<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997.
FILE NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
BETHANY CROSSING OFFICE CENTER
82 BETHANY ROAD
HAZLET, NEW JERSEY 07730
(908) 888-3828
(Name, address, 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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, par value $.00025 per
share.................................... 850,000 $0.21 $1,785,000 $615.52
</TABLE>
(1) Based upon an estimate of the maximum number of shares of Common Stock of
the Registrant issuable in the Merger to holders of shares of common stock
of Octagon and holders of options to acquire shares of common stock of
Octagon.
(2) In accordance with Rule 457(f)(1), the registration fee has been calculated
based upon the market value of the estimated maximum number of shares of
Octagon common stock to be exchanged pursuant to the Merger (8,500,000
shares), at a price of $0.21 per share, the average of the bid and asked
prices of Octagon common stock reported in over-the-counter trading on
January 14, 1997.
------------------------
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 March ,
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 58% 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>
February , 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 MARCH , 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 March ,
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 February ,
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>
February , 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 JANUARY 21, 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 MARCH , 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 March
, 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 the shares of Conversion Common Stock to be issued in
connection with the Merger (the "Merger Shares"). Conversion Common Stock is
quoted on the Nasdaq SmallCap Market under the symbol CTIX. On February ,
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 February , 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 February , 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,
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................................................................... 25
BACKGROUND OF THE MERGER.............................................................. 26
RECOMMENDATION OF THE OCTAGON BOARD AND REASONS FOR THE MERGER........................ 27
OPINION OF BROOKS, HOUGHTON........................................................... 29
THE MERGER............................................................................ 32
DISSENTERS' RIGHTS.................................................................... 41
EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON.................................. 43
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... 44
BUSINESS OF CONVERSION................................................................ 48
CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 61
MANAGEMENT OF CONVERSION.............................................................. 66
CONVERSION EXECUTIVE COMPENSATION..................................................... 72
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION.......................... 74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT OF
CONVERSION.......................................................................... 79
BUSINESS OF OCTAGON................................................................... 81
OCTAGON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 83
MANAGEMENT OF OCTAGON................................................................. 86
OCTAGON EXECUTIVE COMPENSATION........................................................ 89
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF OCTAGON............................. 92
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT OF
OCTAGON............................................................................. 92
DESCRIPTION OF CONVERSION SECURITIES.................................................. 93
COMPARATIVE RIGHTS OF CONVERSION STOCKHOLDERS AND OCTAGON STOCKHOLDERS................ 95
LEGAL MATTERS......................................................................... 96
EXPERTS............................................................................... 96
INDEPENDENT ACCOUNTANTS............................................................... 96
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
EXHIBIT A -- AGREEMENT AND PLAN OF REORGANIZATION..................................... A-1
EXHIBIT B -- OPINION OF BROOKS, HOUGHTON & COMPANY, INC............................... B-1
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 is an early-stage specialty materials company
producing, as its flagship product, an alumino-silicate glass marketed as
ALUMAGLASS-TM-. ALUMAGLASS is manufactured in a patented process utilizing
select industrial wastes from the aluminum, electronics, ceramics products and
other industries as raw materials, together with certain virgin materials.
ALUMAGLASS is marketed primarily as an industrial abrasive for surface cleaning
and surface preparation applications and as an aggregate for non-skid flooring
and construction materials. Conversion is also engaged in the business of
recycling cathode ray tube ("CRT") glass used in televisions for sale to the
original manufacturers of such glass and others. In addition, Conversion
utilizes its manufacturing equipment to convert certain types of CRT glass and
certain other manufacturing by-products and industrial wastes into manufacturing
raw materials for use by Conversion in its production of ALUMAGLASS and for sale
to others.
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.
OCTAGON. Octagon is a technical services firm providing radiological
control and operations and maintenance services to nuclear utilities, the
Department of Defense and the Department of Energy.
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
4
<PAGE>
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 March ,
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 February , 1997
are entitled to vote at the Special Meeting. At the close of business on
February , 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 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
5
<PAGE>
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 58% 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 58%
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 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 an opinion of Brooks, Houghton & Company,
Inc. ("Brooks, Houghton"), Octagon's financial advisor in connection with the
Merger, that, as of the date of 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. A copy of such opinion is
attached as Exhibit B to this Proxy Statement/Prospectus.
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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 April 15, 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, 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,
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<PAGE>
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 eleven members, and William L. Amt, Patricia H.
Engman and William V. Roberti, currently members of the Octagon Board (and, in
the case of Mr. Amt, a significant stockholder and an executive officer of
Octagon), will become directors of Conversion. The Octagon Board will be
composed of Mr. Amt and Harvey Goldman, currently the Chairman and Chief
Executive Officer of Conversion. The executive officers of Conversion after the
Effective Time are expected to be as follows: Harvey Goldman, Chairman, William
L. Amt, President and Chief Executive Officer, Harry O. Christenson, Chief
Financial Officer, Robert Dejaiffe, Vice President -- Technology, John C.
Kolojeski, Vice President, and Catherine Susan Kirby, Vice President --
Communications. 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".
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
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<PAGE>
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. Mr.
Amt and Mr. Christenson will also each receive upon consummation of the Merger
options to purchase 15,000 shares of Conversion Common Stock at an exercise
price of $4.40 per share. 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".
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, 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".
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AGREEMENTS WITH CERTAIN PRINCIPAL STOCKHOLDERS WHO EXECUTED VOTING
AGREEMENTS. 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. Conversion has provided an aggregate of
$310,000 to Octagon as a bridge loan, $60,000 of which 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" and "EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to be a tax-free reorganization 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. The Octagon Board has received the opinion of its counsel, Greenberg,
Traurig, to the effect that the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). 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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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
(through January
10, 1997)....... 2 5/8 2 3/8 .17 .15
</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 February ,
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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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. 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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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 September 30, 1996, the Company had an
accumulated deficit of approximately $(18,830,000). 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 $(1,420,000) for the three
months ended September 30, 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 September 30,
1996, Octagon had an accumulated deficit of approximately $(9,419,000). Octagon
incurred an operating loss of approximately $(392,000) for the fiscal year ended
December 31, 1995 and had an operating profit of approximately $633,000 for the
nine-month period ended September 30, 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 $(2,211,000) for the fiscal year ended June 30, 1996 and an
operating loss of $(2,087,000) for the three-month period ended September 30,
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 and substantially all of its
revenues to date have been derived from recycling CRT glass. Conversion has only
generated minimal revenues to date from sales of its flagship ALUMAGLASS
product. The construction of Conversion's melter to produce ALUMAGLASS was
completed in February 1995, and limited production of ALUMAGLASS commenced in
the spring of 1995. Although Conversion has commenced commercial sales of
ALUMAGLASS, there can be no assurance that Conversion will be able to
successfully market ALUMAGLASS. 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; NEED FOR ADDITIONAL FINANCING. As of September 30,
1996, Conversion had approximately $3,587,000 in cash and marketable securities.
Although Conversion has recently effected a number of cost cutting initiatives,
it will require a significant increase in revenues before it can achieve
profitability. Until such time as profitability is achieved, if ever, Conversion
will continue to rely on its limited cash resources to fund its operations as
well as, following consummation of the Merger, the cash
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needs of the Octagon business and new business initiatives pursued by the
combined entity. Accordingly, in order to achieve growth in the combined
entity's businesses, it may be necessary to seek additional financing. Neither
Conversion nor Octagon has any commitments for any future financing and there
can be no assurance that Conversion will be able to obtain additional financing
in the future from either debt or equity financings, bank loans or other sources
on acceptable terms or at all. If available, any additional equity financings
may be dilutive to Conversion's stockholders and any debt financings may contain
restrictive covenants and additional debt service requirements, which could
adversely affect Conversion's operating results. If Conversion is unable to
obtain necessary financing, it will be required to significantly curtail its
activities or cease operations. See "CONVERSION MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
SUBSTANTIAL INDEBTEDNESS; DEBT SERVICE REQUIREMENTS. At September 30, 1996,
Dunkirk had outstanding an aggregate of approximately $11,615,000 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, which will aggregate approximately
$1,647,000 (excluding capital lease obligations) for the 12-month period ending
June 30, 1997, exclusive of debt service required for Octagon's working capital
line of credit which is discussed below. 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.
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 $1,416,000 as of
September 30, 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 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
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<PAGE>
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 construction of ALUMAGLASS 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.
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 would be approximately
$2,623,000. 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 would be $262,283.
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 Conversion's products 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. In addition, the decision by a potential
customer to utilize ALUMAGLASS as an abrasive 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. There can be no
assurance that potential customers will choose to change their equipment or
established procedures or be willing to incur any necessary costs to make such
changes or that the benefits derived from utilizing ALUMAGLASS will outweigh the
costs incurred to make such changes. Further, there can be no assurance that all
customers will experience the performance and cost advantages demonstrated in
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. In
addition, in order to receive the full performance and cost benefits of
ALUMAGLASS, users must use effective abrasives reclamation systems and
appropriate blasting pressures. 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 broad market acceptance in these
applications. If Conversion is not successful in marketing ALUMAGLASS, its
ability to generate revenues, other than from operations of Octagon, will be
limited to its CRT glass recycling operations, waste conversion services, other
future products and services that may be developed or otherwise obtained by
Conversion, which may provide only limited growth potential. See "-- Limited
Number of CRT Customers; Loss of Significant CRT Customers" and "BUSINESS OF
CONVERSION".
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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 and may construct a second
melter at the Dunkirk facility. 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 "CONVERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS OF CONVERSION".
LIMITED SALES AND MARKETING EXPERIENCE OF CONVERSION. Conversion has had
limited experience in selling and marketing ALUMAGLASS and its recycling and
conversion 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 of its abrasives, Conversion has
relied on its 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 has entered into a joint venture with VANGKOE Industries, Inc.
("VANGKOE") pursuant to which a joint venture company formed by Conversion and
VANGKOE will color-coat ALUMAGLASS and other substrates provided by Conversion
and VANGKOE will market such color-coated and other materials provided by
Conversion. However, this joint venture has experienced delays in start-up,
currently anticipated to occur during the first calendar quarter of 1997. In
addition, VANGKOE is a new company without significant assets or experience in
the business proposed to be conducted by the joint venture and, therefore, there
can be no assurance that such joint venture will be successful. Any joint
venture or other collaberative arrangements 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 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 and the three months ended September 30, 1996, three of
Conversion's CRT glass recycling customers, Techneglas, Inc., 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% and 70% of Conversion's revenues, respectively. In December
1996, Conversion received notice from Thomson that Thomson would cease to send
CRT glass to, or purchase recycled CRT glass from, Conversion as of March 1997.
Thomson accounted for approximately 16.5%, or
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$440,000, of Conversion's consolidated revenues for the fiscal year ended June
30, 1996 and approximately 26.6%, or $91,000, of Conversion's consolidated
revenues for the fiscal quarter ended September 30, 1996, in each case, when
taking into account sales of CRT glass supplied by Thomson to both Thomson and
customers other than 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
ALUMAGLASS. 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 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. 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
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effectively compete may be adversely affected by the ability of these
competitors to offer their products at 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, Conversion was recently
notified of Thomson's intention to cease, effective in March 1997, 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. 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.
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 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. Although William L. Amt, who will be President and
Chief Executive Officer of Conversion, and Harry O. Christenson, who will be
Chief Financial Officer of Conversion, have experience in manufacturing
operations, neither has been a principal officer of a company engaged 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. David L. Sanders, Conversion's Chief
Accounting Officer, resigned in December 1996 and will serve in a consulting
capacity through January 31, 1997. In addition, Perry A. Pappas, Conversion's
Vice President and General Counsel, has indicated that he intends to resign and
seek other employment after the consummation of the Merger. See "THE MERGER --
Business and Management After the Merger; Employment Agreements".
POSSIBLE ADVERSE EFFECTS OF ELECTION OF UNION. In February 1996, a majority
of the employees of Dunkirk elected the United Steelworkers of America (the
"Union") to act as their bargaining representative pursuant to the National
Labor Relations Act (the "NLRA"). Dunkirk is obligated under the NLRA to bargain
with the Union in good faith. The outcome of such bargaining cannot be
determined. There can be no assurance that the election of the Union or the
outcome of the bargaining process will not result in higher labor costs, work
stoppages or strikes or otherwise have a material adverse effect on Conversion's
business, financial condition or results of operations. See "CONVERSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Overview".
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
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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.
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.
Although Conversion has no present intention to issue any shares of preferred
stock, 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.
OUTSTANDING CONVERSION WARRANTS AND OPTIONS; EXERCISE OF REGISTRATION
RIGHTS. As of January 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 at an exercise price of $5.85 per share and 4,639,550 Redeemable
Class B Warrants (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
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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; (iv) options to purchase an aggregate of 271,025 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; (v) non-qualified
options to purchase 50,000 shares of Common Stock issued to Harvey Goldman, the
Chairman, President and Chief Executive Officer of Conversion; and (vi) warrants
to purchase an aggregate of 319,204 shares of Common Stock issued prior to the
Conversion IPO. Conversion has reserved an aggregate of 510,400 shares of Common
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. 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 293,365 shares of Common Stock have certain
demand and "piggy-back" registration rights with respect to their securities.
The exercise of such rights could involve substantial expense to 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
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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.
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN CONVERSION'S
SECURITIES. Blair & Co. makes a market in Conversion's securities. Rule 10b-6
under the Exchange Act may prohibit Blair & Co. from engaging in any
market-making activities with regard to Conversion's securities for the period
from nine business days (or such other applicable period as Rule 10b-6 may
provide) prior to any solicitation by Blair of the exercise of Redeemable
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that Blair may have to receive
a fee for the exercise of Redeemable Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for Conversion's
securities during certain periods while the Redeemable Warrants are exercisable.
In addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of certain of the Redeemable Warrants issued
in exchange for warrants issued in a bridge loan placed by Blair prior to the
Conversion IPO (the "Selling Securityholder Warrants") may not simultaneously
engage in market-making activities with respect to any securities of Conversion
for the applicable "cooling off" period (at least two and possibly nine business
days) prior to the commencement of such distribution. Accordingly, in the event
Blair or Blair & Co. is engaged in a distribution of such Redeemable Warrants,
neither of such firms will be able to make a market in Conversion's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of
Conversion's securities.
POSSIBLE DELISTING OF CONVERSION SECURITIES FROM NASDAQ. While Conversion's
Common Stock meets the current Nasdaq listing requirements and 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. 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.
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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
March , 1997 and any adjournments or postponements thereof. The
approximate date this Proxy Statement/Prospectus is first being sent to Octagon
stockholders is February , 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 February , 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 58% 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.
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 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.
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- 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 $2,231,000
based on market values as of January 10, 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 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 58% 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
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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.
In arriving at its opinion, Brooks, Houghton examined, among other things,
(i) the Merger Agreement; (ii) historical financial information of Octagon and
Conversion; (iii) financial projections prepared by Octagon and a nine-month
sources and uses of funds schedule prepared by Conversion; (iv) 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; (v) publicly available
historical stock price and trading volume information for Octagon and Conversion
common stock and warrants; (vi) Octagon management's projected orderly
liquidation value of Octagon; (vii) a selected comparable analyses for Octagon
and Conversion provided by the management of Octagon; (viii) background
information regarding products and services provided by Conversion and Octagon;
and (ix) an October 1, 1996 Octagon Board briefing package regarding the Merger,
which was prepared by the management of Octagon.
Brooks, Houghton also held discussions with the management of Octagon and
Conversion and met with Conversion's joint venture partner, 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. 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 11 of the Securities Act and
the rules and regulations promulgated thereunder.
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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 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
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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 10 selected environmental consulting companies. Companies believed
by management to be comparable to Conversion were five selected technology
companies. 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 range of present values based on various discount rates applied to
management's estimated pre-tax cash flows.
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, 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 the officers and employees and its relationships with suppliers,
customers and others. Octagon has agreed
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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 58% 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 April 15, 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) April 15, 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 April 15,
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.
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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 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 April 15, 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 options to purchase 15,000 shares of
Conversion Common Stock at an exercise price of $4.40 per share, 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
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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 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, 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. 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 December 1996, Conversion provided an
additional $60,000 to Octagon as a bridge loan, the proceeds of which were 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"
and "EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON".
FEDERAL INCOME TAX CONSEQUENCES
Octagon has received an opinion of its counsel, Greenberg, Traurig, to the
effect that as of the Effective Time 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 that Conversion, Octagon and Sub will each be a
party to a reorganization within the meaning of Section 368(b) of the Code. Such
opinion is conditioned on the accuracy of certain representations and covenants
contained in the Merger Agreement and certain facts and circumstances regarding
the Merger.
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
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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.
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 would be approximately $2,623,000. 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 would be $262,283.
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.
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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.
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 ALUMAGLASS or other substrates produced utilizing Conversion's
facilities or technologies, (ii) continuing to identify markets for ALUMAGLASS
and other substrates produced by Conversion and identifying other substrates 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 manufacturing facilities on-site at industrial customer locations
and (v) growing Conversion's CRT recycling business by entering markets for
recycling end-of-life computer 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: Harvey Goldman, Chairman; William L. Amt, President and Chief Executive
Officer; Harry O. Christenson, Chief Financial Officer; Robert Dejaiffe, Vice
President -- Technology; John C. Kolojeski, Vice President; and Catherine Susan
Kirby, Vice President -- Communications. Following the Merger, Conversion's
Board of Directors shall be expanded from eight to eleven directors and William
L. Amt, 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 will also serve as a director and a member of the Executive
Committee of the Board of 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.
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
40
<PAGE>
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 of the Board and as a member of the Executive Committee of the Board of
Directors.
Perry A. Pappas, Conversion's Vice President and General Counsel, has
indicated that he intends to resign and seek other employment after the
consummation of the Merger.
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 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
41
<PAGE>
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 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
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<PAGE>
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
has loaned to Octagon an aggregate of $310,000 through the date of this Proxy
Statement/Prospectus (the "Bridge Loan"). 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 at any time on or after
February 13, 1997. 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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<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet
includes Conversion's consolidated balance sheet as of September 30, 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 costs, as if such acquisition had occurred on September 30, 1996.
The unaudited pro forma condensed consolidated statements of operations include
Conversion's consolidated statements of operations for the three months ended
September 30, 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 three months ended September 30, 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 unaudited condensed consolidated financial statements for the nine
months ended September 30, 1996 and the unaudited 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. 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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<PAGE>
CONVERSION AND OCTAGON
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA
--------------------------- ---------------------------
<CAPTION>
CONVERSION OCTAGON ADJUSTMENTS AS ADJUSTED
------------- ------------ ------------ -------------
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash................................................. $ 1,551,087 $ 2,174 $ -- $ 1,553,261
Marketable securities................................ 2,036,350 -- -- 2,036,350
Notes receivable..................................... 250,000 -- (250,000 (1) --
Accounts receivable, net............................. 382,677 3,722,029 -- 4,104,706
Unbilled accounts receivable......................... -- 2,027,876 -- 2,027,876
Inventories.......................................... 424,681 -- -- 424,681
Prepaid expenses and other current assets............ 322,209 133,255 (32,794 (2) 422,670
------------- ------------ ------------ -------------
Total current assets................................... 4,967,004 5,885,334 (282,794) 10,569,544
Property, plant and equipment.......................... 14,973,814 843,070 -- 15,816,884
Less accumulated depreciation.......................... (1,970,460) (577,348) -- (2,547,808)
------------- ------------ ------------ -------------
13,003,354 265,722 -- 13,269,076
Goodwill, net.......................................... -- 755,380 1,867,448(3) 2,622,828
Other assets........................................... 1,863,872 49,428 -- 1,913,300
------------- ------------ ------------ -------------
$ 19,834,230 $ 6,955,864 $ 1,584,654 $ 28,374,748
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities
Accounts payable..................................... $ 1,109,483 $ 1,428,969 $ -- $ 2,538,452
Notes payable........................................ -- 1,712,548 (250,000 (1) 1,462,548
Advance billing on uncompleted contracts............. -- 1,239,190 -- 1,239,190
Other current liabilities............................ 2,409,188 1,133,861 217,206(2) 3,760,255
------------- ------------ ------------ -------------
Total current liabilities.............................. 3,518,671 5,514,568 (32,794) 9,000,445
Long-term debt and capital lease obligations........... 11,238,345 9,244 -- 11,247,589
Stockholders' equity (deficiency):
Par value of common stock............................ 1,362 84,047 (83,834 (4) 1,575
Other stockholders' equity........................... 5,075,852 1,348,005 1,701,282 )(5 8,125,139
------------- ------------ ------------ -------------
5,077,214 1,432,052 1,617,448 8,126,714
------------- ------------ ------------ -------------
$ 19,834,230 $ 6,955,864 $ 1,584,654 $ 28,374,748
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
- ------------------------
(1) Represents elimination in consolidation of promissory note from Octagon to
Conversion.
(2) Includes $250,000 of costs of completing the Merger, of which $32,794 had
been incurred at September 30, 1996 and $217,206 is a pro forma accrual.
These costs reduce paid-in capital.
(3) Represents $2,622,828 goodwill resulting from the Merger less $755,380 of
historical unamortized Octagon goodwill.
(4) 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.
(5) 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 $9,418,696.
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<PAGE>
CONVERSION AND OCTAGON
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL PRO FORMA
--------------------------- --------------------------
<CAPTION>
CONVERSION OCTAGON ADJUSTMENTS AS ADJUSTED
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Revenue.............................................. $ 344,273 $ 4,473,655 $ -- $ 4,817,928
Costs and expenses
Cost of goods sold................................. 1,206,908 $ 4,351,690 -- 5,558,598
Selling, general and administrative................ 557,379 780,796 8,407(1) 1,346,582
Interest expense, net.............................. 230,771 71,476 -- 302,247
Other income, net.................................. -- (57,241) -- (57,241)
------------- ------------ ----------- -------------
1,995,058 5,146,721 8,407 7,150,186
------------- ------------ ----------- -------------
Net loss............................................. $ (1,650,785) $ (673,066) $ (8,407) $ (2,332,258)
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
Net loss per common share............................ $ (0.35) $ (0.08)
------------- ------------
------------- ------------
Pro forma net loss per common share.................. $ (0.42)(2)
-------------
-------------
Weighted average common shares....................... 4,709,186 7,970,924 5,559,186
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
- ------------------------
(1) Represents amortization of $2,622,828 of goodwill over 10 years, less
historical Octagon goodwill amortization of $57,164 for the period.
(2) Calculated using Conversion's historical weighted average shares of
4,709,186 (excluding Escrow Shares) for the three months ended September 30,
1996, plus 850,000 shares to be issued in connection with the Merger.
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<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 33,626(1) 4,873,259
Process development costs......................... 996,259 -- -- 996,259
Interest expense, net............................. 961,751 518,891 -- 1,480,642
Other income, net................................. (81,811) (64,851) -- (146,662)
------------- ------------- ----------- -------------
6,790,938 27,670,801 33,626 34,495,365
------------- ------------- ----------- -------------
Net (loss) income before extraordinary item......... $ (4,110,951) $ 599,544 $ (33,626) $ (3,545,033)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Net (loss) income per common share before
extraordinary item................................ $ (2.64) $ 0.09
------------- -------------
------------- -------------
Pro forma net loss per common share................. $ (1.47)(2)
-------------
-------------
Weighted average common shares...................... 1,559,908 6,658,478 2,409,908
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Represents amortization of $2,622,828 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.
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<PAGE>
BUSINESS OF CONVERSION
OVERVIEW
Conversion is an early-stage specialty materials company producing as its
flagship product an alumino-silicate glass marketed as ALUMAGLASS. ALUMAGLASS is
manufactured in a patented process utilizing select industrial wastes from the
aluminum, electronics, ceramics products and other industries as raw materials,
together with certain virgin materials. ALUMAGLASS is marketed primarily as an
industrial abrasive for surface cleaning and surface preparation applications
and as an aggregate for non-skid flooring and construction materials. Conversion
is also engaged in the business of recycling cathode ray tube glass used in
televisions for sale to the original manufacturers of such glass and others. In
addition, Conversion utilizes its manufacturing equipment to convert certain
types of CRT glass and certain other manufacturing by-products and industrial
wastes into manufacturing raw materials for use by Conversion in its production
of ALUMAGLASS and for sale to others.
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. VANGKOE is a newly organized
company, formed by the principals of Cytech Laboratories, Inc., a privately-held
industrial products and research corporation.
PRODUCTS AND SERVICES
ALUMAGLASS
Conversion's initial product line is an alumino-silicate glass marketed as
ALUMAGLASS. ALUMAGLASS is produced in a patented process utilizing commercially
available technologies customized for Conversion's manufacturing processes. As a
loose grain abrasive, ALUMAGLASS 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 is also marketed as an aggregate for
direct incorporation into products such as non-skid flooring, plasters, tiles
and other construction materials.
ALUMAGLASS is manufactured using various alumina, silica and certain other
metal or calcia-enriched manufacturing by-products and wastes of the
electronics, aluminum, specialty steel and automotive industries, together with
virgin materials. 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
48
<PAGE>
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, ALUMAGLASS 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
abrasives to provide the various characteristics required for particular
applications. For example, by altering the batch mix of raw material
ingredients, Conversion can alter the chemical composition of its abrasives to
alter performance characteristics. In addition, Conversion's mechanized
finishing area allows ALUMAGLASS to be produced in coarse, medium or fine
particle or "grit" sizes and, with further processing, into micro grits.
Conversion expects fine to medium grit ALUMAGLASS to be suitable for use in
equipment maintenance operations, industrial process cleaning and other
applications where the integrity of substrates is critical, such as the
maintenance of turbine blades in power generation equipment and equipment used
in the aerospace industry. Conversion expects medium to coarse grit ALUMAGLASS
to be suitable for use in a variety of cabinet and blast room applications and
as an ingredient for direct incorporation into products such as non-skid
flooring. Conversion expects coarse grit ALUMAGLASS to be suitable for cleaning
structures or items having steel substrates such as bridges, ships, rail cars,
car carriers and cargo containers.
RECYCLING OF CRT GLASS
Conversion is also engaged in recycling CRT glass used in televisions.
Conversion's CRT glass recycling customers include electronics manufacturers
such as Techneglas, Inc., Toshiba Display Devices, Inc. and Hitachi Electronic
Devices, U.S.A., Inc. Although Thomson Consumer Electronics, Inc. is also a
current CRT customer of Conversion, Thomson has notified Conversion of its
intention to cease shipping CRT glass to, and purchase recycled CRT glass from,
Conversion as of March 1997. See "RISK 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. Conversion is currently in discussions with
potential customers to purchase such glass and, although there can be no
assurance, believes that it can sell such glass at prices acceptable to
Conversion. In the event Conversion is unable to sell such glass, it believes it
can dispose of such glass at little or no cost by delivering it to others who
use various glass materials in the manufacture of their products or the products
of others. Conversion also believes that it can dispose of such glass in
landfills 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 rate changes and management's determination of
the need for any such reserves based upon the proven saleability or disposition
options for such materials.
