such a default by it of any of the foregoing. To the best knowledge
of Parent, no current customer has notified, or expressed an intention to
notify, Parent that such customer will materially reduce the dollar amount of
business it will do with Parent or cease doing business with Parent.
(n) LITIGATION, ETC. Except as otherwise set forth in the Parent
Disclosure Letter, there are no (i) Actions pending, or to the best knowledge of
Parent, threatened against Parent, whether at law or in equity, or before or by
any Governmental Authority, (ii) judgments, decrees, injunctions or orders of
any Governmental Authority or arbitrator against the Company or (iii) to the
best knowledge of the Company, material disputes with customers or vendors.
(o) COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS. Except as otherwise set forth
in the Parent Disclosure Letter, Parent has complied and is presently in
compliance in all material respects with all material Federal, state, local or
foreign laws, ordinances, regulations and orders applicable to it or its
business, including, without limitation, all Federal and state securities or
"blue sky" laws and all laws and regulations relating to occupational safety and
health and the environment. Parent has all material Federal, state, local and
foreign governmental authorizations, security clearances, consents, approvals,
licenses and permits necessary in the conduct of its business as presently
conducted and as currently proposed to be conducted, such authorizations,
consents, approvals, licenses and permits are in full force and effect, no
material violations are or have been recorded in respect of any thereof and no
proceeding is pending or, to the best knowledge of Parent, threatened to revoke
or limit any thereof.
(p) INSURANCE. Parent maintains policies of liability, theft, fidelity,
fire, product liability, workmen's compensation, indemnification of directors
and officers and other similar forms of insurance. The Parent Disclosure
Schedule sets forth a history of all claims in excess of $50,000 made by Parent
thereunder and the status thereof. All such policies of insurance are in full
force and effect and all premiums with respect thereto are currently paid and,
to the best knowledge of Parent, no basis exists for termination of any thereof
on the part of the insurer. The amounts of coverage under such policies conform
to the requirements set forth in the Parent's customer contracts. Parent has
not, during the last three fiscal years, been denied or had revoked or rescinded
any policy of insurance.
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(q) DISCLOSURE. Neither Section 3.2 of this Agreement nor any document,
written information, statement, financial statement, certificate or exhibit
furnished or to be furnished to the Company by or on behalf of Parent or
Acquisition Sub pursuant hereto or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary in order to make
the statements or facts contained herein and therein not misleading in light of
the circumstances under which they were made.
(r) KNOWLEDGE DEFINITION. As used herein, "to the best knowledge of
Parent" and like phrases shall mean and include (i) actual knowledge and (ii)
that knowledge which a prudent businessperson (including the officers, directors
and other key employees of Parent) would have obtained in the management of his
or her business affairs after making due inquiry and exercising reasonable
diligence with respect thereto. In connection therewith, the knowledge (both
actual and constructive) of any officer, director or other key employee of
Parent shall be imputed to be the knowledge of Parent.
(s) PARENT REFERENCE INCLUDES DUNKIRK. Each reference to Parent in this
Section 3.2 shall be deemed to be a reference to Parent and Dunkirk, unless the
context requires otherwise. Accordingly, the Parent Disclosure Schedule shall
include disclosures with respect to Dunkirk, as well as Parent, in response to
the representations and warranties set forth in Section 3.2, as applicable.
ARTICLE IV
RELATED AGREEMENTS
4.1 VOTING AGREEMENTS. Each of the Stockholders set forth on Schedule 4.1
attached hereto has entered into a Voting Agreement and Irrevocable Proxy with
Parent and the Company in the form of Exhibit B attached hereto (collectively,
the "Voting Agreements"; together with the Affiliate Agreements and the
Employment Agreements, the "Related Agreements"), providing, among other things,
that such Stockholders shall vote in favor of or consent in writing to the
Merger and shall not transfer their shares of Company Common Stock prior to the
Effective Date (as defined therein).
4.2 AFFILIATE AGREEMENTS. Each of (i) the persons (within the meaning of
Rule 145) who or which are, in Parent's reasonable judgment on the date hereof,
"affiliates" of the Company within the meaning of Rule 145 of the rules and
regulations promulgated by the SEC under the Securities Act ("Rule 145") and
identified as such on Schedule 4.2 attached hereto (each such person, together
with the persons identified pursuant to Section 5.15 hereof after the date
hereof, a "Rule 145 Affiliate"), shall, on or prior to the date of filing of the
S-4 with the SEC, enter into a Company Affiliate Agreement with Parent,
effective as of the Effective Time (the "Company Affiliate Agreement"), in the
form of Exhibit C-1 attached hereto, and (ii) the holders of at least 1% of the
outstanding capital stock of the Company who or which are not signatories to a
Company Affiliate Agreement are entering into a Company Affiliate Tax Agreement
with Parent, effective as of the Effective Time, in the form of Exhibit C-2
attached hereto (the "Company Affiliate Tax Agreement"; and the Company
Affiliate Agreement and the Company Affiliate Tax Agreement being sometimes
hereinafter collectively referred to as the "Affiliate Agreements"), in each
case providing, among other things, in the case of the Company Affiliate
Agreement, that such persons shall not transfer their shares of Company Common
Stock following the Effective Time except as provided therein and, in the case
of the Tax Affiliate Agreement, a representation as to such person's intentions
with respect thereto. The Company shall provide Parent such information and
documents as Parent shall reasonably request for purposes of creating Schedule
4.1(b). Parent and Acquisition Sub shall be entitled to place legends on the
certificates evidencing any Parent Common Stock to be received by each Rule 145
Affiliate pursuant to the terms of this Agreement and the Agreement of Merger,
and to issue appropriate stop transfer instructions to the transfer agent for
Parent Common Stock, consistent with the terms of the Company Affiliate
Agreements, whether or not the Company Affiliate Agreements are actually
delivered to Parent.
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ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME;
ADDITIONAL AGREEMENTS
5.1 ACCESS TO RECORDS AND PROPERTIES OF EACH PARTY; CONFIDENTIALITY. (a)
From and after the date hereof until the Effective Time or the earlier
termination of this Agreement pursuant to Section8.1 hereof (the "Executory
Period"), each Party shall afford: (i) to the officers, independent certified
public accountants, counsel and other representatives of the other Party, free
and full access at all reasonable times to all properties, books and records
(including tax returns filed and those in preparation) of such Party, in order
that the other Party and such other persons may have full opportunity to make
such investigations as they shall reasonably desire to make of the business and
affairs of such Party; and (ii) to the independent certified public accountants
of the other Party, free and full access at all reasonable times to the work
papers of the independent certified public accountants for such Party.
Additionally, each Party will permit the other Party to make such reasonable
inspections of such Party and its respective operations during normal business
hours as the other Party may reasonably require and each Party will cause its
officers to furnish to the other Party and such other persons, such additional
financial and operating data and other information as to the business and
properties of such Party as the other Party or such other persons shall from
time to time reasonably request. No investigation pursuant to this Section 5.1,
or made prior to the date hereof, shall affect or otherwise diminish or obviate
in any respect any of the representations and warranties of any Party hereunder.
As used herein, the term "Party" shall mean and refer to the Company, on the one
hand, and Parent and Acquisition Sub, on the other hand.
(b) Reference is made to the Confidentialty Agreement dated June 6, 1996,
between the Company and Parent, which is hereby confirmed by the parties hereto
and is and shall remain in full force and effect in accordance with its terms,
and each of Parent and Company shall observe and perform its respective
obligations thereunder.
5.2 OPERATION OF BUSINESS OF THE COMPANY. During the Executory Period, the
Company will operate its business as now operated and only in the normal and
ordinary course and, consistent with such operation, will use its best efforts
to preserve intact its present business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with licensors, franchisees, licensees, suppliers, contractors,
distributors, customers and other persons having business dealings with it.
Without limiting the generality of the foregoing, during the Executory Period,
the Company shall not, without the prior written consent of Parent, (a) take any
action that would result in any of the representations and warranties of the
Company herein becoming untrue or in any of the conditions to the Merger not
being satisfied, or (b) take or cause to occur any of the actions or
transactions described in Section 3.1(g) hereof.
5.3 OPERATION OF BUSINESS OF THE COMPANY. During the Executory Period,
Parent will operate its business as now operated and only in the normal and
ordinary course and, consistent with such operation, will use its best efforts
to preserve intact its present business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with licensors, franchisees, licensees, suppliers, contractors,
distributors, customers and other persons having business dealings with it.
Without limiting the generality of the foregoing, during the Executory Period,
Parent shall not, without the prior written consent of the Company, (a) take any
action that would result in any of the representations and warranties of Parent
herein becoming untrue or in any of the conditions to the Merger not being
satisfied, or (b) take or cause to occur any action which could reasonably be
expected to result in a Material Adverse Effect.
5.4 NEGOTIATION WITH OTHERS. (a) During the Executory Period, and for a
period of 20 days thereafter, the Company shall not, and the Company shall not
permit any agent or other representative of the Company to, directly or
indirectly, (i) solicit, initiate or engage in discussions or engage in
negotiations with any person (whether such negotiations are initiated by the
Company or otherwise) or take any other
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action to facilitate the efforts of any person, other than Parent, relating to
the possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
capital stock or assets (any such acquisition being referred to in this Section
5.4 as an "Acquisition Transaction"), (ii) provide information with respect to
the Company to any person, other than Parent, relating to a possible Acquisition
Transaction, (iii) enter into an agreement with any person, other than Parent
and Acquisition Sub, relating to a possible Acquisition Transaction, (iv)
consummate an Acquisition Transaction with any person other than the Parent or
enter into an agreement with any person, other than Parent, providing for a
possible Acquisition Transaction or (v) make or authorize any statement,
recommendation or solicitation in support of any possible Acquisition
Transaction, unless the Parent is a party to such Acquisition Transaction;
provided, however, that nothing contained herein shall prohibit the Board of
Directors of the Company from (i) furnishing information to, or entering into
discussions or negotiations with, any unaffiliated third party that makes an
unsolicited written, bona fide offer with respect to an Acquisition Transaction,
which offer is subject to no conditions relating to financing and offers the
Company's stockholders cash or marketable securities having a value in excess of
the aggregate market value of the Merger Shares as of the date ofsuch offer, if
the Board of Directors of the Company, based upon the written advice of outside
legal counsel, determines in good faith that such action is necessary for the
Board of Directors of the Company to comply with its fiduciary duties under
applicable law (such proposal being referred to herein as a "Superior Proposal")
and prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, the Company provides written notice to
Parent thereof and (ii) failing to make or withdrawing or notifying its
recommendation referred to in Section 5.10 if there exists a Superior Proposal
and the Board of Directors of the Company, based upon the written advice of
outside legal counsel, determines in good faith that such action is necessary
for the Board of Directors of the Company to comply with its fiduciary duties to
stockholders under applicable law. If the Company receives any unsolicited offer
or proposal to enter negotiations relating to an Acquisition Transaction, the
Company shall notify Parent thereof, including information as to the identity of
the party making such offer or proposal and the specific terms of such offer or
proposal, as the case may be.
