SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No.:
March 31, 1998 000-28198
----------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)
(407) 207-5900
(Issuer's telephone number, including area code)
-------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 12, 1998, the Issuer
had outstanding 5,539,745 shares of Common Stock, 619,360 shares of Series A
Convertible Preferred Stock, convertible into 6,193,600 shares of Common Stock,
Redeemable Class A Warrants exercisable for 6,546,508 shares of Common Stock and
Redeemable Class B Warrants exercisable for 5,080,656 shares of Common Stock.
Transactional Small Business Disclosure Format
Yes No X
----- -----
<PAGE>
Contents
Page
No.
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Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of March 31, 1998
and June 30, 1997.......................................................... 3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three and nine
month periods ended March 31, 1998 and 1997................................ 4
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the nine month periods
ended March 31, 1998 and 1997.............................................. 5
Notes to Consolidated Financial Statements................................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 11
Part II - Other Information................................................ 15
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<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
March 31, June 30,
1998 1997
------------ ---------
(Uunaudited) (Audited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 297,940 $ 325,092
Accounts receivable, less allowance for doubtful
accounts of $18,000 at March 31, 1998 and June 30, 1997 324,259 146,225
Inventories 577,559 521,060
Prepaid expenses and other current assets 186,236 188,525
----------- -----------
Total current assets 1,385,994 1,180,902
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,957,325 6,713,599
Construction in progress 29,500 29,500
----------- -----------
8,640,118 8,396,392
Less accumulated depreciation (2,057,292) (1,456,610)
----------- -----------
6,582,826 6,939,782
Deferred finance charges, less accumulated amortization
of $91,705 and $135,786 at March 31, 1998 and
June 30, 1997 respectively 77,024 443,829
Other noncurrent assets 10,145 3,100
Restricted assets
Project fund -- 158
Debt service reserve funds -- 869,153
----------- -----------
$ 8,055,989 $ 9,436,924
=========== ===========
Liabilities and stockholders' equity (deficiency)
Accounts payable $ 1,522,475 $ 1,711,212
Deferred revenue -- 491,944
Reserve for disposal 510,000 713,100
Accrued expenses 848,552 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 24,209 35,495
Current portion of long-term debt 490,799 530,258
----------- -----------
Total current liabilities 3,631,035 4,575,456
Capital lease obligations, less current portion 20,816 39,414
Long-term debt, less current portion 1,816,455 10,784,343
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock, $.001 par value,
authorized 880,000 shares, issued and outstanding
553,000 shares at March 31, 1998 553
Common stock, $.00025 par value, authorized 50,000,000
25,000,000 shares, issued and outstanding 5,539,745
shares at and March 31, 1998 and June 30, 1997
respectively 1,385 1,385
Additional paid-in capital 28,714,824 24,186,932
Unearned stock compensation -- (116,369)
Accumulated deficit (26,129,079) (30,034,237)
----------- -----------
Total stockholders' equity (deficiency) 2,587,683 (5,962,289)
----------- -----------
$ 8,055,989 $ 9,436,924
=========== ===========
See accompanying notes
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</TABLE>
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue
Product sales $ 611,748 $ 325,381 $ 1,262,816 $ 774,235
Recycling fees 153,986 142,481 319,480 377,785
--------- --------- ----------- -----------
Total revenue 765,734 467,862 1,582,296 1,152,020
Cost of goods sold 648,011 813,116 1,996,885 2,976,157
--------- --------- ----------- -----------
Gross gain (loss) on sales 117,723 (345,254) (414,589) (1,824,137)
Selling, general and administrative 391,457 638,976 1,614,877 1,847,200
--------- --------- ----------- -----------
Loss from operations (273,734) (984,230) (2,029,466) (3,671,337)
Interest expense, net 62,282 277,460 419,733 775,528
--------- --------- ----------- -----------
Loss before extraordinary item (336,016) (1,261,690) (2,449,199) (4,446,865)
Extraordinary item - gain on debt
retirement -- -- 6,354,356 --
--------- --------- ----------- -----------
Net income (loss) (336,016) (1,261,690) 3,905,157 (4,446,865)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
--------- ---------- ----------- -----------
Net income (loss) attributable to
common shareholders $(336,016) $(1,261,690) $ 2,331,657 $ (4,446,865)
========= =========== =========== ============
Basic Earning Per Common Share:
Loss before extraordinary item $ (0.07) $ (0.26) $ (0.84) $ (0.93)
Extraordinary item -- -- 1.33 --
--------- ----------- ----------- ------------
Net income (loss) $ (0.07) $ (0.26) $ 0.49 $ (0.93)
========= =========== =========== ============
See accompanying notes.
</TABLE>
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<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
For the nine months ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(2,449,199) $(4,446,865)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense 605,009 903,197
Amortization of deferred financing costs 33,437 40,886
Stock compensation expense 116,369 106,673
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (178,034) 109,616
(Increase) decrease in inventories (56,499) (99,003)
(Increase) decrease in other current assets 2,290 (285,135)
(Increase) decrease in other noncurrent assets (7,045) (461,169)
Increase (decrease) in deferred revenue (491,944) (4,057)
Increase (decrease) in accounts payable, reserve for
disposal and other accrued expenses (401,732) (321,900)
------------ ------------
Net cash used in operating activities (2,827,348) (4,457,757)
Investigating activities
Sale of marketable securities -- 2,009,632
Issuance of notes receivable -- (660,000)
Capital expenditures (248,053) (781,518)
------------ ------------
Net cash provided by (used in) investing activities (248,053) 568,114
Financing activities
Decrease (increase) in deferred finance charges 1,750 (3,500)
Issuance of notes payable 500,000 --
Issuance of long term debt -- 8,282
Payment of notes payable (500,000) --
Decrease in restricted assets 675,285 255,024
Principal payments on long-term debt (2,127,347) (325,122)
Principal payments under capital lease obligations (29,884) (62,458)
Issuance of Series A Preferred Stock 4,528,445 --
Issuance of common stock -- 23
------------ ------------
Net cash provided by (used in) financing activities 3,048,249 (127,751)
------------ ------------
(Decrease) increase in cash and cash equivalents (27,152) (4,017,394)
Cash and cash equivalents at beginning of period 325,092 4,539,464
------------ ------------
Cash and cash equivalents at end of period $ 297,940 $ 522,070
============ ============
Supplemental disclosure of cash flow information
Interest paid $ 367,633 $ 1,023,204
============ ============
See accompanying notes
</TABLE>
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<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1997 included in the Company's annual report on Form 10-KSB as
amended.
2. 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:
March 31, 1998 June 30, 1997
-------------- -------------
Raw materials $ 168,327 $ 61,949
Work-in-process 15,040 111,961
Finished goods 394,192 347,150
--------- ---------
$ 577,559 $ 521,060
========= =========
3. Revenue Recognition
The Company derives most of its revenue from fees charged to accept waste
materials and from the sale of its products. With respect to revenue from fees
charged to accept waste materials, the Company initially records the fees it
receives for accepting waste materials for processing as deferred revenue. After
the materials have been processed into finished goods inventory or sold after
preliminary processing, the deferred revenue is recognized as fee revenue based
upon the amount of finished goods inventory produced (by tonnage), valued at the
fee charged for accepting the waste material. With respect to revenue from
product sales, including products created from processed waste materials,
revenue is recognized only upon shipment of products to customers.
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<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
For the three months ended March 31, 1998, 97.6% of the Company's revenue was
derived from five major customers. Revenue generated from each of these
customers amounted to $440,071, $96,353, $85,371, $66,310 and $58,912, which
represents 57.5%, 12.6%, 11.1%, 8.7% and 7.7% of total revenue, respectively.
For the three months ended March 31, 1997, 77.1% of the Company's revenue was
derived from four major customers. Revenues generated from each of these
customers amounted to $210,364, $85,664, $35,230 and $29,258, which represents
45.0%, 18.3%,7.5% and 6.3% of total revenue, respectively.
For the nine months ended March 31, 1998, 94.5% of the Company's revenue was
derived from five major customers. Revenue generated from each of these
customers amounted to $844,309, $177,372, $163,924, $163,541 and $145,802, which
represents 53.4%, 11.2%, 10.4%, 10.3% and 9.2% of total revenue, respectively.
For the nine months ended March 31, 1997, 79.9% of the Company's revenue was
derived from four major customers. Revenue generated from each of these
customers amounted to $500,904, $239,541, $91,224 and $88,265 which represents
43.5%, 20.8%, 7.9% and 7.7% of total revenue, respectively.
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly-owned
subsidiary of the Company, began accepting waste materials (primarily CRT glass)
in early 1994. Upon accepting the waste materials, Dunkirk established a reserve
for the probable disposal and clean-up costs for the unprocessed waste materials
on hand in the event the conversion processes being developed were not
successful. To date, the Company has disposed of 436 tons of the waste materials
which it had not been able to process, all of which was disposed of during the
nine months ended March 31, 1998. The amount of unprocessed waste materials on
hand was 6,732 tons at June 30, 1997 and 2,001 tons at March 31, 1998. From July
1, 1996 to March 31, 1997, the Company increased the reserve by approximately
$44,000, from $737,000 to $781,000. From July 1, 1997 to March 31, 1998, the
Company reduced the reserve by approximately $203,000 from $713,000 to $510,000.
The increases/decreases in the reserve, which resulted from changes in the
quantities of unprocessed waste materials on hand, have been charged/credited
against operations. The Company intends to adjust the reserve for disposal if
and when it can refine existing processes to increase yields and/or develop new
processes for the unprocessed waste materials on hand.
5. Net Income (Loss) Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
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<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
The basic net income (loss) per common share is based on the net income (loss)
attributable to common shareholders for the three and nine-month periods,
divided by the weighted average number of common shares outstanding during the
period (excluding 740,559 common shares that were deposited into escrow in
connection with the Company's initial public offering, and including 1,023,054
shares of the Company's common stock into which the Company's original Series A
Preferred Stock was converted upon the closing of the initial public offering).
The diluted net income (loss) per common share is the same as the basic net
income (loss) per common share since the effect of the conversion of all
dilutive securities would be antidilutive due to the loss before extraordinary
item. The weighted average number of common shares outstanding for the
three-month periods ended March 31, 1998 and 1997 was 4,799,186. The weighted
average number of common shares outstanding for the nine-month periods ended
March 31, 1998 and 1997 was 4,799,186 and 4,765,031, respectively. The discount
on the issuance of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock"), which was issued in August, September and December 1997,
represents the aggregate discount (difference) between the conversion price of
the Preferred Stock and the fair market value of the Company's Common Stock, on
each of the issuance dates of the Preferred Stock by the Company in August and
September 1997. For the issuance of Preferred Stock in December, there was not
any discount (See Note 7).