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Through the date of this Proxy Statement/Prospectus, CRT glass recycling has
accounted for substantially all of Conversion's revenues. Conversion's initial
sources of CRT glass for recycling have been television manufacturers. However,
Conversion is also seeking to receive CRT glass from manufacturers of computers
and plans to take in whole computer monitors and displays on a pilot basis to
evaluate the commercial viability of commencing disassembly operations where all
components of the monitors and displays would be beneficially reused in
accordance with applicable regulatory requirements. There can be no assurance
that Conversion will be able to successfully recycle computer CRT glass.
MECHANICAL CONVERSION
Conversion also utilizes its manufacturing equipment and know-how to convert
manufacturing by-products and waste glass and ceramics into raw materials for
use by Conversion in its manufacture of ALUMAGLASS and for sale to others.
Examples include the cleaning, sorting and grinding of waste ceramics as a
source of alumina for the manufacture of ALUMAGLASS or for sale to others as a
raw material, and the cleaning, sorting and grinding of specialty glass as a raw
material for ALUMAGLASS or other manufacturers.
POTENTIAL FUTURE PRODUCTS
Future products Conversion may develop include (i) glass beads for highway
signage and pavement marking made from CRT panel glass, (ii) specialty glasses
such as electrical resistance glass, radioactive shielding glass and high
density glass, (iii) other abrasive products made from materials received by
Conversion, whether blended with ALUMAGLASS or other products or as a single
constituent product, and (iv) construction materials such as specialty roofing
or flooring materials. No assurance can be given, however, that Conversion will
be successful in developing any future products, or that it will be able to
market any such products successfully.
MANUFACTURING, RECYCLING AND CONVERSION PROCESSES
ALUMAGLASS MANUFACTURING PROCESS
ALUMAGLASS is manufactured 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.
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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 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.
At present, due to sufficient inventories of ALUMAGLASS on hand and efforts
to reduce operating costs, the melter at the Dunkirk facility has been cooled
and drained. During this period, Conversion will make certain technical
improvements to the melter and 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 desires 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.
OTHER FACILITIES. To date, Conversion has utilized its Dunkirk plant as its
exclusive manufacturing facility. However, in addition to its Dunkirk facility,
Conversion's strategy is to develop manufacturing operations on-site at other
industrial locations such as aluminum companies, shipyards, railyards and other
locations where certain raw materials useful in the manufacture of ALUMAGLASS
may be available and/ or large volume utilization of ALUMAGLASS is anticipated.
In such event, Conversion may elect to deploy other commercially available
melting technologies that may differ in some respects to the melting operations
at the Dunkirk facility through the use of different raw material feedstocks or
variations in the melting process described above.
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.
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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. 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.
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
ALUMAGLASS
Conversion has identified two broad markets for ALUMAGLASS. The first is as
an abrasive for numerous surface preparations 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
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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 as an abrasive include utilities, military and defense
agencies, entities engaged in the electronics, aerospace, automotive, glass
products and construction industries and entities engaged in surface finishing,
coating removal and the maintenance of manufacturing and process industries
equipment and facilities, buildings, highways, bridges and commercial vehicles
and vessels.
ALUMAGLASS can also be directly incorporated into other products such as
non-skid flooring, roofing materials, plasters, tiles, grouts and other
construction materials. ALUMAGLASS 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 there can
be no assurance that ALUMAGLASS will ever achieve 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. 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". Conversion has been notified that Thomson Consumer Electronics,
Inc., historically a significant CRT customer, will cease to do 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. 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, Inc., Thomson Consumer Electronics, Inc. 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 has notified Conversion of its intention to cease shipping CRT
glass to, and purchase 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, ALUMAGLASS has 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
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addition, Midvale Industries, Air Power Equipment Corp. and Ryan Equipment Co.,
Inc. are 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, such as its joint venture with VANGKOE discussed below, 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 is a party to an agreement with its joint venture partner,
VANGKOE, relating to the sale of ALUMAGLASS and certain other materials for use
as aggregates in swimming pool plasters, tiles and other construction materials.
The VANGKOE agreement contains a guaranteed minimum purchase commitment of
approximately 350 tons of ALUMAGLASS per month over a 12-month period commencing
with the completion of its joint venture facility, anticipated to occur in the
first calendar quarter of 1997. At VANGKOE's option, VANGKOE may satisfy its
minimum purchase commitment by substituting one-third of such commitment with
crushed specialty glass provided by Conversion. If the guaranteed minimum
purchase commitment is purchased, Conversion will receive approximately
$1,560,000 in revenue (or approximately $1,240,000 if VANGKOE substitutes
crushed specialty glass for one-third of such commitment). Pursuant to
Conversion's joint venture with VANGKOE, the parties have formed a new
corporation, Advanced Particle Technologies, Inc. ("APT"), which will apply
color coatings at cost to particles supplied by Conversion. Conversion will
provide the start-up capital for APT's operations and VANGKOE will grant to APT
an exclusive, perpetual royalty free license of its proprietary color coating
technology. Conversion and VANGKOE will share equally in the profits generated
by sales of the material coated by APT and other materials supplied by
Conversion and sold through VANGKOE. VANGKOE is a newly-formed entity with
nominal assets and no prior sales experience in this market. In addition, the
start-up of the joint venture has experienced delays, and full-scale marketing
efforts will not be initiated until completion of APT's color coating facility.
Completion of the facility was originally anticipated to occur in the fall of
1996, but is currently anticipated to occur during the first calendar quarter of
1997. Accordingly, there can be no assurance that the joint venture will not
experience further delays in start-up, that the joint venture will be successful
or that VANGKOE will meet its minimum purchase commitments or generate any
significant sales of ALUMAGLASS.
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. See
"-- Products and Services -- CRT Glass Recycling". Conversion has three
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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 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 is a registered trademark. In addition, Conversion has
filed a trademark application for ALUMAGLASS with the Patent and Trademark
Office.
COMPETITION
Conversion's products and services are subject to substantial competition.
As an abrasive, ALUMAGLASS competes 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. See "-- Products and
Services".
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As a construction material, ALUMAGLASS 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, Conversion
was recently notified that Thomson Consumer Electronics, Inc., historically a
significant CRT recycling customer, will cease 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 stringent, and may be more stringent,
than their Federal counterparts. These Federal and state laws regulate the
management and disposal of hazardous and non-hazardous wastes, control the
discharge of pollutants into the air and water, provide for the investigation
and remediation of contaminated land and groundwater resources and encourage
pollution prevention programs. Many of these laws have international
counterparts, particularly in Europe and elsewhere in North America.
RCRA provides a comprehensive regulatory framework for the generation,
transportation, treatment, storage and disposal of solid and hazardous waste.
RCRA regulations require that hazardous waste generators, transporters and
operators of hazardous waste treatment, storage and disposal facilities meet
strict standards set by government agencies. In certain circumstances, RCRA
requires owners/operators of treatment, storage and disposal facilities to
obtain RCRA Part B permits from the EPA or from state agencies authorized to
implement the RCRA program. Obtaining such permits may be a lengthy and costly
process that requires regulatory inspection and approval of, among other things,
the facility design,
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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.
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. 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
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formulating printing ink and a non-hazardous wash solution for cleaning printing
presses. The estimated cost to clean and close the tanks is in the range of
$28,000 to $34,000, based upon bid proposals from a qualified environmental
services firm. An investigation by an environmental engineering firm has
disclosed modest soil contamination confined to the immediate vicinity of two
tank locations. Because of the amount and confined location of the
contamination, it is not certain that any remediation will be required. The
environmental engineering firm has estimated that, if remediation of soil and
groundwater is required, the cost of excavation, removal and disposal of
contaminated material would not exceed $30,000. Thus, total remediation and tank
closure costs are expected to range from approximately $28,000, if no
remediation is required, to approximately $64,000 if soil and groundwater
remediation is required.
The Clean Air Act empowers EPA to establish and enforce ambient air quality
standards and limits on emissions of pollutants from specific facilities. The
Clean Air Act Amendments of 1990 impose specific requirements upon "major" or
"area" sources of regulated air pollutants. In certain cases, depending upon the
area the source is located, such sources may be required to meet
technology-based emissions limits based upon Best Available Control Technology
("BACT") for sources subject to new source performance standards, Maximum
Achievable Control Technology ("MACT") for hazardous air pollutant sources and
Reasonably Available Control Technology ("RACT") or Lowest Achievable Emission
Rates ("LAER") for criteria pollutant sources in non-attainment areas. New York
State has also enacted the Air Pollution Control Act, and has promulgated
regulations pursuant to that Act that regulate air contaminant sources.
Under the Clean Air Act and its amendments, and state laws and regulations,
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 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.
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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 commenced by Conversion 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. 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 December 1, 1996, Conversion had approximately 48 full-time employees,
including approximately 30 in manufacturing 5 in research and product
applications development, approximately 6 in sales and marketing and
approximately 7 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.
In February 1996, a majority of the employees of Dunkirk elected the United
Steelworkers of America to act as their bargaining representative pursuant to
the NLRA. Dunkirk is obligated under the NLRA to bargain with the Union in good
faith. The outcome of such bargaining cannot be determined. There can be no
assurance that the election of the Union or the outcome of the bargaining
process will not result in higher labor costs, work stoppages, strikes or
otherwise have a material adverse effect on Conversion's business, financial
condition or results of operations.
Conversion has not experienced any work stoppages and Conversion considers
its relations with its employees to be satisfactory.
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 $328,684
principal amount was outstanding at September 30, 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 $310,550 principal amount was outstanding on
September 30, 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 believes that its existing 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 September 30, 1996, Conversion has sustained
cumulative losses of approximately $(18,830,000). 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
$10,070,000. 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 September 30, 1996, Conversion spent approximately $2,324,000 on
repayment of bridge notes placed through the underwriter (the "Bridge Notes"),
approximately $1,633,000 on the repayment of other indebtedness, approximately
$2,515,000 on the repayment of accounts payable, approximately $737,000 in
capital expenditures and approximately $2,704,000 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 $1,944,000 for the quarter ended September 30,
1996. This level of negative cash flow resulted principally from decreased
revenues for the period in comparison to the quarter 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 experienced relatively
steady, although limited, sales of ALUMAGLASS. In an effort to increase
ALUMAGLASS sales, Conversion has reinitiated marketing efforts, such as trade
journal articles, participation in trade shows and meetings with distributors,
which were curtailed prior to the Conversion IPO due to cash constraints.
Conversion is also continuing with product testing efforts with several
potential large volume users and recently received initial orders from new
customers and new distributors following successful testing. Conversion also
anticipates additional ALUMAGLASS sales resulting from its joint venture with
VANGKOE. As discussed below, Conversion believes that there will be additional
revenue opportunities for ALUMAGLASS and the ALUMAGLASS production technology
following from the Merger.
With respect to CRT glass recycling, Conversion faces substantial
competition in obtaining such glass which has resulted in increased difficulty
in obtaining new CRT recycling customers and maintaining existing CRT customers
and exerts downward pressure on the fees Conversion charges to accept such
glass. In December 1996, Thomson notified Conversion of its intention to cease
sending CRT glass to, and purchasing recycled CRT glass from, Conversion as of
March 1997. See "RISK FACTORS -- Limited
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CRT Customers; Loss of Significant CRT Customer". In order to achieve growth in
CRT recycling, Conversion will have to begin processing CRT glass from
end-of-life computer monitors. Conversion has begun to accept computer CRT glass
on a pilot basis 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.
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 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".
Conversion's workforce recently elected the United Steelworkers of America
to act as its bargaining representative with respect to their terms of
employment with Conversion. Conversion believes that it currently offers
competitive wages and benefits and does not anticipate that negotiations will
have a material adverse effect on Conversion. However, there can be no assurance
that the election of the Union will not result in higher labor costs, work
stoppages or strikes.
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
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
Consolidated revenues for the three months ended September 30, 1996 were
approximately $344,000, consisting primarily of CRT glass recycling fees and
approximately $65,000 of ALUMAGLASS sales. For the same three-month period of
1995, Conversion's consolidated revenues were approximately $792,000, of which
approximately $49,000 was from sales of ALUMAGLASS and the remainder was CRT
recycling fees. This decrease in revenues primarily reflects 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 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 three months ended September
30, 1996 versus the same prior year period, an increase of $574,000 despite
lower sales volume, reflects a number of factors, including (i) a $219,000 net
increase in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (an approximately $14,000 increase in the
reserve for the three months ended September 30, 1996 as a result of a modest
increase in certain raw material inventories as compared with a $205,000
decrease in the reserve for the three months ended September 30, 1995, during
which such inventories decreased significantly), (ii) a portion of the three
months ended September 30, 1995 process development costs, which were fixed in
nature, are now included in cost of goods sold since the specific processes have
since become operational, (iii) an increase of $195,000 in the non-cash charge
for depreciation, reflecting completion of the major components of the abrasives
finishing area and (iv) the expensing of production inefficiencies incurred
during modifications to the abrasives and other processing systems during the
three months ended September 30, 1996.
As a consequence of the above revenue and cost changes, Conversion's gross
margin declined to a loss of approximately $863,000 for the three months ended
September 30, 1996 from a profit of approximately $159,000 for the same period
of 1995.
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Selling, general and administrative expenses of approximately $557,000 for
the three months ended September 30, 1996 compare with approximately $288,000
for the same 1995 period. This increase reflects approximately $70,000 higher
consulting costs, approximately $61,000 higher legal expenses and approximately
$32,000 higher personnel costs, together with a $99,000 settlement received in
the three months ended September 30, 1995 from a former officer of Dunkirk.
During the three months ended September 30, 1995, Conversion incurred
process development costs of approximately $251,000, 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 three-month period
ended September 30, 1996.
Net interest expense increased to approximately $231,000 for the three
months ended September 30, 1996 from approximately $179,000 for the same prior
year period. This cost increase reflects increased indebtedness of Conversion
and approximately $89,000 of capitalized interest during the three months ended
September 30, 1995, which were partially offset by an approximately $80,000
increase in interest income on cash received from the Conversion IPO.
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 during which
inventories were being built up in anticipation of production needs. 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.
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.
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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 September 30, 1996, Conversion had approximately $11,615,000
in principal amount of long-term indebtedness (excluding capital lease
obligations) and net working capital of approximately $1,448,000.
At December 1, 1996, Conversion had approximately $2,100,000 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 capital outlays of approximately $84,000 in connection with its joint
venture with VANGKOE, 50% of which is required to be reimbursed to Conversion by
VANGKOE in accordance with the terms of the joint venture, although there can be
no assurance that such amount will be reimbursed.
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 $484,000 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).
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>
Harvey Goldman (1)..................... 50 Chairman, Chief Executive Officer, President and Director
Robert Dejaiffe........................ 58 Vice President -- Technology
Perry A. Pappas (4).................... 35 Vice President and General Counsel
Catherine Susan Kirby.................. 37 Vice President and Secretary
Eckardt C. Beck (1).................... 53 Director
Norman L. Christenson, Jr., Ph.D....... 49 Director
Peter H. Gardner (1)(2)(3)............. 30 Director
Alexander P. Haig...................... 44 Director
Scott A. Katzmann (1)(2)(3)............ 40 Director
Donald R. Kendall, Jr.................. 44 Director
Irwin M. Rosenthal..................... 67 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Mr. Pappas has indicated that he intends to resign and seek other employment
after the consummation of the Merger.
HARVEY GOLDMAN joined Conversion in March 1994 as President and Chief
Executive Officer and was elected Chairman of the Board in October 1994. From
June 1991 through March 1994, Mr. Goldman served as Executive Vice President and
as a director of Air & Water Technologies Corporation, a publicly-held
environmental technologies company (and successor to Research-Cottrell, Inc.),
and as its Chief Financial Officer from June 1987 through June 1991. Prior to
joining Research Cottrell, Inc. in 1985, Mr. Goldman was a partner at Arthur
Young & Co. (now Ernst & Young LLP), where he served as Director of Financial
Consulting in New York City and National Director of Environmental Consulting.
Mr. Goldman received his B.A. from Duke University and his M.B.A. from Harvard
Business School.
ROBERT DEJAIFFE is 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 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 and General Counsel 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. Mr.
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Pappas has indicated that he intends to resign and seek other employment after
the consummation of the Merger.
CATHERINE SUSAN KIRBY is Vice President and Secretary 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.
ECKARDT C. BECK has been a director of Conversion since February 1995. Mr.
Beck served as the Chairman and Chief Executive Officer of Air & Water
Technologies Corporation from October 1987 through June 1994 and as a director
from June 1990 through November 1994. Mr. Beck has served as Chairman and Chief
Executive Officer of other environmental technologies companies prior to 1987.
Mr. Beck also served as the Assistant Administrator of the United States
Environmental Protection Agency in charge of the national water and waste
programs and as the Regional Administrator of EPA Region 2.
NORMAN L. CHRISTENSEN, JR., PH.D. has been a director of 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 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
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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.
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.
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In March 1995, Conversion entered into a Consulting Agreement with Eckardt
C. Beck, a director of Conversion, pursuant to which Mr. Beck receives $1,000
per month for his services and is eligible to receive additional compensation on
a project basis if approved by Conversion. The Consulting Agreement expires in
March 1997. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CONVERSION".
OTHER KEY PERSONNEL
JOHN G. MURCHIE is the Controller and Chief Administrative Officer of
Dunkirk. Mr. Murchie joined Dunkirk in February 1994 as a consultant in
accounting and became a full-time employee of Dunkirk in February 1995. From
1986 through February 1994, Mr. Murchie was the controller for a privately-held
food products company. Mr. Murchie received his B.S. in Business Administration
from Miami University of Ohio.
MICHAEL S. M. O'DONOUGHUE is Vice President and a Project Engineering for
Dunkirk, most recently assisting in the build out of Conversion's joint venture
company. Mr. O'Donoughue joined Dunkirk in October 1994. Prior to joining
Dunkirk, Mr. O'Donoughue spent six years as General Manager and Plant Manager
with Ferranti-Packard Transformers, Inc. Prior to that, Mr. O'Donoughue held
various manufacturing positions with General Electric Company, Canadian General
Electric Company and Philip Morris Companies Inc. Mr. O'Donoughue received his
Bachelor's degree in Mechanical Engineering from Carleton University, Ottawa,
Ontario.
MARK R. GEISE is Special Project Manager at Dunkirk and serves as a member
of the product marketing team, specializing in technical applications. From
February 1992 until joining Dunkirk in February 1993, Mr. Geise served as
Director of Development for the City of Dunkirk, New York. Prior to that, Mr.
Geise spent over four years with a housing and development agency in Buffalo,
New York. Mr. Geise received his B.S. in Environmental Design and his M.S. in
Urban Planning from the State University of New York at Buffalo.
ASHVIN SRIVASTAVA, PH.D. is Director of Research at Dunkirk. Dr. Srivastava
joined Dunkirk in August 1994. From February 1992 until September 1992, Dr.
Srivastava worked in different capacities, including Vice President-Electronic
Ceramics, with Crest Ultrasonics Corporation, a publicly-held company based in
Trenton, New Jersey. Dr. Srivastava held the position of Research Assistant at
Penn State University from September 1987 until December 1992. From December
1992 until joining Conversion, Dr. Srivastava was in India attending to personal
affairs. Dr. Srivastava has also served as a member of the Advanced Technology
Department for General Electric Company and Teaching Assistant at Alfred
University. Dr. Srivastava received his Bachelors degree from the Institute of
Technology, B.H.U., India, an M.S. in Ceramic Engineering from Alfred University
and a Ph.D. in Solid State Science from Penn State University.
KIMBERLY K. LOTTER, PH.D. joined Dunkirk in July 1995 as Laboratory
Director. Dr. Lotter was an Assistant Professor at the State University of New
York at Fredonia from August 1994 until joining Dunkirk. Prior to August 1994,
Dr. Lotter was pursuing her graduate studies at the State University of New York
at Buffalo and held various teaching and research positions. Dr. Lotter received
her B.S. in Chemistry from the State University of New York at Fredonia and
Ph.D. in Inorganic Chemistry from the State University of New York at Buffalo.
ANDREW C. CANNON joined Conversion in May 1995 as Product Marketing
Specialist, focusing on telemarketing, generation of leads and direct sales.
From February 1988 through June 1994, Mr. Cannon was employed with Air & Water
Technologies Corporation, working in various sales and marketing capacities,
including managing telemarketing efforts, developing lead tracking database
systems and key account management. Mr. Cannon received his B.A. in Economics
from St. Frances College in Loretto, Pennsylvania.
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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 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.
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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 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 --
Chairman of the Board, President and Chief Executive Officer 1996 $ 180,000 50,000(1)
Perry A. Pappas.................................................................... 1995 -- --
Vice President and General Counsel (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.
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.
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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.
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. Mr. Pappas has indicated that he intends to resign and
seek other employment after the consummation of the Merger.
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CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS OF CONVERSION
EMPLOYMENT AGREEMENTS
Conversion has entered into employment agreements with Harvey Goldman, the
Chairman, President and Chief Executive Officer of Conversion, and Perry A.
Pappas, Vice President and General Counsel 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. 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 price). The
term of the TFI Assistance Agreement is one year, subject to renewal, cancelable
by either party upon 30 days' prior written notice.
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<PAGE>
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.
In March 1995, Conversion entered into a Consulting Agreement with Eckardt
C. Beck, a director and stockholder of Conversion, pursuant to which Mr. Beck
receives $1,000 per month for his services and is eligible to receive additional
compensation on a project basis if approved by Conversion. The Consulting
Agreement expires in March 1997.
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 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.
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
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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, a director 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.
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.
76
<PAGE>
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.
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 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;
77
<PAGE>
(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.
78
<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 December 31, 1996, 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 (2)(3).......................................................... 185,964 3.4%
Norman L. Christensen, Jr. (4)................................................. 2,615 *
Eckardt C. Beck (5)............................................................ 15,050 *
Peter H. Gardner (6)........................................................... 327,654 5.9
Alexander P. Haig (7).......................................................... 4,871 *
Scott A. Katzmann (2)(8)....................................................... 36,829 *
Donald R. Kendall, Jr. (9)..................................................... 175,953 3.1
Irwin M. Rosenthal (10)........................................................ -- --
Perry A. Pappas (11)........................................................... 18,931 *
Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (12).... 327,654 5.9
All officers and directors as a group (10 persons)............................. 775,476 13.5
</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) Includes 100,725 Escrow Shares beneficially owned by Harvey Goldman and
12,179 Escrow Shares beneficially owned by Scott A. Katzmann.
(3) Includes currently exercisable warrants to purchase 5,239 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
90,000 shares of Conversion Common Stock which are not exercisable within 60
days, 50,000 of which options are Escrow Options.
(4) 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.
(5) 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 6345 NW 26th Terrace, Boca Raton, Florida
33496.
(6) 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
79
<PAGE>
days. The address of such stockholder is c/o Technology Funding Inc., 2000
Alameda de las Pulgas, San Mateo, California 94403.
(7) Excludes options to purchase 5,121 shares of Conversion Common Stock which
are not exercisable within 60 days.
(8) 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.
(9) 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.
(10) Excludes options to purchase 5,121 shares of Conversion Common Stock which
are not exercisable within 60 days.
(11) 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.
(12) Includes (i) 207,547 shares of Conversion Common Stock, (ii) warrants,
exercisable within 60 days, to purchase 38,186 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 12,741 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) 13,658 shares of Conversion Common Stock held by TFVP V and
(ii) 4,552 shares of Conversion Common Stock held by TFP III, in each case,
which are not exercisable within 60 days.
80
<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.
81
<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.
82
<PAGE>
OCTAGON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Consolidated revenues for the nine months ended September 30, 1996 were
approximately $18,920,000 compared to approximately $22,150,000 for the
nine-month period ended September 30, 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
<S> <C> <C> <C>
CONTRACT REVENUES 1996 1995 1996/1995
- ------------------------------------------------------------------- ------------- ------------- --------------
Commercial......................................................... $ 12,508,000 $ 12,819,000 $ (311,000)
Government......................................................... $ 6,412,000 $ 9,331,000 $ (2,919,000)
------------- ------------- --------------
$ 18,920,000 $ 22,150,000 $ (3,230,000)
</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 $1,900,000 (or 65%) 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 $393,000 of revenues during the nine months ended September 30,
1995, it accounts for the reduction in the comparable period for 1996.
Direct costs of revenues for the nine months ended September 30, 1996 were
approximately $14,424,000 or 76% of revenues compared to approximately
$16,429,000 or 74% of revenues for the comparable nine-month period of 1995.
This $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 2% in the nine-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 nine-month period ended September 30, 1996, by
nearly $2 million from the nine-month period ended September 30, 1995 as shown
below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
<S> <C> <C> <C>
1996 1995 1996/1995
------------ ------------ --------------
Indirect costs........................................................ $ 1,608,000 $ 2,644,000 $ (1,036,000)
Selling, general and administrative................................... $ 2,031,000 $ 2,971,000 $ (940,000)
------------ ------------ --------------
$ 3,639,000 $ 5,615,000 $ (1,976,000)
</TABLE>
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
83
<PAGE>
B and Note 7 of Notes to Octagon's financial statements for the years ended
December 31, 1994 and 1995 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 $1.8 million of the
reductions in indirect overhead and selling, general and administrative costs in
the nine-month period ended September 30, 1996, as compared to the nine months
ended September 30, 1995.
Other income/(expenses) for the nine-month period ended September 30, 1996
was approximately $147,000 compared to the approximately $413,000 for the
comparable period of 1995. The major items included in this reduction of
approximately $266,000 were approximately $410,000 collected in connection with
a favorable judgment awarded to Octagon in its lawsuit over a fraudulent
contract, a $230,000 recovery of legal costs under an insurance policy, offset
by additional costs of approximately $103,000 to settle litigation with a former
officer and director and $145,000 of additional costs for the abandonment of the
investment in Allink.
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".
In September 1996, in order to support the costs and expenses related to
merger activities, it was necessary for Octagon to borrow $250,000 from
Conversion. See "EXISTING RELATIONSHIP BETWEEN CONVERSION AND OCTAGON".
85
<PAGE>
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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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 $100,000.00 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 $15,000 in legal expenses incurred in a suit to recover such
payments.
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OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information concerning options granted during
the fiscal year ended December 31, 1996 to the Octagon Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR (2) ($ 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).
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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".
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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 September 30, 1996, 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.
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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"), 12,042,000 are "blank check" or
subject to designation by the Board.
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.
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
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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 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
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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.
All of the above described registration rights have been waived for a period
of 13 months following completion of the Conversion IPO.
The holders of the Underwriter's Options have demand and piggy-back
registration rights relating to such options and the underlying securities.