(b) Notwithstanding anything contained herein to the contrary, the Company
shall not consummate an Acquisition Transaction with a party other than Parent
unless it shall have terminated this Agreement pursuant to Section8.1(g).
5.5 DISSENTING STOCKHOLDERS. Prior to the Closing, the Company shall give
Parent (a) prompt notice of any demand by Stockholders (the "Dissenting
Stockholders") for purchase of their shares of Company Common Stock at fair
value in the manner provided by Section 262 of the Delaware Statute and (b) the
opportunity to participate in all negotiations and proceedings with respect to
any such demands. Prior to the Closing, the Company shall not, except with the
prior written consent of Parent, voluntarily make any payment with respect to,
or settle or offer to settle, any such demands for payment.
5.6 PREPARATION OF S-4; OTHER FILINGS. As promptly as practicable after
the date of this Agreement, Parent shall prepare and file with the SEC a
Registration Statement on Form S-4 with respect to the Merger Shares, the shares
of Parent Common Stock to be issued in exchange for Vested Company Options and
the shares of Parent Common Stock reserved for issuance upon exercise of the
assumed Company Warrants (the "S-4"), in which the Stockholder Statement will be
included as a prospectus. Each of Parent and the Company shall use its best
efforts to respond to any comments of the SEC, to have the S-4 declared
effective under the Securities Act as promptly as practicable after such filing
and to cause the Stockholder Statement to be mailed to the Stockholders at the
earliest practicable time, but in any event within two Business Days after the
S-4 has been declared effective by the SEC. As promptly as practicable after the
date of this Agreement, Parent and the Company shall properly prepare and file
any other filings required under the Exchange Act, the Securities Act or any
other Federal or state laws and Parent shall properly prepare and file any
filings required under state securities or "blue sky" laws, in each case,
relating to the Merger and the transactions contemplated by this Agreement and
the Agreement of Merger
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(collectively, the "Other Filings"). The Company shall promptly furnish Parent
with all information concerning the Company and the Stockholders as may be
reasonably required in connection with any action contemplated by this Section
5.6. Each Party will notify the other Party promptly of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff or
any other government officials for amendments or supplements to the S-4 or any
Other Filing or for additional information and will supply the other Party with
copies of all correspondence between such Party or any of its representatives,
on the one hand, and the SEC, or its staff or any other government officials, on
the other hand, with respect to the S-4, the Merger or any Other Filing. Each
Party shall promptly provide the other Party (or its counsel) copies of all
filings made by such Party with any Governmental Authority in connection with
this Agreement, the Agreement of Merger and the transactions contemplated hereby
and thereby. The S-4 and the Other Filings shall comply in all material respects
with all applicable requirements of law. Whenever any event occurs which should
be set forth in an amendment or supplement to the S-4 or any Other Filing,
Parent or the Company, as the case may be, shall promptly inform the other Party
of such occurrence and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to stockholders of the Company, such
amendment or supplement.
5.7 ADVICE OF CHANGES. The Company shall confer on a regular and frequent
basis with Parent, report on operational matters and promptly advise Parent
orally and in writing of any change, event or circumstance having, or which,
insofar as can reasonably be foreseen, could have, a Material Adverse Effect on
the Company or which could impair (negatively or positively) its financial
projections or forecasts.
5.8 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall use its best
efforts to cause to be delivered to Parent a letter of BDO Seidman, LLP, dated a
date within two Business Days before the date on which the S-4 shall become
effective and addressed to Parent, in form and substance reasonably satisfactory
to Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the S-4 (and, if requested, a bring-down comfort letter at the
closing of the Merger).
5.9 LETTER OF PARENT'S ACCOUNTANTS. Parent shall use its best efforts to
cause to be delivered to the Company a letter of Ernst & Young LLP, Parent's
independent public accountants, dated a date within two Business Days before the
date on which the S-4 shall become effective and addressed to the Company, in
form and substance reasonably satisfactory to the Company and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the S-4 (and, if requested, a
bring-down comfort letter at the closing of the Merger).
5.10 STOCKHOLDERS' APPROVAL. The Company shall (a) call a special meeting
of the Stockholders (the "Stockholders' Meeting") within 20 days (or such other
period as may be required by applicable law) after the S-4 shall have been
declared effective by the SEC for the purpose of obtaining the approval of the
Merger, this Agreement and the Agreement of Merger and the transactions
contemplated hereby and thereby (the "Stockholder Action") and (b) recommend
that the Stockholders vote in favor of the Merger and approve this Agreement and
the Agreement of Merger and take or cause to be taken all such other action as
may be required by the Delaware Statute and any other applicable law in
connection with the Merger, this Agreement and the Agreement of Merger, in each
case as promptly as possible. The Company shall prepare and distribute any
written notice and other materials relating to the Stockholder Action,
including, without limitation, a proxy statement (the "Stockholder Statement"),
in accordance with the Charter and by-laws of the Company, the Delaware Statute
and any other Federal and state laws relating to the Merger, such Stockholders'
Meeting or any other transaction relating to or contemplated by this Agreement
(collectively, the "Stockholders' Materials"); provided, however, that Parent
and its counsel shall have the opportunity to review all Stockholders' Materials
prior to delivery to the Stockholders, and all Stockholders' Materials shall be
in form and substance reasonably satisfactory to Parent and its counsel; and
provided further, however, that if any event occurs which should be set forth in
an amendment or supplement to any Stockholders' Materials, the Company shall
promptly inform Parent thereof (or, if such
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event relates solely to Parent, Parent shall promptly inform the Company
thereof), and the Company shall promptly prepare an amendment or supplement in
form and substance satisfactory to Parent in accordance with the Charter and
by-laws of the Company, the Delaware Statute and any other Federal or state
laws.
5.11 LEGAL CONDITIONS TO MERGER. Each Party shall take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on such Party with respect to the Merger and will take all reasonable
action necessary to cooperate with and furnish information to the other Party in
connection with any such requirements imposed upon such other Party in
connection with the Merger. Each Party shall take all reasonable actions
necessary (a) to obtain (and will take all reasonable actions necessary to
promptly cooperate with the other Party in obtaining) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Authority, or other third party, required to be obtained or made by such Party
(or by the other Party) in connection with the Merger or the taking of any
action contemplated by this Agreement or the Agreement of Merger, (b) to defend,
lift, rescind or mitigate the effect of any lawsuit, order, injunction or other
action adversely affecting the ability of such Party to consummate the
transactions contemplated hereby and (c) to fulfill all conditions precedent
applicable to such Party pursuant to this Agreement.
5.12 CONSENTS. Each Party shall use its best efforts, and the other Party
shall cooperate with such efforts, to obtain any consents and approvals of, or
effect the notification of or filing with, each person or authority, whether
private or governmental, whose consent or approval is required in order to
permit the consummation of the Merger and the transactions contemplated hereby
and to enable the Surviving Corporation to conduct and operate the business of
the Company substantially as presently conducted and as proposed to be conducted
pursuant to the Budget.
5.13 EFFORTS TO CONSUMMATE. Subject to the terms and conditions herein
provided, the parties hereto shall use their best efforts to do or cause to be
done all such acts and things as may be necessary, proper or advisable,
consistent with all applicable laws and regulations, to consummate and make
effective the transactions contemplated hereby and by the Agreement of Merger
and to satisfy or cause to be satisfied all conditions precedent that are set
forth in Article VI as soon as reasonably practicable.
5.14 NOTICE OF PROSPECTIVE BREACH. Each party hereto shall immediately
notify the other parties in writing upon the occurrence of any act, event,
circumstance or thing that is reasonably likely to cause or result in a
representation or warranty hereunder to be untrue at the Closing, the failure of
a closing condition to be achieved at the Closing, or any other breach or
violation hereof or default hereunder.
5.15 PUBLIC ANNOUNCEMENTS. The parties hereto agree that, to the maximum
extent feasible, but subject, in the case of Parent, to its public disclosure
and other legal and regulatory obligations, they shall advise and confer with
each other prior to the issuance of any public announcement or reports or
statements with respect to the Merger; provided, however, that the Company will
not issue any report, statement or release pertaining to this Agreement or any
transaction contemplated hereby, without the prior written consent of the
Parent.
5.16 AFFILIATES. Within ten Business Days prior to the effective date of
the Stockholder Action, Parent and the Company shall amend Schedule 4.1 hereto
to add the names and addresses of any other person (within the meaning of Rule
145) that Parent reasonably identifies as being a person who may be deemed to be
a Rule 145 Affiliate of the Company within the meaning of Rule 145; provided,
however, that no such person identified by Parent shall be added to the list of
Rule 145 Affiliates of the Company if Parent shall receive from the Company, on
or before the Effective Time, an opinion of counsel reasonably satisfactory to
Parent to the effect that such person is not a Rule 145 Affiliate. The Company
shall use its best efforts to deliver or cause to be delivered to Parent, prior
to the Effective Time, from each of such additional Rule 145 Affiliates a
Company Affiliate Agreement.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of each party
to perform this Agreement and to effect the Merger are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by all parties hereto:
(a) STOCKHOLDER APPROVAL; AGREEMENT OF MERGER. This Agreement, the Agreement
of Merger and the Merger shall have been approved and adopted by at least a
majority of the outstanding shares of Company Common Stock, and the Agreement of
Merger shall have been executed and delivered by Acquisition Sub and the Company
and filed with and accepted by the Secretary of State of the State of Delaware.