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 an improved abrasives finishing area, which was a part of the
Company's capital expansion program. The contractor commenced work in April
1995, but was asked to stop work in November 1995 following significant cost
overruns, problems and delays in construction and disputes with the Company over
the scope of the work to be performed by the contractor. The Company has served
the contractor with its complaint, alleging, among other things, breach of
contract, fraud and defamation, and seeks damages in excess of $1,000,000. The
contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest. The Company
does not believe that there will be a material adverse outcome in the foregoing
dispute.
7. Capital Stock
In August, September, and December of 1997, the Company sold 553,000 shares of
Preferred Stock, with a par value of $.001 per share and a stated value of $10
per share, under a placement agency agreement for the private placement of the
Preferred Stock. The net proceeds to the Company were $4,528,445 after deducting
the placement agent commissions and expenses and other transaction expenses.
Each share of Preferred Stock is convertible into ten shares of common stock at
a conversion price of $1.00 per share. Commencing in December 1998, the
-8-
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
holders of the Preferred Stock are entitled to receive dividends payable in
cash, or at the option of the Company, in additional shares of Preferred Stock
at the rate of 10% per annum. The placement agent received a cash commission of
9% and a non-accountable expense allowance of 4% of the gross proceeds. The
placement agent also received warrants to purchase 61,945 shares of the
Company's Preferred Stock at an exercise price of $9.82 (after giving effect to
anti-dilution adjustments resulting from the issuance of the additional shares
of Preferred Stock described in Note 9).
In July and August of 1997 the Company borrowed and repaid a total of $500,000
for working capital purposes, and in connection therewith, issued warrants to
purchase 132,575 shares of Common Stock at an exercise price equal to $0.99
(after giving effect to anti-dilution adjustments resulting from the above sale
of Preferred Stock and the issuance of the additional shares of Preferred Stock
described in Note 9).
At June 30, 1997, the Company had outstanding Class A Warrants to purchase
4,639,550 shares of Common Stock at an exercise price of $5.85 and Class B
Warrants to purchase 3,527,050 shares of Common Stock at an exercise price of
$7.80. After giving effect to anti-dilution adjustments resulting from the above
sale of Preferred Stock and the issuance of the additional shares of Preferred
Stock described in Note 9, the Company now has outstanding Class A Warrants for
6,546,508 shares at an exercise price of $4.42 and Class B Warrants for
5,080,656 shares at an exercise price of $5.89.
The Company's Board of Directors authorized an increase of the authorized number
of common shares to 50 million shares, which was approved by the Company's
stockholders at the Company's Annual Meeting held on March 31, 1998.
8. Extraordinary Item
In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 above. This forgiveness resulted in a net pretax gain to the Company of
approximately $5,862,000, which is reported as an Extraordinary Item.
In December 1997, the Empire State Development Corporation/JDA (the "ESDC"),
which had previously assumed approximately $1,888,000 of debt plus accrued
interest of approximately $82,000 owed by Dunkirk to Key Bank of New York ("Key
Bank"), granted the Company a debt forgiveness of $500,000. Also, the balance of
the related debt service reserve fund of approximately $459,000 was applied
against the outstanding principal and accrued interest. This forgiveness
resulted in a net pretax gain to the Company of approximately$492,000, which is
reported as an Extraordinary Item.
To the extent that Dunkirk is deemed to be insolvent immediately prior to either
of these debt forgivenesses by an amount which equals or exceeds the amount of
debt forgiveness, the Company will not recognize taxable income from such
forgiveness; however, certain of
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<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Dunkirk's tax attributes (such as net operating loss carryforwards ("NOLs"))
would be subject to reduction and would not be available to offset future income
from operations, if any. For this purpose, the amount of insolvency is defined
to be the excess of Dunkirk's liabilities over the fair value of its assets. An
independent appraisal of the fair value of Dunkirk's assets has not been
completed at this time to determine Dunkirk's solvency; however, the Company
believes that Dunkirk was insolvent at the time of forgiveness, and accordingly
has not recorded a tax provision on the Extraordinary Item. If Dunkirk is deemed
to be solvent immediately prior to the time of the forgiveness, the Company will
recognize taxable income for the debt forgiveness in its tax year ending June
30, 1998. The amount of such income may be offset by NOLs, subject to possible
limitations as discussed below. Even if sufficient NOLs were available to offset
such taxable income after such limitations, the Company may be subject to
alternative minimum tax.
The Company has federal NOLs that amounted to approximately $20.6 million at
June 30, 1997, which expire between 2006 and 2012. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), utilization of NOLs
is limited if there has been a change in control (ownership) of the Company.
Although a comprehensive evaluation has not yet been performed, it is likely
that due to prior shifts in ownership (the Dunkirk merger and the completion of
the IPO) and the current shifts in ownership (the Preferred Stock offering), the
Company's ability to utilize its NOLs could be severely limited.
9. Subsequent Events
On April 10, 1998, the Company issued an additional 66,360 shares of Preferred
Stock (convertible into 663,600 shares of Common Stock) to the purchasers of the
private placement of Preferred Stock (See Note 7). As described in Part II Item
2 these additional shares were issued due to delays in registering the shares of
Common Stock underlying the Preferred Stock.
On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement with two significant stockholders of the Company which provides for a
line of credit of up to $1,200,000 with borrowings at the discretion of the
lender. The line of credit is secured by the receivables and inventory of the
Company and accrues interest on the amounts borrowed at 12%. As described in
Part II Item 5, the Company issued warrants to purchase Common Stock and the
line of credit has certain other covenants and conditions.
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<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended March 31, 1998 Compared to Three Months Ended March 31, 1997.
Total revenues increased by $298,000 for the three months ended March 31, 1998
to $766,000 compared with $468,000 for the three months ended March 31, 1997
primarily due to an increase of $210,000 in sales of clean cullet and to $59,000
of sales from the decorative particles business, which was not operating in
1997.
The decrease in cost of goods sold of $165,000 for the three months ended March
31, 1998 to $648,000, compared with $813,000 for the three months ended March
31, 1997, despite the increase in revenue of $298,000, is due to a number of
factors, including (i) a decrease of $178,000 as a result of discontinuing the
melter operations and writing-off the assets associated therewith during the
fourth quarter of Fiscal 1997, (ii) an increase in the credit to operations of
$75,000 for the change in the reserve for disposal costs for the unprocessed
waste materials on hand, and (iii) an increase of $109,000 from the decorative
particles business, which was not operating in 1997.
As a result of the increased revenues and decreased cost of goods sold discussed
above, the Company's gross margin improved by $463,000 for the three months
ended March 31, 1998 to a gain of $118,000 compared to a loss of $345,000 for
the three months ended March 31, 1997.
Selling, general and administrative expenses decreased by $248,000 for the three
months ended March 31, 1998 to $391,000, compared with $639,000 for the three
months ended March 31, 1997, primarily as a result of a $41,000 decrease in
salaries and related fringe costs, a decrease of $113,000 in professional fees,
a decrease of $58,000 in compensation expenses relating to capital stock and an
increase of $23,000 from the decorative particles business.
Net interest expense decreased by $215,000 to $62,000 for the three months ended
March 31, 1998, compared with $277,000 for the three months ended March 31,
1997. This resulted from a decrease in interest income of $28,000 earned on cash
received from the Company's initial public offering and on the restricted cash
balances and a decrease in interest expense of $243,000 resulting from the
reduction of debt from the repayment and forgivenesses during 1997.
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997.
Total revenues for the nine months ended March 31, 1998 were $1,582,000 compared
to $1,152,000 for the nine months ended March 31, 1997 or an increase of
$430,000 mainly due to an increase of $279,000 in the sales of clean cullet and
to $164,000 of sales from the decorative particles business, which was not
operating in the prior year.
The decrease in cost of goods sold of $979,000 to $1,997,000 for the nine months
ended March 31, 1998, from $2,976,000 for the nine months ended March 31, 1997,
despite the increase in revenues of $430,000, is caused by a number of factors,
including (i) a decrease of $915,000 as a result of discontinuing the melter
operations and writing-off the assets associated therewith during the last
quarter of Fiscal 1997, (ii) a net decrease in the charge to operations of
$225,000 for the change in the reserve
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<PAGE>
for disposal costs for the unprocessed waste materials on hand, (iii) a decrease
of $149,000 due to the reduced level of operations in the abrasives finishing
department, and (iv) an increase of $410,000 from the decorative particles
business started in the current fiscal year.
The Company's gross margin improved by $1,409,000 to a loss of $415,000 for the
nine months ended March 31, 1998, from a loss of $1,824,000 for the nine months
ended March 31, 1997, as a result of the $430,000 increase in revenues and the
$979,000 decrease in cost of goods sold discussed above.
Selling, general and administrative expenses decreased by $232,000 for the nine
months ended March 31, 1998 to $1,615,000, as compared to $1,847,000 for the
nine months ended March 31, 1997 primarily as a result of a $134,000 decrease in
salaries and related fringe costs, a decrease of $176,000 in professional fees
and an increase of $87,000 from the decorative particles business.
Net interest expense decreased by $356,000 to $420,000 for the nine months ended
March 31, 1998, from $776,000 for the nine months ended March 31, 1997,
primarily as a result of a $487,000 decrease in interest expense due to the
reduction in debt from the repayment and forgivenesses and of a $131,000
decrease in interest income due mainly to the interest received on cash received
from the Company's initial public offering and earned on the restricted cash
balances in 1997.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of shares of
preferred stock and the proceeds of the Company's initial public offering. At
March 31, 1998, the Company had approximately $2,307,000 in principal amount of
long-term indebtedness (excluding capital lease obligations) and net working
capital deficiency of approximately $2,245,000. As of March 31, 1998, the
Company had cash and cash equivalents of approximately $298,000.
In August, September, and December 1997, the Company raised aggregate gross
proceeds of $5,530,000 in a private placement of Preferred Stock. An aggregate
of 553,000 shares of Preferred Stock were issued in the private placement. In
April 1998, an additional 66,360 shares of Preferred Stock were issued to the
purchasers of the private placement as described in Note 9 to the financial
statements. Each share of Preferred Stock is convertible into ten shares of
Common Stock at a conversion price of $1.00 per share.