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
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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 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 financial statements of Octagon at December 31, 1993 and
1994 have been audited by Grant Thornton LLP, independent certified public
accountants, and the consolidated financial statements of Octagon at December
31, 1995 have been audited by BDO Seidman, LLP, independent auditors, in each
case as set forth in their respective reports 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 reports given upon
the authority of such firms 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.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-3
Consolidated Balance Sheets of Conversion Technologies International, Inc. and
Subsidiary as of September 30, 1996 (unaudited) and June 30, 1996 and 1995......... F-4
Consolidated Statements of Operations of Conversion Technologies International, Inc.
and Subsidiary for the three months ended September 30, 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-5
Consolidated Statements of Stockholders' Equity of Conversion Technologies
International, Inc. and Subsidiary for the years ended June 30, 1995 and 1996 and
the three months ended September 30, 1996 (unaudited).............................. F-6
Statement of Stockholders' Deficiency of Dunkirk International Glass and Ceramics
Corporation (Predecessor) for the two months ended August 31, 1994................. F-7
Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
and Subsidiary for the three months ended September 30, 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-8
Notes to Consolidated Financial Statements........................................... F-10
OCTAGON, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995 AND SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
Report of Independent Certified Public Accountants................................... F-27
Financial statements:
Consolidated balance sheets as of September 30, 1996 (unaudited) and December 31,
1995............................................................................. F-28
Consolidated statements of operations for the nine months ended September 30, 1995
and 1996 (unaudited) and for the year ended December 31, 1995.................... F-29
Consolidated statements of stockholders' equity for the period from January 1, 1995
to the year ended December 31, 1995 and the nine months ended September 30, 1996
(unaudited)...................................................................... F-30
Consolidated statements of cash flows for the nine months ended September 30, 1995
and 1996 (unaudited) and for the year ended December 31, 1995.................... F-31
Summary of accounting policies..................................................... F-34
Notes to consolidated financial statements......................................... F-36
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
OCTAGON, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Independent auditors' report......................................................... F-46
Financial statements:
Consolidated balance sheet as of December 31, 1994 and 1993........................ F-47
Consolidated statement of operations for the years ended December 31, 1994, 1993
and 1992......................................................................... F-48
Consolidated statement of stockholders' equity for the period from January 1, 1992
to the year ended December 31, 1994.............................................. F-49
Consolidated statement of cash flows for the years ended December 31, 1994, 1993
and 1992......................................................................... F-50
Notes to consolidated financial statements......................................... F-51
</TABLE>
F-2
<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-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ------------------------------
1996 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents.......................................... $ 1,551,087 $ 4,539,464 $ 733,843
Marketable securities.............................................. 2,036,350 2,009,632 --
Notes receivable................................................... 250,000 -- --
Accounts receivable, less allowance for doubtful accounts of
$25,000 at September 30 and June 30, 1996, and $0 at June 30,
1995............................................................. 382,677 343,214 283,571
Inventories........................................................ 424,681 337,736 227,724
Prepaid expenses and other current assets.......................... 322,209 205,984 133,032
-------------- -------------- --------------
Total current assets............................................... 4,967,004 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.......................................... 11,643,802 11,573,933 6,298,912
Construction in progress......................................... 1,645,180 1,008,480 2,393,829
-------------- -------------- --------------
14,973,814 14,267,245 9,952,085
Less accumulated depreciation.................................... (1,970,460) (1,630,639) (824,632)
-------------- -------------- --------------
13,003,354 12,636,606 9,127,453
Deferred finance charges, less accumulated amortization of $94,900,
$81,272 and $26,970 at September 30, 1996,
June 30, 1996 and June 30, 1995, respectively.................... 481,215 494,843 508,718
Other noncurrent assets............................................ 98,027 38,304 31,266
Restricted assets
Project fund..................................................... 154 72,859 78,772
Debt service reserve funds....................................... 1,284,476 1,268,457 915,136
-------------- -------------- --------------
$ 19,834,230 $ 21,947,099 $ 12,039,515
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Notes payable...................................................... $ -- $ -- $ 386,500
Accounts payable................................................... 1,109,483 1,279,280 1,077,714
Deferred revenue................................................... 567,980 557,907 944,230
Reserve for disposal............................................... 750,900 737,000 1,360,000
Accrued expenses................................................... 606,454 778,306 1,168,696
Current portion of capital lease obligations....................... 46,761 72,914 94,130
Current portion of long-term debt.................................. 437,093 437,285 404,387
-------------- -------------- --------------
Total current liabilities.......................................... 3,518,671 3,862,692 5,435,657
Capital lease obligations, less current portion.................... 60,907 74,693 147,227
Long-term debt, less current portion............................... 11,177,438 11,281,715 8,657,582
Stockholders' equity (deficiency):
Preferred stock, $.001 par value, authorized 15,000,000 shares,
issued and outstanding 0 at September 30 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 5,449,745 at September 30 and
June 30, 1996, and 909,404 shares at June 30, 1995............. 1,362 1,362 227
Additional paid-in capital....................................... 23,905,705 23,905,705 10,421,981
Accumulated deficit.............................................. (18,829,853) (17,179,068) (12,626,117)
-------------- -------------- --------------
Total stockholders' equity (deficiency)............................ 5,077,214 6,727,999 (2,200,951)
-------------- -------------- --------------
-------------- -------------- --------------
$ 19,834,230 $ 21,947,099 $ 12,039,515
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------------------------- COMPANY
-----------
THREE MONTHS ENDED TWO MONTHS
SEPTEMBER 30, YEAR ENDED JUNE 30, ENDED
-------------------------- ----------------------------- AUGUST 31,
1996 1995 1996 1995 1994
------------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue.................................. $ 344,273 $ 792,129 $ 2,679,987 $ 1,173,264 $ 62,452
Cost of goods sold....................... 1,206,908 633,394 3,093,560 2,788,599 379,661
------------- ----------- ------------- -------------- -----------
Gross profit (loss) on sales............. (862,635) 158,735 (413,573) (1,615,335) (317,209)
Selling, general and administrative...... 557,379 288,305 1,821,179 2,529,263 297,792
Process development costs................ -- 250,986 996,259 1,531,955 82,427
Write-off of in-process technology....... -- -- -- 6,232,459 --
------------- ----------- ------------- -------------- -----------
Loss from operations..................... (1,420,014) (380,556) (3,231,011) (11,909,012) (697,428)
Interest expense, net.................... 230,771 178,827 961,751 345,690 40,999
Other income............................. -- -- 81,811 -- --
------------- ----------- ------------- -------------- -----------
Loss before extraordinary item........... (1,650,785) (559,383) (4,110,951) (12,254,702) (738,427)
Extraordinary item....................... -- -- 442,000 -- --
------------- ----------- ------------- -------------- -----------
Net loss................................. $ (1,650,785) $(559,383) $ (4,552,951) $ (12,254,702) $(738,427)
------------- ----------- ------------- -------------- -----------
------------- ----------- ------------- -------------- -----------
Net loss per common share before
extraordinary item..................... $ (0.35) $ (0.47) $ (2.64) $ (16.68)
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Net loss per common share................ $ (0.35) $ (0.47) $ (2.92) $ (16.68)
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND THE THREE MONTHS ENDED SEPTEMBER
30, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK CLASS A COMMON STOCK
----------------------------------------- -----------------------------------------------------
ADDITIONAL ADDITIONAL
NUMBER PAID-IN NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT SUBSCRIPTIONS CAPITAL DEFICIT
--------- ----------------- ----------- ----------- ----------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1994........ -- -- -- 586,246 $ 147 $ (131) $ 6,055 $ (371,415)
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........ (12,254,702)
--------- ------ ----------- ----------- ----------- ----- ---------- ------------
Balance at June
30, 1995........ 2,958,000 2,958 5,994,271 909,404 227 -- 4,427,710 (12,626,117)
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........ (4,552,951)
--------- ------ ----------- ----------- ----------- ----- ---------- ------------
Balance at June
30, 1996........ -- -- -- 5,449,745 1,362 -- 23,905,705 (17,179,068)
Net loss........ -- -- -- -- -- -- -- (1,650,785)
--------- ------ ----------- ----------- ----------- ----- ---------- ------------
Balance at
September 30,
1996............ -- $ -- $ -- 5,449,745 $ 1,362 -- $23,905,705 ($18,829,853)
--------- ------ ----------- ----------- ----------- ----- ---------- ------------
--------- ------ ----------- ----------- ----------- ----- ---------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIENCY)
------------
<S> <C>
Balance at June
30, 1994........ $ (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)
------------
Balance at June
30, 1995........ (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)
------------
Balance at June
30, 1996........ 6,727,999
Net loss........ (1,650,785)
------------
Balance at
September 30,
1996............ $5,077,214
------------
------------
</TABLE>
See accompanying notes.
F-6
<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-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDESSOR
------------------------------------------------- COMPANY
-----------
THREE MONTHS ENDED TWO MONTHS
SEPTEMBER 30, YEAR ENDED JUNE 30, ENDED
------------------------ ----------------------- AUGUST 31,
1996 1995 1996 1995 1994
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss........................................ ($1,650,785) $(559,383) $(4,552,951) $(12,254,702) $(738,427)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation expense........................ 339,821 214,331 886,863 742,090 33,607
Amortization of deferred financing and
patent costs.............................. 13,628 13,423 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) -- --
Debt discount on Bridge Notes............... -- -- 66,750 -- --
Accrued interest income on marketable
securities................................ (26,718) -- -- -- --
Changes in operating assets and liabilities:
Increase in accounts receivable........... (39,463) (77,255) (59,643) (115,478) (48,299)
Increase in inventories................... (86,945) (75,829) (110,012) (227,724) --
(Increase) decrease in other current
assets.................................. (116,225) (61,267) (72,952) 173,623 44
Increase in other noncurrent assets....... (59,723) (4,714) (7,038) (29,165) --
Increase (decrease) in deferred revenue... 10,073 (136,885) (386,323) 504,010 136,754
Increase (decrease) in accounts payable,
reserve for disposal and other accrued
expenses................................ (327,749) 293,136 (811,824) 1,418,150 (314,051)
----------- ----------- ---------- ----------- -----------
Net cash used in operating activities........... (1,944,086) (493,443) (5,091,828) (3,503,402) (930,372)
INVESTING ACTIVITIES
Issuance of notes receivable.................... (250,000) -- -- -- --
Purchase of marketable securities............... -- -- (2,009,632) -- --
Capital expenditures............................ (706,569) (2,559,026) (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 used in investing activities........... (956,569) (2,559,026) (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......................................... -- (36,485) (40,427) (424,228) (30,425)
Issuance of notes payable....................... -- 200,000 2,675,000 320,000 --
Payment of notes payable........................ -- -- (3,061,500) (195,430) --
Issuance of long-term debt...................... 8,282 3,015,211 3,056,476 7,938,455 191,193
Decrease (increase) in restricted assets........ 56,686 (671,624) (347,408) (993,908) --
Principal payments on long-term debt............ (112,751) (90,983) (399,445) (259,476) (6,397)
Principal payments under capital lease
obligations................................... (39,939) (23,768) (93,750) (81,690) (23,794)
Issuance of common stock........................ -- -- 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.................................... (87,722) 2,392,351 15,303,097 12,308,583 1,640,247
----------- ----------- ---------- ----------- -----------
(Decrease) increase in cash and cash
equivalents................................... (2,988,377) (660,118) 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...... $1,551,087 $ 73,725 $4,539,464 $ 733,843 $ 171,661
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
F-8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
COMPANY PREDESSOR
------------------------------------------------- COMPANY
-----------
THREE MONTHS ENDED TWO MONTHS
SEPTEMBER 30, 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........ $ 375,147 $ 250,821 $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 -- --
</TABLE>
See accompanying notes.
F-9
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 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-10
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 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
September 30, 1996 and 1995 and for the three months ended September 30, 1996
and 1995 are unaudited and have been prepared in a manner consistent with the
preparation of the audited consolidated financial statement 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.
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
F-11
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 September 30, 1996 the Company increased the
reserve by approximately $14,000. 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.
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,
SEPTEMBER 30, ----------------------
1996 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Raw materials......................................... $ 71,805 $ 79,237 $ 48,015
Work-in-process....................................... 160,592 135,536 109,168
Finished goods........................................ 192,284 122,963 70,541
------------- ---------- ----------
$ 424,681 $ 337,736 $ 227,724
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
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.
F-12
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
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 September 30, 1996 and 1995, and June 30, 1996 and 1995 were
4,709,186, 1,187,003, 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
F-13
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 repayment is guaranteed by the former
Dunkirk president and the New York State Job Development Authority (JDA)........... 2,192,379 2,492,767
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
</TABLE>
F-14
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
3. DEBT (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
------------- ------------
collateralized by a subordinated security interest in certain equipment having a
carrying value of approximately $11,683,500........................................ 59,974 68,816
<S> <C> <C>
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 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
------------- ------------
Total Debt........................................................................... 11,719,000 9,061,969
Less current maturities.............................................................. 437,285 404,387
------------- ------------
$ 11,281,715 $ 8,657,582
------------- ------------
------------- ------------
</TABLE>
F-15
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
3. DEBT (CONTINUED)
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>
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.
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
4. NOTES PAYABLE (CONTINUED)
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 paid 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.
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 $154, $72,859 and $78,772 of project funds available at
September 30, 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 ($851,319 at September 30, 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 $433,157 at September 30,
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,
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996
AND 1995 ARE UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 Company does not believe that an adverse outcome in the foregoing
dispute would have a material adverse effect on the Company.
The Company is currently negotiating a union contract with its employees at
the Dunkirk facility.
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 SEPTEMBER 30, 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.
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 SEPTEMBER 30, 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 SEPTEMBER 30, 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 SEPTEMBER 30, 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 SEPTEMBER 30, 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. Octagon Inc.'s revenue and net loss was $28,779,075 and
$(527,768), respectively, for the year ended December 31, 1995.
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.
On September 20, 1996, the Company advanced $250,000 to Octagon Inc. under a
secured promissory note. The note is secured by a second lien on Octagon Inc.'s
assets and interest is charged at 8.25 %. The note is due on demand on or after
February 13, 1997.
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. No shares have been granted under the Plan.
F-23
<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, 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 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, 1995 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Certified Public Accountants
Orlando, Florida
May 10, 1996
F-24
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS (NOTE 4)
Current:
Cash.............................................................................. $ 2,174 $ 162,493
Accounts receivable, less allowance for doubtful accounts of $434,996 and $463,258
at September 30, 1996 and December 31, 1995, respectively (Notes 1 and 4)....... 3,722,029 3,641,703
Unbilled accounts receivable.................................................... 2,027,876 508,645
Note receivable--current portion (Note 3)......................................... -- 35,694
Prepaid expenses and other........................................................ 133,255 175,159
------------- ------------
Total current assets.......................................................... 5,885,334 4,523,694
Property and equipment, less accumulated depreciation of $577,348 and $647,451 at
September 30, 1996 and December 31, 1995, respectively............................ 265,722 455,591
Other assets:
Goodwill, less accumulated amortization of $693,155 and $521,663 at September 30,
1996 and December 31, 1995, respectively........................................ 755,380 926,872
Noncompete agreements, less amortization of $257,825 and $205, 825 at September
30, 1996 and December 31, 1995, respectively.................................... 23,471 75,470
Deposits and other................................................................ 25,957 8,616
Notes receivable, less current portion (Note 3)................................... -- 50,000
------------- ------------
804,808 1,060,958
------------- ------------
$ 6,955,864 $6,040,243
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 4)............................................................ $ 1,712,548 $1,484,135
Accounts payable--trade........................................................... 1,428,969 1,479,424
Accrued salaries, payroll taxesand other.......................................... 642,687 406,453
Accrued vacation leave............................................................ 187,459 204,522
Other accrued expenses............................................................ 296,822 348,047
Capital lease obligation--current portion......................................... 6,893 6,261
Advance billings on uncompleted contracts......................................... 1,239,190 1,188,425
------------- ------------
Total current liabilities..................................................... 5,514,568 5,117,267
Long-term Liabilities:
Capital lease obligation--noncurrent portion...................................... 9,244 14,928
------------- ------------
Total Liabilties.............................................................. 5,523,812 5,132,195
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 7, 8 and 9):
Common stock, $.01 par value, 25,000,000 shares authorized, 8,404,702 and
6,969,500 issued and outstanding at September 30, 1996 and December 31, 1995,
respectively.................................................................... 84,047 69,695
Paid-in capital in excess of par value............................................ 10,867,201 10,794,003
Less stock subscriptions receivable............................................... (100,500) (100,500)
Accumulated deficit............................................................... (9,418,696) (9,855,150)
------------- ------------
1,432,052 908,048
------------- ------------
$ 6,955,864 $6,040,243
------------- ------------
------------- ------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-25
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
---------------------------- DECEMBER 31,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Contract Revenue.................................................... $ 18,919,800 $ 22,150,163 $ 28,779,075
Cost of revenue production
Direct costs...................................................... 14,424,419 16,428,504 21,796,720
Indirect costs.................................................... 1,608,352 2,643,901 3,332,916
Amortization of goodwill and noncompete agreement costs........... 223,491 235,677 320,376
Selling, General & Administration................................. 2,030,689 2,971,179 3,720,757
------------- ------------- -------------
18,286,951 22,279,261 29,170,769
------------- ------------- -------------
Income/(loss) from operations................................... 632,849 (129,098) (391,694)
Interest expense (net).............................................. (343,762) (336,424) (448,546)
Other income/(expense)--net......................................... 147,367 413,361 312,472
------------- ------------- -------------
(196,395) 76,937 (136,074)
------------- ------------- -------------
Net income/(loss)................................................... $ 436,454 $ (52,161) $ (527,768)
------------- ------------- -------------
------------- ------------- -------------
Income/(loss) per common share...................................... $ 0.06 $ -- $ (0.08)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-26
<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) -- -- -- --
Stock compensation............. 400,000 4,000 24,000 -- -- -- 28,000
Issuance of common stock
warrants as settlement of
litigation................... -- -- 560,000 -- -- -- 560,000
Acquisition of Allink.......... 95,000 950 152,175 -- -- -- 153,125
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
(unaudited) (Note 9)......... 1,600,000 16,000 96,000 -- -- -- 112,000
Issuance of common stock as
settlement of debt
(unaudited).................. 133,868 1,339 86,211 -- -- -- 87,550
Treasury shares purchased
(unaudited).................. -- -- -- -- (112,000) -- (112,000)
Treasury shares retired
(unaudited).................. (298,666) (2,987) (109,013) -- 112,000 -- --
Net income (unaudited)......... -- -- -- -- -- 436,454 436,454
----------- --------- ------------ ------------ --------- ------------ ------------
Balance at September 30, 1996
(unaudited).................... 8,404,702 $ 84,047 $ 10,867,201 $ (100,500) $ -- $(9,418,696) $1,432,052
----------- --------- ------------ ------------ --------- ------------ ------------
----------- --------- ------------ ------------ --------- ------------ ------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-27
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------------- DECEMBER 31,
1996 1995 1995
------------- ----------- -------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income/(loss)..................................................... $ 436,454 $ (52,161) $ (527,768)
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization..................................... 340,491 403,329 458,340
Loss on abandonment of investment in Allink....................... -- 153,125 153,125
(Gain)/Loss on disposal of fixed assets........................... (8,528) (80,148) 137,065
Reserves for bad debts............................................ -- 304,783 124,954
Stock compensation................................................ -- -- 28,000
Deferred rent..................................................... -- (64,740) (64,740)
Changes in assets and liabilities, net of effects of acquisition
in 1995:
Accounts receivable............................................. (1,599,557) (126,331) 1,487,640
Prepaid expenses and other...................................... 77,599 (557,110) 84,839
Accounts payable................................................ 37,095 481,393 (813,470)
Accrued salaries, payroll taxes and other....................... 185,008 (387,404) (554,031)
Accrued vacation leave.......................................... (17,063) (76,646) (22,297)
Income taxes receivable......................................... -- (5,027) 6,139
Advance billings on uncompleted contracts....................... 50,765 (759,417) (759,417)
------------- ----------- -------------
Net cash used for operating activities................................ (497,736) (766,354) (261,621)
Cash flows from investing activities:
Decrease/(Increase) in notes receivable............................. 50,000 (50,000) (35,694)
Release of deposit for injunction bond.............................. -- 500,000 500,000
Proceeds from disposition of property and equipment................. 85,000 45,953 45,953
Purchase of property and equipment.................................. (3,603) (180,218) (278,469)
Loans to officers and stockholders.................................. -- 75,000 75,000
Payments on capital lease obligation................................ (5,052) (4,063) (5,074)
Decrease/(Increase) in deposits..................................... (17,341) 109,017 109,817
------------- ----------- -------------
Net cash provided by investing activities............................. 109,004 495,689 411,533
Cash flows from financing activities:
Payments on long term debt.......................................... (45,000) (492,000) (492,000)
Net borrowings on short-term debt................................... 273,413 793,433 340,023
------------- ----------- -------------
Net cash provided by (used for) financing activities.................. 228,413 301,433 (151,977)
------------- ----------- -------------
Net increase (decrease) in cash and cash equivalents.................. (160,319) 30,768 (2,065)
Cash and cash equivalents, beginning of period........................ 162,493 164,558 164,558
------------- ----------- -------------
Cash and cash equivalents, end of period.............................. $ 2,174 $ 195,326 $ 162,493
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-28
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
<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.
The consolidated financial statements and related notes
thereto as of September 30, 1996 and for the nine months
ended Sebtember 30, 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.
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.
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-29
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
<TABLE>
<S> <C>
Revenue from contracts with the United States government
comprised approximately 36% of revenue in 1995. Revenue from
export sales is not material. During 1995, approximately
26%, 18% and 10% of revenue was derived from three customers
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. The
liability will be paid upon completion of the cost audits
described in Note 7, which completion is not expected until
1996 or thereafter.
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 life 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 (76% of total accounts receivable at December 31,
1995) 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 September 30, 1996
and as of December 31, 1995.
</TABLE>
F-30
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
<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 taw laws including tax rates,
with the measurement of deferred income tax assets being
reduced by available tax benefits not expected to be
realized.
Cash Flows................... For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash
equivalents.
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 September 30, 1996
and as of December 31, 1995.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and equivalents, trade
receivables, accounts payable and accrued expenses. 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.
</TABLE>
F-31
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
<TABLE>
<S> <C>
Recent Accounting
Pronouncements............. Impairment of Long-Lived Assets and Long-Lived Assets Being
The FASB has issued SFAS No. 121, "Accounting for the
Disposed of," which provides guidance on how and when
impairment losses are recognized on long-lived assets. This
statement, when adopted, is not expected to have a material
impact on the Company.
The FASB has issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value
based method of accounting for stock-based compensation
plans. This statement provides a choice to either adopt the
fair value based method of accounting or continue to apply
APB Opinion No. 25, which would require only disclosure of
the pro forma net income and earnings per share, determined
as' if the fair value based method had been applied. The
Company plans to continue to apply APB Opinion No. 25 when
adopting this statement, and accordingly, this statement is
not expected to have a material impact on the Company.
</TABLE>
F-32
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
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, 1995 will be billed
and collected in 1996 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 4).
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) and issued promissory notes of $30,000.
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.
3. NOTES RECEIVABLE
Notes receivable are due at various dates through January 1999. The notes
bear interest at rates ranging from 7% to prime. One of the notes is noninterest
bearing.
4. DEBT
The Company has a credit facility agreement with Foothill Capital
Corporation which allows the Company to borrow the lesser of $3,000,000 or 80%
of certain accounts receivable at 3% over prime rate. The credit agreement is
collateralized by substantially all of the Company's assets. Interest payments
on the note are due monthly. The balance at December 31, 1995 under this
agreement was $1,394,135. The agreement was renewed and modified in February
1996. Under the renewed agreement, the Company may borrow the lesser of
$5,000,000 or 80% of certain accounts receivable at 3% over prime.
The agreement remains collateralized by substantially all of the Company's
assets and matures February 27, 1998.
The Company is obligated under a $90,000 note payable in connection with the
settlement of the class action litigation (see Note 7). The note provides for
payments of $45,000 plus interest at 10% to be paid by June 30, 1996 and by
December 31, 1996.
The Company is obligated under a capitalized lease for equipment which
requires monthly payments of $715 through 1998.
F-33
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
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 tax assets and liabilities consist of the
following as of December 31, 1995:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carryforward............................... $3,366,000
Accruals...................................................... 332,000
Bad debts..................................................... 163,000
Depreciation.................................................. 83,000
Amortization.................................................. 75,000
Other......................................................... 16,000
----------
Gross deferred income tax assets................................ 4,035,000
Deferred income tax liabilities:
Unbilled revenue.............................................. (191,000)
----------
Gross deferred income tax liabilities........................... 191,000)
----------
Total net deferred income tax assets............................ 3,844,000
Valuation allowance............................................. (3,844,000)
----------
$ --
----------
----------
</TABLE>
During 1995, the Company recorded a valuation allowance of $812,521 on the
deferred tax assets to reduce the total to an amount that management believes
will ultimately be realized. Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that temporary
differences and carryforwards are expected to be available to reduce taxable
income.
The Company has a net operating loss carryforward expiring in 2010 of
approximately $8,103,000 as of December 31, 1995 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.
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 in 2000. Rental expense for the year
ended December 31, 1995 was approximately $473,000.
F-34
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's minimum future annual rental commitments under the leases are
as follows:
<TABLE>
<S> <C>
Year ended December 31,
1996.............................................................. $ 201,000
1997.............................................................. 131,000
1998.............................................................. 96,000
1999.............................................................. 15,000
2000.............................................................. 1,000
---------
$ 444,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain
officers and directors of the Company. Minimum future annual salary commitments
under the agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996.............................................................. $ 450,000
1997.............................................................. 362,500
---------
$ 812,500
</TABLE>
In addition, upon execution of the agreement, 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, 1991.
Subsequent years are subject to DCAA audit. The Company believes that any audit
adjustments for the periods subsequent to December 31, 1991 would not have a
material adverse effect on the financial position or results of operations of
the Company.
As of September 30, 1996 audits of the Company's costs have been completed
through December 31, 1994. Adjustments resulting from the audits were reflected
in the Company's results of operations for the nine month period ended September
30, 1996.
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.
SELF-INSURANCE
The Company maintains a self-insurance program for that portion of health
care costs not covered by insurance. The Company is liable for claims up to
$50,000 per employee annually. Self-insurance costs are accrued based upon the
aggregate of the liability for reported claims and an estimated liability for
claims incurred but not reported.
F-35
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPEN LITIGATION
ACQUISITION OF PSESI
The Company is a co-defendant in litigation involving the purchase of PSESI,
a wholly-owned subsidiary which currently represents 60% 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 include the seller's representation
at closing 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. Accordingly, the Company believes that it will not have any
ultimate liability in this matter. The Company is currently pursuing a motion to
be dismissed from this case and is seeking recovery of legal costs incurred from
the seller.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On September 1, 1994, the U.S. Securities and Exchange Commission entered 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 the federal securities laws. The SEC has
alleged violations of reporting requirements and violations which address
related party transactions and the disclosure of timeliness of the disclosure of
the MacKenzie agreement (discussed below). The acts and practices appear to
relate to the Company's first and second quarter reports of Form 10-Q of 1994.