(b) APPROVALS. All authorizations, consents, orders or approvals of, or
declarations or filings with or expiration of waiting periods imposed by any
Governmental Authority necessary for the consummation of the transactions
contemplated hereby shall have been obtained or made or shall have occurred.
(c) LEGAL ACTION. No temporary restraining order, preliminary injunction or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any Federal or state court or other Governmental
Authority and remain in effect.
(d) S-4. The S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceeding seeking a stop order.
(e) LEGISLATION. No Federal, state, local or foreign statute, rule or
regulation shall have been enacted which prohibits, restricts or delays the
consummation of the transactions contemplated by this Agreement or the Agreement
of Merger or any of the conditions to the consummation of such transactions.
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND ACQUISITION SUB. The
obligations of Parent to perform this Agreement and of Acquisition Sub to
perform this Agreement and the Agreement of Merger are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by Parent and Acquisition Sub:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in Section 3.1 hereof shall in each case be true and
correct in all material respects (except for any representation or warranty that
by its terms is qualified by materiality, in which case it shall be true and
correct in all respects) as of the date of this Agreement, and as of the
effective date of the Stockholder Action and as of the Closing Date as though
made at and as of such dates, respectively, Parent and Acquisition Sub shall
have received a certificate signed by the Chief Executive Officer of the Company
to that effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects the obligations required to be performed by
it under this Agreement and the Agreement of Merger prior to or as of the
Closing Date, and, with respect to performance by the Company, Parent and
Acquisition Sub shall have received a certificate signed by the Chief Executive
Officer of the Company to that effect.
(c) AUTHORIZATION OF MERGER. All action necessary to authorize the
execution, delivery and performance of this Agreement, the Agreement of Merger
and the Related Agreements by the Company and the consummation of the
transactions contemplated hereby and thereby shall have been duly and validly
taken by the board of directors of the Company, and the Company and the
Stockholders shall have full power and right to effect the Merger on the terms
provided herein.
(d) OPINION OF THE COMPANY'S COUNSEL. Parent and Acquisition Sub shall have
received an opinion dated the Closing Date of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A. ("GT"), special counsel to the Company, reasonably
satisfactory in form and substance to Parent and Acquisition Sub.
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<PAGE>
(e) ACCEPTANCE BY COUNSEL TO PARENT AND ACQUISITION SUB. The form and
substance of all legal matters contemplated hereby and of all papers delivered
hereunder shall be reasonably acceptable to O'Sullivan Graev & Karabell, LLP
("OG&K"), special counsel for Parent and Acquisition Sub.
(f) CONSENTS AND APPROVALS. Parent and Acquisition Sub shall have received
duly executed copies of all consents and approvals contemplated by this
Agreement or the Company Disclosure Schedule, in form and substance satisfactory
to Parent and Acquisition Sub.
(g) GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC. All consents, authorizations,
orders or approvals of, and filings or registrations with, any Governmental
Authority which are required for or in connection with the execution and
delivery by the Company of this Agreement, the Agreement of Merger and the
Related Agreements and the consummation by the Company of the transactions
contemplated hereby and thereby shall have been obtained or made.
(h) RELATED AGREEMENTS. Each of the Related Agreements shall be in full
force and effect as of the Effective Time in accordance with the respective
terms thereof, and each person or entity who or which is required or
contemplated by the parties hereto to be a party to any Related Agreement who or
which did not theretofore enter into such Related Agreement shall execute and
deliver such Related Agreement.
(i) DISSENTERS. The holders of no more than five percent (5%) of the issued
and outstanding shares of Company Common Stock immediately prior to the
Effective Time shall have preserved their right to exercise dissenter's rights
under the Delaware Statute.
(j) EMPLOYMENT AGREEMENTS. Each of William L. Amt and Harry Christenson
shall have executed and delivered an employment agreement with Parent in the
form of Exhibit D attached hereto (collectively, the "Employment Agreements"),
which Employment Agreement shall provide, among other things, for the placement
of 34,560 Merger Shares into escrow, which Merger Shares shall be subject to
forfeiture in the event of a termination of employment with the Company in
accordance with the terms thereof.
(k) RELEASES. Each of John Royall and Steve Koinis ("Koinis") shall have
executed and delivered a release with respect to any indemnification or other
claims against the Company, Parent or Acquisition Sub or any of their respective
Affiliates, in form and substance reasonably satisfactory to Parent, which
releases shall remain in full force and effect.
(l) AMENDMENT TO KOINIS EMPLOYMENT AGREEMENT. Koinis shall have executed and
delivered an amendment to his employment agreement with the Company providing
for the termination thereof at the Effective Time, which amendment shall remain
in full force and effect.
(m) AMENDMENT TO OCTAGON CHARTER. The Charter of the Company shall have been
amended to delete therefrom the provisions relating to the purchase price
payable for Company Common Stock.
(n) FAIRNESS OPINION. Parent shall have received an opinion from a financial
advisor acceptable to it with respect to the fairness, from a financial point of
view, to the stockholders of Parent of the Merger and such opinion shall remain
in full force and effect as of the Closing Date.
(o) D&O INSURANCE. Parent shall have obtained directors' and officers'
liability insurance on satisfactory terms and conditions with respect to the
directors and officers of Parent and the Surviving Corporation.
(p) NMC. Nuclear Management Corporation shall not have commenced any
proceedings for injunctive or other equitable relief against Parent or the
Company.
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to perform this Agreement and the Agreement of Merger are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by the Company:
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(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Parent and Acquisition Sub set forth in Section 3.2 hereof shall be true and
correct in all material respects (except for any representation or warranty that
by its terms is qualified by materiality, in which case it shall be true and
correct in all respects) as of the date of this Agreement, and as of the
effective date of the Stockholder Action and as of the Closing Date as though
made at and as of such dates, respectively, and the Company shall have received
a certificate signed by the Chief Financial Officer of each of Parent and
Acquisition Sub to that effect.
(b) PERFORMANCE OF OBLIGATIONS OF PARENT AND ACQUISITION SUB. Parent and
Acquisition Sub shall have performed in all material respects their respective
obligations required to be performed by them under this Agreement and the
Agreement of Merger prior to or as of the Closing Date and the Company shall
have received a certificate signed by the Chief Financial Officer of each of
Parent and Acquisition Sub to that effect.
(c) AUTHORIZATION OF MERGER. All action necessary to authorize the
execution, delivery and performance of this Agreement and the Related Agreements
by Parent, the execution, delivery and performance of this Agreement and the
Agreement of Merger by Acquisition Sub, and the consummation of the transactions
contemplated hereby and by the Agreement of Merger shall have been duly and
validly taken by Parent and Acquisition Sub and by Parent as the sole
stockholder of Acquisition Sub.
(d) OPINION OF COUNSEL TO PARENT AND ACQUISITION SUB. The Company shall have
received an opinion dated the Closing Date of OG&K in form and substance
reasonably satisfactory to the Company.
(e) TAX OPINION. The Company shall have received an opinion in form and
substance satisfactory to the Company of GT, counsel for the Company, to the
effect that the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code and that Parent,
Acquisition Sub and the Company will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. In connection with such
opinion, counsel shall be entitled to rely upon certain representations of
Parent, Acquisition Sub and the Company and certain stockholders of the Company.
(f) ACCEPTANCE BY COUNSEL TO THE COMPANY. The form and substance of all
legal matters contemplated herein and of all papers delivered hereunder shall be
reasonably acceptable to GT.
(g) GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC. All consents, authorizations,
orders or approvals of, and filings or registrations with, any Governmental
Authority which are required for or in connection with the execution and
delivery by Parent and Acquisition Sub of this Agreement and the Related
Agreements and by Acquisition Sub of the Agreement of Merger and the
consummation by Parent and Acquisition Sub of the transactions contemplated
hereby or thereby shall have been obtained or made.
(h) PAYMENT OF EXPENSES. Parent shall have paid the Company Expenses in
accordance with the first sentence of Section 7.1 as provided therein.
(i) APPOINTMENT OF DIRECTORS. The Board of Directors of Parent shall have
taken such action as shall be necessary to expand the size of Parent's Board of
Directors and to appoint William L. Amt, Harry O. Christenson, Patricia H.
Engman and William V. Roberti as directors of Parent.
(j) FAIRNESS OPINION. The Company shall have received an opinion of Brooks,
Houghton & Company, Inc. or other financial advisor acceptable to it and Parent
with respect to the fairness, from a financial point of view, to the
stockholders of the Company of the Merger, and such opinion shall remain in full
force and effect as of the Closing Date.
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<PAGE>
ARTICLE VII
RELATED TRANSACTIONS
RELATED TRANSACTIONSTO BE EFFECTED AT THE CLOSING
7.1 PAYMENT OF CERTAIN FEES AND EXPENSES. (a) At the Closing, Parent shall
pay, or cause the Surviving Corporation to pay, in cash, against presentation of
statements therefor, the reasonable fees and expenses of GT, BDO Seidman LLP and
Brooks, Houghton & Company, Inc., incurred in connection with the transactions
contemplated hereby. Except as expressly provided in this Section 7.1, neither
Parent, Acquisition Sub, the Company nor the Surviving Corporation shall pay or
in any respect be liable for any Company Expenses.