The Company received net proceeds of $4,528,445 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses). Of such net
proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus accrued
interest was used to repay the 1997 Bridge Loan (defined below), with the
remainder used for general working capital purposes, including accrued payables.
In July and August 1997, the Company borrowed an aggregate of $500,000, which
was used for general working capital purposes (the "1997 Bridge Loan"). On
September 8, 1997, the 1997 Bridge Loan was repaid, together with accrued
interest at the rate of 12% per annum, out of the proceeds of the Preferred
Stock placement. In connection with the 1997 Bridge Loan, the Company issued
warrants to purchase 132,575 shares of Common Stock at an exercise price equal
to $0.99 per share (after giving effect to anti-dilution adjustments resulting
from the sale of the Preferred Stock and the issuance of the additional shares
of Preferred Stock in April 1998).
-12-
<PAGE>
In September 1997, the $8,000,000 principal amount of IDA Bonds were redeemed in
full in exchange for a cash payment of $1,620,000 and Dunkirk's forfeiture of
its interest in a related debt service reserve fund (which had a then current
balance of approximately $194,000).
In July 1997, the Empire State Development Corporation (the "ESDC") agreed to
honor its guarantee of the term loans owing by the Company's Dunkirk subsidiary
to Key Bank, which process was completed in December 1997 by ESDC assuming the
principal of approximately $1,888,000 and accrued interest of approximately
$82,000 due on the loans. In addition, in December 1997 ESDC forgave $500,000 on
the outstanding principal balance of the loans. ESDC has agreed to defer all
interest and principal payments due under the loans through July 1998 until the
maturity date of the loans, with interest continuing to accrue on such deferred
amounts payable at maturity. ESDC has also allowed Dunkirk to reduce the amount
owed on such loans by the amount of a debt service reserve fund (approximately
$459,000) that was forfeited by Dunkirk.
As of March 31, 1998, the Company had approximately $2,307,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $ 951,000 outstanding principal amount under the
Key Bank term loans assumed by ESDC, which loans bear interest at the prime rate
and are payable in monthly installments through December 2001 (subject to the
deferral through July 1, 1998 described above), (ii) approximately $652,000
aggregate outstanding principal amount under various mortgage and secured
equipment loans and (iii) approximately $704,000 aggregate outstanding principal
amount under subordinated indebtedness from certain of the Company's CRT glass
customers who provided financial assistance to the Company during its start-up
phase. The Company's long-term indebtedness is secured by liens on its fixed
assets. The Company'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 customary covenants and default
provisions.
The Company's capital lease payments were approximately $30,000 for the nine
months ended March 31, 1998 and are estimated to be approximately $41,000,
$27,000 and $23,000 for the fiscal years ending June 30, 1998, 1999 and 2000,
respectively, under current commitments. The Company's utility expenses average
approximately $25,000 per month at its current level of operations.
The Company's base annual fixed expenses include approximately $316,000 in
aggregate annual base compensation for the current executive officers of the
Company and debt service obligations relating to the Company's outstanding
indebtedness, which are estimated to aggregate approximately $247,000 for the
fiscal year ending June 30, 1998, excluding capital lease obligations.
The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carryforwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
the current shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.
The Company receives waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
-13-
<PAGE>
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company is continually attempting to refine existing processes to
increase yields and/or develop new processes for the waste materials on hand,
which have not been able to be processed. The Company records a disposal reserve
with respect to materials it cannot process because it is probable it will incur
these costs on the ultimate disposition of the waste materials. The Company
estimates that the disposal costs for material received by the Company that the
Company cannot process, if and when incurred, will exceed the fees the Company
was paid to accept such materials.
The Company had 2,001 tons of unprocessed waste materials on hand as of March
31, 1998, compared to 7,459 tons at March 31, 1997 and 5,301 tons at December
31, 1997. The Company's disposal reserve was $510,000 as of March 31, 1998,
compared to $781,000 at March 31, 1997 and $596,000 at December 31, 1997. The
decreases in unprocessed waste materials on hand, and related decreases in
reserve for disposal, resulted primarily from applying certain manual and
"off-line" processing efforts to certain types of unprocessed CRT glass which
were processed and then purchased by a customer of the Company.
In May 1998, the Company obtained a working capital line of credit of $1,200,000
as described in Note 9 to the Financial Statements and in Part II Item 5.
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws and regulations
and (x) the risk that the Company will not be able to continue to satisfy the
minimum maintenance requirements for continued listing on the Nasdaq SmallCap
Market.
-14-
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Financial Statements above.
Item 2. Changes in Securities and Use of Proceeds
As previously reported by the Company, in August, September and December 1997,
the Company raised an aggregate gross proceeds of $5,530,000 in the private
placement (the "Private Placement") of 553,000 shares of its Series A
Convertible Preferred Stock (the "Preferred Stock"). Each share of Preferred
Stock is convertible into ten shares of Common Stock at a conversion price of
$1.00 per share. Pursuant to the terms of the Private Placement, the Company was
required to register the shares of Common Stock underlying the Preferred Stock
within 90 days of final closing of the Private Placement. Those shares of Common
Stock were not registered within 90 days of the final closing, and accordingly,
the Company issued an additional 66,360 shares of Preferred Stock (convertible
into 663,600 shares of Common Stock) to the purchasers of the Private Placement
on April 10, 1998.
The Preferred Stock was issued pursuant to an exemption from registration
pursuant to Regulation D, promulgated under the Securities Act of 1933, as
amended (the "Securities Act"). In connection with the sale of the Preferred
Stock, the Company did not conduct any general advertisement or solicitation;
each purchaser of the Preferred Stock represented that, among other things, the
purchaser was an "accredited investor" as that term is defined in Regulation D
and the purchaser was purchasing the shares of Preferred Stock for investment
and not with a view to distribution. Appropriate legends were affixed to the
certificates representing the Preferred Stock.
The holders of the Preferred Stock are entitled to the number of votes equal to
the number of shares of Common Stock of the Company into which such shares of
Preferred Stock are convertible, and are entitled to vote together with the
holders of the Common Stock. The holders of the Preferred Stock are also
entitled to certain voting rights not shared by the holders of the Common Stock,
so long as a majority of the Preferred Stock sold in the Private Placement
remains outstanding. The affirmative vote of the holders of at least two-thirds
of the Preferred Stock will be required for (i) the issuance of securities
senior to or on a parity with the Preferred Stock with respect to dividends,
voting or liquidation, (ii) any alterations to the rights of the Preferred
Stock, (iii) a liquidation, dissolution or sale of substantially all of the
assets of the Company, (iv) the incurrence of over $100,000 of indebtedness
(other than borrowings under working capital lines of credit), and (v) the
repurchase of any of the securities of the Company. In addition, the holders of
the Preferred Stock are entitled to a liquidation preference in an amount per
share equal to $13.50 plus declared and/or accrued but unpaid dividends, if any.
Finally, the holders of the preferred stock are entitled to dividends, payable
in cash or in kind, at an annual rate of 10% beginning in December 1998. The
Company must pay such dividend prior to any dividend declared on the Common
Stock. (For a detailed description of the terms of the Preferred Stock, see the
Certificate of Designation of Series A Convertible Preferred Stock, which was
filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1997).
-15-
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on March 31, 1998.
There were 4,316,119 shares of Common Stock and 287,000 shares of Series A
Convertible Preferred Stock, each of which has 10 votes, making a total of
7,186,119 shares present at the meeting in person or by proxy. The results of
the vote taken at such meeting with respect to each nominee for director were as
follows:
Nominee For Against
------- --- -------
William L. Amt 7,123,897 62,222
Eckardt C. Beck 7,130,784 55,335
Douglas M. Costle 7,130,784 55,335
Stephen D. Fish 7,130,784 55,435
Peter H. Gardner 7,130,784 55,335
Alexander P. Haig 7,130,784 55,435
Irwin M. Rosenthal 7,030,784 55,435
David R. Walner 7,130,784 55,335
A vote was taken on the proposal to amend the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of Common
Stock from 25,000,000 to 50,000,000 shares. Of the 7,186,119 shares present at
the meeting in person, or by proxy, 7,031,664 shares were voted in favor of such
proposal, 49,990 shares were voted against such proposal, and 104,465 shares
abstained from voting.
A vote was taken on the proposal to amend the Company's 1994 Stock Option Plan
for Non-Employee Directors to increase the maximum number of shares of Common
Stock available for issuance from 100,000 to 250,000 shares. Of the 7,186,119
shares present at the meeting in person or by proxy, 7,015,469 shares were voted
in favor of such proposal, 106,345 shares were voted against such proposal, and
64,305 shares abstained from voting.
Finally, a vote was taken on the proposal to ratify the appointment of Ernst &
Young LLP as independent auditors for the year ending June 30, 1998. Of the
7,186,119 shares present at the meeting in person or by proxy, 6,946,204 shares
were voted in favor of such proposal, 151,910 shares were voted against such
proposal, and 66,440 shares abstained from voting.
-16-
<PAGE>
Item 5. Other Information
On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement (the "Credit Agreement") with the Aries Domestic Fund, L.P. and The
Aries Fund, a Cayman Island trust (collectively, the "Funds"), two significant
shareholders of the Company. The Credit Agreement provides for a line of credit
(the "Line of Credit") of up to $1,200,000 pursuant to which the Company can
draw down up to $300,000 per month, although draw downs beyond the initial
$300,000 draw will be at the discretion of the Funds. The Line of Credit is
secured by the receivables and inventory of the Company and its subsidiaries.
Amounts borrowed under the Line of Credit accrue interest at an annual rate of
12%. In addition, the Company issued to the Funds warrants to purchase an
aggregate of 240,000 shares of Common Stock at an exercise price equal to $1.00
(the closing price of the Common Stock on the date of issuance), subject to
vesting. Of such warrants, warrants to purchase 20,000 shares of Common Stock
vest with respect to each $100,000 (or ratable portion thereof) drawn under the
Credit Agreement. The Line of Credit matures on the earlier of May 8, 1999 or
any financing of at least $1,500,000.