At this time, management is unable to predict the outcome of the investigation.
However, the Company believes that since such acts occurred under prior
management, the ultimate impact on the Company will not have a significant
impact on further operations.
On September 30, 1996 the Company agreed with an Administrative Proceeding
from the Securities and Exchange Commission instituting a cease and desist
proceeding pursuant to Section 21c of the Securities Act of 1934. In agreeing,
the Company neither admitted nor denied compliance 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. There was no financial impact
as a result of concluding this investigation.
CONCLUDED LITIGATION
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.
F-36
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $560,000 worth of Class A warrants
for the purchase of Octagon stock (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, $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 plan as determined by the Board of Directors. Total
employer contributions and administrative costs to the plan for the year ended
December 31, 1995 were approximately $150,000.
F-37
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
9. STOCKHOLDER'S EQUITY
WARRANTS
In connection with an initial public offering on February 24, 1994, the
Company issued Class A warrants to purchase 3,450,000 shares of common stock.
The warrants expire February 23, 1999 and carry an exercise price of $4.00 per
share. The warrants are redeemable upon certain conditions.
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.
As of December 31, 1995, none of the above warrants have been exercised.
COMMON STOCK ISSUED--ACQUISITIONS
In connection with the acquisition of Allink (see Note 2), the Company
issued 95,000 shares of common stock.
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 (7e 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.
STOCK OPTIONS
In connection with the acquisition of Allink (see Note 2), the Company
granted stock options to purchase 30,000 shares of common stock to certain
individuals at $2 per share. These options expire January 18, 1997.
STOCK OPTION PLAN
In November 1995, the Board of Directors approved a long-term incentive plan
which provides for the granting of stock options to substantially all
nonemployee directors, officers and employees. Under the plan, a maximum of
3,500,000 options may be granted with an exercise price equal to the fair market
value of the stock at date of grant. There are no charges or credits to income
in connection with the plan. During 1995, options were granted to purchase
1,600,000 shares which were outstanding with a price per share of 7c per share.
Options granted shall become exercisable after the date of grant as to one-third
each year beginning March 31, 1996.
In August 1996 the Board of Directors accelerated the vesting period for the
balance of these options. In August the total 1,600,000 options were exercised
with 298,666 shares of the Company's common stock having a market value of
$112,000 or $.375 per share.
F-38
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(AMOUNTS AND DISCLOSURES INCLUDED FOR SEPTEMBER 30, 1996 AND 1995 ARE UNAUDITED)
9. STOCKHOLDER'S EQUITY (CONTINUED)
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.
10. OTHER INCOME AND EXPENSES
At December 31, 1995, other income and expenses were comprised of the
following:
<TABLE>
<S> <C>
OTHER INCOME
Collection of MacKenzie judgment.................................. $ 410,321
Reimbursement of professional fees................................ 230,000
Other............................................................. 108,346
---------
$ 748,667
---------
---------
OTHER EXPENSES
Settlement of litigation with former officer...................... $ 103,455
Abandonment of investment in Allink............................... 145,156
Other............................................................. 187,584
---------
$ 436,195
---------
---------
</TABLE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
---------------------- DECEMBER 31,
1996 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Cash paid for interest................................. $ 307,689 $ 281,278 $ 417,321
---------- ---------- ------------
---------- ---------- ------------
Supplemental disclosure of non cash transactions
Sale of equipment through acceptance of note
receivable........................................... $ -- $ 50,000 $ 50,000
Issuance of common stock warrants to settle
litigation........................................... -- 560,000 560,000
Issuance of common stock to settle account payable..... 87,550 -- --
Issuance of notes payable to settle litigation......... -- 90,000 90,000
Issuance of common stock in connection with the
acquisition of Allink................................ -- 153,125 153,125
</TABLE>
F-39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Octagon, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Octagon,
Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for the three
years in the period ended December 3l, 1994, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
B to the financial statements, the Company experienced a significant loss in
1994, contributing to a deficit in working capital. These factors, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Washington, D.C.
March 17, 1995 (except for Note J5d,
as to which the date is March 20, 1995, and
Note 15a, as to which the date is April 14, 1995)
F-40
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1994 1993
----------- -----------
ASSETS
Current Assets
Cash.................................................................................. $ 164,558 $ 1,814,216
Accounts receivable, less allowance for doubtful accounts of $338,304 in 1994 and
$46,397 in 1993 (Notes A2, A5, F and H)............................................. 5,762,942 3,426,278
Collateral for injunction bond (Note J5a)............................................. 500,000 --
Income taxes receivable Notes A6 and I)............................................... 6,139 --
Other Receivables (Note J4)........................................................... -- 218,912
Prepaid expenses and other............................................................ 259,998 23,485
----------- -----------
Total current assets.............................................................. 6,693,637 5,482,891
----------- -----------
Property and equipment, at original cost (Note A3)...................................... 1,084,544 649,826
Less allowance for depreciation....................................................... 511,884 374,239
----------- -----------
572,660 275,587
----------- -----------
Other Assets
Goodwill, net of amortization of $293,007 in 1994 and $17,400 in 1993 (Note A4)....... 1,155,529 1,024,176
Costs of public offering.............................................................. -- 536,654
Noncompete agreements, net of amortization of $114,107 in 1994 and $28,500 in 1993
(Note A4)........................................................................... 142,633 228,214
Deposits and other.................................................................... 118,433 55,186
Notes receivable--officer, noncurrent (Note E)........................................ 75,000 --
----------- -----------
1,491,595 1,844,230
----------- -----------
$ 8,757,892 $ 7,602,708
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable and current maturities of long-term liabilities (Notes C and F)......... $ 1,546,112 $ 1,000,000
Accounts payable--trade............................................................... 2,292,894 2,221,736
Accrued salaries, payroll taxesand other Note G)...................................... 1,398,531 653,132
Accrued vacation leave................................................................ 226,819 249,632
Capital lease obligation--current portion............................................. 5,507 --
Deferred income taxes (Notes A6 and I)................................................ -- 33,300
Advance billings on uncompleted contracts (Note A2)................................... 1,947,842 2,165,686
----------- -----------
Total current liabilities......................................................... 7,417,705 6,323,486
----------- -----------
Long-term Liabilities (Notes C, F and J5c)
Acquisition debt...................................................................... -- 750,000
Deferred rent......................................................................... 64,740 --
Capital lease obligation--noncurrent portion.......................................... 20,756 --
Obligation from litigation settlement (Note J5c).................................... 560,000 --
----------- -----------
Total long-term liabilities....................................................... 645,496 750,000
----------- -----------
Commitments and Contingencies (Note J)
Stockholders' Equity (Notes c, L, and J5c)
Common stock, $.01 par value, 25,000,000 shares authorized, 6,450,000 issued and
outstanding......................................................................... 64,500 30,000
Paid-in capital in excess of par value................................................ 10,058,073 520,000
Less stock subscriptions receivable................................................... (100,500) (100,500)
Retained (deficit) earnings........................................................... (9,327,382) 79,722
----------- -----------
694,691 529,222
----------- -----------
$ 8,757,892 $ 7,602,708
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Contract Revenue (Note A2).......................................... $ 31,756,237 $ 23,574,611 $ 33,221,962
Cost of revenue production
Direct costs...................................................... 24,474,955 14,259,638 20,237,284
Indirect costs.................................................... 11,214,137 8,400,122 11,185,504
Reserve for contract deposit...................................... 1,265,000 -- --
Amortization of goodwill and noncompete agreement costs........... 361,228 45,886 --
Reserve for uncollectible accounts receivable..................... 291,907 108,010 --
Legal fees........................................................ 1,234,245 70,799 107,057
Other operating expenses.......................................... 1,164,141 17,450 117,303
------------- ------------- -------------
40,005,613 22,901,905 31,647,148
------------- ------------- -------------
(Loss) earnings from operations............................... (8,249,376) 672,706 1,574,814
Charges arising from settlement of litigation (Note J5)............. 1,172,414 -- --
Interest charges.................................................... 208,808 68,403 27,269
Interest (Income)................................................... (193,539) (27,808) (29,086)
------------- ------------- -------------
1,187,683 40,595 (1,817)
------------- ------------- -------------
(Loss) earnings before taxes on income........................ (9,437,059) 632,111 1,576,631
------------- ------------- -------------
Provision (Benefit) for Income Taxes (Notes A6 and I)
Current........................................................... 3,345 33,025 43,425
Deferred.......................................................... (33,300) 33,300 --
------------- ------------- -------------
(29,955) 66,325 43,425
------------- ------------- -------------
NET (LOSS) EARNINGS........................................... $ (9,407,104) $ 565,786 $ 1,533,206
------------- ------------- -------------
------------- ------------- -------------
(Loss) earnings per common share (Note A8)........................ $ (1.56) $ 0.19 $ 0.51
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL STOCK TOTAL
NUMBER OF PAR PAID-IN SUBSCRIPTIONS RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL RECEIVABLE EARNINGS EQUITY
---------- ---------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992........... 100,000 $ 100,000 $ -- $ -- $ 1,990,846 $ 2,090,846
Dividends.......................... -- -- -- -- (2,369,578) (2,369,578)
Net Earnings....................... -- -- -- -- 1,533,206 1,533,206
---------- ---------- ------------- ------------ ------------- -------------
Balance at December 31, 1992......... 100,000 100,000 -- -- 1,154,474 1,254,474
Dividends.......................... -- -- -- -- (544,612) (544,612)
Merger............................. -- -- -- -- (1,095,926) (1,095,926)
Stock Split........................ 2,750,000 (71,500) 71,500 -- -- --
Issuance of Common Stock........... 150,000 1,500 448,500 (100,500) -- 349,500
Net Earnings....................... -- -- -- -- 565,786 565,786
---------- ---------- ------------- ------------ ------------- -------------
Balance at December 31, 1993......... 3,000,000 30,000 520,000 (100,500) 79,722 529,222
Initial Public Offering
(Note C)......................... 3,450,000 34,500 9,486,010 -- -- 9,520,510
Stock Compensation (Note L)........ -- -- 52,063 -- -- 52,063
Net loss........................... -- -- -- -- (9,407,104) (9,407,104)
---------- ---------- ------------- ------------ ------------- -------------
Balance at December 31, 1994......... 6,450,000 $ 64,500 $ 10,058,073 $ (100,500) $ (9,327,382) $ 694,691
---------- ---------- ------------- ------------ ------------- -------------
---------- ---------- ------------- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) earnings.................................................. $ (9,407,104) $ 565,786 $ 1,533,206
Adjustments to reconcile net (loss) earnings to net cash from
operating activities:
Employees' severance settlement.................................. 117,097 -- --
Litigation settlement............................................ 560,000 -- --
Stock compensation............................................... 52,063 -- --
Reserves for uncollectible loans and advances.................... 1,556,907 -- --
Deferred rent.................................................... 64,740 -- --
Loss on disposal of fixed assets................................. 54,602 -- --
Depreciation and amortization.................................... 517,037 229,034 233,563
(Decrease) increase in deferred income taxes..................... (33,300) 33,300 --
Changes in assets and liabilities, net of effects of acquisition
in 1994
Decrease in accounts receivable................................ 1,650,137 2,151,494 326,054
(Increase) decrease in prepaid expenses and other.............. (215,478) (187,371) 554,353
Increase (decrease) in accounts payable........................ (729,842) 281,668 103,689
(Decrease) increase in accrued salaries, payroll taxes and
other........................................................ 745,399 (396,009) (212,389)
(Decrease) in accrued vacation leave........................... (22,813) (213,948) (84,327)
(Decrease) increase in accrued income taxes.................... -- (40,231) 7,519
Increase in income taxes receivable............................ (6,139) -- --
Decrease in other receivables.................................. 218,912 -- --
Increase in other assets....................................... (63,247) -- --
Increase in advance billings on uncompleted contracts.......... (217,844) 665,686 226,000
------------- ------------- -------------
Net Cash (Used) Provided by Operating Activities..................... 4,248,231 2,523,623 1,154,462
(5,158,873) 3,089,409 2,687,668
------------- ------------- -------------
Cash Flows from Investing Activities
Payments on notes to former employees.............................. (5,000) -- --
Deposit for performance bond on contract........................... (1,265,000) -- --
Deposit for injunction bond........................................ (500,000) -- --
Proceeds from disposition of property and equipment................ -- 6,741 --
Purchase of property and equipment................................. (465,376) (38,704) (191,599)
Loans to officers and stockholders................................. (390,743) -- --
Payments of capital lease obligation............................... (4,845) -- --
(Increase) decrease in other assets................................ -- (44,537) 3,501
------------- ------------- -------------
Net cash (Used) by Investing Activities.............................. (2,630,964) (76,500) (188,098)
------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from sale of common stock................................. 10,057,164 -- --
Proceeds from acquisition debt..................................... -- 2,000,000 --
Payment on acquisition debt........................................ (1,750,000) (250,000) --
Net borrowings (payments) on short-term debt....................... 942,015 -- --
Payments in connection with acquisition............................ (3,109,000) (2,356,740) --
Net acquisition and merger costs................................... -- (37,461) --
Cash paid for registration costs................................... -- (187,154) --
Payment of dividends............................................... -- (544,612) (2,369,578)
------------- ------------- -------------
Net Cash (Used) by Financing Activities.............................. 6,140,179 (1,375,967) (2,369,578)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents................. (1,649,658) 1,636,942 129,992
Cash and Cash Equivalents, Beginning................................. 1,814,216 177,274 47,282
------------- ------------- -------------
Cash and Cash Equivalents, Ending.................................... $ 164,558 $ 1,814,216 $ 177,274
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
NOTE A--SUMMARY OF ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Octagon, Inc. and its wholly-owned subsidiaries (collectively referred to as the
Company). All significant inter-company accounts and transactions are eliminated
in consolidation.
2. RECOGNITION OF REVENUE
The Company's telecommunications business, which operates under the trade
name "Octacom," recognizes revenue under cost-type and fixed-price contracts
with 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 period in which the changes are
determined. Estimated losses on all contracts are recorded in full when
identified.
The Company's environmental services operations conducted through its
wholly-owned subsidiary, Power Systems Energy Services, Inc. (PSESI) performs
services under cost-type and fixed price per unit of service contracts. Revenue
on PSESI's 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 on the contract. Estimated
losses on all contracts are recorded in full when identified.
Revenue from contracts with the United States Government comprised 41% of
revenue in 1994 and substantially 100% of revenue in 1993 and 1992. Revenue from
export sales is not material. During 1994, approximately 26% of revenue was
derived from two contracts with the U.S. Agency for International Development.
Advanced billings on uncompleted contracts in the accompanying balance sheet
represent amounts due to United States Government agencies. Such amounts arise
from billings on contracts exceeding amounts recognized as revenue. The
liability will be paid upon completion of the cost audits described in Note I
which completion is not expected until 1996 or thereafter.
Indirect costs associated with revenue in the accompanying statement of
operations represent costs, including selling, general and administrative
expenses, allocable to more than one contract.
3. PROPERTY AND EQUIPMENT
Property and equipment are recorded at their original cost. Depreciation on
property and equipment is computed principally on a straight-line basis for both
financial and tax reporting purposes. Leasehold improvements are amortized over
the estimated economic lives of the improvements or the remaining effective term
of the lease, whichever is shorter. Property and equipment, remodeling,
betterments and
F-45
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
improvements are capitalized. The costs of repairs and maintenance and small
furnishings are expensed as incurred.
4. 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 (note C). 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 life used in computing annual
amortization. Management's reassessment of the realizability and useful life of
the ERA goodwill in 1994 resulted in a change in the useful life from 20 years
to five years and a writedown for an impairment of such goodwill, resulting in
an additional charge to operations of approximately $250,000 in the fourth
quarter of l994.
Goodwill arising from the acquisition of PSESI is amortized on a
straight-line basis over a period of 20 years.
The costs of noncompete agreements are amortized over the life of the
agreements (three years) on a straight-line basis.
5. CONCENTRATION OF CREDIT RISK
A substantial portion of the Company's telecommunications business accounts
receivable (45% of total accounts receivable at December 31, 1994) represents
amounts due directly from United States Government customers under prime
contracts or subcontracts with prime contractors to the U.S. Government.
Accounts receivable of the Company's environmental services operations (55% of
total accounts receivable at December 31, 1994) 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 3l, 1994.
6. TAXES ON INCOME
Provisions for taxes on income are based upon revenue and expenses reported
for financial statement purposes rather than the amounts currently payable under
tax laws and regulations. Deferred taxes on income result from temporary
differences in reporting revenue and expenses for financial statement purposes
and for income tax purposes and are accounted for using the provisions of
Financial Accounting Standard No. 109.
Beginning with the periods ending after April 30, 1989, the Company elected
to be taxed by the Internal Revenue Service as an S Corporation. Under
S-Corporation status, taxable earnings of the Company, subject to certain
restrictions and elections, were taxed directly to the shareholders as long as
the election is effective. As discussed in Note I, the Company terminated its
election to be taxed as an S Corporation on August 31 1993 and elected to be
taxed as a C Corporation effective September 1, 1993. Deferred income taxes were
reinstated on this date.
F-46
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE A--SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
7. CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
8. EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of shares and,
if dilutive, common equivalent shares outstanding during each year.
NOTE B--RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS
The Company incurred a net loss of $9,407,104 in 1994 and has a deficiency
in working capital of $724,068 as of December 31, 1994. Factors contributing to
the loss in 1994 were:
- A charge of $1,265,000 for amounts advanced to secure performance on a
contract. Management later found the contract to be a fraud.
- A charge of $1,172,000 recorded to accrue the cost of settling a class
action lawsuit as described in Note J, related to the announcement of the
above contract.
- Legal fees of approximately $1,200,000 incurred in asserting claims and
defenses in connection with the aforementioned and other legal issues.
- Approximately $1,000,000 expended primarily in commercial marketing
efforts, public relations expenses, and recruiting costs during 1994.
- General and administrative costs of approximately $2,000,000 charged to
operations without related contract revenue sufficient to absorb such
costs.
In order to alleviate liquidity problems caused by the net loss, which along
with debt payments and acquisition costs, depleted proceeds of the public
offering (see Note C), management has restructured its operations in late 1994
and early 1995 (see below). In addition, with the settlement of the class action
litigation in February 1995 and the closure of other litigation in early 1995,
management expects a substantial reduction of legal costs in 1995. In addition,
the Company will receive approximately $700,000 in April 1995 upon the release
of collateral for an injunction bond and settlement of related litigation. A
summary of management's plans regarding 1995 operations and improved liquidity
is as follows:
- Administrative and marketing staffs were reduced in September 1994 and
March 1995. In addition, the employment of the Company's former president
and chairman of the board was terminated with cause in February 1995.
Management believes administrative support staff costs following the
reductions are commensurate with the volume of contract revenue expected
in 1995.
- Management negotiated a new line of credit in March 1995 providing for
borrowings up to $3,000,000 based upon eligible accounts receivable (see
Note F). The line of credit replaces a financing agreement from late 1994
which carried higher financing costs.
- As described in Note C, the Company acquired Allink Network Management
Company (Allink) in January 1995 for stock and an earnout based upon
profits. Allink has developed a proprietary expert network management
software package for use in local- and wide-area networks. The
F-47
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE B--RESULTS OF OPERATIONS AND MANAGEMENT'S PLANS (CONTINUED)
software monitors the efficiency of network utilization and can isolate
causes and specific locations of network outages, thus allowing minimized
response time. Management believes the system's capabilities, together
with access to the customer base of NYNEX, a former owner of Allink, will
improve profitability by mid-1995 through higher margin commercial sales
of the software, and through support and maintenance service contracts.
- While success cannot be guaranteed, management intends to explore other
means by which liquidity can bee improved, including the possible sale of
a portion of the Company's operations, and the raising of additional
capital through a private issuance of securities or long-term debt
financing.
NOTE C--SIGNIFICANT TRANSACTIONS
1. INITIAL PUBLIC OFFERING
On February 24, 1994, the Company issued 1,725,000 units at a price of $7.00
per unit. The issuance resulted in net proceeds of $10,057,164 alter deducting
offering expenses. Each unit consisted of two shares of common stock and two
redeemable Class A warrants. The common stock and Class A warrants are
detachable and trade separately. Each Class A warrant entitles the holder to
purchase one share of common stock at $4.00 per share during the four-year
period commencing February 24,1995. The Class A warrants are redeemable upon
certain conditions.
2. ACQUISITIONS
a. POWER SYSTEMS ENERGY SERVICES INC.
On March 15, 1994, the Company purchased with cash and a note, all of the
outstanding common stock of ABB Power Systems Energy Services, Inc. PSESI, a
subsidiary of Combustion Engineering, Inc., in turn a subsidiary of Asea Brown
Boveri (ABB), headquartered in Switzerland. PSESI provides contract manpower
principally to the electric power utility industry in health physics, quality
assurance and control, and engineering and training. The purchase price,
including external costs, was $3,601,000, and was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS
OF DOLLARS)
-------------
<S> <C>
Accounts receivable............................................................ $ 4,448
Other current assets........................................................... 14
Property and equipment......................................................... 11
Goodwill....................................................................... 407
Accounts payable and accrued liabilities, including plant closing and severance
costs........................................................................ (1,279)
------
Total assets............................................................... $ 3,601
------
------
</TABLE>
F-48
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE C--SIGNIFICANT TRANSACTIONS (CONTINUED)
Unaudited pro forma operating results presented as if the Company had
acquired PSESI in the beginning of 1994 and 1993 follow (in thousands of
dollars, except per share data):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Revenue................................................................. $ 36,594 $ 59,215
(Loss) earnings from operations......................................... (8,391) 1,268
Net (loss) earnings..................................................... (9,570) 1,134
(Loss) earnings per share............................................... (1.59) .38
</TABLE>
The Company is a co-defendant in litigation involving the purchase of PSESI.
The plaintiff asserted the seller breached a contract to sell PSESI to the
plaintiff, which contract pre-existed the Company's purchase agreement.
Management believes it has meritorious defenses which include the seller's
representing at closing that the PSESI stock was free of any claims against it.
b. ALLINK NETWORK MANAGEMENT COMPANY
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., in exchange for 65,000 shares of the Company's common stock. The
acquisition also provides for an earnout covering 42 months following the
acquisition paid in cash, and additional stock of the Company based upon a
percentage of Allink's gross profit and a one-year stock bonus based on Allink
revenue.
Allink has developed a proprietary expert network management software
package for use in local- and wide-area networks. The software monitors
efficiency of network utilization and can isolate causes and specific locations
of network outages, allowing minimized response time. Allink's net sales were
less than $1,000,000 in 1994. The purchase price will be valued at approximately
$150,000, although its allocation has not yet been finalized. Pro forma
financial information related to this acquisition is immaterial and is not
presented herein.
In connection with the Allink acquisition, the Company is negotiating a
restructuring of an existing Allink note payable to NYNEX to reduce the
Company's fixed liability to NYNEX from $1,350,000 to $100,000, payable in 1999,
with interest payable quarterly at 7 1/2%. The debt would be collateralized by a
senior security interest in the Allink software. Additional payments of 5% of
sales would be due to NYNEX upon the sale of the software licenses, and the
Company would pay NYNEX 35% of sales, limited to $750,000, to a foreign
government customer should Allink be awarded a contract with such government.
3. LEVERAGED BUYOUT AND MERGER
Effective September J, 1993, the Company as a Virginia corporation issued
2,280,000 newly-created shares of common stock to the shareholders of Octagon
Holdings, Inc. (Octagon Holdings), a newly-formed Delaware corporation. The
issuance was made in exchange for 100% of Octagon Holdings' stock issued and
outstanding. Octagon Holdings then merged into the Company, which continued as
the surviving corporation. Prior to the exchange, the Company purchased
2,280,000 shares of common stock from its founding stockholders for $2,100,000.
The repurchased shares were subsequently canceled. The founding stockholders
were also paid $256,740 for covenants not to compete for the next three years.
On November 5, 1993, the Company reincorporated in Delaware as Octagon, Inc. On
December 21, 1993, the
F-49
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE C--SIGNIFICANT TRANSACTIONS (CONTINUED)
Virginia corporation merged into the Delaware corporation. The purchase of
common stock and covenants not to compete was financed entirely by borrowings
under a $2,000,000 acquisition term loan and a $1,000,000 revolving line of
credit with a bank. Both the loan and the line of credit were repaid in full
after the public stock offering described in Note B 1.
Because of the change in control, the Company has accounted for the purchase
transaction as a leveraged buyout, therefore giving effect to the new basis in
the Company's stock to the extent of the 80% ownership change and resulting in
additional equity and goodwill of approximately $1,096,000.
NOTE D--ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1994 1993
------------ ------------
Billed accounts receivable........................................ $ 5,012,926 $ 2,980,509
Unbilled accounts receivable...................................... 686,469 410,406
------------ ------------
5,699,395 3,390,915
Officers, employees and stockholders.............................. 331,000 81,760
Other receivables................................................. 70,851 --
------------ ------------
6,101,246 3,472,675
Allowance for doubtful accounts............................... (338,304) (46,397)
------------ ------------
$ 5,762,942 $ 3,426,278
------------ ------------
------------ ------------
</TABLE>
Following is a table depicting the activity in the Company's allowance for
doubtful accounts for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Beginning balance............................................ $ 46,397 $ -- $ --
Increase in allowance
Provision charged to operations............................ 291,907 46,397 --
Amounts written off.......................................... -- -- --
---------- --------- ---------
Ending balance............................................... $ 338,304 $ 46,397 $ --
---------- --------- ---------
---------- --------- ---------
</TABLE>
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, 1994 will be billed
and collected in 1996 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 F).
F-50
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE D--ACCOUNTS RECEIVABLE (CONTINUED)
Also included in accounts receivable are various advances to and notes due
from officers and a former officer of the Company. These are promissory notes
from an officer and a former officer of the Company for $29,500 each, bearing
interest at 7% per annum. The notes are due on demand.
NOTE E--NOTE RECEIVABLE--NONCURRENT
Note receivable--officer--noncurrent represents the balance due under a
non-interest bearing note for $75,000 for relocation expenses. The note balance
is due in August 1996 and is collateralized by a personal asset of the officer.
NOTE F--SHORT-TERM AND LONG-TERM DEBT
At December 31, 1994, the Company had an agreement with Commerce Funding
Corporation, which provided for financing upon the assignment of the proceeds
due from specific accounts receivable to the finance company. Upon assignment,
the Company was advanced 80% of the face value of the receivable. Finance costs
charged to the Company were comprised of a 1% processing charge per 15-day
period, and interest at prime plus 2% computed on the daily amount outstanding.