(b) If this Agreement is terminated by the Company pursuant to Section
8.1(g) or by Parent pursuant to Section 8.1(h), the Company shall pay to Parent
within five business days following such termination a fee of $200,000 plus all
out-of-pocket expenses (including, without limitation, all attorneys' and
accountants' fees and expenses) incurred by Parent in connection with the
transactions contemplated by this Agreement (the "Break-up Fee"). The Break-up
Fee shall also be payable if the Company shall consummate an Acquisition
Transaction prior to June 30, 1997 with a party other than Parent who made an
offer or proposal with respect to an Acquisition Transaction prior to the
termination of this Agreement (other than pursuant to Section 8.1(g) or 8.1(h)),
or during the 20-day period after such termination (in which case the Break-up
Fee will be paid within 5 business days following consummation of such
Acquisition Transaction).
7.2 BRIDGE INDEBTEDNESS. At the Closing, any indebtedness of the Company
to Parent shall becontributed by Parent to the Company.
ARTICLE VIII
TERMINATION; AMENDMENT, MODIFICATION AND WAIVER
8.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, notwithstanding the approval by Parent, Acquisition Sub and the
Company of this Agreement, at any time prior to the Effective Time, by:
(a) the mutual consent of Parent, Acquisition Sub and the Company; or
(b) Parent, Acquisition Sub or the Company, if (i) the conditions set forth
in Section 6.1 hereof shall not have been met by June 30, 1997, except if such
conditions have not been met solely as a result of the action or inaction of the
party seeking to terminate or (ii) the other party or parties have materially
breached any material covenant or agreement set forth herein and such breach is
not cured (if curable) within 15 days following written notice thereof; or
(c) Parent and Acquisition Sub if the conditions set forth in Section 6.2
hereof shall not have been met, and the Company if the conditions set forth in
Section 6.3 hereof shall not have been met, in either case by June 30, 1997,
except if such conditions have not been met solely as a result of the action or
inaction of the party seeking to terminate; or
(d) Parent and Acquisition Sub on the one hand, or the Company on the other
hand, if such party or parties shall have determined in its or their sole
discretion, exercised in good faith, that the Merger contemplated by this
Agreement and the Agreement of Merger has become impracticable by reason of the
institution of any litigation, proceeding or investigation to restrain or
prohibit the consummation of the Merger, or which questions the validity or
legality of the transactions contemplated by this Agreement and the Agreement of
Merger; or
(e) Parent and Acquisition Sub if any statute, rule, regulation or other
legislation shall have been enacted which, in the sole judgment of Parent and
Acquisition Sub, exercised reasonably and in good faith,
A-27
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materially adversely impairs the conduct or operation of the Company as
presently conducted and as contemplated to be conducted pursuant to the Budget;
or
(f) the Company if any statute, rule, regulation or other legislation shall
have been enacted which, in the sole judgment of the Company, exercised
reasonably and in good faith, materially adversely impairs the conduct or
operation of Parent's business as presently conducted; or
(g) the Company, if it shall have received a Superior Proposal, and the
Company's Board of Directors, based upon the written advice of outside legal
counsel, determines in good faith that accepting such Superior Proposal is
necessary for the Board of Directors of the Company to comply with its fiduciary
duties to stockholders under applicable law; or
(h) Parent, if the Board of Directors of the Company shall have (i)
withdrawn, modified or amended in any adverse respect its approval or
recommendation of this Agreement, the Merger or the transactions contemplated
hereby, (ii) failed to include in the Proxy Statement such recommendation
(including the recommendation that the Stockholders vote in favor of the
Merger), or (iii) recommended to the Stockholders an Acquisition Transaction
with any party other than Parent.
Any termination pursuant to this Section 8.1 (other than a termination
pursuant to Section 8.1(a) hereof) shall be effected by written notice from the
party or parties so terminating to the other parties hereto.
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect and no party hereto, nor its stockholders, directors, officers
or affiliates, shall have any liability in connection herewith; provided,
however, that, Section 5.1(b), Section 5.4, Article VII, this Section 8.2 and
Article IX shall survive the termination of this Agreement. Notwithstanding the
foregoing, this Section 8.2 shall not relieve any party from liability in
connection with an intentional or willful material breach of this Agreement
prior to its termination; provided, however, that the payment set forth in
Section 7.1(b) shall be the sole and exclusive remedy of Parent in connection
with the consummation of an Acquisition Transaction with a party other than
Parent or the termination of this Agreement by the Company or Parent pursuant to
Section 8.1(g) or 8.1(h), respectively, in connection therewith.
ARTICLE IX
MISCELLANEOUS
9.1 EXPENSES. As used in this Agreement, "Transaction Costs" shall mean,
with respect to any party, all actual, out-of-pocket expenses incurred by such
party to third parties, in connection with this Agreement, the Agreement of
Merger, the Merger and all other transactions provided for herein and therein;
but shall not in any event include general overhead; the time spent by employees
of such party internally; postage, telephone, telecopy, photocopy and delivery
expenses; permit and filing fees; and other non-material expenses that are
incidental to the ordinary course of business. Each party hereto shall bear its
own fees and expenses in connection with the transactions contemplated hereby;
provided, however, that in the event the Merger shall be consummated, (a) Parent
and Acquisition Sub shall bear all Transaction Costs of Parent and Acquisition
Sub and (b) except as expressly provided in Section 7.1, which provides for
certain specified expenses to be paid by Parent or the Surviving Corporation,
the Stockholders shall bear all Transaction Costs of the Company pro rata among
such Stockholders based on their former relative ownership of Company Common
Stock, whether or not such fees and expenses have been paid by the Company or
the Stockholders on or before the Closing Date and whether or not such fees and
expenses are reflected in the Company Disclosure Schedule or the Schedule of
Expenses (such Transaction Costs of the Company and the Stockholders without
regard to the provisions of Section 7.1 being herein collectively referred to as
the "Company Expenses").
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9.2 ENTIRE AGREEMENT. This Agreement and the Agreement of Merger
(including the Company Disclosure Schedule, the Parent Disclosure Schedule and
the Exhibits attached hereto) and the other writings referred to herein contain
the entire agreement among the parties hereto with respect to the transactions
contemplated hereby and supersede all prior agreements or understandings,
written or oral, among the parties with respect thereto (including, but not
limited to, the Letter of Intent dated August 13, 1996, as amended, between
Parent and the Company.
9.3 DESCRIPTIVE HEADINGS. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
9.4 NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by nationally-recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested or by telecopier, with
confirmation as provided above addressed as follows:
if to Parent or Acquisition Sub, to:
Conversion Technologies International, Inc.
82 Bethany Road
Hazlet, New Jersey 07730
Attention: Harvey Goldman
Telecopier: (908) 888-3930; and
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10012
Attention: Julie M. Allen, Esq.
Telecopier: (212) 408-2420
if to the Company, to:
Octagon, Inc.
317 S. North Lake Boulevard
Suite 1024
Altamonte Springs, Florida 32701
Attention: William L. Amt
Telecopier: (407) 834-4559;
with a copy to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A.
111 North Orange Avenue
Orlando, Florida 32801
Attention: Michael J. Sullivan, Esq.
Telecopier: (407) 420-5909;
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be received (a) in the case of personal
delivery or telecopy, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent and (c) in the case of
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mailing, on the third business day following the date on which the piece of mail
containing such communication was posted.
9.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by original or facsimile signature, each such counterpart shall be
an original instrument, and all such counterparts together shall constitute one
and the same agreement.
9.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the Delaware Statute and with the laws of the State of Delaware
applicable to contracts made and to be performed wholly therein.
9.7 BENEFITS OF AGREEMENT. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. This Agreement shall not be
assignable by any party hereto without the consent of the other parties hereto;
provided, however, that anything contained herein to the contrary
notwithstanding , Acquisition Sub may assign and delegate any or all of its
rights and obligations hereunder to any other direct or indirect wholly-owned
subsidiary of Parent.
9.8 PRONOUNS. As used herein, all pronouns shall include the masculine,
feminine, neuter, singular and plural thereof whenever the context and facts
require such construction.
9.9 AMENDMENT, MODIFICATION AND WAIVER. This Agreement shall not be
altered or otherwise amended except pursuant to an instrument in writing signed
by Parent and the Company; provided, however, that after the approval and
adoption of this Agreement, the Agreement of Merger and the Merger by the
Stockholders, no amendment of this Agreement shall be made which pursuant to the
Delaware Statute or other law requires the further approval of the Stockholders;
provided further, however, that any party to this Agreement may waive any
obligation owed to it by any other party under this Agreement. The waiver by any
party hereto of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any subsequent breach.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement and
Plan of Reorganization to be executed on its behalf as of the day and year first
above written.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By:
-----------------------------------------
Name:
Title:
CTI ACQSUB-II, INC.
By:
-----------------------------------------
Name:
Title:
OCTAGON, INC.
By:
-----------------------------------------
Name:
Title:
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EXHIBIT B-1
BROOKS, HOUGHTON & COMPANY, INC.
STEVEN H. BROOKS
MANAGING DIRECTOR
PRIVATE AND CONFIDENTIAL
November 20, 1996
Mr. William L. Amt, Chief Executive Officer
Mr. Harry Christenson, Chief Financial Officer & Chairman of the Board Octagon,
Inc.
317 S. North Lake Blvd., Suite 1024
Altamonte Springs, FL 32701
RE: Fairness Opinion--The Acquisition of Octagon, Inc. by
Conversion Technologies International, Inc.
Dear Sirs:
You have requested the opinion of Brooks, Houghton & Company, Inc. and its
affiliate company PCA Securities, Inc. to the appropriateness of the proposed
acquisition of Octagon, Inc. ("Octagon" or the "Company") by Conversion
Technologies International, Inc. ("Conversion") described herein. In addressing
this opinion to Octagon, we have relied completely on information provided by
Octagon, Conversion and publicly available stock price and volume information
that was provided to us. Therefore, we qualify our opinion in all respects upon
the accuracy and completeness of the material submitted to us by Octagon and
Conversion.
We have reviewed and analyzed the contents of the documents and financial
statements provided to us by Octagon and Conversion concerning the proposed
acquisition as well as the documents describing the background of the two
companies. In summary, for Federal income purposes, the proposed merger of
Conversion and Octagon will be treated as a tax-free reorganization within the
context of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended, by reason of Section 368(a)(2)(E) of the Code.