The Credit Agreement contains customary covenants and default provisions. In
addition, upon an Event of Default (as defined in the Credit Agreement), but
only after a 60-day cure period, the Funds will be entitled to appoint a
majority of the Board of Directors. In addition, upon an Event of Default, but
only after a 90-day cure period, the Funds may convert any outstanding principal
amount plus interest, into shares of Common Stock of the Company at the then
fair market value of the Common Stock.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
10.34 Senior Secured Line of Credit Agreement
11 Computation of per share earnings.
27 Financial Data Schedule.
Form 8-K
--------
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: May 15,1998 /s/ William L. Amt
------------------------------------------
William L. Amt
President and Chief
Executive Officer
(Principal executive officer)
Dated: May 15,1998 /s/ John G. Murchie
------------------------------------------
John G. Murchie
Acting Chief Financial
Officer and Controller
(Principal financial officer)
-18-
SENIOR SECURED
--------------
LINE OF CREDIT AGREEMENT
------------------------
This Senior Secured Line of Credit Agreement (the "Agreement") is entered
into as of this 8th day of May, 1998 (the "Effective Date"), by and among ARIES
DOMESTIC FUND, L.P. (the "Partnership"), THE ARIES FUND, A CAYMAN ISLAND TRUST
(the "Trust" and collectively with the Partnership sometimes hereinafter
referred to as the "Funds"), CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a
Delaware Corporation (the "Company"), DUNKIRK INTERNATIONAL GLASS AND CERAMICS
CORPORATION "Dunkirk"), a Delaware Corporation and ADVANCED PARTICLE
TECHNOLOGIES, INC., a Delaware Corporation ("APT") (each, a "Subsidiary" and
collectively, the "Subsidiaries").
WHEREAS, the Funds are substantial shareholders of the Company;
WHEREAS, the Company and the Subsidiaries have each requested that the
Funds provide a line of credit to the Company, which will benefit both the
Company and the Subsidiaries;
WHEREAS, the Funds have agreed to provide a line of credit on the terms and
conditions hereinafter set forth; and
WHEREAS, the Company, the Partnership and the Trust hereby agree to appoint
Paramount Capital Asset Management, Inc., as secured party (the "Secured
Party"), to act as agent under the Security Agreement, attached hereto as
EXHIBIT C, for the benefit of the Partnership and the Trust in order to secure
the obligations of the Company to the Partnership and the Trust under their
respective Notes.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. The Line of Credit.
------------------
1.1. Subject to the provisions of this Agreement and satisfaction by the
Company of the conditions set forth herein, the Funds hereby agree to establish
a line of credit of up to One Million Two Hundred Thousand Dollars ($1,200,000)
(the "Line of Credit") to fund anticipated ordinary research and operating
expenses of the Company and the Subsidiaries and the repayment of certain
indebtedness as set forth in Schedule 5.7, from the date of this Agreement until
the earlier of (i) 12 months from the Effective Date and (ii) the completion of
any financing of at least $1,500,000. Any amounts drawn down under this Line of
Credit, along
1
<PAGE>
with any and all accrued but unpaid interest shall be immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by the Company, upon the earlier to
occur of (i) 12 months from the Effective Date and (ii) the completion of any
financing of at least $1,500,000. All loans drawn under this Line of Credit
shall be provided by the Partnership and the Trust respectively, in such
proportion as they shall agree and shall be evidenced by secured notes (the
"Notes") substantially in the form attached hereto as EXHIBIT A, which Notes
shall be secured by the receivables and inventory of the Company and the
Subsidiaries now owned and hereafter owned or acquired (the "Assets"), which
Assets now owned are set forth on Schedule 1.1 attached hereto.
1.2. The Company may draw down upon this Line of Credit in the amount of
Three Hundred Thousand Dollars ($300,000) per month (the "Draw Down Amount").
The Company shall be entitled to the Draw Down Amount for the first month of
this Agreement. Any subsequent amounts drawn down upon the Line of Credit shall
be made at the sole discretion of the Funds. Each date upon which the Company
draws down upon the Line of Credit is hereinafter referred to as a "Draw Down
Date."
1.3 Any request for funds hereunder shall be subject to the conditions set
forth in Section 3. To the extent that such conditions are not met at the time
the Company requests any draw down, the Funds shall have no obligations with
respect to financing the Company and any of the other matters set forth
hereunder.
2. Consideration.
-------------
2.1. As consideration for the Line of Credit, the Company shall issue to
the Funds on the date hereof warrants (the "Warrants") substantially in the form
of Exhibit B attached hereto to purchase up to 240,000 shares of common stock,
par value $.00025 per share, of the Company (the "Common Stock"). From and after
any Draw Down Date, including the date hereof, the Warrants shall vest and
become immediately exercisable by the Funds for Twenty Thousand (20,000) shares
of Common Stock per $100,000 of Draw Down Amount at an exercise price equal to
the representative closing bid price of the Common Stock on the date hereof,
which the parties agree and acknowledge to be equal to $1.00 per share of Common
Stock. If at any time the Company shall draw down a Draw Down Amount that is not
less than $100,000 or is not evenly divisible by $100,000, then the Warrants
shall vest and become immediately exercisable for an appropriate amount of
shares of Common Stock representing a pro rata share of such Draw Down Amount.
2.2. The Funds shall be entitled to the registration rights as set forth in
Section 5 of the Warrant.
2
<PAGE>
3. Conditions to Draw Downs.
The obligation of the Funds to fund any Draw Down Amount is subject to the
satisfaction on or prior to the Effective Date, and each Draw Down Date, of each
of the following conditions, which may only be waived by written consent of the
Funds:
3.1. Prior to each Draw Down Date, the Company shall have provided to the
Funds (a) the unaudited balance sheet of the Company and the Subsidiaries as of
February 28, 1998, and the related unaudited statement of operations for the
eight-month period then ended, as well as the related unaudited statements of
stockholders' equity (deficit) and cash flows for the eight-month period then
ended, accompanied by the unqualified certification thereon of the Chief
Financial Officer of the Company (together with any notes thereto, the "February
28, 1998 Financial Statements") and (b) a "bring-down" certificate of the Chief
Executive Officer of the Company and the Chief Financial Officer of the Company
and the Subsidiaries with respect to the financial position of the Company and
the Subsidiaries as of the Effective Date and as to results for the period from
the date of the February 28 Financial Statements to the Effective Date, in form
and substance satisfactory to the Funds and their counsel.
3.2. Except as set forth in Schedule 3.2 attached hereto or as set forth in
the SEC Documents (as defined below), as of the Effective Date and each Draw
Down Date, no event or events or condition or conditions shall have occurred, or
become known (including information not previously disclosed), which separately
or in the aggregate, in the reasonable judgment of the Funds will, or could
reasonably be expected to, materially and adversely effect the rights or
remedies of the Funds or the ability of the Company and the Subsidiaries to
perform their obligations under this Agreement, the Notes, the Security
Agreement, the Subsidiary Guarantee (as defined below) and the Warrants, and
there shall have been no material adverse change in the financial condition,
operating results, employee or customer relations or prospects of, or otherwise
with respect to, the Company from the date of the February 28 Financial
Statements to the Effective Date, from the date of the February 28 Financial
Statements to each Draw Down Date, or from the Effective Date to each Draw Down
Date.
3.3. No injunction, order, investigation, claim, action or proceeding
before any court or governmental body shall be pending or threatened wherein an
unfavorable judgment, decree or order would restrain, impair or prevent the
carrying out of this Agreement or any of the transactions contemplated hereby,
declare unlawful the transactions contemplated by this Agreement or cause any
such transaction to be rescinded.
3
<PAGE>
3.4. The Company and the Subsidiaries shall have obtained in writing or
made all consents, waivers, approvals, orders, permits, licenses and
authorizations of, and registrations, declarations, notices to and filings and
applications with, any governmental authority or any other person or entity
(including, without limitation, security holders and creditors) required to be
obtained or made in order to enable the Company and each of the Subsidiaries to
observe and comply with all their respective obligations under this Agreement
and to consummate the transactions contemplated hereby.
3.5. All executive officers, including, without limitation, the Chief
Executive Officer and the Chief Financial Officer of the Company agree and
acknowledge the seniority of the Notes and any payments to such officers upon
termination of their employment are subject to the repayment of the principal
and interest of the Notes.
3.6. The Security Agreement is sufficient in form so as to create a valid
security interest in favor of the Partnership and the Trust under the Delaware
Uniform Commercial Code (the "Delaware UCC"), the New York General Obligations
Law (the "New York UCC") and the Florida Uniform Commercial Code (the "Florida
UCC") in the Collateral (as defined in the Security Agreement) described in the
Security Agreement to the extent that the creation of a security interest in
such Collateral is governed by the Delaware UCC, the New York UCC and the
Florida UCC, as security for the payment and performance of the obligations
expressed to be secured by the Security Agreement for the benefit of the
Partnership and the Trust under their respective Notes. Upon the filing of
properly prepared and executed financing statements, such security interest will
be perfected to the extent that a security interest in such Collateral may be so
perfected.
3.7. All of the representations and warranties of the Company and the
Subsidiaries contained in this Agreement, the Notes, the Security Agreement, the
Subsidiary Guarantee and the Warrants, shall be true and correct at and as of
the Effective Date and each Draw Down Date with the same effect as though such
representations and warranties have been made on and as of such date. Prior to
each draw down, the Company shall provide the Funds with written notice that it
intends to make a draw down. Such notice shall be in the form attached hereto as
EXHIBIT D.
3.8. All of the covenants and agreements of the Company and the
Subsidiaries, as the case may be, contained in this Agreement, the Notes, the
Security Agreement, the Subsidiary Guarantee and the Warrants, and required to
be performed on or prior to the Effective Date and each Draw Down Date shall
have been performed in a manner satisfactory in all respects to the Funds.
4
<PAGE>
3.9. After giving effect to the funding of the applicable Draw Down Amount,
there shall exist no Event of Default (as defined in Section 7) nor any event
that, with notice or lapse of time or both, would constitute an Event of
Default.
3.10. All corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated by this Agreement,
the Notes, the Security Agreement, the Subsidiary Guarantee and the Warrants
shall be satisfactory in form and substance to the Funds. The Funds shall have
received all information and copies of all certificates, documents and papers,
including records of corporate proceedings and governmental approvals, if any,
which the Funds may have requested in connection therewith, such documents and
papers where appropriate to be certified by proper corporate or governmental
authorities.