The effective interest rate on borrowings under this agreement was approximately
13% in 1994. The prime rate applicable to these borrowings was 8.5% at December
31,1994.
On February 28, 1995, the Company entered into a new credit facility
agreement with Foothill Capital Corporation. The new agreement replaced that
with Commerce Funding Corporation and allows the Company to borrow the lesser of
$3,000,000 or 80% of certain accounts receivable at 3% over prime rate. The
credit agreement is collateralized by substantially all of the Company's assets.
Interest payments on the line of credit are due monthly, and the facility
matures February 28, 1996. Renewal is automatic unless written notice is given
60 days prior. The Company paid a fee at closing of $30,000, and will pay a
monthly service fee equal to the greater of $2,000 or 4/10% of the average
principal amount of the loan balance during each month.
In connection with the acquisition of PSESI, the Company executed a note
payable to the seller in October 1994 for $942,000. The note is collateralized
by 150,000 shares of the Company's common stock and is pledged by an officer of
the Company. The note provided for interest payable monthly at prime and monthly
principal payments of $150,000. As of December 31,1994, the remaining balance
due on the note was $492,000 and was paid in full in March 1995.
The Company is obligated under a capitalized lease for equipment which
requires monthly payments of $715 extending through 1998. The net book value of
assets under capitalized leases was $25,000 at December 31,1994.
On December 15, 1994, the Company signed three short-term, non-interest
bearing notes to two former employees in accordance with the terms and
conditions of a settlement agreement for back pay, severance and other related
costs totaling $75,000. In addition, the Company is obligated to pay the
attorney's fees for the former employees. On January 23, 1995, the Company
signed a fourth short-term, non-interest bearing note to the former employees'
counsel for $31,114. The principal due under the notes has been reflected as
notes payable on the accompanying balance sheet. The total cost of the action is
included in other operating expenses in the accompanying financial statements.
The three notes payable to the former employees are payable monthly in aggregate
installments of $6,250. The fourth note payable is
F-51
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE F--SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
payable in two installments of $10,000 each in February and March 1995, with a
final installment in April 1995 of $11,114.
Long-term and short-term debt outstanding at December 31, 1993 was due under
a bank term note payable and was retired in March 1994, using proceeds from the
public offering described in Note C 1.
NOTE G--ACCRUED SALARIES, PAYROLL TAXES AND OTHER
Accrued salaries, payroll taxes and other are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Accrued salaries.................................................... $ 459,338 $ 491,503
Accrued legal fees.................................................. 300,000 --
Accrued bonuses..................................................... 242,550 125,000
Payroll taxes accrued............................................... 209,174 36,629
Accrued litigation settlement....................................... 140,000 --
Other accrued expenses.............................................. 47,469 --
------------ ----------
$ 1,398,531 $ 653,132
------------ ----------
------------ ----------
</TABLE>
NOTE H--RELATED PARTIES
During the year ended December 31, 1994, the Company paid $548,079 to an
attorney who is also a stockholder of the Company, for legal services rendered.
Of this amount, $334,000 was related to the Company's public offering and was
charged against the proceeds of the offering.
Also in 1994, the Company paid $103,589 to another attorney who is a
director of the Company, for legal services rendered.
The Company paid $219,000 in fees to an investment banking firm established
in the names of an officer and former officer's wife and the wife of an attorney
who is a stockholder of the Company. Pursuant to actions taken by the Board of
Directors, the officer's wife has repaid $73,000 as of December 31, 1994.
The remaining fees currently being pursued for collection from the former
officer and the attorney are included in accounts receivable in the accompanying
financial statements.
During the year ended December 31, 1994, the Company paid $42,000 in
consulting fees to a former outside director of the Company.
NOTE I--TAXES ON INCOME
The Company applies the provisions of Statement of Financial Accounting
Standards No. 109 in computing its provision for income taxes. The Company
terminated its election to be taxed as an S Corporation on August 31, 1993, and
elected to be taxed as a C Corporation effective September 1, 1993. The Company
now provides for deferred income taxes on temporary differences between
financial statement and tax reporting of certain income and expenses.
F-52
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE I--TAXES ON INCOME (CONTINUED)
The Company's provision for taxes on income differs from the statutory rate
as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1993 1992
------------------------ ---------------------- ------------------------
<CAPTION>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE TAXES ON INCOME.......... $ 9,407,104 100.0% $ 632,111 100.0% $ 1,576,631 100.0%
----------- ----- --------- ----- ----------- -----
----------- ----- --------- ----- ----------- -----
Taxes on income at federal statutory
rate................................... $(3,198,242) (34.0)% $ 215,000 34.0% $ -- --%
Taxes paid by shareholders on S
Corporation income..................... -- -- (224,500) (35.5 ) -- --
State taxes on income, net of federal tax
benefit................................ (395,077) (4.2 ) 37,025 5.9 43,425 2.8
Deferred tax liability adjustment........ -- -- 32,300 5.1 -- --
Permanent differences.................... 528,939 5.6 -- -- -- --
Valuation allowance...................... 3,031,479 32.2 -- -- -- --
Other.................................... 2,946 .1 6,500 1.0 -- --
----------- ----- --------- ----- ----------- -----
PROVISION FOR TAXES ON INCOME............ $ (29.955) (.3 )% $ 66,325 10.5% $ 43,425 2.8%
----------- ----- --------- ----- ----------- -----
----------- ----- --------- ----- ----------- -----
</TABLE>
Temporary differences are attributable to deferrals of income associated
with unbilled accounts receivable which are not contractually billable, and
certain accrued employee benefits which are not currently deductible until paid
in the following year.
The Company has a net operating loss carryforward expiring in 2009 of
approximately $5,300,000, as of December 31, 1994, 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.
Deferred income taxes result from the following differences between
treatment for income tax return purposes and financial reporting purposes:
<TABLE>
<S> <C>
Net operating loss carryforward................................. $2,013,723
Accrued legal expenses.......................................... 158,497
Unbilled revenue, not taxable until billed to the customer...... (62,390)
Accrued expenses, not deductible until paid in the following
year.......................................................... 226,299
Allowance for doubtful accounts, contract losses and reserves... 668,156
Other........................................................... 27,194
---------
3,031,479
Valuation allowance............................................. (3,031,479)
---------
Deferred income taxes........................................... $ --
---------
---------
</TABLE>
F-53
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE J--COMMITMENTS AND CONTINGENCIES
1. 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 in 2003. Total rental expense for the
Company's operating leases for years ended December 31, 1994, 1993, and 1992 was
approximately $514,000, $641,000 and $816,000, respectively.
The Company's minimum future, annual rental commitments under the new lease
are as follows:
<TABLE>
<CAPTION>
RENTAL
Year ending December 31, COMMITMENT
---------------
<S> <C>
1995..................................................... $ 416,000
1996..................................................... 397,000
1997..................................................... 383,000
1998..................................................... 381,000
1999..................................................... 328,000
Thereafter............................................... 1,408,000
---------------
$ 3,313.000
---------------
---------------
</TABLE>
2. EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with an officer of the
Company. Minimum future, annual salary commitments under the agreement are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, SALARY BONUS TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1995...................................... $ 175,000 $ 78,750 $ 253,750
1996...................................... 175,000 78,750 253,750
1997...................................... 175,000 78,750 253,750
1998...................................... 175,000 78,750 253,750
--------- --------- ---------
$700,000.. $ 315,000 $1,015,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The agreement also provides for incentive compensation based upon certain
performance criteria of the Company. The above employment agreement commitment
schedule does not include amounts related to a former officer whose agreement,
which requires annual salary and bonus through 1998 of approximately $278,000,
was terminated for cause in February 1995. Such termination is the subject of
litigation as described in Note I.
3. CONTRACT COST AND IRS AUDITS
Audits of the Company's costs charged to government contracts have been
completed by the Defense Contract Audit Agency (DCAA) through December 31, 1991.
Subsequent years are subject to DCAA audit. Management is of the opinion that
any audit adjustments for the periods subsequent to December 31, 1991 would not
have a material effect on the financial position or results of operations of the
Company.
F-54
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Audits of the Company's income tax returns have been completed by the
Internal Revenue Service (IRS) through April 30, 1988. Tax years from 1991
through 1993 currently are subject to IRS audit.
Management is of the opinion that any audit adjustments for periods
subsequent would not have a material effect on the financial position or results
of operations of the Company.
4. SELF-INSURANCE
The Company maintains a self-insurance program for that portion of health
care costs not covered by insurance. The Company is liable for claims up to
$50,000 per employee annually. Self-insurance costs are accrued based upon the
aggregate of the liability for reported claims and an estimated liability for
claims incurred but not reported. Included in other receivables in the
accompanying balance sheet at December 31, 1993 is a receivable of $186,200 for
a refund received in January 1994, for excess amounts paid to the insurance
administrator in 1993.
5. LITIGATION
a. OCTAGON, INC. VERSUS JAMES MACKENZIE INTERNATIONAL TRADING PLC, JAMES
KHAN, AND THE KHAN FAMILY TRUST
In August and September 1994, the Company initiated legal proceedings 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. Management believes the agreement and the
proposed letter of credit were fraudulent. The aforementioned legal proceedings
resulted in the freezing of certain of MacKenzie's and Khan's assets.
Company management continues to believe it will ultimately prevail in these
legal proceedings. However, the Company has recorded a charge against earnings
of $1,265,000 to reserve fully the deposit since recovery is contingent upon the
success of continued legal proceedings against MacKenzie and Khan. The Company
paid $500,000 as collateral for injunction bonds, and management expects to
recover such funds at the completion of litigation. The collateral is included
in current assets in the accompanying financial statements.
On April 14,1995, the Company agreed to settle the Virginia case against the
defendant and receive $210,000 from assets of the defendant, which assets were
previously frozen. In addition, the collateral posted for the injunction bonds
of $500,000 was released at the same time. The recovery of $210,000 will be
recorded in 1995 to offset expenses of continuing the litigation and the
proceedings in the United Kingdom.
An application for summary judgment has been made, whereby the Company seeks
final judgment against the defendants without the need for a full trial,
resulting in an order made by the Court in the United Kingdom dated March 3,
1995. The order instructs the defendants to defend themselves upon the condition
that they pay into the Court by May 3, 1995 the sum of $1,315,600. If the
defendant fails to make
F-55
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
such payment, the Company will enter judgment forthwith for $1,265,000. The
defendant has not yet paid the amount ordered.
b. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On September 1, 1994, the U.S. Securities and Exchange Commission entered 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 the federal securities laws. The acts and
practices appear to relate to trading in the Company's securities and to the
Company's second quarter report of Form 10-Q filed on August 16, 1994. The
Company reported on certain matters relating to the MacKenzie agreement,
discussed above, in that report. At this time, management is unable to predict
the outcome of the investigation.
c. CLASS ACTION LITIGATION
In 1994, a class action suit was brought against the Company and two
officers, alleging violations of the Securities Exchange Act of 1934, claiming
the Company and its officers misled investors regarding events surrounding a
contract with MacKenzie to deliver telecommunications products to a third party.
On February 17, 1995, the matter was settled with the plaintiffs. Management
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. While management believes the settlement will be concluded, there
can be no assurance the proposed settlement will receive final court approval.
Under the terms of the settlement an insurance company which had provided
liability coverage for officers and directors paid $!,050,000 to the class of
shareholders represented in the suit. The Company will pay $140,000 with
interest of l0% accruing from the date of the insurance company's payment, and
will have the option of issuing $560,000 worth of Class A warrants for the
purchase of Octagon stock, or that amount of cash. The Company has recorded the
fixed cash portion of its obligation under the settlement ($140,000) as a
current accrued liability and the remaining portion which the Company currently
intends to satisfy with warrants as a long-term obligation pending the issuance
of such warrants.
As on a pro forma basis, stockholders' equity will increase by $560,000 upon
the issuance of such warrants. In addition, discussions are ongoing with the
insurance company regarding its reimbursement to the Company for a portion of
the legal fees incurred on behalf of the officers' defense in the matter which
have been charged to operations in their entirety in the accompanying financial
statements. However, the outcome of these discussions is uncertain at this time,
and no reimbursement has been recorded.
d. LITIGATION WITH FORMER OFFICER
On March 20,1995, a former officer and director commenced litigation 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 seeks damages of approximately $1.65 million with
respect to employment agreement claims, and $10 million of compensatory damages
and $350,000 of punitive damages with respect to his defamation claim.
Management and counsel believe the former officer and director's claims are
without merit and a vigorous defense is planned.
F-56
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE K--RETIREMENT PLAN
On May l, 1986, the Company established a 401(k) savings plan (the Plan).
Prior to January 1,1993, the Plan provided for a annual employer contribution of
l% of compensation for all eligible employees. Effective January 1, 1993, the
Plan provides for an annual employer contribution at the discretion of the
Company's Board of Directors. In addition, the Company will match employee
contributions up to 6% of the total employee compensation. Total employer
contributions and administrative costs to the Plan for the years ended December
31, 1994, 1993 and 1992 were approximately $215,000, $556,000 and $772,000,
respectively.
NOTE L--STOCKHOLDER'S EQUITY
In December 1994, the Company granted options to purchase 20,000 each to
three outside members of the Board of Directors at $2.125 per share, the fair
market value at the date of the grant.
In addition, the Company also awarded 24,500 shares of stock to three
officers in December, 1994, as a bonus for service rendered. Compensation
expense of $52,063 was recorded related to such awards measured using the
trading price of the Company's stock at that date ($2.125 per share).
NOTE M--SUPPLEMENTAL CASH FLOWS INFORMATION
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
The Company paid interest and income taxes for the years ended December 31,
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Interest.................................................... $ 217,000 $ 68,400 $ 28,000
---------- --------- ---------
---------- --------- ---------
Taxes on income............................................. $ 6,000 $ 42,000 $ 82,000
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-57
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE N--SEGMENT INFORMATION
Prior to 1994, the Company operated in a single segment wherein it provided
diverse technical and professional services primarily to agencies of the U.S.
Government. In 1994, they began operating in two segments: Environmental
Services and Telecommunications. Financial information relating to each segment
is as follows at December 31,1994:
<TABLE>
<S> <C>
Sales to unaffiliated customers:
Environmental services........................................... $ 19,086
Telecommunications............................................... 12,670
---------
Total.......................................................... $ 31,756
---------
---------
Intersegment sales or transfers:
Environmental services........................................... $ --
Telecommunications............................................... --
---------
Total.......................................................... $ --
---------
---------
Operating profit or loss:
Environmental services........................................... $ 21
Telecommunication................................................ (8,728)
Other............................................................ (700)
---------
Total.......................................................... $ (9,407)
---------
---------
Identifiable assets:
Environmental services........................................... $ 3,808
Telecommunications............................................... 4,949
---------
Total.......................................................... $ 8,757
---------
---------
</TABLE>
NOTE O--FOURTH QUARTER ADJUSTMENTS
The Company recognized adjustments in the fourth quarter of 1994 related
principally to the following:
- A reassessment of the useful life and the carrying value of goodwill
associated with the acquisition of ERA resulting in a charge of
approximately $250,000;
- A charge for approximately $519,000 associated with general and
administrative costs incurred prior to the quarter of 1994, which costs
were previously deemed collectible by management;
- A charge for $800,000 to increase the valuation allowance for deferred
income tax assets recognized prior to the fourth quarter of 1994;
- An accrual of estimated contract losses of $160,000;
- An accrual of $700,000 for the settlement of a class action lawsuit
against the Company and two officers of the Company, and an accrual of
$472,000 in associated legal fees.
F-58
<PAGE>
OCTAGON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
NOTE P--QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the Company's consolidated results of operations for each of
the fiscal quarters for the years ended December 31,1994 and 1993 is shown in
the tables below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 3L JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
Revenue.................................... $ 5,783 $ 10,064 $ 7,127 $ 8,782
Contribution margin........................ (302) (734) (2,090) (5,123)
Net loss................................... (195) (492) (2,946) (5,774)
Loss per share............................. (.04) (.07) (.38) (1.07)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 3L JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
Revenue.................................... $ 8,162 $ 7,396 $ 5,957 $ 4,080
Contribution margin........................ 2,438 2,633 2,464 1,780
Net (Loss) Earnings........................ 249 331 116 (130)
(Loss) Earnings per share.................. .08 .11 .04 (.04)
</TABLE>
The fiscal year 1994 fourth quarter reflects certain costs and expenses
further discussed in Note O to the financial statements.
F-59
<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
A-1
<PAGE>
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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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 greater of $4.40 per share
of Parent Common Stock and 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
atSeptember 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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(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, 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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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 April 15, 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 April 15, 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 April 15, 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,
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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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<PAGE>
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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<PAGE>
EXHIBIT B
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. In addition, ten percent of the aggregate number of shares of
Conversion Common Stock to be issued in the merger will be placed in escrow to
provide support for the agreed upon representations, warranties and indemnities
of Octagon in connection with the Merger. 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.
B-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>
B-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>
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<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
B-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
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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,
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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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EXHIBIT D
VOTING AGREEMENT AND IRREVOCABLE PROXY
VOTING AGREEMENT AND IRREVOCABLE PROXY (the "Agreement"), dated as of August
30, as amended, 1996, 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
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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) April 15, 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.
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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.
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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:
-----------------------------------------
-----------------------------------------
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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>
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<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
10.3 Form of Employment Agreement between the Registrant and Harry O. Christenson
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.
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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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., assignee of Cytech
11.1*** Statement of Computation of Net Loss Per Share
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 Grant Thornton LLP (relating to financial statements of Octagon, Inc.)
23.4** Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quental, P.A. (to be included in Exhibit 8.1)
23.5** Consent of O'Sullivan Graev & Karabell, LLP (to be included in Exhibit 5.1)
23.6 Consent of Collier, Shannon, Rill & Scott
24.1 Powers of Attorney of directors and officers of the Registrant (included as part of signature page)
99.1** Form of Proxy of Octagon
99.2 Opinion of Brooks, Houghton, Inc. (included in the Proxy Statement/Prospectus as Exhibit B)
</TABLE>
- ------------------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 declared effective by the SEC on May 16, 1996.
** To be filed by amendment.
*** 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.
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<PAGE>
ITEM 22. UNDERTAKINGS
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.
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 21st day of January, 1997.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
By: /s/ HARVEY GOLDMAN
-----------------------------------------
Harvey Goldman
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Harvey Goldman and Catherine Susan Kirby, and each of them (with full power to
act alone), such person's true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution for such person and in such person's
name, place and stead, in any and all capacities, to sign on any or all
amendments (including post-effective amendments) to the Registration Statement
on Form S-4 of Conversion Technologies International, Inc., and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 21st day of January, 1997, by the
following persons in the capacities indicated:
Chairman, President and
/s/ HARVEY GOLDMAN Chief Executive Officer
- ------------------------------ (Principal Executive
Harvey Goldman Officer and Principal
Accounting Officer)
/s/ ECKARDT C. BECK
- ------------------------------ Director
Eckardt C. Beck
/s/ PETER H. GARDNER
- ------------------------------ Director
Peter H. Gardner
/s/ SCOTT A. KATZMANN
- ------------------------------ Director
Scott A. Katzmann
II-5
<PAGE>
/s/ ALEXANDER P. HAIG
- ------------------------------ Director
Alexander P. Haig
/s/ DONALD R. KENDALL, JR.
- ------------------------------ Director
Donald R. Kendall, Jr.
/s/ IRWIN M. ROSENTHAL
- ------------------------------ Director
Irwin M. Rosenthal
/s/ NORMAN L. CHRISTENSEN,
JR.
- ------------------------------ Director
Norman L. Christensen, Jr.
II-6
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
BETWEEN
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND
WILLIAM L. AMT
THIS AGREEMENT, is made as of the 18th day of November, 1996, between
Conversion Technologies International, Inc., a Delaware corporation (the
"Company") and William L. Amt (the "Employee").
WHEREAS, the parties desire to enter into this Agreement simultaneously
with the execution and delivery of an Agreement and Plan of Reorganization (the
"Merger Agreement") relating to the merger (the "Merger") of Octagon, Inc.
("Octagon") with and into a subsidiary of the Company for the purpose of setting
forth the terms and conditions of the employment relationship of the Employee
with the Company effective upon the date of consummation of the Merger
(hereinafter, the "Effective Date");
WHEREAS, the Board of Directors of the Company (the "Board") has approved
and authorized the entry into this Agreement with the Employee;
NOW, THEREFORE, it is agreed as follows:
1. EMPLOYMENT. From the Effective Date, the Employee shall function as the
President and Chief Operating Officer of the Company. The Employee shall
also serve as a director and as a member of the Board's Executive Committee
during the term of this Agreement. The Employee's duties and
responsibilities shall be consistent with the duties of those performed by
a President and Chief Operating Officer in a Contemporary Public Company
(listed on NASDAQ) and of a similar size and scale. The Employee shall
report to the Chairman and Chief Executive Officer of the Company, but
shall have complete and unhindered access to the Board of Directors and
shall serve at the discretion of the Board of Directors. The Employee
shall devote his best efforts to the Company and his position, which shall
include such additional duties as the Board, directly or through the
Chairman and Chief Executive Officer of the Company, may from time to time
reasonably direct and that are reasonably consistent with the Employee's
education, experience and background. During the terms of this Agreement,
there shall be no material increase or decrease in the duties and
responsibilities of the Employee other than as provided herein, unless the
parties agree otherwise in writing. During the term of this Agreement, the
Employee shall not be required to relocate.
2. COMPENSATION.
(a) SALARY. Beginning on the Effective Date, the Company agrees to pay
the Employee during the term of this Agreement a salary at an annual
rate equal to
<PAGE>
$160,000 per year ($13,333.33 per month payable at the Company's
standard payroll periods). The Employee shall not receive an annual
bonus or an incentive bonus, except as may be provided by the Board.
The Employee acknowledges that any and all deferred compensation,
bonuses, accrued but unused vacation or other compensation earned or
otherwise to be received by the Employee as a result of his employment
with Octagon, will have been received or waived by the Employee prior
to the Effective Date (other than the Merger Shares (as defined below)
to be received by the Employee in the Merger), and the Employee hereby
releases the Company (and, effective as of the Effective Date, Octagon
as a subsidiary of the Company) from any liability in connection
therewith.
(b) ADJUSTMENT IN SALARY. The Employee's salary shall be increased at
the discretion of the Compensation Committee of the Board of Directors
of the Company. The salary of Employee shall not be decreased at any
time during the term of this Agreement unless the Employee agrees
otherwise in writing. Participation in deferred compensation,
discretionary bonuses, retirement and other employee benefit plans and
fringe benefits shall not reduce the salary payable to employee.
3. INSURANCE, RETIREMENT AND EMPLOYEE BENEFIT PLANS: FRINGE BENEFITS,
BUSINESS EXPENSES.
(a) BENEFITS AND PRE-REQUISITES. The Employee shall be entitled to
participate in any plan of the Company relating to stock options,
restricted stock, employee stock purchase or ownership, pension,
thrift, profit sharing, group life insurance, medical coverage,
education, or other retirement or employee benefit plans or
arrangements that the Company has adopted or may adopt for the benefit
of its employees or executive officers. The Employee shall also be
entitled to participate in, or enjoy the benefit of, any other fringe
benefits or perquisites that are now or may be or become applicable to
the Company's executive employees (other than paid life insurance,
which was taken on the life of Harvey Goldman as a condition to
consummation of the Company's initial public offering). The Employee
shall also be provided with a car allowance in the amount of $600.00
per month.
(b) BUSINESS EXPENSES. During the term of the Employee's employment by
the Company, the Company shall promptly reimburse the Employee for all
reasonable and customary expenses incurred by the Employee in
performing services for the Company, including all expenses of travel
and living expenses while away from home on business or at the request
of and in the service of the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and
procedures establish by the Company.
(c) STOCK GRANT AND OPTIONS. The Employee shall be entitled to
participate in a Board approved stock option incentive program that is
now or may become applicable to the Company's executive employees.
2
<PAGE>
4. TERM. The initial term of this Agreement shall be twelve (12) months from
the Effective Date. This Agreement may not be terminated by the Company
without cause during the first twelve (12) months of the term. Thereafter,
the Company must provide Employee with not less than six (6) months written
notice of intent to terminate the Agreement without cause. This Agreement
shall be automatically renewed for each additional year on each anniversary
date of the Effective Date, unless either party gives contrary written
notice to the other hereto not less than six (6) months before such
anniversary date. The initial term and all such renewal terms are
collectively referred to herein as the term of this Agreement.
5. EMPLOYMENT ESCROW ACCOUNT. The Employee shall deliver 34,560 Merger Shares
(as defined in the Merger Agreement) to the Secretary of the Company to be
held in escrow (the "Employment Escrow Account"). Six months after the
Effective Date, 5,760 of the Merger Shares shall be released to the
Employee. Thereafter, each month for the next five months, an additional
5,760 Merger Shares shall be released to the Employee. Accordingly, the
Employment Escrow Account shall be terminated one year after the Effective
Date. Merger Shares subject to the Employment Escrow Account may not be
sold, assigned, pledged or hypothecated by the Employee until released;
however the Employee shall be entitled to vote such Merger Shares. Any
dividends or other distribution on such shares shall be placed in the
Employment Escrow Account to be released upon release of the Merger Shares.
6. VOLUNTARY ABSENCES: VACATIONS. The Employee shall be entitled, without
loss of pay, to be absent voluntarily for reasonable period of time from
the performance of the duties and responsibilities under this Agreement.
All such voluntary absences shall count as paid vacation time, unless the
Board otherwise approves. The Employee shall be entitled to an annual paid
vacation of at least four weeks per year or such longer period as the Board
may approve. The timing of paid vacations shall be scheduled in a
reasonable manner by the Employee. The Employee shall not be entitled to
receive compensation in lieu of vacation if he is unable to utilize the
full amount of paid vacation time available to him in any year.
7. TERMINATION OF EMPLOYMENT. The Employee's employment may be terminated
without any breach of this Agreement only under the following
circumstances:
(a) DEATH. The Employee's employment shall terminate upon his death.
(b) DISABILITY. The Company may terminate the Employee's employment
because of Disability. For this purpose, "Disability" shall mean the
inability of the Employee to perform his duties under this Agreement
because of physical illness or incapacity for a continuous period of
six months during which the Employee shall have been absent from his
duties under this Agreement on a substantially full-time basis.
3
<PAGE>
(c) CAUSE. The Company may terminate the Employee's employment for Cause.