The exchange ratio (the "Exchange Ratio") is for each share of outstanding
Octagon Common Stock will be exchanged for one-tenth of a share of Conversion
Common Stock. Octagon's Class A warrants outstanding as a result of the merger
and without any further action on the part of any current holder, shall be
assumed by Conversion and automatically converted, pursuant to its terms, into a
warrant to purchase a number of shares of Conversion's Common Stock, which is
directly related to the Exchange Ratio.
The Board of Directors of Conversion will be expanded to include William L.
Amt, Patricia H. Engman and Charles R. Henry.
B1-1
<PAGE>
BACKGROUND OF OCTAGON
<TABLE>
<S> <C>
1. Capitalization As of September 30, 1996, 25,000,000 shares of Octagon common
stock (Bulletin Board symbol OCTA) are authorized, of which
8,404,702 shares thereof are issued and outstanding.
As of September 30, 1996, 3,450,000 and 1,100,000 Class A
warrants are issued and outstanding, with an exercise price of
$4.00 expiring on February 23, 1999 and February 28, 2000
respectively. These warrants were issued in connection with
the Octagon's initial public offering on February 24, 1994.
2. Key Aspects Effecting
Octagons Ability to Raise
Capital: The Company has a history of losses both on a cash flow and
net income basis.
The segment of the industry that the Company serves is
shrinking and highly regulated.
The business that Octagon participates in is very competitive
and price sensitive. Furthermore, Octagons competitors are for
the most part larger and far better capitalized.
Octagon and its previous senior management have been
sanctioned by the SEC. Octagon entered into a Cease and Desist
Order and settlement in September, 1996.
The Company has been a defendant in shareholder class action
litigation, which was settled in February, 1995. Octagon has
also been a defendant in a case brought by former officer John
Royall, which was settled in January, 1996.
Octagon's common stock and warrants are listed only on the
Bulletin Board and the trading volume is minimal. The common
stock and warrants do not appear to be supported by market
makers and are not followed by an equity analyst. The closing
bid price per share of Octagon common stock on November 11,
1996 was $0.1875.
3. Financial Condition The Company is currently undercapitalized and does Condition
not have sufficient working capital. Furthermore, the lack of
adequate equity capital has significantly contributed to
limiting the Company from growing sufficiently to reach a
breakeven sales level.
4. Raising Capital The management of the Company has indicated that it is very
unlikely that Octagon will be successful in raising sufficient
capital in the near to intermediate term. This assessment is
based on their recent attempts to raise capital, the financial
condition of the company and the company's history.
</TABLE>
B1-2
<PAGE>
BACKGROUND OF CONVERSION TECHNOLOGIES, INC.
<TABLE>
<S> <C>
1. Capitalization As of September 30, 1996, 25,000,000 shares of Conversion
common stock (symbol CTIX) are authorized, of which 5,539,745
shares thereof are issued and outstanding.
As of September 30, 1996, 4,639,550 Redeemable Class A
warrants (symbol CTIXW) 3,527,050 Redeemable Class B warrants
(symbol CTIXZ) are issued and outstanding. 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.
Each Class B warrant entitles the holder to purchase one share
of common stock at an exercise price of $7.80. The Class A and
Class B warrants expire on May 16, 2001. These warrants were
issued in connection with the Conversion's initial public
offering on May 16, 1996.
2. Financial Condition As of October 31, 1996, the Company has a balance sheet
consisting of (approximately):
</TABLE>
<TABLE>
<S> <C> <C>
Current Assets: $ 4,097m (cash: $2660m)
Total Assets: $ 19,067m
Current Liabilities: $ 3,260m
Long Term Debt: $ 11,198m
Total Equity: $ 4,609m
</TABLE>
<TABLE>
<S> <C>
Conversion has a history of losses both on a cash flow and
net income basis.
Conversion has a tax loss carry forward of approximately
$19,298m as of October 31, 1996.
The common stock of Conversion is listed on NASDAQ SmallCap
Market and the average trading volume for the past thirty
days is 23,000 shares.
The closing bid price per share of Conversion common stock
on November 11, 1996 was $3 1/8.
3. Patents Conversion has a patented process for manufacturing an
alumin-silicate glass, marketed as Alumaglass-TM-, which is
used for industrial abrasives, construction material and
non-skid flooring. Alumaglass-TM- can be made from processed
waste from aluminum manufactures. Conversion also recycles
cathode ray (CRT) tube glass and also uses this glass in the
manufacture of Alumaglass-TM-.
4. Joint Venture In July 1996, Conversion entered into a joint venture with
Vangkoe Industries, Inc. ("Vangkoe"), of St. Augustine,
Florida, to manufacture coated particles for the used as a
component in construction materials. These materials include
swimming pool plasters, commercial flooring and roofing
materials. Vangkoe is a newly organized company with limited
financial resources.
</TABLE>
B1-3
<PAGE>
CONCLUSION:
With reference to the aforementioned information, the current date, and
based on the information and facts supplied by Octagon and Conversion to our
firm including the orderly liquidation value of Octagon and the November 11,
1996 market price of a share of Conversion's common stock, it is our conclusion
that the proposed transaction as described to us would be fair to Octagon's
shareholders within an approximate range of eight (8) shares of Octagon's common
stock for one (1) share of Conversion common stock to ten (10) shares of
Octagon's common stock for one (1) share of Conversion common stock.
Sincerely,
Brooks, Houghton & Company, Inc.
and its affiliate company PCA
Securities, Inc.
/s/ Gerald Houghton
for
Steven H. Brooks
Managing Director
B1-4
<PAGE>
EXHIBIT B-2
BROOKS, HOUGHTON & COMPANY, INC.
STEVEN H. BROOKS
MANAGING DIRECTOR
PRIVATE AND CONFIDENTIAL
March 26, 1997
Mr. William L. Amt, Chief Executive Officer
Mr. Harry Christenson, Chief Financial Officer & Chairman of the Board
Octagon, Inc.
317 S. North Lake Blvd., Suite 1024
Altamonte Springs, FL 32701
RE: Review of the Fairness Opinion - The Merger of Octagon, Inc. with
Conversion Technologies International, Inc.
Dear Sirs:
You have requested that Brooks, Houghton & Company, Inc. and its affiliate
company Brooks, Houghton Securities, Inc. review its opinion of November 20,
1996 and consider the appropriateness of the proposed merger (the "Merger") of
Octagon, Inc. ("Octagon" or the "Company") with Conversion Technologies
International, Inc. ("Conversion") described herein.
SCOPE OF THE REVIEW
This review of our November 20, 1996 opinion (the "Opinion") has been
requested by the Octagon's Board of Directors because of potential changes in
the business conditions of Octagon and Conversion due to the passage of time,
changes in the business conditions of Octagon and Conversion, changes in
management as a result of Eckardt C. Beck becoming Chairman of Conversion and
Harvey Goldman becoming Vice-Chairman, the proposed two year moratorium on all
interest and debt payments due under Conversion's $8 million Solid Waste
Disposal Facility Bonds, the anticipated private placement of Premium Preferred
Stock to be issued by Conversion at an aggregate gross offering price of a
minimum of $2 million, a maximum of $10 million and a targeted amount of
approximately $7 million, Octagon's audited statements for the year ending
December 31, 1996, as well as other changes, including the elimination of the
escrow of ten percent of the aggregate number of shares of Conversion common
stock that were to be issued in the Merger in order to provide support for the
agreed upon representations, warranties and indemnities of Octagon in connection
with the Merger.
In reviewing the opinion rendered to Octagon on November 20, 1996 and the
significant events and changes that have occurred since that date, we have
relied completely on information provided to our firm by Octagon and Conversion
as well as publicly available stock price and volume information. Therefore, we
qualify our opinion and review in all respects upon the accuracy and
completeness of the material submitted to us by Octagon and Conversion as well
as the above cited public information.
We have reviewed and analyzed the contents of the documents and financial
statements provided to us by Octagon and Conversion concerning the proposed
Merger as well as the documents describing the background of the two companies.
OVERVIEW OF THE MERGER AND THE MERGER EXCHANGE
In summary, for Federal income purposes, the proposed merger of Conversion
and Octagon will be treated as a tax-free reorganization within the context of
Section 368 (a)(1)(A) of the Internal Revenue Code of 1986, as amended, by
reason of Section 368 (a)(2)(E) of the Code.
B2-1
<PAGE>
The agreed upon Merger exchange ratio (the "Exchange Ratio") is for every
ten shares of outstanding Octagon common stock to be exchanged for one share of
Conversion common stock. Octagon has certain Class A warrants currently
outstanding and as a result of the Merger and without any further action on the
part of any current holder, such warrants shall be assumed by Conversion and
automatically converted, pursuant to its terms, into a warrant to purchase a
number of shares of Conversion's common stock, which number is directly
calculated from the Exchange Ratio.
The Board of Directors of Conversion will be expanded to include William L.
Amt, Harry Christenson, Patricia H. Engman and William V. Roberti.
CERTAIN BACKGROUND FACTORS RELATING TO OCTAGON, INC.
<TABLE>
<CAPTION>
1. Capitalization As of March 25, 1997, 25,000,000 shares of Octagon common stock
(Bulletin Board symbol OCTA) are authorized, of which 8,404,702
shares thereof are issued and outstanding.
<S> <C> <C>
As of March 25, 1997, two tranches--3,450,000 and 1,100,000--of
Class A warrants are issued and outstanding, with an exercise
price for both tranches of $4.00 expiring on February 23, 1999
and February 28, 2000, respectively. These warrants were issued
in connection with the Octagon's initial public offering on
February 24, 1994.
2. Key Factors Affecting For the year ending December 31, 1996, Octagon had a net income
Octagon's Ability to of $28,500 and a decrease in cash of ($160,395), versus a loss
Raise Capital: of ($527,768) and a decrease of cash of ($2,065), respectively
for the year ending 1995. Note that the positive net income in
1996 resulted, to a certain degree, from an Accounts Payable
trade settlement. In the prior years, Octagon had a history of
losses both on a cash flow and net income basis.