3.11. The Company and the Subsidiaries shall have provided to the Funds all
schedules required pursuant to this Agreement, the Notes, the Security
Agreement, the Subsidiary Guarantee and the Warrants, which schedules shall be
satisfactory to the Funds and their counsel in their sole discretion.
Notwithstanding the foregoing, such schedules may not be revised without the
prior written consent of the Funds.
3.12. Each of the Subsidiaries shall have duly authorized, executed and
delivered a Subsidiary Guarantee in the form of EXHIBIT E (as modified, amended
or supplemented from time to time in accordance with the terms thereof and
hereof, the "Subsidiary Guarantee") and such Subsidiary Guarantee shall be in
full force and effect.
3.13. At each Draw Down Date after the Company has drawn down $500,000 in
the aggregate, the Company's financial position shall be within twenty percent
(20%) of the cash flow projections provided to the Funds pursuant to Section
5.3(d).
3.14 Prior to the Effective Date, the Board of Directors has adopted
resolutions which authorize the transactions contemplated by this Agreement, the
Notes, the Warrants and the Security Agreement. Such resolutions are attached
hereto as EXHIBIT F.
4. Representations and Warranties of the Company and the Subsidiaries.
------------------------------------------------------------------
In order to induce the Funds to enter into this Agreement, the Warrants,
the Notes and the Security Agreement and to fund the Draw Down Amounts, the
representations and warranties set forth below shall be true and accurate as of
the Effective Date and each Draw Down Date, and shall survive the execution,
delivery and performance of such agreements. The Company and the Subsidiaries
represent and warrant to the Funds, as follows:
5
<PAGE>
4.1. Due Authorization, Valid Issuance, Etc. The Notes have been duly
------------------------------------------
authorized and, when issued in accordance with this Agreement upon each Draw
Down Date, will be free and clear of all liens, security interests, claims,
options, adverse interests or other encumbrances ("Liens") imposed by or through
the Company. The Warrants have been duly authorized and, when issued in
accordance with this Agreement upon each Draw Down Date will be validly issued
and free and clear of all liens imposed by or through the Company. The Common
Stock issuable upon the exercise of the Warrants and this Agreement has been
duly authorized and reserved, and upon the exercise of the Warrants in
accordance with the terms and conditions thereof and this Agreement, will be
validly issued, fully paid and nonassessable shares of Common Stock and will be
free and clear of all liens imposed by or through the Company. The issuance,
sale and clear delivery of the Notes, the Warrants and the shares of Common
Stock issuable upon the exercise of the Warrants will not be subject to any
preemptive right of stockholders of the Company or to any right of first refusal
or other right in favor of any person.
4.2 Authorization; No Breach. The Company and the Subsidiaries have full
-------------------------
corporate power and authority to execute, deliver and enter into this Agreement
and to perform their obligations hereunder, and the execution, delivery and
performance of this Agreement, the Notes, the Security Agreement, the Subsidiary
Guarantee and the Warrants and all other transactions contemplated hereby have
been duly authorized by the Company and the Subsidiaries, and this Agreement
constitutes a legal, valid and binding obligation of the Company and the
Subsidiaries, enforceable in accordance with its terms except as the
enforceability hereof may be limited by (a) bankruptcy, insolvency, moratorium
and similar laws affecting creditors= rights generally and (b) the availability
of remedies under general equitable principles. The execution and delivery by
the Company and the Subsidiaries of this Agreement and the Security Agreement,
and the Subsidiary Guarantee and the issuance of the Notes and the Warrants by
the Company pursuant to this Agreement, and the performance and fulfillment of
the Company and the Subsidiaries of their obligations under this Agreement, the
Security Agreement, the Notes, the Subsidiary Guarantee and the Warrants, as the
case may be, do not and will not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under, or event
which, with notice or lapse of time or both, would constitute a breach of or
default under, (iii) give any third party the right to accelerate any obligation
under or terminate, (iv) result in a violation of, (v) result in the loss of any
license, certificate, legal privilege or legal right enjoyed or possessed by the
Company or the Subsidiaries under, (vi) or result in the imposition of (or the
obligation to create or impose) any Lien upon any of the property or assets of
the Company or the Subsidiaries, (vii) require any authorization, consent,
approval, exemption or other action by or notice to any court or administrative
or governmental body pursuant to or require the consent of any other person
under, the Certificate of Incorporation or By-Laws of the Company or the
Subsidiaries or any law, statute, rule or regulation to which the Company or the
Subsidiaries are subject or
6
<PAGE>
by which any of their properties are bound, or any agreement, instrument, order,
judgment or decree to which the Company or the Subsidiaries are subject or by
which their properties are bound or (viii) give any securityholder or other
party the right to any antidilution or similar adjustment, including, without
limitation, to the conversion or exercise prices or rates of the instruments
held by such securityholder or party.
4.3 Capitalization. As of the date hereof, the Company's authorized
--------------
capitalization consists of: 50,000,000 shares of Common Stock, par value $.00025
per share, of which 5,539,745 shares are presently issued and outstanding and
15,000,000 shares of preferred stock, par value $.001 per share, of which
880,000 shares are designated as Series A Preferred Stock, of which 619,360 are
issued and outstanding. As of the date hereof 27,159,593 shares of Common Stock
are reserved for issuance upon the conversion or exercise of presently
outstanding convertible securities, options, warrants or other rights to
purchase Common Stock. All outstanding securities of the Company are validly
issued, fully paid and nonassessable. No stockholder of the Company is entitled
to any preemptive rights with respect to the purchase or sale of any securities
by the Company. Except as has been set forth in Schedule 4.3 hereto or in the
SEC Documents, there are no outstanding options, warrants or other rights,
commitments or arrangements, written or oral, to purchase or otherwise acquire
any authorized but unissued shares of capital stock of the Company or any
security directly or indirectly convertible into or exchangeable for any capital
stock of the Company or under which any such option, warrant or convertible
security may be issued in the future, and there are no voting trusts or
agreements, stockholders= agreements, pledge agreements, buy-sell, rights of
first offer, negotiation or refusal or proxies or similar arrangements relating
to any securities of the Company to which the Company is a party, and to the
best knowledge of the Company after due inquiry there are no such trusts,
agreement, rights, proxies or similar arrangements as to which the Company is
not a party with respect to the capital stock. Except as set forth on Schedule
4.3 or in the SEC Documents and as contemplated herein, none of the shares of
capital stock of the Company is reserved for any purpose, and the Company is
neither subject to any obligation (contingent or otherwise), nor has any option
to repurchase or otherwise acquire or retire any shares of its capital stock.
Schedule 4.3 sets forth (a) the number of shares of Common Stock authorized for
issuance under the Company's Incentive Stock Option Plan, as amended and
restated, and the Company's Non-Employee Director Stock Option Plan; (b) the
number of shares of Common Stock as to which options under such plan have been
(i) reserved for issuance and (ii) exercised; (c) the exercise prices for all
outstanding options under such plan; (d) the number of shares of Common Stock
underlying the outstanding warrants; and (e) the exercise prices for the
outstanding warrants. Schedule 4.3 sets forth an accurate description of any
instruments having any antidilution adjustment provisions or similar rights and
a list of all events that have triggered such provisions or rights, and except
as set forth on Schedule 4.3, no antidilution adjustments with respect to the
outstanding securities of the Company will be triggered by the issuance of the
securities contemplated hereby or by the Warrants or the Notes.
7
<PAGE>
4.4. Financial Statements and SEC Documents. (a) Attached hereto as
-----------------------------------------
Schedule 4.4 are the unaudited financial statements of the Company for the eight
month period ended February 28, 1998, including the balance sheet as at the end
of such period and the related statements of operations, stockholders= equity
(deficit) and cash flows for such eight-month period, (collectively, the
"Financial Statements"). For purposes of this Agreement, February 28, 1998,
shall be hereinafter referred to as the "Balance Sheet Date." The Financial
Statements have been prepared in accordance with the books and records of the
Company and generally accepted accounting principles, applied consistently with
the past practices of the Company (except as otherwise noted in such Financial
Statements), reflect all liabilities and obligations of the Company, as of their
respective dates, and present fairly the financial position of the Company and
the results of its operations as of the time and for the periods indicated
therein.
(b) The Company has made available to the Funds a true and complete copy of
each report, schedule, registration statement and definitive proxy statement
filed by the Company with the Securities and Exchange Commission since January
1, 1993 (as such documents have since the time of their filing been amended, the
"SEC Documents") which are all the documents (other than preliminary material)
that the Company filed with the Securities and Exchange Commission since such
date. As of their respective dates, the SEC Documents complied in all respects
with the requirements of the Securities Act of 1933, as amended (the "Securities
Act") and/or the Exchange Act of 1934, as amended (the "Exchange Act") as the
case may be, and the rules and regulations of the Securities and Exchange
Commission thereunder applicable to such SEC Documents and none of the SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Securities and
Exchange Commission with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved and fairly present (subject, in the case of the unaudited
statements, to normal, recurring audit adjustments) the financial position of
the Company as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended.
4.5. No Material Adverse Changes. Except as set forth in Schedule 4.5
-----------------------------
attached hereto or in the SEC Documents, since the Balance Sheet Date there has
not at any time been (a) in the reasonable judgment of the Funds any material
adverse change in the financial condition, operating results, business
prospects, employee relations or customer relations of the Company or either of
the Subsidiaries or the Company and the Subsidiaries taken as a whole, or (b) in
the reasonable judgment of the Funds, other changes, which in the
8
<PAGE>
aggregate have been materially adverse to the Company or either of the
Subsidiaries or the Company and the Subsidiaries taken as a whole.