For purposes of this Agreement, the Company shall have "Cause" to
terminate the Employee's employment only in the event of (1) the
willful and continued failure by the Employee to substantially perform
his duties hereunder (other than any such failure resulting from the
Employee's inability to perform such duties as a result of physical
illness or incapacity or any such actual or anticipated failure after
the delivery of a Notice of Termination, as defined in Sections 7(e),
by the Employee for Good Reason, as defined, in Section 7(d)(2)),
after delivery to the Employee of a written demand for substantial
performance that specifically identifies the manner in which the
Company believes that the Employee has not substantially performed his
duties and a reasonable opportunity to cure; (2) willful misconduct by
the Employee that causes actual and substantial damage to the business
and operations of the Company, the continuation of which, in the
reasonable judgment of the Board, will continue to substantially and
materially damage the Company; or (3) conviction of the Employee of a
felony. The Employee shall not be deemed to have been terminated for
Cause unless the Employee shall have been provided with (i) not less
than 60 days written notice setting forth the reasons that the Company
believes constitute Cause for the termination of his employment; (ii)
a reasonable opportunity to be heard by the Board, after not less than
10 days following the Company's 60 day notice; and (iii) a Notice of
Termination, as defined in Section 7(e), from the Board finding that,
in the reasonable good faith opinion of the Board, Cause for the
termination exists and specifying the particulars thereof in
reasonable detail.
(d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his
employment (a) for Good Reason or (b) for any other reason at any
time, in each case, by giving sixty days prior written notice to the
Company.
For this purpose, "Good Reason" shall mean:
(1) The assignment to the Employee of any duties inconsistent with
the Employee's status as stipulated in Section 1 of this
Agreement or any substantial adverse alteration in the nature or
status of the Employee's responsibilities;
(2) Any change in the Employee's reporting responsibility such that
the Employee is required to report other than to the Chairman and
Chief Executive Officer or the failure of the Employee to have
complete and unhindered access to the Board of Directors or serve
at the discretion of the Board of Directors;
(3) Any purported termination of the Employee's employment by the
Company that is not effected pursuant to a Notice of Termination
satisfying the requirements of Sections 7(c) and (e) hereof;
4
<PAGE>
(4) Any other failure by the Company to comply with any material
provision of this Agreement which failure continues for more than
ten days after written notice of such noncompliance from the
Employee; or
(5) Any notice given by the Company to the Employee under Section 4
hereof that this Agreement will not be renewed on any anniversary
date.
(e) NOTICE OF TERMINATION. Any termination of the Employee's employment
by the Company or by the Employee hereto shall be communicated to the
other party by a written Notice of Termination. Any Notice of
Termination given by a party shall specify the particular termination
provision of this Agreement relied upon by such party and shall set
forth in reasonable detail the facts and circumstances relied upon as
providing a basis for the termination under the provision so
specified.
(f) TERMINATION DATE. Termination Date shall mean (1) if the Employee's
employment is terminated by his death, the date of his death; (2) if
the Employee's employment is terminated pursuant to Section 7(b)
hereof, the date specified in the Notice of Termination, which shall
be after the expiration of the six month period specified in that
subsection; (3) if the Employee's employment is terminated by the
Company for Cause, the date specified in the Notice of Termination or
the Board's determination confirming cause as specified in Section
7(c), whichever is later, or (4) if the Employee's employment is
terminated for any other reason, sixty days following the date on
which the Notice of Termination is given.
8. COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(a) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If the Employee's
employment is terminated by the Company for Cause, or by the Employee
other than for Good Reason, the Company shall pay the Employee his
salary through the Termination Date and the Company shall have no
further obligation to the Employee hereunder, except with regard to
obligations owed under Section 2 (b) herein and any other benefits to
which Employee may be entitled, as specified in Section 8(c)(4) below.
Any Merger Shares (and any dividends or other distributions made with
respect thereto) still remaining in the Employee Escrow Account on the
Effective Date of termination pursuant to this Section 8(a) shall be
canceled and/or returned to the Company, and the Employee shall have
no rights therein or thereto; provided, however, that such Merger
Shares shall not be canceled (and shall be released to the Employee)
in the event the Employee voluntarily resigns his employment as the
result of the repeated failure by the Company or its executive
officers to follow the lawful and reasonable advice of the Employee
with respect to financial reporting and corporate disclosures;
provided further, however, that (i) such failure could reasonably be
expected to have material adverse impact on the Company, result in a
material misstatement or omission or
5
<PAGE>
constitute a violation of law and (ii) the Employee shall have first
advised the Audit Committee of the Board of Directors of such failure.
(b) TERMINATION BECAUSE OF DISABILITY. If the Employee's employment is
terminated by the Company because of Disability under Section 7(b)
hereof, the employee shall be entitled to the benefits of the then
current disability policies of the Company or Octagon, as applicable,
and any Merger Shares then remaining in the Employee Escrow Account
shall immediately be released to the Employee. The Company will
review the Company's disability policies with respect to its senior
executives in good faith with respect to expanded coverage
opportunities that may be available on satisfactory economic terms.
(c) TERMINATION BECAUSE OF DEATH, WITHOUT CAUSE OR WITH GOOD REASON. If
(i) in breach of this Agreement, the Company shall terminate the
Employee's employment other than (a) for cause or (b) because of
Disability or (ii) the Employee shall terminate his employment for
Good Reason (other than pursuant to Section 7(d)(5)) or because of his
death, then:
(1) The Company shall pay the Employee or his estate his salary
through the Termination Date and all other unpaid and pro rata
amounts to which the Employee is entitled as of the Termination
Date under any compensation plan or program of the Company,
including, without limitation, any incentive performance bonus
and all accrued vacation time - such payments are to be made in a
lump sum on or before the Termination Date.
(2) The Company will release the balance of the Merger Shares held in
the Employment Escrow Account; which shares shall be released to
the Employee or his estate on the Termination Date (unless said
shares have been released at an earlier time pursuant to Section
5 hereof);
(3) The Company shall pay as liquidated damages to the Employee, and
in lieu of any further salary payments hereunder for periods
after the Termination Date, an amount equal to the Employee's
annual salary, specified in Section 2(a) hereof, which amount
shall be paid in a lump sum no later than fifteen (15) days
subsequent to the Termination Date.
(4) In addition to the liquidated damages amounts that are payable to
the Employee, the following shall apply: (A) the Employee shall
continue to participate in, and accrue benefits under, all
retirement, pension, profit sharing, employee stock, ownership,
thrift, and other deferred compensation plans of the Company for
the remaining term of this Agreement as if the termination of
employment of the Employee had not occurred (with Employee being
deemed to receive annually for the purposes of such plans the
Employee's then current salary (at the time of
6
<PAGE>
his termination) under Section 2(a) of this Agreement), except to
the extent that such continued participation and accrual is
expressly prohibited by law, or to the extent such plan
constitutes a "qualified plan" under Section 401 of the Internal
Revenue Code of 1986, as amended ("the Code"), by the terms of
the plan, in which case the Company shall provide the Employee a
substantially equivalent, unfunded, nonqualified benefit; (B) the
Employee shall be entitled to continue to receive all other
employee benefits and then existing fringe benefits referred to
in Section 3(a) and (b) hereof for the remaining term of this
Agreement as if the termination of employment had not occurred;
(C) the Company shall, on the Termination Date, establish an
irrevocable trust that meets the guidelines set forth in Rev.
Proc. 92-64 published by the Internal Revenue Service (as the
same may be modified or supplemented from time to time) (the
"Trust"), the assets of which will be held, subject to the claims
of creditors of the Company, solely to provide for the benefits
that the Employee is entitled to under this Section 8(c)(3); and
the Company shall transfer to the Trust an amount sufficient to
provide for such benefits; and (D) all insurance or other
provisions for indemnification, defense or hold-harmless of
officers or directors of the Company that are in effect on the
date the Notice of Termination is sent to the Employee shall
continue for the benefit of the Employee with respect to all of
his acts and omissions while an officer or director as fully and
completely as if such termination had not occurred, and until the
final expiration or running of all periods of limitation against
action while may be applicable to such acts or omissions; and
(5) The liquidation damages amount and other benefits provided for in
this Section 8(c) shall not be reduced by any compensation or
benefits that the Employee may receive for other employment with
the Company.
(d) COST OF ENFORCEMENT. In the event the employment of the Employee is
terminated by the Company because of Disability or without Cause or by
the Employee for Good Reason, and the Company fails to make timely
payment of the amounts owed to the Employee under this Agreement, the
Employee shall be entitled to reimbursement for all reasonable costs,
including attorney's fees, incurred by the Employee in taking action
to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime
rate. (defined as the base rate on corporate loans at large U.S.
money center commercial banks as published by the Wall Street Journal,
compounded monthly, for the period from the date of employment
termination until payment is made to the Employee. Such reimbursement
and interest shall be in addition to all rights to which the Employee
is otherwise entitled under this Agreement.
(e) PARACHUTE PAYMENT LIMITATION. If any payment or benefit to the
Employee under this Agreement would be considered a "parachute
payment" within the meaning
7
<PAGE>
of Section 280G9(b)(2) of the Code and if, after reduction for any
applicable federal excise tax imposed by Section 4999 of the Code (the
"Excise Tax") and federal income tax imposed by the Code, the
Employee's net proceeds of the amounts payable and the benefits
provided under This Agreement would be less than the amount of the
Employee's net proceeds resulting form the payment of the Reduced
Amount described below, after reduction for federal income taxes, then
the amount payable and the benefits provided under this Agreement
shall be limited to the Reduced Amount. The "Reduced Amount" shall be
the largest amount that could be received by the Employee under this
Agreement such that no amount paid to the Employee under this
Agreement and any other agreement, contract, or understanding
heretofore or hereafter entered into between the Employee and the
Company (the "Other Agreement") and any formal or informal plan or
other arrangement heretofore or hereafter adopted by the Company for
the direct or indirect provision of compensation to the Employee
(including groups or classes of participants of beneficiaries of which
the Employee is a member), whether or not such compensation is
deferred, is in cash, or is subject to the Excise Tax. In the event
that the amount payable to the Employee shall be limited to the
Reduced Amount, then the Employee shall have the right, in the
Employee's sole discretion, to designate those payments or benefits
under this Agreement, any Other Agreement, and/or any Benefits Plan,
that should be reduced or eliminated so as to avoid having the payment
to the Employee under this Agreement be subject to the Excise Tax.
9. CONFIDENTIALITY. In consideration of the willingness of the Company to
employ the Employee and the compensation to be paid and benefits to be
received therefore, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Employee agrees
as follows:
(a) THE COMPANY OWNS ALL OF THE EMPLOYEE'S WORK WHICH IS PERFORMED FOR
COMPANY. Company acknowledges that Employee is a full time employee
that work performed by Employee for himself or another employer will
be owned by Company. All improvements, discoveries, inventions,
designs - documents, licenses and patents, or other data devised,
conceived, made, developers, obtained, filed, perfected, acquired, or
first reduced to practice, in whole or in part, or in the regular
course of employment by the Employee during the term of this
Agreement, and related in any way to the business, including
development and research, of the Company or any subsidiary or
affiliate engaged in business substantially similar to that of the
Company shall be promptly disclosed to the Company. The Employee
hereby assigns and transfers to the Company all his right, interest
and title hereto, and such improvements, discoveries, inventions,
designs, documents, licenses and patents, or other data shall become
the property of the Company. During the term of this Agreement, and
at any time thereafter, upon request of the Company, the Employee will
join and render assistance in any proceedings and execute any papers
necessary to file and prosecute applications for, and to acquire,
maintain and enforce, letters patent, trademarks, registrations
8
<PAGE>
and/or copyrights, both domestic and foreign, with respect to such
improvements, discoveries, inventions, designs, documents, licenses
and patents, or other data as required for vesting and maintaining
title to same in the Company.
(b) NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee agrees and
acknowledges that the term "Confidential and Proprietary Information"
shall mean any and all information not in public domain, in any form,
emanating from or relating to the Company or its subsidiaries and
affiliates, including, but not limited to, trade secrets, technical
information, costs, designs, drawings, processes, systems, methods of
operation and procedures, formulae, test data, know-how, improvements,
price lists, financial data, code books, invoices and other financial
statements, computer programs, discs and printouts, sketches, and
plans (engineering, architectural or otherwise), customer lists,
telephone numbers, names, addresses, information about equipment and
processes (including specifications and operating manuals), or any
other compilation of information written or unwritten that is used in
the business of the Company or any subsidiary or affiliate and that
gives the Company or any subsidiary or affiliate any opportunity to
obtain an advantage over competitors of the Company who do not know or
use such information. The Employee agrees and acknowledges that all
Confidential and Proprietary Information, in any form, and all copies
and extracts thereof, is and are and shall remain the sole and
exclusive property of the Company and, upon termination of his
employment with the Company hereby agrees to return to the Company the
originals and all copies of any Confidential and Proprietary
Information provided to or acquired by the Employee during the period
of his employment. Except as ordered by a court of competent
jurisdiction, the Employee expressly agrees never to disclose to any
person (except to other Company employees, and then only on a "need to
know" basis) or entity any Confidential and Proprietary Information
either during the term of this Agreement or at any time after the
termination of his employment, except with the express written
authorization and consent of the Company.
(c) CUSTOMERS INFORMATION. The Employee understands and acknowledges that
each customer of the Company or its subsidiaries or affiliates will
disclose information will be within the Company's control in
connection with the Company's furnishing of services to its customer.
The Employee covenants and agrees to hold such information in the
strictest confidence and shall treat such information in the same
manner as if such information were "Confidential and Proprietary
Information," as defined herein.
10. OTHER CONTRACTS. Each party acknowledges that Employee is employed on a
full time basis. The Employee may not accept employment with a third
party or undertake other activities for compensation at any time during the
term of this Agreement which prevent Employee from discharging his duties
hereunder.
11. RESTRICTIVE COVENANT.
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<PAGE>
(a) The Employee acknowledges and recognizes that during the term
hereof he will be privy to trade secrets and confidential
proprietary information critical to the Business of the Company
and its Affiliates and further acknowledges and recognizes that
the Company would find it extremely difficult to replace the
Employee. Accordingly, if the Employee terminates his employment
without a Good Reason, or the Company terminates the Employee for
Cause, the Employee shall not, during the term hereof and for the
one-year period following termination, (i) directly or indirectly
engage in, represent in any way, or be connected with, any
business (such business being referred to herein as a "Competing
Business") competing with the business of the Company or any of
its Affiliates within any state or country in which the Company
or any such Affiliate transacts business, whether such engagement
shall be as an officer, director, owner, employee, partner,
Affiliate or other participant in any Competing Business, (ii)
assist others in engaging in any Competing business in the manner
described in clause (i) above, (iii) induce any employees of the
Company or any of its Affiliates to terminate their employment
with the Company or any such Affiliate, or to engage in any
Competing Business, or (iv) induce any entity or person with
which the Company or any of its Affiliates has a business
relationship to terminate or alter such business relationship;
provided, however, that nothing contained in this Section 11(a)
shall prevent, restrain or otherwise restrict the Employee from
owning 5% or less of any class of securities of any competitor of
the Company so long as such securities are listed for trade by
NASDAQ in the over-the-counter market or are traded on an
organized securities exchange.
(b) The Company and the Employee expressly acknowledge and agree that
no restrictive covenants will be imposed upon the Employee if the
Employee terminates his employment for Good Reason or the Company
terminates the Employee without Cause. If the Company allegedly
terminates the Employee "For Cause" and the Employee does not
agree with such allegation, no restrictive covenants shall be
imposed upon the Employee unless and until a judicial decision
finds that the Company was justified in terminating the Employee
"For Cause."
(c) The Employee understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to
the Business of the Company and its Affiliates, but he
nevertheless believes that he has received and will receive
sufficient consideration and other benefits as an employee of the
Company as provided hereunder, to justify clearly such
restrictions. The Company reserves the right to provide
additional compensation to Employee to the extent necessary to
enforce this restrictive covenant.
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<PAGE>
12. AMENDMENTS OR ADDITIONS: ACTION BY BOARD. No amendments or additions to
the Agreement shall be binding unless in writing and signed by all parties
hereto. The prior approval by a two-thirds affirmative vote of the full
Board shall be required in order for the Company to authorize any
amendments or additions to this Agreement, to give any consents or waivers
of provisions of the Agreement, or to take any other action under this
Agreement including any Notice of Termination.
13. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be personally delivered or mailed by first class
registered or certified mail, postage prepaid, return receipt
requested, or transmitted by facsimile, telegram or telex addressed to
the Company or the Employee at the addresses set forth on the
signature page of this Agreement, or at such other address as such
party may designate by ten days advance written notice to the other
party.
Each notice or communication that shall have been transmitted in the
manner described above, or that shall have been delivered to a
telegraph company, shall be deemed sufficiently given, served, sent or
received for all purposes at such time as it is sent to the addressee
(with return receipt, delivery receipt or (with respect to a telex)
the answer back being deemed" conclusive, but not exclusive, evidence
of such sending) or at such time as delivery is refused by the
addressee upon presentation.
(b) SEVERABILITY. Nothing in this Agreement shall be construed so as to
require the commission of any act contrary to law and wherever this is
a conflict between any provision of this Agreement and any law,
statute, ordinance, order or regulation, the latter shall prevail, but
in such event any provision of this Agreement shall be curtailed and
limited only to the extent necessary to bring it within applicable
legal requirements. If any provision of this Agreement should be
held invalid or unenforceable, the remaining provisions shall be
unaffected by such a holding.
(c) COMPLETE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties relating to the subject matter
hereof, and supersedes any prior understandings, agreements, or
representations by or between the parties, written or oral, relating
to the subject matter hereof. Upon the Effective Date, the Employment
Agreement dated, December 1, 1995 between Octagon, Inc. and the
Employee shall cease to be of any further force or effect, and the
Employee releases the Company, and effective as of the Effective Date,
Octagon, from any claims thereunder.
(d) SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations
of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by way of reorganization,
merger or consolidation and any assignee
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of all or substantially all of its business and assets, but except as
to any such successor or assignee of the Company, neither this
Agreement nor any rights or benefits hereunder may; be assigned by the
Company or the Employee. However, in the event of the death of the
Employee, all rights to receive payments hereunder shall become the
rights of the Employee's estate.
(e) SECTION HEADINGS. The Section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
(f) GOVERNING LAWS. This Agreement shall be governed by and construed in
accordance with the laws of the State as such laws are applied to
contracts entered into and to be performed entirely within the State
of Delaware.
(g) INDEMNIFICATION.
(1) ACKNOWLEDGMENT OF PRIOR STATUS. The parties acknowledge that
Employee has previously acted as the Chief Financial Officer of
Power Systems Energy Services, Inc. and as Chairman of the Board
of Directors, Vice President and Chief Financial Officer of
Octagon, Inc. which will become a wholly owned subsidiary of the
Company on the Effective Date.
(2) UNDERTAKING OF COMPANY. In order to induce Employee to execute
this Agreement, Company agrees to maintain Octagon's present
indemnification obligation to Employee for six years following
the Effective Date.
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IN WITNESS WHEREOF, the parties have executed and delivered the Agreement
on the day and year first above written.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
a Delaware corporation
By:_________________________________________________
____________________________________________________
Address:____________________________________________
____________________________________________
WILLIAM L. AMT
____________________________________________________
Address:
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Exhibit 10.3
EMPLOYMENT AGREEMENT
BETWEEN
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND
HARRY O. CHRISTENSON
THIS AGREEMENT, is made as of the 18th day of November, 1996, between
Conversion Technologies International, Inc., a Delaware corporation (the
"Company") and Harry O. Christenson (the "Employee").
WHEREAS, the parties desire to enter into this Agreement simultaneously
with the execution and delivery of an Agreement and Plan of Reorganization (the
"Merger Agreement") relating to the merger (the "Merger") of Octagon, Inc.
("Octagon") with and into a subsidiary of the Company for the purpose of setting
forth the terms and conditions of the employment relationship of the Employee
with the Company effective upon the date of consummation of the Merger
(hereinafter, the "Effective Date");
WHEREAS, the Board of Directors of the Company (the "Board") has approved
and authorized the entry into this Agreement with the Employee;
NOW, THEREFORE, it is agreed as follows:
1. EMPLOYMENT. From the Effective Date, the Employee shall function as Chief
Financial Officer of the Company. The Employee's duties and
responsibilities shall be consistent with the duties of those performed by
a Chief Financial Officer in a Contemporary Public Company (listed on
NASDAQ) and of a similar size and scale. The Employee shall report to the
President and Chief Operating Officer of the Company, but shall have
complete and unhindered access to the Board of Directors and shall serve at
the discretion of the Audit Committee of the Board of Directors. The
Employee shall devote his best efforts to the Company and his position,
which shall include such additional duties as the Board, directly or
through the President of the Company, may from time to time reasonably
direct and that are reasonably consistent with the Employee's education,
experience and background. During the terms of this Agreement, there shall
be no material increase or decrease in the duties and responsibilities of
the Employee other than as provided herein, unless the parties agree
otherwise in writing. During the term of this Agreement, the Employee
shall not be required to relocate.
2. COMPENSATION.
(a) SALARY. Beginning on the Effective Date, the Company agrees to pay
the Employee during the term of this Agreement a salary at an annual
rate equal to $160,000 per year ($13,333.33 per month payable at the
Company's standard payroll periods). The Employee shall not receive
an annual bonus or an incentive
<PAGE>
bonus, except as may be provided by the Board. The Employee
acknowledges that any and all deferred compensation, bonuses, accrued
but unused vacation or other compensation earned or otherwise to be
received by the Employee as a result of his employment with Octagon,
will have been received or waived by the Employee prior to the
Effective Date (other than the Merger Shares (as defined below) to be
received by the Employee in the Merger), and the Employee hereby
releases the Company (and, effective as of the Effective Date, Octagon
as a subsidiary of the Company) from any liability in connection
therewith.
(b) ADJUSTMENT IN SALARY. The Employee's salary shall be increased at
the discretion of the Compensation Committee of the Board of Directors
of the Company. The salary of Employee shall not be decreased at any
time during the term of this Agreement unless the Employee agrees
otherwise in writing. Participation in deferred compensation,
discretionary bonuses, retirement and other employee benefit plans and
fringe benefits shall not reduce the salary payable to employee.
3. INSURANCE, RETIREMENT AND EMPLOYEE BENEFIT PLANS: FRINGE BENEFITS,
BUSINESS EXPENSES.
(a) BENEFITS AND PRE-REQUISITES. The Employee shall be entitled to
participate in any plan of the Company relating to stock options,
restricted stock, employee stock purchase or ownership, pension,
thrift, profit sharing, group life insurance, medical coverage,
education, or other retirement or employee benefit plans or
arrangements that the Company has adopted or may adopt for the benefit
of its employees or executive officers. The Employee shall also be
entitled to participate in, or enjoy the benefit of, any other fringe
benefits or perquisites that are now or may be or become applicable to
the Company's executive employees (other than paid life insurance,
which was taken on the life of Harvey Goldman as a condition to
consummation of the Company's initial public offering). The Employee
shall also be provided with a car allowance in the amount of $600.00
per month.
(b) BUSINESS EXPENSES. During the term of the Employee's employment by
the Company, the Company shall promptly reimburse the Employee for all
reasonable and customary expenses incurred by the Employee in
performing services for the Company, including all expenses of travel
and living expenses while away from home on business or at the request
of and in the service of the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and
procedures establish by the Company.
(c) STOCK GRANT AND OPTIONS. The Employee shall be entitled to
participate in a Board approved stock option incentive program that is
now or may become applicable to the Company's executive employees.
(d) RELOCATION. The Company recognizes that the Employee was required to
relocate from the Virginia area to the Orlando area in order to
perform the duties of the
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Chairman and Chief Financial Officer of Octagon, Inc. The Employee
will be reimbursed for all reasonable Realtors fees and closing costs
for the sale of the Virginia residence if not sold as of the Effective
Date.
4. TERM. The initial term of this Agreement shall be twelve (12) months from
the Effective Date. This Agreement may not be terminated by the Company
without cause during the first twelve (12) months of the term. Thereafter,
the Company must provide Employee with not less than six (6) months written
notice of intent to terminate the Agreement without cause. This Agreement
shall be automatically renewed for each additional year on each anniversary
date of the Effective Date, unless either party gives contrary written
notice to the other hereto not less than six (6) months before such
anniversary date. The initial term and all such renewal terms are
collectively referred to herein as the term of this Agreement.
5. EMPLOYMENT ESCROW ACCOUNT. The Employee shall deliver 34,560 Merger Shares
(as defined in the Merger Agreement) to the Secretary of the Company to be
held in escrow (the "Employment Escrow Account"). Six months after the
Effective Date, 5,760 of the Merger Shares shall be released to the
Employee. Thereafter, each month for the next five months, an additional
5,760 Merger Shares shall be released to the Employee. Accordingly, the
Employment Escrow Account shall be terminated one year after the Effective
Date. Merger Shares subject to the Employment Escrow Account may not be
sold, assigned, pledged or hypothecated by the Employee until released;
however the Employee shall be entitled to vote such Merger Shares. Any
dividends or other distribution on such shares shall be placed in the
Employment Escrow Account to be released upon release of the Merger Shares.
6. VOLUNTARY ABSENCES: VACATIONS. The Employee shall be entitled, without
loss of pay, to be absent voluntarily for reasonable period of time from
the performance of the duties and responsibilities under this Agreement.
All such voluntary absences shall count as paid vacation time, unless the
Board otherwise approves. The Employee shall be entitled to an annual paid
vacation of at least four weeks per year or such longer period as the Board
may approve. The timing of paid vacations shall be scheduled in a
reasonable manner by the Employee. The Employee shall not be entitled to
receive compensation in lieu of vacation if he is unable to utilize the
full amount of paid vacation time available to him in any year.
7. TERMINATION OF EMPLOYMENT. The Employee's employment may be terminated
without any breach of this Agreement only under the following
circumstances:
(a) DEATH. The Employee's employment shall terminate upon his death.
(b) DISABILITY. The Company may terminate the Employee's employment
because of Disability. For this purpose, "Disability" shall mean the
inability of the Employee to perform his duties under this Agreement
because of physical illness or incapacity for a continuous period of
six months during which the Employee shall
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<PAGE>
have been absent from his duties under this Agreement on a
substantially full-time basis.
(c) CAUSE. The Company may terminate the Employee's employment for Cause.
For purposes of this Agreement, the Company shall have "Cause" to
terminate the Employee's employment only in the event of (1) the
willful and continued failure by the Employee to substantially perform
his duties hereunder (other than any such failure resulting from the
Employee's inability to perform such duties as a result of physical
illness or incapacity or any such actual or anticipated failure after
the delivery of a Notice of Termination, as defined in Sections 7(e),
by the Employee for Good Reason, as defined, in Section 7(d)(2)),
after delivery to the Employee of a written demand for substantial
performance that specifically identifies the manner in which the
Company believes that the Employee has not substantially performed his
duties and a reasonable opportunity to cure; (2) willful misconduct by
the Employee that causes actual and substantial damage to the business
and operations of the Company, the continuation of which, in the
reasonable judgment of the Board, will continue to substantially and
materially damage the Company; or (3) conviction of the Employee of a
felony. The Employee shall not be deemed to have been terminated for
Cause unless the Employee shall have been provided with (i) not less
than 60 days written notice setting forth the reasons that the Company
believes constitute Cause for the termination of his employment; (ii)
a reasonable opportunity to be heard by the Board, after not less than
10 days following the Company's 60 day notice; and (iii) a Notice of
Termination, as defined in Section 7(e), from the Board finding that,
in the reasonable good faith opinion of the Board, Cause for the
termination exists and specifying the particulars thereof in
reasonable detail.