The segment of the industry that Octagon serves is shrinking and
highly regulated. As of March 25, 1997, Octagon has an estimated
backlog of $1.8 million versus an estimated backlog of $2.4
million on November 20, 1996.
The business that Octagon participates in is very competitive
and price sensitive. Furthermore, Octagon's competitors are for
the most part larger and far better capitalized.
Octagon and its previous senior management have been sanctioned
by the SEC. Octagon entered into a Cease and Desist Order and
settlement in September, 1996. Octagon's previous senior
management also has concluded a settlement with the SEC.
Octagon has been a defendant in shareholder class action
litigation, which was settled in February, 1995. Octagon has
also been a defendant in a case brought by former officer John
Royall, which was settled in January, 1996.
Octagon's common stock and warrants are listed only on the
Bulletin Board and the trading volume is minimal. The common
stock and warrants do not appear to be supported by market
makers and are not followed by an equity analyst.
</TABLE>
B2-2
<PAGE>
<TABLE>
<S> <C> <C>
The closing bid price per share of Octagon common stock on March
24, 1997 was $0.13.
3. Financial Condition Octagon is currently undercapitalized and does not have
sufficient working capital. Furthermore, the lack of adequate
equity capital has also contributed to limiting Octagon from
growing sufficiently to reach a breakeven sales and cash flow
level.
4. Raising Capital The management Octagon has indicated that it is very unlikely
that the Company will be successful in raising sufficient
capital in the near to intermediate term. This assessment is
based on their recent attempts to raise capital, the financial
condition of Octagon and the Company's financial and legal
history.
</TABLE>
CERTAIN BACKGROUND FACTORS RELATING TO CONVERSION TECHNOLOGIES, INC.
<TABLE>
<S> <C> <C>
1. Capitalization As of March 25, 1997, 25,000,000 shares of Conversion common
stock (symbol CTIX) are authorized, of which 5,539,745 shares
thereof are issued and outstanding.
As of March 25, 1997, 4,639,550 Redeemable Class A warrants
(symbol CTIXW) and 3,527,050 Redeemable Class B warrants (symbol
CTIXZ) are issued and outstanding. 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. Each Class B warrant
entitles the holder to purchase one share of common stock at an
exercise price of $7.80. The Class A and Class B warrants expire
on May 16, 2001. These warrants were issued in connection with
the Conversion's initial public offering on May 16, 1996.
2. Financial Condition As of December 31, 1996, the Company has a balance sheet
consisting of (approximately):
Current Assets: $3,147m(C+CE:$1,764m)
Total Assets: $17,857m
Current Liabilities: $3,150m
Long Term Debt: $11,062m
Total Equity: $3,591m
Conversion has a history of losses both on a cash flow and net
income basis.
Conversion has a tax loss carry forward of approximately $14.7m
as of December 31, 1996.
The common stock of Conversion is listed on NASDAQ SmallCap
Market and the average trading volume for the past thirty days
is 13,000 shares.
The closing bid price per share of Conversion common stock on
March 25, 1997 was $1 5/8. The 52 week high was $7 1/4 and the
52 week low was $1 5/8.
</TABLE>
B2-3
<PAGE>
<TABLE>
<S> <C> <C>
3. Patents Conversion has a patented process for manufacturing an aluminum-
silicate glass, marketed as ALUMAGLASS-TM-, which is used for
industrial abrasives, construction material and non-skid
flooring. ALUMAGLASS-TM- can be made from processed waste which
is obtained from aluminum manufacturers. Conversion also
recycles cathode ray (CRT) tube glass and also uses this glass
in the manufacture of ALUMAGLASS-TM-.
</TABLE>
CONCLUSION:
With reference to the aforementioned information, as of the current date,
and based on information and facts supplied by Octagon and Conversion to our
firm including the orderly liquidation value of Octagon, furnished to our firm
by Octagon, the March 24, 1997 market price of a share of Octagon's and
Conversion's common stock, and based on our current review it is our conclusion
that the proposed transaction as described to us would be fair to Octagon's
shareholders within an approximate range of: (a) eight (8) shares of Octagon's
common stock for one (1) share of Conversion common stock, to (b) ten (10)
shares of Octagon's common stock, for one (1) share of Conversion common stock.
Sincerely,
Brooks, Houghton & Company, Inc. and its affiliate company Brooks, Houghton
Securities, Inc.
(The latter had changed its name from PCA Securities, Inc.)
Steven H. Brooks
Managing Director
B2-4
<PAGE>
EXHIBIT C
SECTION 262 OF DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(A) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(B) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to SectionSection251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
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<PAGE>
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section228 or
Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and the appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within twenty days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of
C-2
<PAGE>
such holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the close
of business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
C-3
<PAGE>
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in
all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 349, L.
'96, eff. 7-1-96.)
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<PAGE>
EXHIBIT D
VOTING AGREEMENT AND IRREVOCABLE PROXY
VOTING AGREEMENT AND IRREVOCABLE PROXY (the "Agreement"), dated as of August
30, 1996, as amended, by and among (the "Stockholder"), Octagon, Inc., a
Delaware corporation ("Octagon"), and Conversion Technologies International,
Inc., a Delaware corporation (the "CTI").
W I T N E S S E T H:
WHEREAS, CTI and Octagon have entered into a Letter of Intent dated August
13, 1996 with respect to the proposed acquisition of Octagon by CTI pursuant to
a merger (the "Merger") wherein a newly-organized subsidiary of CTI will be
merged with and into Octagon, with holders of Octagon Common Stock receiving one
share of CTI Common Stock for every 10 shares of Octagon Common Stock; and
WHEREAS, the Stockholder owns, of record and beneficially, shares of
Octagon's Common Stock (all such shares, together with any additional shares of
Octagon's Common Stock that the Stockholder may acquire during the term hereof,
being referred to herein as the "Shares"); and
WHEREAS, the Letter of Intent requires among other things, the execution and
delivery of voting agreements with respect to 51% of Octagon's outstanding
Common Stock;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained and other good and valuable consideration, it is
hereby agreed as follows:
1. AGREEMENT TO VOTE AND IRREVOCABLE PROXY.
1.1 AGREEMENT TO VOTE. The Stockholder hereby agrees that at any meeting
of the stockholders of Octagon, however called, and in any action by written
consent of the stockholders of Octagon, he shall (a) vote all of his Shares in
favor of the Merger and other transactions contemplated thereby, provided that
the Board of Directors of Octagon shall have approved such Merger; and (b) until
the termination of this Agreement, vote such Shares against any (i) merger,
consolidation, share exchange, business combination or other similar transaction
pursuant to which control of Octagon would be transferred to any person other
than CTI or (ii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 50% or more of the assets of Octagon and its subsidiaries taken
as a whole, in a single transaction or in a series of transactions.
Notwithstanding the foregoing, if the Stockholder is currently a director of
Octagon, the Stockholder's agreements set forth herein shall not be construed to
obligate him in his capacity as a director of Octagon. Notwithstanding the
foregoing, this Section 1.1 shall be null and void and not binding on the
Stockholder unless the Stockholder will receive in the Merger shares of CTI
Common Stock in the same proportion or ratio as all other holders of Octagon
Common Stock.
1.2 IRREVOCABLE PROXY. The Stockholder hereby constitutes and appoints
Harvey Goldman and Perry A. Pappas (each, a "Proxy Holder"), and each of them,
with full power of substitution, his true and lawful proxy and attorney-in-fact
to (i) vote at the meeting of stockholders of Octagon all Shares which he
beneficially owns as of the record date for such meeting (or to execute any
consent of the stockholders of Octagon in lieu of such meeting for the number of
Shares that he beneficially owns as of the date of or record date for such
consent) in favor of the approval of the Merger, the related merger agreement
and the other transactions contemplated thereby, provided that the Board of
Directors of Octagon shall have approved such Merger and (ii) until the
termination of this Agreement to vote at any meeting of the stockholders of
Octagon all Shares which he beneficially owns as of the record date for such
meeting (or to execute any consent of the stockholders of Octagon in lieu of
such meeting for the number of Shares that he beneficially owns as of the date
of or record date for such consent) against any matter referred to in Section
1.1(b) hereof. Such proxy shall be limited strictly to the power to vote such
Shares in the manner
D-1
<PAGE>
set forth in the preceding sentence and shall not extend to any other matters
presented for vote at such meeting, and the Stockholder shall have the right to
vote the Shares on any other matter whatsoever in his sole discretion. The
Stockholder acknowledges that the proxy granted hereby is coupled with an
interest and is irrevocable to the full extent permitted by the Delaware General
Corporation Law.
In the event that the Stockholder fails for any reason to vote his Shares in
accordance with the requirements of Section 1.1 hereof, then the Proxy Holder
shall have the right to vote such Shares in accordance with the provisions of
this Section 1.2. The vote of the Proxy Holder shall control in any conflict
between the vote by the Proxy Holder of such Shares and a vote by the
Stockholder of such Shares.
Notwithstanding the foregoing, this Section 1.2 shall be null and void and
not binding on the Stockholder unless the Stockholder will receive in the Merger
shares of CTI Common Stock in the same proportion or ratio as all other holders
of Octagon Common Stock.
2. CERTAIN COVENANTS OF THE STOCKHOLDER. The Stockholder agrees, until
this Agreement is terminated in accordance with Section 4 hereof, not to:
(a) sell, transfer, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to the sale, transfer, pledge, encumbrance, assignment or other
disposition of, any Shares;
(b) grant any proxies, deposit any Shares into a voting trust or enter
into a voting agreement with respect to any Shares; or
(c) directly or indirectly solicit or enter into any negotiations with,
or furnish or cause to be furnished any information concerning the business
or assets of Octagon or its subsidiaries to, any person or entity (other
than CTI) in connection with any potential acquisition of Octagon; provided,
however, that, if the Stockholder is currently a director of Octagon, the
foregoing does not restrict the Stockholder from otherwise exercising the
fiduciary duties imposed by virtue of his position as a director of Octagon;
provided further, however, that the Stockholder will promptly communicate to
CTI any solicitation or inquiry or proposal relating to a potential
acquisition of Octagon received by the Stockholder in writing.