4.6. Absence of Certain Developments. Except as set forth on Schedule 4.6
--------------------------------
or in the SEC Documents, since the Balance Sheet Date, neither the Company nor
the Subsidiaries will have, prior to any Draw Down Date: (a) issued any
securities other than upon exercise of outstanding warrants or options or upon
conversion of outstanding preferred stock; (b) borrowed any amount or incurred
or become subject to any liabilities (absolute or contingent), other than
liabilities incurred in the ordinary course of business and liabilities under
contracts entered into in the ordinary course of business, none of which are or
shall be material and which are less than $50,000 individually or less than
$500,000 in the aggregate; (c) discharged or satisfied any lien, adverse claim
or encumbrance or paid any obligation or liability (absolute or contingent),
other than current liabilities paid in the ordinary course of business in an
amount less than $50,000; (d) declared or made any payment or distribution of
cash or other property to the stockholders of the Company with respect to the
Common Stock or purchased or redeemed any shares of Common Stock; (e) mortgaged,
pledged or subjected to any lien, adverse claim, charge or any other
encumbrance, any of their properties or assets, except for liens for taxes not
yet due and payable; (f) sold, assigned or transferred any of their assets,
tangible or intangible, except inventory in the ordinary course of business and
in an amount less than $50,000, or disclosed to any person, firm or entity not
party to a confidentiality agreement with the Company any proprietary
confidential information; (g) suffered any extraordinary losses or waived any
rights of material value; (h) made any capital expenditures or commitments
therefor in an amount greater than $10,000 in the aggregate; (i) entered into
any other transaction other than in the ordinary course of business in an amount
less than $50,000 or entered into any material transaction, whether or not in
the ordinary course of business; (j) made any charitable contributions or
pledges; (k) suffered damages, destruction or casualty loss, whether or not
covered by insurance, affecting any of the properties or assets of the Company
or any other properties or assets of the Company which could have a material
adverse effect on the business or operations of the Company; (l) engaged in any
transactions with affiliates of the Company, any officer or director of the
Company or any affiliates of any officer or director of the Company; (m)
resolved or entered into any agreement or understanding with respect to any of
the foregoing or (n) made any payments of any kind (except for payroll) or
issued any securities to any officer of the Company.
4.7. Properties. Schedule 4.7 annexed hereto contains a true, complete and
----------
correct list of all real and personal property owned or leased by the Company
and the Subsidiaries. The Company and the Subsidiaries have good and marketable
title to all of the real property and good title to all of the personal property
and assets they purport to own, including those reflected as owned on the
Company Balance Sheet or acquired thereafter, and a good and valid leasehold
interest in all property indicated as leased on the Company
9
<PAGE>
Balance Sheet, whether such property is real or personal, free and clear of all
liens, adverse claims, charges, encumbrances or restrictions of any nature
whatsoever, except (a) such as are reflected on the Company Balance Sheet and
(b) for receivables and charges collected in the ordinary course of business.
The Company and the Subsidiaries own or lease all such properties as are
necessary to their operations as now conducted and as presently proposed to be
conducted and all such properties are, in all material respects, in good
operating condition and repair.
4.8. Taxes. The Company and the Subsidiaries have timely filed all federal,
-----
state, local and foreign tax returns and reports required to be filed, and all
taxes, fees, assessments and governmental charges of any nature shown by such
returns and reports to be due and payable have been timely paid except for those
amounts being contested in good faith and for which appropriate amounts have
been reserved in accordance with generally accepted accounting principles and
are reflected on the Company Balance Sheet. There is no tax deficiency which has
been, or, to the knowledge of the Company might be, asserted against the Company
or their Subsidiaries which could reasonably result in losses of more than
$50,000 to the Company or the Subsidiaries. All such tax returns and reports
were prepared in accordance with the relevant rules and regulations of each
taxing authority having jurisdiction over the Company and the Subsidiaries and
are true and correct. Neither the Company nor the Subsidiaries have given nor
been requested to give any waiver of any statute of limitations relating to the
payment of federal, state, local or foreign taxes. Neither the Company nor the
Subsidiaries has been, nor is now being, audited by any federal, state, local or
foreign tax authorities. The Company and the Subsidiaries have made all required
deposits for taxes applicable to the current tax year. Neither the Company nor
the Subsidiaries is, or has ever been, a member of any "affiliated group" within
the meaning of Section 1504 of the Internal Revenue Code, as in effect from time
to time.
4.9. Litigation. Except as set forth on Schedule 4.9 or in the SEC
----------
Documents, there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the Company's or the Subsidiaries' knowledge, threatened
against or affecting the Company or the Subsidiaries, at law or in equity or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality that could reasonably
result in losses of more than $50,000; there are no arbitration proceedings
pending under collective bargaining agreements or otherwise that could
reasonably result in losses of more than $50,000; and, to the knowledge of the
Company or the Subsidiaries, there is no basis for any of the foregoing.
4.10. Compliance with Law. The Company and the Subsidiaries have complied
-------------------
in all respects with all applicable statutes and regulations of the United
States and of all states, municipalities and applicable agencies and foreign
jurisdictions or bodies in respect of the conduct of their businesses and
operations which noncompliance could reasonably result
10
<PAGE>
in losses of more than $50,000.
4.11. Insurance. Schedule 4.11 annexed hereto contains a brief description
---------
of each insurance policy maintained by the Company and the Subsidiaries with
respect to their properties, assets and businesses; each such policy is in full
force and effect; and neither the Company nor the Subsidiaries is in default
with respect to their obligations under any of such insurance policies. The
insurance coverage of the Company and the Subsidiaries is in amounts not less
than is customarily maintained by corporations engaged in the same or similar
business and similarly situated, including, without limitation, insurance
against loss, damage, fire, theft, public liability and other risks. The
activities and operations of the Company and the Subsidiaries have been
conducted in a manner so as to conform to all applicable provisions of these
insurance policies and neither the Company nor the Subsidiaries have taken or
failed to take any action which would cause any such insurance policy to lapse.
4.12. Agreements. Except for this Agreement and the Notes contemplated
----------
hereby or as otherwise set forth in Schedule 4.12 attached hereto or in the SEC
Documents, neither the Company nor the Subsidiaries are parties to or bound by
any agreement or commitment, written or oral, which obligates the Company or the
Subsidiaries to make payments to any person, or which obligates any person to
make payments to the Company or the Subsidiaries, in the case of each such
agreement in an amount exceeding $10,000, or which is otherwise material to the
conduct and operation of the Company's or the Subsidiaries business or proposed
business or any of their properties or assets, including, without limitation,
all shareholder, employment, non-competition and consulting agreements and
employee benefit plans and arrangements and collective bargaining agreements to
which the Company or the Subsidiaries are parties or by which they are bound.
All such agreements are legal, valid and binding obligations of the Company or
the Subsidiaries, in full force and effect, and enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by
(a) bankruptcy, insolvency, moratorium, and similar laws affecting creditors'
rights generally and (b) the availability of remedies under general equitable
principles. The Company and the Subsidiaries have performed all obligations
required to be performed by them, and are not in default, or in receipt of any
claim, under any such agreement or commitment, and neither the Company nor the
Subsidiaries have any present expectation or intention of not fully performing
all of such obligations, nor does the Company or the Subsidiaries have any
knowledge of any breach or anticipated breach by the other parties to any such
agreement or commitment. Neither the Company nor the Subsidiaries is a party to
any contract, agreement, instrument or understanding which materially adversely
affects the business, properties, operations, assets or condition (financial or
otherwise) of the Company or the Subsidiaries. The Funds have been furnished
with, or the Company and the Subsidiaries have made available for the Funds=
review, a true and correct copy of each written agreement referred to in
Schedule 4.12 or in the SEC Documents, together with all amendments, waivers or
other changes thereto.
11
<PAGE>
4.13. Undisclosed Liabilities. Except as set forth on Schedule 4.13
------------------------
attached hereto or in the SEC Documents, neither the Company nor the
Subsidiaries have any obligation or liability of any nature whatsoever (whether
accrued, absolute, contingent, unliquidated, or otherwise, whether or not known
to the Company or the Subsidiaries, whether due or to become due) arising out of
transactions entered into at or prior to the Effective Date or any Draw Down
Date, or any action or inaction at or prior to the Effective Date of this
Agreement, or any state of facts existing at or prior to the Effective Date of
this Agreement or any Draw Down Date, except (a) liabilities reflected on the
Company's or the Subsidiaries' Balance Sheets and (b) liabilities in an
aggregate amount less than $50,000 incurred in the ordinary course of business
since the Balance Sheet Date (none of which is a liability for breach of
contract, breach of warranty, torts, infringements, claims or lawsuits).
4.14. Employees; Conflicting Agreements. Except as set forth on Schedule
-----------------------------------
4.14 attached hereto or in the SEC Documents, to the best of the Company's and
each of the Subsidiaries= knowledge, no stockholder, director, officer or key
employee of the Company or the Subsidiaries is a party to or bound by any
agreement, contract or commitment, or subject to any restrictions in connection
with any previous or current employment of any such person, which adversely
affects, or which in the future may adversely affect, the business or the
proposed business of the Company or the Subsidiaries or the rights of the Funds
under this Agreement and in respect of its rights as a holder of the Notes and
the Warrants.
4.15. Disclosure. Neither this Agreement nor any of the schedules,
----------
exhibits, written statements, documents or certificates prepared or supplied by
the Company or the Subsidiaries with respect to the transactions contemplated
hereby contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which made. Except as
disclosed in Schedule 4.15 hereto or in the SEC Documents, there exists no fact
or circumstance which, to the knowledge of the Company and the Subsidiaries upon
due inquiry, materially adversely affects, or which could reasonably be
anticipated to have a material adverse effect on, the existing or expected
financial condition, operating results, assets, customer relations, employee
relations or business prospects of the Company or the Subsidiaries.
4.16. Environmental Matters (a) The Company and the Subsidiaries and all
----------------------
properties owned, operated or leased by the Company and the Subsidiaries have
obtained and currently maintain all environmental permits required for their
business and operations and are in compliance with all such environmental
permits; (ii) there are no legal proceedings pending nor, to the best knowledge
of the Company and the Subsidiaries, threatened to modify or revoke any such
environmental permits; and (iii) neither the Company
12
<PAGE>
nor the Subsidiaries nor any property owned, operated or leased by the Company
or the Subsidiaries has received any notice from any source that there is
lacking any environmental permit required for the current use or operation of
the business of the Company or the Subsidiaries, or any property owned, operated
or leased by the Company or the Subsidiaries.
(b) Except as set forth in Schedule 4.16 hereto or in the SEC Documents,
(i) all real property owned, operated or leased by the Company or the
Subsidiaries, and, to the best knowledge of the Company and the Subsidiaries,
all property adjacent to such properties, are in compliance with the
environmental laws with respect to hazardous materials; and the Company and the
Subsidiaries are not subject to environmental costs and liabilities with respect
to hazardous materials beyond those costs contemplated in the ordinary course of
business, and no facts or circumstances exist which could give rise to
environmental costs and liabilities with respect to hazardous materials beyond
those costs contemplated in the ordinary course of business.