(d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his
employment (a) for Good Reason or (b) for any other reason at any
time, in each case, by giving sixty days prior written notice to the
Company.
For this purpose, "Good Reason" shall mean:
(1) The assignment to the Employee of any duties inconsistent with
the Employee's status as stipulated in Section 1 of this
Agreement or any substantial adverse alteration in the nature or
status of the Employee's responsibilities;
(2) Any change in the Employee's reporting responsibility such that
the Employee is required to report other than to the President
and Chief Operating Officer or the failure of the Employee to
have complete and unhindered access to the Board of Directors or
serve at the discretion of the Audit Committee of the Board of
Directors;
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<PAGE>
(3) Any purported termination of the Employee's employment by the
Company that is not effected pursuant to a Notice of Termination
satisfying the requirements of Sections 7(c) and (e) hereof;
(4) Any other failure by the Company to comply with any material
provision of this Agreement which failure continues for more than
ten days after written notice of such noncompliance from the
Employee; or
(5) Any notice given by the Company to the Employee under Section 4
hereof that this Agreement will not be renewed on any anniversary
date.
(e) NOTICE OF TERMINATION. Any termination of the Employee's employment
by the Company or by the Employee hereto shall be communicated to the
other party by a written Notice of Termination. Any Notice of
Termination given by a party shall specify the particular termination
provision of this Agreement relied upon by such party and shall set
forth in reasonable detail the facts and circumstances relied upon as
providing a basis for the termination under the provision so
specified.
(f) TERMINATION DATE. Termination Date shall mean (1) if the Employee's
employment is terminated by his death, the date of his death; (2) if
the Employee's employment is terminated pursuant to Section 7(b)
hereof, the date specified in the Notice of Termination, which shall
be after the expiration of the six month period specified in that
subsection; (3) if the Employee's employment is terminated by the
Company for Cause, the date specified in the Notice of Termination or
the Board's determination confirming cause as specified in Section
7(c), whichever is later, or (4) if the Employee's employment is
terminated for any other reason, sixty days following the date on
which the Notice of Termination is given.
8. COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(a) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If the Employee's
employment is terminated by the Company for Cause, or by the Employee
other than for Good Reason, the Company shall pay the Employee his
salary through the Termination Date and the Company shall have no
further obligation to the Employee hereunder, except with regard to
obligations owed under Section 2 (b) herein and any other benefits to
which Employee may be entitled, as specified in Section 8(c)(4) below.
Any Merger Shares (and any dividends or other distributions made with
respect thereto) still remaining in the Employee Escrow Account on the
Effective Date of termination pursuant to this Section 8(a) shall be
canceled and/or returned to the Company, and the Employee shall have
no rights therein or thereto; provided, however, that such Merger
Shares shall not be canceled (and shall be released to the Employee)
in the event the Employee voluntarily resigns his employment as the
result of the repeated failure by the Company or its
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<PAGE>
executive officers to follow the lawful and reasonable advice of the
Employee with respect to financial reporting and corporate
disclosures; provided further, however, that (i) such failure could
reasonably be expected to have material adverse impact on the Company,
result in a material misstatement or omission or constitute a
violation of law and (ii) the Employee shall have first advised the
Audit Committee of the Board of Directors of such failure.
(b) TERMINATION BECAUSE OF DISABILITY. If the Employee's employment is
terminated by the Company because of Disability under Section 7(b)
hereof, the employee shall be entitled to the benefits of the then
current disability policies of the Company or Octagon, as applicable,
and any Merger Shares then remaining in the Employee Escrow Account
shall immediately be released to the Employee. The Company will
review the Company's disability policies with respect to its senior
executives in good faith with respect to expanded coverage
opportunities that may be available on satisfactory economic terms.
(c) TERMINATION BECAUSE OF DEATH, WITHOUT CAUSE OR WITH GOOD REASON. If
(i) in breach of this Agreement, the Company shall terminate the
Employee's employment other than (a) for cause or (b) because of
Disability or (ii) the Employee shall terminate his employment for
Good Reason (OTHER THAN PURSUANT TO SECTION 7(D)(5)) or because of his
death, then:
(1) The Company shall pay the Employee or his estate his salary
through the Termination Date and all other unpaid and pro rata
amounts to which the Employee is entitled as of the Termination
Date under any compensation plan or program of the Company,
including, without limitation, any incentive performance bonus
and all accrued vacation time - such payments are to be made in a
lump sum on or before the Termination Date.
(2) The Company will release the balance of the Merger Shares held in
the Employment Escrow Account; which shares shall be released to
the Employee or his estate on the Termination Date (unless said
shares have been released at an earlier time pursuant to Section
5 hereof);
(3) The Company shall pay as liquidated damages to the Employee, and
in lieu of any further salary payments hereunder for periods
after the Termination Date, an amount equal to the Employee's
annual salary, specified in Section 2(a) hereof, which amount
shall be paid in a lump sum no later than fifteen (15) days
subsequent to the Termination Date.
(4) In addition to the liquidated damages amounts that are payable to
the Employee, the following shall apply: (A) the Employee shall
continue to participate in, and accrue benefits under, all
retirement, pension, profit sharing, employee stock, ownership,
thrift, and other deferred
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<PAGE>
compensation plans of the Company for the remaining term of this
Agreement as if the termination of employment of the Employee had
not occurred (with Employee being deemed to receive annually for
the purposes of such plans the Employee's then current salary (at
the time of his termination) under Section 2(a) of this
Agreement), except to the extent that such continued
participation and accrual is expressly prohibited by law, or to
the extent such plan constitutes a "qualified plan" under Section
401 of the Internal Revenue Code of 1986, as amended ("the
Code"), by the terms of the plan, in which case the Company shall
provide the Employee a substantially equivalent, unfunded,
nonqualified benefit; (B) the Employee shall be entitled to
continue to receive all other employee benefits and then existing
fringe benefits referred to in Section 3(a) and (b) hereof for
the remaining term of this Agreement as if the termination of
employment had not occurred; (C) the Company shall, on the
Termination Date, establish an irrevocable trust that meets the
guidelines set forth in Rev. Proc. 92-64 published by the
Internal Revenue Service (as the same may be modified or
supplemented from time to time) (the "Trust"), the assets of
which will be held, subject to the claims of creditors of the
Company, solely to provide for the benefits that the Employee is
entitled to under this Section 8(c)(3); and the Company shall
transfer to the Trust an amount sufficient to provide for such
benefits; and (D) all insurance or other provisions for
indemnification, defense or hold-harmless of officers or
directors of the Company that are in effect on the date the
Notice of Termination is sent to the Employee shall continue for
the benefit of the Employee with respect to all of his acts and
omissions while an officer or director as fully and completely as
if such termination had not occurred, and until the final
expiration or running of all periods of limitation against action
while may be applicable to such acts or omissions; and
(5) The liquidation damages amount and other benefits provided for in
this Section 8(c) shall not be reduced by any compensation or
benefits that the Employee may receive for other employment with
the Company.
(d) COST OF ENFORCEMENT. In the event the employment of the Employee is
terminated by the Company because of Disability or without Cause or by
the Employee for Good Reason, and the Company fails to make timely
payment of the amounts owed to the Employee under this Agreement, the
Employee shall be entitled to reimbursement for all reasonable costs,
including attorney's fees, incurred by the Employee in taking action
to collect such amounts or otherwise to enforce this Agreement, plus
interest on such amounts at the rate of one percent above the prime
rate. (defined as the base rate on corporate loans at large U.S.
money center commercial banks as published by the Wall Street Journal,
compounded monthly, for the period from the date of employment
termination until payment is made to
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<PAGE>
the Employee. Such reimbursement and interest shall be in addition to
all rights to which the Employee is otherwise entitled under this
Agreement.
(e) PARACHUTE PAYMENT LIMITATION. If any payment or benefit to the
Employee under this Agreement would be considered a "parachute
payment" within the meaning of Section 280G9(b)(2) of the Code and if,
after reduction for any applicable federal excise tax imposed by
Section 4999 of the Code (the "Excise Tax") and federal income tax
imposed by the Code, the Employee's net proceeds of the amounts
payable and the benefits provided under This Agreement would be less
than the amount of the Employee's net proceeds resulting form the
payment of the Reduced Amount described below, after reduction for
federal income taxes, then the amount payable and the benefits
provided under this Agreement shall be limited to the Reduced Amount.
The "Reduced Amount" shall be the largest amount that could be
received by the Employee under this Agreement such that no amount paid
to the Employee under this Agreement and any other agreement,
contract, or understanding heretofore or hereafter entered into
between the Employee and the Company (the "Other Agreement") and any
formal or informal plan or other arrangement heretofore or hereafter
adopted by the Company for the direct or indirect provision of
compensation to the Employee (including groups or classes of
participants of beneficiaries of which the Employee is a member),
whether or not such compensation is deferred, is in cash, or is
subject to the Excise Tax. In the event that the amount payable to
the Employee shall be limited to the Reduced Amount, then the
Employee shall have the right, in the Employee's sole discretion, to
designate those payments or benefits under this Agreement, any Other
Agreement, and/or any Benefits Plan, that should be reduced or
eliminated so as to avoid having the payment to the Employee under
this Agreement be subject to the Excise Tax.
9. CONFIDENTIALITY. In consideration of the willingness of the Company to
employ the Employee and the compensation to be paid and benefits to be
received therefore, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Employee agrees
as follows:
(a) THE COMPANY OWNS ALL OF THE EMPLOYEE'S WORK WHICH IS PERFORMED FOR
COMPANY. Company acknowledges that Employee is a full time employee
that work performed by Employee for himself or another employer will
be owned by Company. All improvements, discoveries, inventions,
designs - documents, licenses and patents, or other data devised,
conceived, made, developers, obtained, filed, perfected, acquired, or
first reduced to practice, in whole or in part, or in the regular
course of employment by the Employee during the term of this
Agreement, and related in any way to the business, including
development and research, of the Company or any subsidiary or
affiliate engaged in business substantially similar to that of the
Company shall be promptly disclosed to the Company. The Employee
hereby assigns and transfers to the Company all his right, interest
and title hereto, and such improvements, discoveries, inventions,
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designs, documents, licenses and patents, or other data shall become
the property of the Company. During the term of this Agreement, and
at any time thereafter, upon request of the Company, the Employee will
join and render assistance in any proceedings and execute any papers
necessary to file and prosecute applications for, and to acquire,
maintain and enforce, letters patent, trademarks, registrations and/or
copyrights, both domestic and foreign, with respect to such
improvements, discoveries, inventions, designs, documents, licenses
and patents, or other data as required for vesting and maintaining
title to same in the Company.
(b) NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee agrees and
acknowledges that the term "Confidential and Proprietary Information"
shall mean any and all information not in public domain, in any form,
emanating from or relating to the Company or its subsidiaries and
affiliates, including, but not limited to, trade secrets, technical
information, costs, designs, drawings, processes, systems, methods of
operation and procedures, formulae, test data, know-how, improvements,
price lists, financial data, code books, invoices and other financial
statements, computer programs, discs and printouts, sketches, and
plans (engineering, architectural or otherwise), customer lists,
telephone numbers, names, addresses, information about equipment and
processes (including specifications and operating manuals), or any
other compilation of information written or unwritten that is used in
the business of the Company or any subsidiary or affiliate and that
gives the Company or any subsidiary or affiliate any opportunity to
obtain an advantage over competitors of the Company who do not know or
use such information. The Employee agrees and acknowledges that all
Confidential and Proprietary Information, in any form, and all copies
and extracts thereof, is and are and shall remain the sole and
exclusive property of the Company and, upon termination of his
employment with the Company hereby agrees to return to the Company the
originals and all copies of any Confidential and Proprietary
Information provided to or acquired by the Employee during the period
of his employment. Except as ordered by a court of competent
jurisdiction, the Employee expressly agrees never to disclose to any
person (except to other Company employees, and then only on a "need to
know" basis) or entity any Confidential and Proprietary Information
either during the term of this Agreement or at any time after the
termination of his employment, except with the express written
authorization and consent of the Company.
(c) CUSTOMERS INFORMATION. The Employee understands and acknowledges that
each customer of the Company or its subsidiaries or affiliates will
disclose information will be within the Company's control in
connection with the Company's furnishing of services to its customer.
The Employee covenants and agrees to hold such information in the
strictest confidence and shall treat such information in the same
manner as if such information were "Confidential and Proprietary
Information," as defined herein.
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10. OTHER CONTRACTS. Each party acknowledges that Employee is employed on a
full time basis. The Employee may not accept employment with a third
party or undertake other activities for compensation at any time during the
term of this Agreement which prevent Employee from discharging his duties
hereunder.
11. RESTRICTIVE COVENANT.
(a) The Employee acknowledges and recognizes that during the term
hereof he will be privy to trade secrets and confidential
proprietary information critical to the Business of the Company
and its Affiliates and further acknowledges and recognizes that
the Company would find it extremely difficult to replace the
Employee. Accordingly, if the Employee terminates his employment
without a Good Reason, or the Company terminates the Employee for
Cause, the Employee shall not, during the term hereof and for the
one-year period following termination, (i) directly or indirectly
engage in, represent in any way, or be connected with, any
business (such business being referred to herein as a "Competing
Business") competing with the business of the Company or any of
its Affiliates within any state or country in which the Company
or any such Affiliate transacts business, whether such engagement
shall be as an officer, director, owner, employee, partner,
Affiliate or other participant in any Competing Business, (ii)
assist others in engaging in any Competing business in the manner
described in clause (i) above, (iii) induce any employees of the
Company or any of its Affiliates to terminate their employment
with the Company or any such Affiliate, or to engage in any
Competing Business, or (iv) induce any entity or person with
which the Company or any of its Affiliates has a business
relationship to terminate or alter such business relationship;
provided, however, that nothing contained in this Section 11(a)
shall prevent, restrain or otherwise restrict the Employee from
owning 5% or less of any class of securities of any competitor of
the Company so long as such securities are listed for trade by
NASDAQ in the over-the-counter market or are traded on an
organized securities exchange.
(b) The Company and the Employee expressly acknowledge and agree that
no restrictive covenants will be imposed upon the Employee if the
Employee terminates his employment for Good Reason or the Company
terminates the Employee without Cause. If the Company allegedly
terminates the Employee "For Cause" and the Employee does not
agree with such allegation, no restrictive covenants shall be
imposed upon the Employee unless and until a judicial decision
finds that the Company was justified in terminating the Employee
"For Cause."
(c) The Employee understands that the foregoing restrictions may
limit his ability to earn a livelihood in a business similar to
the Business of the
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Company and its Affiliates, but he nevertheless believes that he
has received and will receive sufficient consideration and other
benefits as an employee of the Company as provided hereunder, to
justify clearly such restrictions. The Company reserves the
right to provide additional compensation to Employee to the
extent necessary to enforce this restrictive covenant.
12. AMENDMENTS OR ADDITIONS: ACTION BY BOARD. No amendments or additions to
the Agreement shall be binding unless in writing and signed by all parties
hereto. The prior approval by a two-thirds affirmative vote of the full
Board shall be required in order for the Company to authorize any
amendments or additions to this Agreement, to give any consents or waivers
of provisions of the Agreement, or to take any other action under this
Agreement including any Notice of Termination.
13. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be personally delivered or mailed by first class
registered or certified mail, postage prepaid, return receipt
requested, or transmitted by facsimile, telegram or telex addressed to
the Company or the Employee at the addresses set forth on the
signature page of this Agreement, or at such other address as such
party may designate by ten days advance written notice to the other
party.
Each notice or communication that shall have been transmitted in the
manner described above, or that shall have been delivered to a
telegraph company, shall be deemed sufficiently given, served, sent or
received for all purposes at such time as it is sent to the addressee
(with return receipt, delivery receipt or (with respect to a telex)
the answer back being deemed" conclusive, but not exclusive, evidence
of such sending) or at such time as delivery is refused by the
addressee upon presentation.
(b) SEVERABILITY. Nothing in this Agreement shall be construed so as to
require the commission of any act contrary to law and wherever this is
a conflict between any provision of this Agreement and any law,
statute, ordinance, order or regulation, the latter shall prevail, but
in such event any provision of this Agreement shall be curtailed and
limited only to the extent necessary to bring it within applicable
legal requirements. If any provision of this Agreement should be
held invalid or unenforceable, the remaining provisions shall be
unaffected by such a holding.
(c) COMPLETE AGREEMENT. This Agreement contains the entire agreement and
understanding between the parties relating to the subject matter
hereof, and supersedes any prior understandings, agreements, or
representations by or between the parties, written or oral, relating
to the subject matter hereof. Upon the Effective Date, the Employment
Agreement dated, December 1, 1995 between Octagon, Inc. and the
Employee shall cease to be of any further force or effect,
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and the Employee releases the Company, and effective as of the
Effective Date, Octagon, from any claims thereunder.
(d) SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations
of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by way of reorganization,
merger or consolidation and any assignee of all or substantially all
of its business and assets, but except as to any such successor or
assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may; be assigned by the Company or the Employee.
However, in the event of the death of the Employee, all rights to
receive payments hereunder shall become the rights of the Employee's
estate.
(e) SECTION HEADINGS. The Section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
(f) GOVERNING LAWS. This Agreement shall be governed by and construed in
accordance with the laws of the State as such laws are applied to
contracts entered into and to be performed entirely within the State
of Delaware.
(g) INDEMNIFICATION.
(1) ACKNOWLEDGMENT OF PRIOR STATUS. The parties acknowledge that
Employee has previously acted as the Chief Financial Officer of
Power Systems Energy Services, Inc. and as Chairman of the Board
of Directors, Vice President and Chief Financial Officer of
Octagon, Inc. which will become a wholly owned subsidiary of the
Company on the Effective Date.
(2) UNDERTAKING OF COMPANY. In order to induce Employee to execute
this Agreement, Company agrees to maintain Octagon's present
indemnification obligation to Employee for six years following
the Effective Date.
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IN WITNESS WHEREOF, the parties have executed and delivered the Agreement
on the day and year first above written.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
a Delaware corporation
By:_________________________________________________
____________________________________________________
Address:____________________________________________
____________________________________________________
HARRY O. CHRISTENSON
____________________________________________________
Address: 1584 Rockdale Loop
Heathrow, Florida 32746
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LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is entered into as of September 19, 1996 between Conversion
Technologies International, a Delaware corporation (hereinafter called
"Lender"), and Octagon, Inc., a Delaware corporation with its executive
office at 317 S North Lake Blvd., Suite 1024, Altamonte Springs, FL, 32701
and its wholly owned subsidiary Power Systems Energy Services, Inc. a
Delaware corporation with its executive office at 317 S. North Lake Blvd.,
Suite 1024, Altamonte Springs, FL 32701 (together the "Borrower"),
WHEREAS, Borrower desires to obtain a loan from Lender on the terms and
conditions herein set forth and Lender is willing to make a loan to Borrower
on the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the premises set forth above the
terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged
Lender and Borrower agree as follows:
1. DEFINITIONS
1.1 "ACCOUNTS" shall mean all of Borrower's presently existing and
hereafter arising accounts, instruments, contract rights, documents and
chattel paper.
1.2 "ACCOUNT DEBTOR" shall mean any "Person" (as defined below) who is
or who may become obligated to Borrower under, with respect to, or on account
of an Account.
1.3 "AFFILIATE" shall mean (a) any Person (other than Lender) which,
directly and/or indirectly, owns or controls, on an aggregate basis,
beneficially or of record (including all beneficial ownership and ownership
or control as a trustee, guardian or other fiduciary) at least 10 percent
(10%) of the outstanding capital stock having ordinary voting power to elect
a majority of the board of directors (irrespective of whether, at the time,
stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency) of Borrower
or Lender, as applicable, (b) any "Subsidiary" (as defined below) of Borrower
or Lender, as applicable, (c) any Person which is controlled by or is under
common control with Borrower or Lender, as applicable, or (d) any
stockholders of any of the foregoing. For the purpose of this definition,
"control" means the possession, directly or indirectly, of the power to
direct or cause the direction of management and policies, whether through the
ownership of voting securities, by contract or otherwise.
1.4 "AGREEMENT" shall mean this Loan and Security Agreement, any
concurrent or subsequent rider to this Loan and Security Agreement and any
extensions, supplements, amendments or modifications to this Loan and
Security Agreement and any such rider thereto.
1.5 "BORROWERS BOOKS" shall mean all of Borrower's books and records
including but not limited to: ledgers; records indicating, summarizing or
evidencing Borrower's assets, including its Accounts, business operations or
financial condition; and computer-prepared information and equipment of any
kind.
1.6 "BUSINESS DAY" shall mean any day not a Saturday, Sunday or legal
holiday in the State of New York.
1.7 "COLLATERAL" shall mean all of Borrower's Accounts, "Inventory"
(as defined below) "Equipment" (as defined below), "General Intangibles" (as
defined below) and all property of Borrower in the possession or under the
control of Lender, any Affiliate of Lender, any bailee of
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Lender or any bailee of any Affiliate of Lender (whether now owned or
existing or hereafter acquired or arising or in which Borrower now has or may
hereafter acquire any rights) and all accessions to, substitutions for and
all replacements, proceeds (including, without limitation, proceeds of any
insurance policies) and products of all such Accounts, Inventory, Equipment,
General Intangibles and property and all Borrower's Books related to any of
the foregoing, together with all of Borrower's right, title and interest in
and to any deposits or other sums at any time credited by or due from any
Affiliate of Lender to Borrower.
1.8 "EQUIPMENT" shall mean all of Borrower's now owned or hereafter
acquired fixtures and equipment, including, without limitation, furniture,
vehicles and trade fixtures, together with all accessions thereto and all
substitutions and replacements thereof and parts therefor.
1.9 "EVENT OF DEFAULT" shall have the meaning set forth in Section 6
below.
1.10 "GENERAL INTANGIBLES" shall mean all chooses in action, causes of
action and all other intangible personal property of Borrower of every kind
of nature (other than Accounts) now owned or hereafter acquired by Borrower,
including, without limitation, corporate or other business records, deposit
accounts, inventions, designs, patents, patent applications, patent rights,
trademarks, trademark applications, trade names, service marks, service mark
applications, trade secrets, good will, copyrights, computer programs, and
other computer software, proprietary processes and formulae, registrations,
licenses, franchises, tax refund claims and any letters of credit, guarantee
claims, security interests or other security held by or granted to Borrower
to secure payment by an Account Debtor of any of the Accounts.
1.11 "INVENTORY" shall mean any and all goods, merchandise and other
personal property (including without limitation, goods in transit),
wheresoever located and whether now owned or hereafter acquired by Borrower
which is or may at any time be held for sale or lease, furnished under any
contract of service or held as raw materials, work in process, supplies or
materials used or consumed in Borrower's business, and all such property the
sale or other disposition of which has given rise to Accounts and which has
been returned to or repossessed or stopped in transit by Borrower.
1.12 "LENDER'S COSTS" shall mean all costs, fees and expenses incurred
by Lender in connection with this Agreement or any of the Other Agreements
(as defined below), including without limitation, taxes of every nature and
kind of Borrower paid by Lender in protection of its interests hereunder,
filing, recording, publication and search fees in connection with this
Agreement paid by Lender, costs incurred by Lender in collecting the
Accounts, with or without suit, costs incurred by Lender in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale and advertising to sell the Collateral, whether or not a
sale is consummated; costs of suit incurred by Lender in enforcing or
defending this Agreement or any portion hereof; and reasonable attorneys and
paralegals' fees and expenses incurred by Lender in drafting, reviewing,
enforcing, defending or obtaining legal advice with respect to this Agreement
or any of the Other Agreements or any portion thereof, whether or not suit is
brought.
1.13 "LETTER OF INTENT" shall mean the Letter of Intent dated August
13, 1996, as amended, between Lender and Borrower.
1.14 "LIEN" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), or preference,
priority or other security agreement or preferential arrangement of any kind
or nature whatsoever (including, without limitation, any conditional sale or
other title retention agreement, any financing lease having substantially the
same economic effect as any of the foregoing), and the filing of any
financing statement under the Uniform Commercial Code as the same may from
time to time be in effect in
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the states of Florida, Ohio and Virginia (collectively, the "Code") or
comparable laws of any jurisdictions.
1.15 "MERGER AGREEMENT" shall mean the Agreement and Plan of
Reorganization contemplated by the Letter of Intent to be entered into
between the Lender and the Borrower to effect the proposed merger.
1.16 "OBLIGATIONS" shall mean all of Borrower's liabilities,
obligations and indebtedness to Lender or any Affiliate of Lender of any and
every kind and nature (including, without limitation, Lender's Costs,
interest, charges, expenses, attorneys fees and other sums chargeable to
Borrower by Lender or any Affiliate of Lender and future advances made to or
for the benefit of Borrower), whether arising under this Agreement, under any
of the Other Agreements or acquired by Lender or any Affiliate of Lender from
any other source, whether heretofore, now or hereafter owing, arising, due or
payable from Borrower to Lender or any Affiliate of Lender and howsoever
evidenced, created, incurred, acquired or owing, whether primary, secondary,
direct, contingent, fixed, or otherwise, including obligations of performance
and forbearance.
1.17 "OTHER AGREEMENTS" shall mean all "Supplemental Documentation" (as
defined below) and all agreements, instruments and documents, including,
without limitation, notes, guaranties, mortgages, deed of trust, chattel
mortgages, pledges, powers of attorney, consents, assignments, contracts,
notices, security agreements, leases, financing statements, subordination,
agreements, trust account agreements and all other written matter whether
heretofore, now, or hereafter executed by or on behalf of Borrower or any
other Person and/or delivered to Lender or any Affiliate of Lender with
respect to this Agreement or any other agreement between Lender and Borrower
or with respect to the financing by Borrower or any Affiliate of Borrower.
1.18 "PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, associations
corporation, institutions entity, party or government (whether national,
Federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department
thereof).
1.19 "SUBSIDIARY" shall mean any corporation of which fifty percent
(50%) or more of the outstanding capital stock having ordinary voting power
to elect a majority of the board of directors of such corporation
(irrespective of whether, at the time, stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time, directly or indirectly, owned
beneficially or of record by Lender or Borrower, as applicable.
1.20 "SUPPLEMENTAL DOCUMENTATION" shall mean any and all agreements,
instruments, documents, financing statements, warehouse receipts,
certificates of title, bills of lading, notices of assignment of accounts,
schedules of accounts assigned, mortgages and other written matter necessary
or requested by Lender to perfect and maintain perfected Lender's security
interest in the Collateral.