3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
represents and warrants to CTI as follows:
3.1 OWNERSHIP OF SHARES. The Shares are owned of record and beneficially
by the Stockholder free and clear of all liens, encumbrances, rights to
purchase, restrictions and claims of any kind whatsoever and constitute all the
shares of Common Stock owned of record and beneficially by such Stockholder. The
Stockholder does not have any rights to acquire any additional shares of Octagon
Common Stock except, if applicable, pursuant to existing employee stock options
that have been disclosed to CTI.
3.2 POWER; BINDING AGREEMENT. The Stockholder has full legal right, power
and authority to enter into and perform all of his obligations under this
Agreement. The execution and delivery of this Agreement by the Stockholder will
not violate any other agreement to which he is a party, including, without
limitation, any voting agreement, stockholders agreement or voting trust. This
Agreement has been duly executed and delivered by the Stockholder and
constitutes a legal, valid and binding agreement, enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws, now or hereafter in effect,
affecting creditors' rights and remedies generally and to general principles of
equity.
4. TERMINATION. Anything contained herein to the contrary notwithstanding,
this Agreement (other than the provisions of Section 5) shall terminate and be
of no further force or effect on the earlier of (i) June 30, 1997, (ii) the
termination of the Letter of Intent, as the same may be amended from time to
time by the parties, in accordance with its terms and (iii) the termination of
the definitive merger agreement in accordance with its terms.
D-2
<PAGE>
5. EXPENSES. Each party hereto will pay all of its or his own expenses in
connection with the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of its and his counsel and other
advisers.
6. AMENDMENT; ASSIGNS. This Agreement may not be modified, amended,
altered or supplemented except by an agreement in writing executed by each of
the parties hereto. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, but
none of the parties hereto may assign any of its rights, interests or
obligations under this Agreement without the prior written consent of the other
party.
7. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall have been duly given when
delivered in person, by telecopy or overnight courier or sent by registered or
certified mail (postage prepaid, return receipt requested), to the respective
parties as follows:
If to Octagon:
Octagon, Inc.
317 S. North Lake Blvd.
Suite 1024
Altamonte Springs, Florida 32701
Attention: Bill Amt
If to CTI:
Conversion Technologies International, Inc.
82 Bethany Road, Suite 6
Hazlet, New Jersey 07730
Attention: General Counsel
If to the Stockholder; to his address set forth on the signature page
hereto;
or to such other address as any party may designate in writing in accordance
herewith, except that notices of changes of address will only be effective upon
receipt. All such notices or communications shall be deemed to be received (a)
in the case of personal delivery, or telecopy, on the date of such delivery, (b)
in the case of overnight courier, on the next business day after the date when
sent and (c) in the case of registered or certified mailing, on the third
business day following the date on which the piece or mail containing such
communication was posted.
8. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same document.
9. GOVERNING LAW. This Agreement, and all matters relating hereto, shall
be governed by and construed and enforced in accordance with the laws of the
State of Delaware without regard to any principles of choice of laws or
conflicts of law.
10. SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement is so broad as to be unenforceable, such provision
shall be interpreted to be only so broad as is enforceable.
11. THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or
implied, shall be construed to give any person other than the parties hereto any
legal or equitable right, remedy or claim under or by reason of this Agreement
or any provision contained herein.
D-3
<PAGE>
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter contained herein and
supersedes all prior agreements and understandings, express or implied, among
the parties with respect to such subject matter.
13. INJUNCTIVE RELIEF. The parties agree that in the event of a breach of
any provision of this Agreement by the Stockholder, CTI may be without an
adequate remedy at law. The parties therefore agree that in the event of a
breach by the Stockholder of any provision of this Agreement, CTI may elect to
institute and prosecute proceedings in any court of competent jurisdiction to
enforce specific performance or to enjoin the continuing breach of such
provision, as well as to obtain damages for breach of this Agreement. By seeking
or obtaining any such relief, CTI will not be precluded from seeking or
obtaining any other relief to which it may be entitled.
IN WITNESS WHEREOF, each of the parties have caused this Agreement to be
duly executed and delivered on the day and year first above written.
OCTAGON, INC.
By: -----------------------------------------
Name:
Title:
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
By: -----------------------------------------
Name:
Title:
STOCKHOLDER:
-----------------------------------------
Signature
-----------------------------------------
Print Name
ADDRESS:
-----------------------------------------
-----------------------------------------
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 "DGCL").
In accordance with Section 102(a)(7) of the DGCL, the Restated Certificate
of Incorporation of the Registrant elimiantes the personal liability of
directors to the Registrant or its stockholders for monetary damanges 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 10.10
and reference is hereby made to such form.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(A) EXHIBITS
The following Exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
2 Agreement and Plan of Reorganization, dated as of November 18, 1996, as amended, by and among the
Registrant, CTI ACQSUB-II and Octagon, Inc. (included in the Proxy Statement/Prospectus as Exhibit A)
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
8.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. regarding certain tax matters
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Form of Voting Agreement and Irrevocable Proxy (included in the Proxy Statement/ Prospectus as Exhibit
D)
10.2** Form of Employment Agreement between the Registrant and William L. Amt, as amended
10.3** Form of Employment Agreement between the Registrant and Harry O. Christenson, as amended
10.4** Loan and Security Agreement dated as of September 19, 1996, between the Registrant and Octagon, Inc.
10.5* Conversion Technologies International, Inc. 1994 Employee Stock Option Plan, as amended
10.6* Conversion Technologies International, Inc. 1994 Stock Option Plan for Non-Employee Directors, as
amended
10.7* Amended and Restated Employment Agreement dated as of June 9, 1994, between the Registrant and Harvey
Goldman
10.8** Amendment dated January 20, 1997, to Amended and Restated Employment Agreement between the Registrant
and Harvey Goldman
10.9* Employment Agreement dated as of September 1, 1995, between the Registrant and Perry A. Pappas
10.10* Form of Indemnification Agreement
10.11* Lease dated as of March 1, 1995 between County of Chautauqua Industrial Development Agency and Dunkirk
10.12* Sludge and Mixed Cullet Purchase Agreement dated January 1994, between Toshiba Display Devices, Inc.
and Dunkirk
10.13* Clean Cullet Sale Agreement dated as of August 27, 1993, between Ol-Neg TV Products, Inc. and Dunkirk
10.14* Raw Materials Purchase and Clean Cullet Sale Agreement dated November 4, 1993, between Thomson
Consumer Electronics Inc. and Dunkirk
10.15* Project Development Assistance Agreement dated as of April 20, 1995, between the Registrant and
Paramount Capital, Inc.
10.16* 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.
10.17* 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.
10.18* Consulting Agreement dated March 1, 1995, between the Registrant and Eckardt C. Beck
10.19* Consulting Agreement dated July 5, 1995, between the Registrant and Palmetto Partners, Ltd.
10.20* 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.
10.21* Registration Rights Agreement dated as of April 21, 1994, among the Registrant, Palmetto Partners,
Ltd., Harvey Goldman and Donald R. Kendall, Jr.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.22* Registration Rights Agreement dated as of August 19, 1994, among the Registrant and certain former
Dunkirk stockholders, including Gerald P. Balcar and Robert Dejaiffe
10.23* Warrant for the Purchase of shares of Series A Convertible Preferred Stock issued to Paramount
Capital, Inc. by the Registrant
10.24* Research Agreement dated December 1994, between Dunkirk and Alfred University
10.25* Note and Warrant Purchase Agreement dated as of April 21, 1994 among the Registrant and each of the
investors listed on Schedule I thereto
10.26* 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.
10.27* Business Lease dated as of December 31, 1995, between the Registrant and Bethany Road Associates
10.28* Purchase, Supply and Distributorship Agreement dated as of March 28, 1996, among Registrant, Dunkirk
and Cytech Laboratories, Inc. ("Cytech")
10.29* Amendment to Purchase and Supply Agreement dated May 9, 1996, among the Registrant, Dunkirk and
VANGKOE Industries, Inc. ("VANGKOE"), assignee of Cytech
10.30** Letter Agreement dated February 14, 1997, between the Registrant and VANGKOE
11.1*** Statement of Computation of Net Loss Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP (relating to financial statements of the Registrant)
23.2 Consent of BDO Seidman, LLP (relating to financial statements of Octagon, Inc.)
23.3 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. (included in Exhibit 8.1)
23.4** Consent of O'Sullivan Graev & Karabell, LLP (included in Exhibit 5.1)
23.5** Consent of Collier, Shannon, Rill & Scott
23.6** Consent of Brooks, Houghton & Company, Inc.
23.7** Consent of William L. Amt
23.8** Consent of Patricia H. Engman
23.9** Consent of William V. Roberti
23.10** Consent of Harry O. Christenson
24.1** Powers of Attorney of directors and officers of the Registrant
99.1** Form of Proxy of Octagon
99.2 Opinion of Brooks, Houghton & Company, Inc. (included in the Proxy Statement/ Prospectus as Exhibit
B-1)
99.3 Opinion of Brooks, Houghton & Company, Inc. (included in the Proxy Statement/ Prospectus as Exhibit
B-2)
</TABLE>
- ------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 declared effective by the SEC on May 16, 1996.
** Previously filed.
II-3
<PAGE>
*** Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1996.
(B) FINANCIAL STATEMENT SCHEDULES
None required.
(C) REPORTS, OPINIONS OR APPRAISALS
Information requested hereunder is furnished as Exhibits 99.2 hereto and as
Exhibit B to the Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
II-4
<PAGE>
The undersigned Registrant undertakes that every prospectus (i) that is
filed pursuant to the immediately preceding paragraph, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and
issued in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to this Registration Statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer of 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 question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 17th day of April, 1997.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
By: /s/ HARVEY GOLDMAN
-----------------------------------------
Harvey Goldman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on the 17th day of April, 1997,
by or on behalf of the following persons in the capacities indicated:
President and Chief
/s/ HARVEY GOLDMAN Executive Officer
- ------------------------------ (Principal Executive
Harvey Goldman Officer and Principal
Accounting Officer)
*
- ------------------------------ Chairman of the Board
Eckardt C. Beck
*
- ------------------------------ Director
Peter H. Gardner
*
- ------------------------------ Director
Scott A. Katzmann
*
- ------------------------------ Director
Alexander P. Haig
*
- ------------------------------ Director
Donald R. Kendall, Jr.