(c) Except as set forth in Schedule 4.16 hereto or in the SEC Documents,
there is not now, nor has there been in the past, on, in, or under any real
property owned, leased, or operated by the Company or the Subsidiaries, or by
any of their predecessors (i) any asbestos-containing materials, (ii) any
leaking underground storage tanks, (iii) above-ground storage tanks, (iv)
impoundments, (v) poly-chlorinated biphenyl or (vi) radioactive substances.
(d) The Company and the Subsidiaries have provided or made available to the
Funds drafts and final versions of all environmental site assessments, risk
management studies and internal environmental audits that have been conducted by
or on behalf of the Company or the Subsidiaries ("Environmental Studies"), with
respect to any real property that now or in the past has been owned, operated or
leased by the Company or the Subsidiaries, or any of their predecessors.
(e) Except as set forth in Schedule 4.16 hereto or in the SEC Documents,
the Company and the Subsidiaries and all properties owned, operated or leased by
the Company and the Subsidiaries are in compliance with environmental law.
(f) Except as set forth in Schedule 4.16 hereto or in the SEC Documents,
neither the Company nor the Subsidiaries nor any property owned, leased or
operated by the Company or the Subsidiaries has received or been issued any
written request for information, or has been notified that it is a potentially
responsible party under the environmental laws with respect to any on-site or
off-site for which environmental costs and liabilities are asserted.
13
<PAGE>
4.17. On and as of the Effective Date and each Draw Down Date, after giving
effect to the Draw Down Amount and all other indebtedness (including guarantees)
incurred and to be incurred by the Company and the Subsidiaries in connection
therewith, (x) the sum of the assets, at a fair valuation, of the Company and
the Subsidiaries, will exceed its debts, (y) neither the Company nor the
Subsidiaries will have incurred or intended to, or believe that it will, incur
debts beyond their ability to pay such debts as such debts mature and (z) the
Company and the Subsidiaries will have sufficient capital with which to conduct
their businesses. For purposes of this Section 4.17 "debt" means any liability
on a claim, and "claim" means any (i) right to payment whether or not such a
right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or (ii) right to an equitable remedy for breach of performance if
such breach gives rise to a payment, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured.
4.18. Neither the Company nor any of the Subsidiaries is an "investment
company" or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
4.19. Neither the Company nor any of the Subsidiaries (i) is a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended or (ii) is subject to regulation under the Federal Power
Act, the Investment Company Act of 1940 or the Interstate Commerce Act, or is
subject to any other statute or regulation which regulates the incurring by the
Company or any of the Subsidiaries of indebtedness for borrowed money, other
than Federal and state securities laws.
4.20. Subsidiaries and Investments. Except for a wholly-owned subsidiary of
----------------------------
the Company, CTI ACQSUB-II, Inc., which presently holds no assets, liabilities,
obligations or operations and which was formed in connection with a previously
proposed merger of the Company, Dunkirk and APT, the Company has no wholly or
partially owned Subsidiaries and does not control, directly or indirectly, any
other corporation, business trust, firm, partnership, association, joint
venture, entity or organization. Except for the Company's interests in the
Subsidiaries, neither the Company nor the Subsidiaries own any shares of stock,
partnership interest, joint venture interest or any other security, equity or
interest in any other corporation or other organization or entity. "Subsidiary"
means any person, corporation, firm or entity at least the majority of the
equity securities (or equivalent interest) of which are, at the time as of which
any determination is being made, owned of record or beneficially by the Company,
directly or indirectly, through any Subsidiary or otherwise. "Control" and
similar terms shall have the meanings ascribed thereto in Rule 12b-2 promulgated
under the Exchange Act.
14
<PAGE>
4.21. No finder, broker, agent, financial person or other intermediary has
acted on behalf of the Company in connection with the transactions contemplated
by this Agreement.
4.22. The Company has provided the Funds with a copy of any and all
employment agreements to which the Company is a party.
4.23. The Company currently has no liens or adverse claims on its inventory
or receivables. The Company's former working capital line of credit (the "Key
Bank Loan") with Key Bank of New York ("Key Bank"), secured by inventory and
receivables as evidenced by UCC-1 No. 116645 (the "Key Bank UCC"), was repaid in
full and terminated in May 1996. The assignment of the Key Bank UCC by Key Bank
to the New York State Job Development Authority (the "JDA") pursuant to UCC-3
No. 116645 was made after repayment of the Key Bank Loan and is therefor void
and of no effect.
5. Covenants of the Company and the Subsidiaries. Until such time as the
----------------------------------------------
Company pays to the Funds the principal sum and interest evidenced by the Notes,
and performs and discharges of each and every obligation of the Company under
this Agreement, the Security Agreement, the Warrants and the Notes, the Company
and the Subsidiaries covenant and agree as follows:
5.1 Draw Down Schedules; Notice of Change. The Company shall (i) in advance
-------------------------------------
of any draw down under this Line of Credit, provide the Funds with a detailed
schedule identifying the proposed use of proceeds of such draw down and the
Company's projected budget for the month and six-month period following such
draw down, (ii) in advance of any draw down after the Company's initial draw
down, provide the Funds with a schedule detailing the actual use of proceeds
from any prior draw down, (iii) provide written notice to the Funds of any
material developments relating to the Company within one (1) day of becoming
aware of any such developments and provide the Funds on an ongoing basis with
such information as is necessary to keep them reasonably informed of the
Company's business and (iv) provide the Funds with any information relating to
the Company as may be requested.
5.2. Books and Accounts. The Company and the Subsidiaries will: (a) make
------------------
and keep books, records and accounts, which, in reasonable detail, accurately
and fairly reflect their transactions, including, without limitation,
dispositions of their assets; and (b) devise and maintain systems of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and in accordance with the Company's and the Subsidiaries' past
practices or any other criteria
15
<PAGE>
applicable to such statements, and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
5.3. Financial Reporting and Business Plan.
-------------------------------------
(a) The Company will furnish to the Funds as soon as practicable, and in
any event within 90 days after the end of each fiscal year of the Company
(commencing with the fiscal year ended June 30, 1998), an annual report of the
Company, including a balance sheet (consolidated to include the Subsidiaries) as
at the end of such fiscal year and statement of operations, stockholders= equity
(deficit) and cash flows for such fiscal year, together with the related notes
thereto, setting forth in each case in comparative form corresponding figures
for the preceding fiscal year, all of which will be correct and complete and
will present fairly the financial position of the Company and the Subsidiaries
on a consolidated basis and the results of its operations and changes in its
financial position as of the time and for the period then ended. Such financial
statements shall be accompanied by an unqualified report (other than
qualifications contingent upon the Company's ability to obtain additional
financing), in form and substance reasonably satisfactory to Funds, of
independent public accountants reasonably satisfactory to Funds to the effect
that such financial statements have been prepared in accordance with the books
and records of the Company and the Subsidiaries and generally accepted
accounting principles applied on a basis consistent with prior years (except as
otherwise specified in such report), and present fairly the financial position
of the Company and the Subsidiaries and the results of its operations and
changes in their financial position as of the time and for the period then
ended. The Company will use its best efforts to conduct its business so that
such report of the independent public accountants will not contain any
qualifications as to the scope of the audit, the continuance of the Company, or
with respect to the Company's compliance with generally accepted accounting
principles consistently applied, except for changes in methods of accounting in
which such accountants concur.
(b) The Company will furnish to the Funds, as soon as practicable and in
any event within 45 days after the end of each of the first three fiscal
quarters of the Company during each fiscal year, a quarterly report of the
Company consisting of a consolidated unaudited balance sheet as at the end of
such quarter and a consolidated unaudited statement of operations, stockholders'
equity (deficit) and cash flows for such quarter and the portion of the fiscal
year then ended, setting forth in each case in comparative form corresponding
figures for the preceding fiscal year. All such reports shall be certified by
the Chief Financial Officer of the Company to be correct and complete, to
present fairly the financial position of the Company and the Subsidiaries and
the consolidated results of its operations and changes in its financial position
as of the time and for the period then ended and
16
<PAGE>
to have been prepared in accordance with generally accepted accounting
principles consistently applied except for normal, recurring, year-end audit
adjustments and the absence of footnotes.
(c) The Company shall furnish to the Funds, within 30 days after the end of
each calendar month, an unaudited consolidated balance sheet of the Company as
of the end of such month and the related unaudited statement of operations,
stockholders= equity (deficit) and cash flows for such month and for the fiscal
year to date, setting forth in each case comparative form the corresponding
figures for the budget for the current fiscal year, or such other financial
information as otherwise agreed to by the parties hereto. All such statements
shall be certified by the Chief Financial Officer of the Company to the effect
that such statements fairly present the financial condition of the Company as of
the dates shown and the results of its operations for the periods then ended and
that such statements have been prepared in conformity with generally accepted
accounting principles consistently applied except for normal, recurring,
year-end audit adjustments and the absence of footnotes.
(d) Commencing with the Company's fiscal year commencing July 1, 1998, the
Company shall furnish to the Funds, as soon as practicable and in any event not
less than 60 days prior to the end of each fiscal year of the Company, (i) an
annual operating budget for the Company and the Subsidiaries, for the succeeding
fiscal year, containing projections of profit and loss, cash flow and ending
balance sheets for each month of such fiscal year and (ii) the Business Plan.
The Company shall furnish to the Funds within five (5) days after the date the
Board of Directors has approved the annual operating budget and business plan
referred to above, which shall be no later than 60 days after the beginning of
each fiscal year, such operating budget and business plan as approved by the
Board of Directors. Promptly upon preparation thereof, the Company shall furnish
to the Funds any other operating budgets or business plans that the Company may
prepare and any revisions or modifications of such previously furnished budgets
or business plans.
(e) The annual statements and quarterly statements furnished pursuant to
Sections 5.3(a) and (b) shall include a narrative discussion prepared by the
Company describing the business operations of the Company and the Subsidiaries
during the period covered by such statements. The monthly statements furnished
pursuant to Section 5.3(c) shall be accompanied by a statement describing any
material events, transactions or deviations from the Business Plan and
containing an explanation of the causes and circumstances thereof.
5.4. Certificates of Compliance. The Company and each of the Subsidiaries
--------------------------
covenant that promptly after the occurrence of any default hereunder or any
default under or breach of any material agreement, or any other material adverse
event or circumstance affecting the Company or the Subsidiaries, it will deliver
to the Funds an Officers= Certificate specifying in reasonable detail the nature
and period of existence thereof,
17
<PAGE>
and what actions the Company or the Subsidiaries have taken and proposes to take
with respect thereto.