1.21 "OTHER TERMS" Any and all terms used in this Agreement shall be
construed and defined in accordance with the meaning and definition of such
terms under and pursuant to the Code.
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2. LOAN AND TERMS OF PAYMENT
2.1 LOAN. Subject to the terms and conditions hereof, on the date
hereof Lender is making a loan to Borrower in the principal amount of
$250,000 (the "Loan") by Purchasing a secured promissory note of Borrower in
substantially the form of Exhibit A attached hereto in the principal amount
of $250,000 (the "Note") at a closing (the "Closing") to be held on the date
hereof. The Note shall be payable as to principal and interest as set forth
therein, subject to acceleration thereof upon the occurrence of an Event of
Default, and shall bear interest as set forth in Section 2.4 hereof.
2.2 CLOSING, ISSUANCE OF NOTE. The Loan to be made by Lender shall be
made by wire transfer to Borrower against delivery to Lender of a Note in the
principal amount of $250,000.
2.3 TIME AND PLACE OF CLOSING. The Closing hereunder shall be held at
the offices of Borrower simultaneously with the execution and delivery of
this Agreement.
2.4 INTEREST ON LOAN. The Loan shall bear interest on the principal
amount outstanding from time to time at an annual rate equal to 8.25%
(computed on the basis of the actual number of days lapsed in a year of 360
days).
2.5 PREPAYMENT OF LOAN. Borrower shall have the right at any time and
from time to time to prepay the Loan, in whole or in part, without premium or
penalty, upon at least three business Days' prior written notice to Lender,
PROVIDED, HOWEVER that (i) each such partial prepayment shall be in the
principal amount of not less than $10,000, and (ii) the Loan must be prepaid
in full in the event that the Borrower consummates an Acquisition Transaction
(as defined in the Letter of Intent) with a party other than Lender,
simultaneously with the closing of such Acquisition Transaction. Each notice
of prepayment shall specify the prepayment date and the principal amount of
the Loan to be prepaid, shall be irrevocable and shall commit Borrower to
prepay the Loan by the amount stated therein on the date stated therein. All
prepayments shall be accompanied by accrued interest on the principal amount
being prepaid to the date of prepayment.
3. SECURITY INTEREST; COLLATERAL
3.1 GRANT OF SECURITY INTEREST. As collateral security for the prompt
and complete payment and performance when due of all of the Obligations of
Borrower hereunder and in order to induce Lender to enter into this
Agreement, Borrower hereby grants to Lender an irrevocable and unconditional
security interest in all Borrower's right, title and interest in, to and
under all of the Collateral. Lender acknowledges that its security interest
shall be second in priority to Foothill Capital, and in accordance with the
terms of the intercreditor agreement entered into between Lender and Foothill
Capital dated the date hereof.
3.2 SUPPLEMENTAL DOCUMENTATION. Borrower shall execute and deliver to
Lender concurrently with Borrower's execution of this Agreement, and at any
time or times hereafter at the request of Lender, all Supplemental
Documentation requested by Lender. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. Borrower shall
make appropriate entries in Borrower's Books disclosing Lender's security
interest in the Accounts.
3.3 COLLATERAL; ACCOUNTS: Promptly at such intervals as Lender may from
time to time specify, Borrower shall provide Lender with schedules describing
all Accounts created or acquired by Borrower. Borrower's failure to execute
and deliver such schedules shall not affect or limit Lender's security
interest and other rights in and to the Accounts.
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3.4 RETURNS AND DISPUTES: Returns and allowances between Borrower and
its Account Debtors will be in accordance with the usual and customary
practices of the Borrower. Borrower shall promptly notify Lender of all
returns and recoveries and, on request, deliver the returned inventory to
Lender. Borrower shall also promptly notify Lender of all disputes and claims
other than in accordance with the usual and customary practices of the
Borrower and settle or adjust them on terms approved by Lender. After the
occurrence of an Event of Default, no discount, credit or allowance shall be
granted to any Account Debtor by Borrower and no return of Inventory shall be
accepted by Borrower without Lender's consent.
3.5 SALE OF INVENTORY: Until an Event of Default occurs, Borrower may
sell inventory in the ordinary course of its business (which does not include
a transfer in partial or total satisfaction of a debt or other obligation).
3.6 POWER OF ATTORNEY. After the occurrence of an Event of Default
Borrower appoints Lender or any other person whom Lender may designate as
Borrower's attorney, with power to: (a) endorse Borrower's name on any
checks, notes, acceptances, money orders, drafts or other forms, of payment
or security that may come into Lender's possession; (b) sign Borrower's name
on any invoice or bill of lading relating to any Accounts, on drafts against
customers, on schedules and assignments of Accounts, on verifications of
Accounts and on notices to Account Debtors; (c), notify the post office
authorities to change the address for delivery of Borrower's mail to an
address designated by Lender, (d) receive, open and distribute all mail
addressed to Borrower, retaining all mail relating to Collateral and
forwarding all other mail to Borrower, (e) settle or adjust disputes and
claims directly with Account Debtors for amounts and upon terms which Lender
considers reasonable under the circumstances and in such cases Lender may
execute and cause to be delivered any and all documents and releases which
Lender may deem necessary or desirable and Lender will credit Borrower's loan
account with Lender with only the net amounts received by Lender in payment
of the Accounts, after deducting all Lender's Costs in connection therewith;
(f) send requests for Verification of Accounts and to do all things necessary
to carry out this Agreement; and (g) take any other actions necessary to
carry out the terms and provisions of this Agreement. Borrower ratifies and
approves all acts of the attorney. Neither Lender nor its attorney will be
liable for any acts or omissions or for any error of judgment or mistake of
fact of law taken in good faith in accordance with the terms of this Agreement
and in the absence of willful misconduct. This power is coupled with an
interest, and is irrevocable until all of the obligations have been fully
satisfied.
3.7 RELEASE OF COLLATERAL. Upon payment in full of all of the
Obligations Lender shall reassign to Borrower all Collateral held by Lender,
and shall execute a termination of all security agreements and security
interests given by Borrower to Lender.
4. CONDITIONS OF LENDING
The commitment of Lender to make the Loan hereunder is subject in all
respects to the accuracy, as of the date of Closing, of the representations
and warranties of Borrower contained in Sections 5.1 and 5.2 hereof and to
the performance by Borrower of its Obligations to be performed hereunder on
or prior to the date of the Closing.
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5. WARRANTIES, REPRESENTATIONS AND COVENANTS
5.1 EQUIPMENT REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower
represents, warrants and covenants that:
(a) Borrower shall keep the equipment (except for equipment which is
in transit) only at the locations listed on Exhibit B attached hereto and
made a Part hereof;
(b) All of the equipment in and shall remain free from all purchase
money or other security interests, liens or encumbrances, except those held
by Lender,
(c) Borrower shall keep correct and a accurate, records itemizing and
describing the kind, type and quantity of the equipment;
5.2 GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower
represents, warrants and covenants that:
(a) Borrower is and shall at all times hereafter be a corporation duly
organized and validly existing in good standing under the laws of the State
of Delaware and qualified and licensed to do business in all other states in
which the conduct of its affairs or the ownership of its assets requires such
qualification;
(b) Borrower has the right and power and is duly authorized to execute
and deliver this Agreement and the Other Agreements and to perform all of its
obligations hereunder and thereunder;
(c) The execution and delivery by Borrower of this Agreement and the
other Agreements shall not constitute a breach of any provision contained in
Borrower's Certificate of Incorporation or By-Laws;
(d) Borrower's executive office is located at the address described in
the preamble to this Agreement and Borrower will not, during the term of this
Agreement, without prior written notification of Lender, relocate said
executive office;
(e) The execution, delivery and performance by Borrower of all of the
terms and provisions contained in this Agreement and the other Agreements
shall not, by the lapse of time, the giving of notice or otherwise,
constitute a violation of any applicable law or a breach of any provision
contained in any agreement, note, indenture or other instrument to which
Borrower is now or may hereafter become a party or by which Borrower is now
or may hereafter be bound;
(f) All assessments and taxes, whether real, personal or otherwise due
or payable by, or imposed, levied or assessed against borrower or any of its
property shall be paid in full, before delinquency; Borrower shall make due
and timely payment or deposit of all federal, state and local taxes,
assessments or contributions required of it by law, and will execute and
deliver to Lender, on demand, appropriate certificates attesting to the
payment or deposit thereof Borrower will make timely payment of deposit of
all F.I.C.A. payments and withholding taxes required of by applicable laws,
and will upon request furnish Lender with proof satisfactory to it that
Borrower has made such payments or deposits;
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(g) There are no actions or proceedings pending by or against Borrower
or before any court or administrative agency and Borrower has no knowledge of
any pending, threatened or imminent litigation, governmental investigations or
claims, complaints, actions or prosecutions involving Borrower or any
guarantor of Borrower, except as specifically disclosed in Borrowers audited
financial statements for the year ended December 31, 1995 and as heretofore
specifically disclosed in writing to Lender; if any of the foregoing arise
during the term of this Agreement, Borrower shall, immediately notify Lender
in writing;
(h) Borrower, subject to its loan and security agreement with Foothill
Capital, has, and shall at all times hereafter have, good and indefeasible
title to the Collateral; and,
(i) The Collateral is adequately insured against loss by fire,
explosion, theft and such other casualties, hazards and risks as are usually
insured against by companies of comparable size and financial condition
engaged in the same or similar business,
(j) Borrower shall not at any time while the Loan or any part thereof
is outstanding grant to any party other than Foothill Capital a security
interest in any of its assets which ranks on a parity with or senior to the
security interest granted to the Lender hereby.
5.3 INSURANCE. Borrower, at its expense shall keep and maintain (i) the
Collateral insured for the full insurable value thereof against loss or
damage by fire, flood, earthquake, burglary, loss in transit, theft,
explosion, sprinkler, and such other hazards and risks ordinarily insured
against by other owners who use such properties in similar businesses for the
full insurable value thereof, and (ii) business interruption insurance and
public liability and property damage insurance relating to Borrower's
ownership and use of the collateral and its other assets. All such policies
of insurance maintained pursuant to this Agreement shall be in such form,
with such companies and in such amounts as may be satisfactory to Lender,
which Lender acknowledges to be satisfactory having review such policies in
connection with the contemplated Merger Agreement.
5.4 REPORTING; INSPECTION OF PREMISES. Borrower at all times hereafter
shall: (a) maintain a standard and modern system of accounting in accordance
with generally accepted accounting principles consistently applied, together
with ledger and sub-ledgers and/or computer tapes and computer discs,
computer printouts and computer records pertaining to the Accounts which
contain information as may from time to time be requested by Lender; (b)
permit Lender and any of its employees, officers or agents, upon demand,
during Borrower's usual business hours, or the usual business hours of third
persons having control of any of Borrower's Books, to have access to and
examine all of Borrower's Books relating to the Accounts, the Obligations,
Borrower's financial condition and the results of Borrower's operations, and
in connection therewith, permit Lender or any of its agents, employees or
officers to copy and make extracts therefrom; (c) promptly supply Lender with
such other information concerning its affairs as Lender may reasonably
request from time to time hereafter, and (d) promptly notify Lender of any
material adverse change in Borrower's financial condition and of any
condition or event which constitutes an Event of Default.
5.5 SURVIVAL OF WARRANTIES AND REPRESENTATION. Borrower covenants,
warrants and represents to Lender that all representations and warranties of
Borrower contained in this Agreement and the Other Agreements shall be true
at the time of Borrower's execution of this Agreement, and the Other
Agreements, and shall survive the execution, delivery and accepted hereof and
thereof by the parties hereto and thereto and the closing of the transactions
described herein and therein or related hereto and thereto. Borrower and
Lender expressly agree that any misrepresentation or breach of any warranty
whatsoever contained in this Agreement or the Other Agreements shall be
deemed material.
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6. EVENTS OF DEFAULT
Any one or more of the following events ("Events of Default") shall
constitute a default under this Agreement:
(a) Borrower or any Affiliate of Borrower fails or neglects to
perform, keep or observe any term, provision, condition, covenant,
agreement, warranty or representation contained in this Agreement or
any of the Other Agreements, including, without limitation, any term,
provision or condition contained in any promissory note now or hereafter
executed by Borrower and delivered to Lender to evidence a portion of
the obligations.
(b) Any representation statement, report or certificate made or
delivered by Borrower or any Affiliate of Borrower or any of their
respective officers, employees or agents to Lender hereunder or under
any of the Other Agreements was not true and correct.
(c) Borrower fails to pay any of the Obligations when due and
payable or declared due and payable, or Borrower is in material default
or commits a material breach under the terms of the Letter of Intent or
the Merger Agreement and such default is not cured (if curable) within
ten (10) days following notice thereof.
(d) Borrower fails to pay any account payable, excluding the work
out accounts payable previously disclosed to Lender by Borrower, in
excess of $10,000 when due and such failure continues for more than thirty
(30) days.
(e) A material portion of Borrower's assets are attached, seized,
subjected to a writ or distress warrant, or are levied upon, or come
into the possession of, any judicial officer or assignee and the same
are not released, discharged or bonded against within thirty (30) days
thereafter.
(f) Any proceeding is filed or commenced by or against Borrower for
its dissolution or liquidation and is not dismissed within thirty (30)
days.
(g) Borrower is enjoined, restrained or in any way prevented by
court order from continuing to conduct all or any material part of its
business affairs.
(h) A notice of lien, levy or assessment with respect to a claim in
excess of ten thousand dollars ($10,000.00) is filed or record with
respect to any or all of Borrower's assets by the United States
Government, or any departments agency, or instrumentality thereof, or by
any state, county, municipal or other governmental agency, or any taxes or
debts owing at any time or times hereafter to any one or more of such
entities becomes a lien or encumbrance upon the collateral or any of the
Borrower's other assets and the same is not released within ten (10)
days after the same becomes a lien or encumbrance.
(i) A judgment or court order for payment of money in excess of
ten thousand dollars ($10,000.00) or any other claim becomes a lien or
encumbrance upon any or all of Borrower's assets and the same is not
satisfied, dismissed or bonded against within ten (10) days thereafter.
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(j) Borrower fails to provide Lender with any reasonably requested
information or financial data pertaining to the Collateral, Borrower's
financial condition or the results of Borrower's operations.
(k) A default shall occur under any agreement, document or
instrument for goods purchased, money borrowed or property leased, other
than this Agreement, now or hereafter existing to which Borrower is a
party.
(l) Any misrepresentation or omission now or hereafter exists in
any warranty or representation made herein or in any of the other
Agreements by any officer or director individually or as an officer or
director of Borrower, or any such warranty or representation is withdrawn
by any officer or director.
(m) Borrower is unable at any time or times hereafter, whether by
court order or otherwise, to perform and satisfy all provisions,
warranties, terms and conditions contained herein which are required by
Lender to be performed and satisfied hereunder.
(n) An application is made by Borrower for the appointment of a
trustee or custodian for the Collateral or any other of Borrower's
assets.
(o) An application is made by any Person, other than Borrower for
the appointment of a trustee or custodian of the Collateral or any other
of Borrower's assets and the same is not dismissed within thirty (30) days
after the application therefor.
7. LENDER'S RIGHTS AND REMEDIES
7.1 LENDER'S RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default, Lender may at its election and without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare the obligations, whether evidenced by installment notes,
demand notes or otherwise, immediately due and payable, without any
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived.
(b) Terminate this Agreement as to any future liability or obligation
of Lender, but without affecting the Obligations or Lender's rights and
security interests in the Collateral.
(c) Without notice to or demand upon Borrower or any guarantor, make
such payments and do such acts as Lender considers necessary or reasonable
to protect its security interest in the Collateral. Borrower authorizes
Lender to enter the premises where the Collateral is located, take
possession of the Collateral, or any part of it, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which in the opinion
of Lender appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith.
(d) Ship reclaim recover, store, finish, maintain and repair the
collateral, and prepare the Collateral for sale.
9
<PAGE>
(e) Sell the Collateral at either a public or private sale, or both, by
way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as is
commercially reasonable in the opinion of Lender, the Collateral need not
be present at any such sale.
(f) Purchase all or any portion of the Collateral at any public sale
thereof.
(g) Require Borrower to take any or all of the following actions:
pledge assemble and deliver the Inventory to Lender or to a third party
as Lender's bailee; or hold the same in trust for Lender's account; or
store the same in a warehouse in Lender's name; or deliver to Lender
documents of title representing said inventory; or evidence Lender's
security interest in any other manner acceptable to Lender.
7.2 NOTICE OF DISPOSITION OF COLLATERAL. Lender shall (unless notice has
been waived after an Event of-default pursuant to the provisions of the Code)
give notice of the disposition of the Collateral as follows;
(a) Lender shall give the Borrower and each holder of a security
interest in the Collateral who has filed with Lender a written request
for notice, a notice in writing of the time and place of public sale or,
if the sale is a private sale or some other disposition other than a
public sale is to be made of the Collateral, the time on or after which
the private sale or other disposition is to be made,
(b) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower's address set forth in Section 10 of this Agreement
at least five (5) days before the date fixed for the sale, or at least
five (5) days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or
threatens to decline speedily in value. Notice to persons other than
Borrower claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Lender,
(c) If the sale is to be public sale, Lender shall also give
notice of the time and place by publishing a one-time notice at least
ten (10) days; before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held.
7.3 DEFICIENCIES. Any deficiency which exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned to Borrower by Lender.
7.4 RIGHTS AND REMEDIES CUMULATIVE. Lender's rights and remedies under
this Agreement and the Other Agreements shall be cumulative. Lender shall
have all other rights and remedies not inconsistent herewith as provided by
law or in equity. No exercise by Lender of one right or remedy shall be
deemed an election, and no waiver by Lender of any default on Borrower's part
shall be deemed a continuing waiver. No delay by Lender shall constitute a
waiver, election or acquiescence by it.
10
<PAGE>
8. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY
-------------------------------------------------
If Borrower fails to pay any assessments, taxes, contributions, or make
any deposits, or furnish any required proof thereof as met forth in
Section 5.2(f) above or in any other provision of this Agreement, Lender may,
in its sole and absolute discretion and without notice to Borrower, (a) make
payment of the same or any part thereof, or (b) set up such reserves in
Borrower's account as Lender deems necessary to satisfy the liability
therefor, or both, if Borrower fails to pay promptly when due, to any other
person or entity, monies which Borrower is required to pay by reason of any
provision in this Agreement, Lender may, but need not, pay the same and
charge Borrower's account therefor, and Borrower shall promptly reimburse
Lender. All such sums shall constitute part of the Obligations, shall bear
interest at the rate herein above provided, shall be secured by all
Collateral and shall constitute Lender's costs. Any payment made by Lender
shall not constitute (a) an agreement by it to make similar payments in the
future, or (b) a waiver by Lender of any Event of Default. Lender need not
contest nor inquire as to the validity of any such expense, tax, security
interest, encumbrance or lien, and the receipt of the usual official notice
for the payment thereof shall be conclusive evidence that the same was
validly due and owing.
9. WAIVERS BY BORROWER
-------------------
9.1 APPLICATION OF PAYMENTS AND COLLECTIONS. Borrower agrees that checks
and other instruments received by Lender in payment or on account of the
Obligations constitute only conditional payment until such items are actually
paid to Lender, Borrower waives the right to direct the application of any
payments at any time or times received by Lender on account of the
Obligations and Borrower agrees that Lender shall have the continuing
exclusive right to apply and reapply such payments in any manner as Lender
may deem advisable.
9.2 BORROWER'S WAIVERS. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
documents, instruments, chattel paper and guaranties at any time held by
Lender an which Borrower may in any way be liable except as required hereby.
Borrower waives any right to trial by jury in any action or proceeding
relating to this Agreement or the other Agreements or any transactions
thereunder.
9.3 RISK OF LOSS. Lender shall not in any way or manner be liable or
responsible for (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
10. NOTICES
-------
Unless otherwise provided in this Agreement any notice required
hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered upon deposit in the
11
<PAGE>
United States mails, with proper postage prepaid, and addressed to the party
to be notified as follows:
(A) If to Lender, to:
Conversion Technologies International, Inc.
82 Bethany Road, Suite 6
Hazlet, NJ 07730
Attention: General Counsel
(B) If to Borrower, to:
Octagon, Inc.
317 S. North Lake Blvd.
Altamonte Springs, FL 32701
Attention: Chief Financial Officer
or to such other address as each party may designate for itself by like
notice.
11. GENERAL PROVISIONS
------------------
11.1 LENDER'S COSTS. Borrower shall immediately, and without demand,
reimburse Lender for all sums expended by Lender in connection with the
filing of any third party claim(s) as to the Collateral or any part thereof,
which Lender may deem necessary or desirable or in connection with any action
brought by Lender to correct any Event of Default or enforce any provision of
this Agreement, including attorneys' and paralegals, fees and expenses and
court costs. Borrower authorizes and approves all advances and payments by
Lender for items described in this Agreement as Lender's Costs. Borrower
agrees to pay promptly, upon demand by Lender, all Lender's Costs.
11.2 PARTIES; ASSIGNMENTS. This Agreement shall bind, and inure to the
benefit, of the respective successors and assigns of each of the parties
hereto; PROVIDED, HOWEVER, Borrower may not assign this Agreement or any
rights hereunder without Lender's prior written consent and any prohibited
assignment shall be absolutely void. No consent to any assignment by Lender
shall release Borrower from its obligations to Lender. Lender may at any time
sell, assign, transfer, grant participations in or otherwise dispose of this
Agreement and its rights and duties hereunder. Any such purchaser, assignee,
transferee or participant shall have all the rights of Lender hereunder.
11.3 SECTION TITLES. Section headings and section numbers have been set
forth herein for convenience only; unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this
entire Agreement.
11.4 CONSTRUCTION OF AGREEMENT. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Lender
or Borrower, whether under any rule of construction or otherwise; on the
contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words
used so as to fairly accomplish the purposes and intentions of all parties
hereto. When permitted by the context, the singular includes the plural and
vice versa.
12
<PAGE>
11.5 GOVERNING LAW. The validity of this Agreement, its construction,
interpretation and enforcement and the rights of the parties hereunder
concerning the Collateral, shall be determined under and according to the
internal laws of the State of Delaware.
11.6 SEVERABILITY. Each provision of this Agreement shall be severable
from every other provision of this Agreement for the purpose of determining
the legal enforceability of any specific provision.
11.7 MODIFICATION. This Agreement shall be binding and deemed effective
when executed by the Borrower and accepted and executed by Lender, and can be
changed only in writing signed by the parties hereto. All prior agreements,
understandings, representations, warranties, and negotiations, if any, are
merged into this Agreement.
11.8 STANDARD OF LIABILITY. Lender shall be liable only for its
intentional misconduct, and not its negligence or gross negligence, in
the event Lender fails to comply with any terms of this agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first hereinabove written.
Octagon, Inc. and its wholly owned subsidiary
Power Systems Energy Services, Inc.
By /s/ Harry Christenson
----------------------------------------
Harry Christenson
Chief Financial Officer
Conversion Technologies International, Inc.
By /s/ Perry A. Pappas
----------------------------------------
Perry A. Pappas
Vice President and General Counsel
13
<PAGE>
EXHIBIT A
---------
SECURED PROMISSORY NOTE
$250,000 September 19, 1996
FOR VALUE RECEIVED, the undersigned, Octagon, Inc., a Delaware corporation
and its wholly owned subsidiary Power Systems Energy Services, Inc. A
Delaware corporation (the "Company"), hereby promises to pay to the order of
Conversion Technologies International, Inc. a Delaware corporation (the
"Lender") or its successors or assigns (the "Holder"), at such location as
the Holder may designate, ON DEMAND at any time on or after February 13, 1997
the principal sum of Two Hundred Fifty Thousand dollars ($250,000), together
with interest, payable (subject to prepayment in the manner provided in the
Loan Agreement (as hereinafter defined)), in lawful money of the United
States of America in immediately available funds.
The Company hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The non-exercise by the Holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
Upon the occurrence of an Event of Default (as defined in the Loan and
Security Agreement dated the date hereof (the "Loan Agreement"), between the
Company and the Lender, the principal hereof and the accrued interest hereon
may be declared to be due and payable in the manner and with the affect
provided within the Loan Agreement.
Should the indebtedness evidenced by this Note or any part hereof be
collected in any suit in equity, action at law or in bankruptcy receivership
or other court or administrative proceedings, or this Note be placed in the
hands of attorneys for collection after default, the Company agrees to pay,
in addition to the principal and interest due and payable hereon, all costs
of collecting this Note, including reasonable attorneys fees and expenses.
Payment and performance of this Note is secured pursuant to the Loan
Agreement, and the Holder of this Note is entitled to the rights and benefits
thereof.
The Company agrees that any suit, action or proceeding instituted with
respect to the Loan Agreement or the Note may be brought in a Federal court
or state court located in New York, New York and the Company shall not
institute or maintain any suit, action or proceeding in any court of any other
jurisdiction and the Company irrevocably waives any objection it may have or
may hereafter acquire to, or any right of immunity on the ground of, venue,
the convenience of the forum, of jurisdiction of such courts or the execution
or the forum, of jurisdiction of such courts or the execution of judgments
resulting therefrom, and the Company irrevocably accepts and submits to the
jurisdiction of the aforesaid courts in any such suit, action or proceeding.
This Note shall be construed in accordance with and governed by the laws
of the State of Delaware.
Octagon, Inc. And its wholly owned subsidiary
Power Systems Energy Services, Inc.
By _______________________________________
Harry Christenson
Chief Financial Officer
14
<PAGE>
EXHIBIT B
---------
EQUIPMENT LOCATIONS
Octagon, Inc.
317 S. North Lake Blvd., Suite 1024
Altamonte Springs, FL 32701
Octagon Inc.
3554 Chain Bridge Rd., Suite 201
Fairfax, VA 22030
Octagon, Inc.
10967 Hamilton Cleves HWY.
Harrison, OH 45030-9728
15
<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 the Registration Statement (Form
S-4) and related Prospectus of Conversion Technologies International, Inc.
for the registration of 850,000 shares of the Company's common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
MetroPark, New Jersey
January 17, 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 May 10, 1996 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
January 15, 1997
<PAGE>
EXHIBIT 23.3
[GRANT THORNTON LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 17, 1996, accompanying the financial
statements and schedules of Octagon, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned reports
in the Registration Statement and Prospectus, and to the use of our name as
it appears under the caption "Experts".
GRANT THORNTON LLP
Vienna, Virginia
January 15, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF COLLIER, SHANNON, RILL & SCOTT
We know that we are referred to under the heading "Legal Matters" in the
Prospectus forming a part of the Registration Statement of Conversion
Technologies International, Inc. on Form S-4, and we hereby consent to such use
of our name in the Registration Statement.
DATED: January 17, 1996 COLLIER, SHANNON, RILL & SCOTT, PLLC
By: /S/ KATHERINE MC MAHON
--------------------------------------