*
- ------------------------------ Director
Irwin M. Rosenthal
II-6
<PAGE>
*
- ------------------------------ Director
Norman L. Christensen, Jr.
HARVEY GOLDMAN
-----------------------------------------
Harvey Goldman
*By: ATTORNEY-IN-FACT
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
2 Agreement and Plan of Reorganization, dated as of November 18, 1996, as amended, by and among the
Registrant, CTI ACQSUB-II and Octagon, Inc. (included in the Proxy Statement/Prospectus as Exhibit A)
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
8.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. regarding certain tax matters
10.1 Form of Voting Agreement and Irrevocable Proxy (included in the Proxy Statement/ Prospectus as
Exhibit D)
10.2** Form of Employment Agreement between Conversion and William L. Amt, as amended
10.3** Form of Employment Agreement between Conversion and Harry O. Christenson, as amended
10.4** Loan and Security Agreement dated as of September 19, 1996, between the Registrant and Octagon, Inc.
10.5* Conversion Technologies International, Inc. 1994 Employee Stock Option Plan, as amended
10.6* Conversion Technologies International, Inc. 1994 Stock Option Plan for Non-Employee Directors, as
amended
10.7* Amended and Restated Employment Agreement dated as of June 9, 1994, between the Registrant and Harvey
Goldman
10.8** Amendment dated January 20, 1997, to Amended and Restated Employment Agreement between the Registrant
and Harvey Goldman
10.9* Employment Agreement dated as of September 1, 1995, between the Registrant and Perry A. Pappas
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.10* Form of Indemnification Agreement
10.11* Lease dated as of March 1, 1995 between County of Chautauqua Industrial Development Agency and
Dunkirk
10.12* Sludge and Mixed Cullet Purchase Agreement dated January 1994, between Toshiba Display Devices, Inc.
and Dunkirk
10.13* Clean Cullet Sale Agreement dated as of August 27, 1993, between Ol-Neg TV Products, Inc. and Dunkirk
10.14* Raw Materials Purchase and Clean Cullet Sale Agreement dated November 4, 1993, between Thomson
Consumer Electronics Inc. and Dunkirk
10.15* Project Development Assistance Agreement dated as of April 20, 1995, between the Registrant and
Paramount Capital, Inc.
10.16* 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.
10.17* 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.
10.18* Consulting Agreement dated March 1, 1995, between the Registrant and Eckardt C. Beck
10.19* Consulting Agreement dated July 5, 1995, between the Registrant and Palmetto Partners, Ltd.
10.20* 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.
10.21* Registration Rights Agreement dated as of April 21, 1994, among the Registrant, Palmetto Partners,
Ltd., Harvey Goldman and Donald R. Kendall, Jr.
10.22* Registration Rights Agreement dated as of August 19, 1994, among the Registrant and certain former
Dunkirk stockholders, including Gerald P. Balcar and Robert Dejaiffe
10.23* Warrant for the Purchase of shares of Series A Convertible Preferred Stock issued to Paramount
Capital, Inc. by the Registrant
10.24* Research Agreement dated December 1994, between Dunkirk and Alfred University
10.25* Note and Warrant Purchase Agreement dated as of April 21, 1994 among the Registrant and each of the
investors listed on Schedule I thereto
10.26* 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.
10.27* Business Lease dated as of December 31, 1995, between the Registrant and Bethany Road Associates
10.28* Purchase, Supply and Distributorship Agreement dated as of March 28, 1996, among Registrant, Dunkirk
and Cytech Laboratories, Inc. ("Cytech")
10.29* Amendment to Purchase and Supply Agreement dated May 9, 1996, among the Registrant, Dunkirk and
VANGKOE Industries, Inc. ("VANGKOE"), assignee of Cytech
10.30** Letter Agreement dated February 14, 1997, between the Registrant and VANGKOE
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
11.1*** Statement of Computation of Net Loss Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP (relating to financial statements of the Registrant)
23.2 Consent of BDO Seidman, LLP (relating to financial statements of Octagon, Inc.)
23.3 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. (included in
Exhibit 8.1)
23.4** Consent of O'Sullivan Graev & Karabell, LLP (included in Exhibit 5.1)
23.5** Consent of Collier, Shannon, Rill & Scott
23.6** Consent of Brooks, Houghton & Company, Inc.
23.7** Consent of William L. Amt
23.8** Consent of Patricia H. Engman
23.9** Consent of William V. Roberti
23.10** Consent of Harry O. Christenson
24.1** Powers of Attorney of directors and officers of the Registrant
99.1** Form of Proxy of Octagon
99.2 Opinions of Brooks, Houghton & Company, Inc. (included in the Proxy Statement/ Prospectus as Exhibit
B-1)
99.3 Opinion of Brooks, Houghton & Company, Inc. (included in the Proxy Statement/ Prospectus as Exhibit
B-2)
</TABLE>
- ------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 declared effective by the SEC on May 16, 1996.
** Previously filed.
*** Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1996.
<PAGE>
EXHIBIT 8.1
[GREENBERG TRAURIG LETTERHEAD]
April 22, 1997
Octagon, Inc.
317 S. North Lake Boulevard
Suite 1024
Altamonte Springs, Florida 32701
RE: MERGER OF CTI ACQ-SUB II, INC., A WHOLLY OWNED SUBSIDIARY OF
CONVERSION TECHNOLOGIES INTERNATIONAL, INC., INTO OCTAGON, INC.
---------------------------------------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to Octagon, Inc., a Delaware corporation (the
"Company"), in connection with the proposed merger (the "Merger") with and into
the Company of CTI ACQ-SUB II, Inc. ("Acquisition Sub"), a Delaware corporation
and a wholly owned subsidiary of Conversion Technologies International, Inc., a
Delaware corporation ("Parent"), pursuant to the terms of the Agreement and
Plan of Reorganization by and among Company, Parent and Acquisition Sub dated
as of November 18, 1996, as amended (the "Agreement"), as described in
Amendment No. 2 to the Registration Statement on Form S-4 to be filed by Parent
with the Securities and Exchange Commission today (the "Registration
Statement"). These opinions are being rendered pursuant to your request. All
capitalized terms, unless otherwise specified, have the meaning assigned to
them in the Registration Statement.
In connection with these opinions, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Agreement, (ii) the shareholder certificates signed by Company
shareholders holding 42.11% percent of the outstanding Company Common Stock on
the date of the Merger (the "Shareholder Certificates"), (iii) the Registration
Statement and (iv) those other documents as we have deemed necessary or
appropriate in order to enable us to render the opinions below. In our
examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of those copies. In rendering the opinions set
forth below, we have relied upon certain written representations,
certifications and covenants of Company and Parent (and assumed the accuracy of
their knowledge with respect to the relevant facts) and on the Shareholder
Certificates.
In rendering our opinions, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, pertinent judicial authorities, interpretive rulings of the
Internal Revenue Service and those other authorities as we have considered
relevant.
<PAGE>
Octagon, Inc.
April 22, 1997
Page 2
Based upon and subject to the foregoing, it is our opinion that under
current law the Merger will constitute a reorganization within the meaning of
section 368(a) of the Code, and Company, Parent and Acquisition Sub each will
be a party to the reorganization within the meaning of section 368(b) of the
Code.
As a reorganization, the Merger will have the following Federal income tax
consequences:
1. A Company shareholder will not recognize gain or loss on the exchange
of a share of Company Common Stock for a share of Parent Common Stock pursuant
to the Merger.
2. The basis of a Company shareholder in a share of Parent Common Stock
received pursuant to the Merger will be equal to his basis in the share of
Company Common Stock surrendered in exchange therefor.
3. The holding period of a Company shareholder in a share of Parent Common
Stock received pursuant to the Merger will include his holding period for the
share of Company Common Stock surrendered in exchange therefor, provided he
held that share of Company Common Stock as a capital asset at the Effective
Time.
4. Parent, Acquisition Sub and Company will not recognize gain or loss as
a result of the Merger.
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether Federal, state, local or foreign, of the Merger or of any
transactions related to the Merger or contemplated by the Agreement or
described in the Registration Statement. These opinions are being furnished
only to you in connection with the Merger and are solely for your benefit in
connection therewith and may not be used or relied upon for any other purpose
and may not be circulated, quoted or otherwise referred to for any other purpose
without our express written consent.
WE HEREBY CONSENT TO THE FILING OF THIS OPINION LETTER AS AN EXHIBIT TO THE
REGISTRATION STATEMENT AND TO THE REFERENCE TO THIS FIRM IN THE PROXY
STATEMENT/PROSPECTUS, WHICH IS CONTAINED IN THE REGISTRATION STATEMENT. IN
GIVING THIS CONSENT, WE DO NOT THEREBY ADMIT THAT WE ARE AN "EXPERT" WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED.
Sincerely,
GREENBERG, TRAURIG, HOFFMAN,
LIPOFF, ROSEN & QUENTEL
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- -------------------------------------------------------------------------------------- --------------------------
<S> <C>
Dunkirk International Glass and Ceramics Corporation.................................. Delaware
CTI ACQSUB-II, Inc.................................................................... Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 13, 1996, except for Note 9, as to which the date
is September 20, 1996, included in Amendment No. 2 to the Registration Statement
(Form S-4 No. 333-20075) and related Prospectus of Conversion Technologics
International, Inc. for the registration of 850,000 shares of the Company's
Common Stock.
ERNST & YOUNG LLP
MetroPark, New Jersey
April 16, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Octagon, Inc.
Altamonte Springs, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 21, 1997 relating to the
consolidated financial statements of Octagon, Inc., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Orlando, Florida
April 17, 1997