5.5. Other Reports and Inspection. (a) The Company will furnish to the
------------------------------
Funds (i) as soon as practicable after issuance, copies of any financial
statements or reports prepared by the Company or the Subsidiaries for, or
otherwise furnished to, their stockholders or the Securities and Exchange
Commission and (ii) promptly, such other documents, reports and financial data
as the Funds, in their sole discretion, may request. In addition, the Company
will, upon request, make available to the Funds or its representatives or
designees (i) all assets, properties and business records of the Company and the
Subsidiaries for inspection and/or copying and (ii) the directors, officers and
employees of the Company and the Subsidiaries for interviews concerning the
business, affairs and finances of the Company and the Subsidiaries.
5.6. Insurance. The Company and the Subsidiaries will at all times maintain
---------
valid policies of worker's compensation and director and officer and such other
insurance with respect to their properties and business of the kinds and in
amounts not less than is customarily maintained by corporations engaged in the
same or similar business and similarly situated, including, without limitation,
insurance against fire, loss, damage, theft, public liability and other risks.
The activities and operations of the Company and the Subsidiaries shall be
conducted in a manner to as to conform in all material respects to all
applicable provisions of such policies.
5.7. Use of Proceeds; Restriction on Payments. The Company shall use the
------------------------------------------
net proceeds from the Line of Credit to bridge its working capital needs, to
repay certain indebtedness and settle certain law suits as set forth in Schedule
5.7 through such time as it can obtain additional financing. The Company
covenants and agrees that it will not directly or indirectly use any of the
proceeds to (i) repay any indebtedness of the Company or the Subsidiaries,
including but not limited to any indebtedness to officers, employees, directors
or principal stockholders of the Company or the Subsidiaries, but excluding
accounts payable to non-affiliates incurred in the ordinary course of business,
other than the indebtedness set forth on Schedule 5.7, (ii) redeem, repurchase
or otherwise acquire any equity security of the Company or the Subsidiaries or
(iii) make any payment to any officer or director or any affiliates of any of
the foregoing, without the prior written approval of the Funds. Notwithstanding
the foregoing, neither the Company nor the Subsidiaries shall make any payments
to any parties which exceed $50,000 individually or $500,000 in the aggregate,
without the prior written consent of the Funds.
5.8. Material Changes. The Company and the Subsidiaries will promptly
-----------------
notify the Funds of any material adverse change in the business, properties,
assets or condition, financial or otherwise, of the Company or the Subsidiaries,
or any other material
18
<PAGE>
adverse event or circumstance affecting the Company or the Subsidiaries, and of
any litigation or governmental proceeding pending or, to the knowledge of the
Company, threatened against the Company or the Subsidiaries or against any
director or officer of the Company or the Subsidiaries.
5.9. Corporate Existence, Licenses and Permits; Maintenance of Properties;
----------------------------------------------------------------------
New Businesses. The Company and the Subsidiaries will at all times conduct their
- --------------
business in the ordinary course and cause to be done all things necessary to
maintain, preserve and renew their existence and will preserve and keep in force
and effect, all licenses, permits and authorizations necessary to the conduct of
their respective businesses. The Company and the Subsidiaries will also maintain
and keep their properties in good repair, working order and condition, and from
time to time, to make all needful and proper repairs, renewals and replacements,
so that the business carried on in connection therewith may be properly
conducted at all times.
5.10. Other Material Obligations. The Company and the Subsidiaries will
---------------------------
comply with, (a) all material obligations which they are subject to, or become
subject to, pursuant to any contract or agreement, whether oral or written, as
such obligations are required to be observed or performed, unless and to the
extent that the same are being contested in good faith and by appropriate
proceedings and the Company or the Subsidiaries, as the case may be, have set
aside on its books adequate reserves with respect thereto, and (b) all
applicable laws, rules, and regulations of all governmental authorities, the
violation of which could have a material adverse effect upon the business of the
Company or of the Subsidiaries.
5.11. Amendment to the Certificate of Incorporation and the By-Laws. The
--------------------------------------------------------------
Company and the Subsidiaries will perform and be in compliance with and observe
all of the provisions set forth in their respective Certificate of Incorporation
and By-Laws to the extent that the performance of such obligations is legally
permissible; provided that the fact that performance is not legally permissible
will not prevent such nonperformance from constituting an event of default under
this Agreement, the Warrants, the Notes or the Security Agreement. The Company
and the Subsidiaries will not amend their respective Certificate of
Incorporation or By-Laws or any Certificate of Designations for any other
capital stock of the Company, including, but not limited to, any series of
Preferred Stock so as to adversely affect the rights of the Funds under this
Agreement, the Certificate of Incorporation, the By-Laws, the Warrants, the
Subsidiary Guarantee and the Notes.
5.12. Mergers, Consolidations, Sales of Assets and Acquisitions. The
--------------------------------------------------------------
Company and the Subsidiaries shall not (i) merge into or consolidate with any
other person, or entity or permit any other person to merge into or consolidate
with them, or (ii) sell, transfer, lease or otherwise dispose of (in one
transaction or in a series of transactions) any of their
19
<PAGE>
assets in an amount more than $25,000 individually or more than $250,000 in the
aggregate (whether now owned or hereafter acquired) or purchase, lease or
otherwise acquire (in one transaction or a series of transactions) any of the
assets of any other person or entity, except in the ordinary course of business
with respect to clause (ii).
5.13. Acquisition. Neither the Company nor the Subsidiaries will acquire
-----------
any interest in any business from any person, firm or entity (whether by a
purchase of assets, purchase of stock, merger or otherwise) without the prior
approval of the Funds.
5.14. Dividends; Distributions; Repurchases of Common Stock; Treasury
--------------------------------------------------------------------
Stock. Other than with respect to its Series A Preferred Stock, the Company
- -----
shall not declare or pay any dividends on, or make any other distribution with
respect to, its capital stock, whether now or hereafter outstanding, or
purchase, acquire, redeem or retire any shares of its capital stock.
5.15. Consents and Waivers. (a) Except as set forth on Schedule 5.15, the
--------------------
Company and the Subsidiaries have obtained all consents and waivers needed to
enable them to perform all of their obligations under this Agreement and the
transactions contemplated hereby, copies of which have been provided to the
Funds.
(b) Except as set forth on Schedule 5.15, the Company has obtained from all
holders of options, warrants and other securities of the Company having any
right of first refusal, offer, sale, negotiation or similar rights or
antidilution or other rights to have the terms (including, without limitation,
conversion or exercise prices or rates) of such instruments adjusted by virtue
of the issuance of the Notes and the Warrants or the other transactions
contemplated by this Agreement, a written waiver in form and substance
satisfactory to the Funds and their counsel, a copy of each of which has been
provided to the Funds.
5.16. Taxes and Liens. The Company and the Subsidiaries will duly pay and
---------------
discharge when payable, all taxes, assessments and governmental charges imposed
upon or against the Company or the Subsidiaries or their properties, or any part
thereof or upon the income or profits therefrom, in each case before the same
become delinquent and before penalties accrue thereon, as well as all claims for
labor, materials or supplies which if unpaid might by law become a lien upon any
of their property, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings and the Company and the Subsidiaries
have set aside on their books adequate reserves with respect thereto.
5.17. Restrictive Agreement. The Company and the Subsidiaries covenant and
---------------------
agree that they will not be a party to any agreement or instrument which by its
terms would restrict the Company's or the Subsidiaries' performance of their
obligations
20
<PAGE>
pursuant to this Agreement, the Certificate of Incorporation, By-laws, the
Security Agreement, the Guarantee, the Warrants or the Notes.
5.18. Board of Directors. The Company shall at all times maintain
--------------------
provisions in its By-laws and/or Certificate of Incorporation indemnifying all
directors against liability and absolving all directors from liability to the
Company and its stockholders to the maximum extent permitted under the laws of
the State of Delaware. The By-laws of the Company shall always contain
provisions consistent with the provisions of this Section 5.18. In addition, the
Company shall at all times maintain Director and Officer insurance acceptable to
the Funds in their sole discretion.
5.19. No Creation of Subsidiaries. Neither the Company nor the Subsidiaries
---------------------------
will create or acquire any entity that would be a subsidiary without the prior
written consent of the Funds.
5.20. Publicity. (a) Neither the Company nor the Subsidiaries shall issue
---------
any press release or make any other public announcement with respect to this
Agreement or the transactions contemplated hereby or utilizing the names of the
Funds or their officers, directors, employees, agents or affiliates without
obtaining the prior approval of the Funds.
(b) Neither the Company nor the Subsidiaries shall not disclose the names,
identity, addresses or any other information regarding the Partnership and/or
the Trust or any of its officers, directors, employees, shareholders, nominees
and/or designees without the Funds' prior written consent.
5.21. Restriction on Securities. Prior to the Effective Date, the Company
-------------------------
and the Subsidiaries shall obtain the written agreement of all executive
officers and directors of the Company and the Subsidiaries and as requested by
the Funds shall use its best efforts to obtain a written agreement from all
stockholders of 5% or more of the Common Stock of the Company to "lock-up" all
of the shares of Common Stock owned by each of them (except with respect to the
securities purchased by Stephen Fish) at any time until the Company repays, to
the Funds, the principal and interest on the Notes, and to agree not to directly
or indirectly, issue, agree or offer to sell, grant an option for the purchase
or sale, assign, sell, contract to sell, sell "short" or "short against the box"
(as those terms are generally understood), pledge, hypothecate, distribute or
otherwise encumber or dispose of, any such shares (including options, rights,
warrants or other securities convertible into, exchangeable, exercisable for or
evidencing any right to purchase or subscribe for shares of capital stock of the
Company or the Subsidiaries (whether or not beneficially owned by the
undersigned)) or any beneficial interest therein of any shares of the Common
Stock, all in form and substance satisfactory to the Funds and their counsel.
21
<PAGE>
5.22. Restriction on Liens. The Company and the Subsidiaries shall not
---------------------
create, incur, assume or permit to exist any lien on any property or assets
(including stock or other securities of any person) now owned or hereafter
acquired by the Company or the Subsidiaries, other than as set forth on Schedule
5.22 and as contemplated by this Agreement, the Note and the Security Agreement.
5.23. Restrictions on Indebtedness. Neither the Company nor the
--------------------------------
Subsidiaries shall incur, create, assume or permit to exist any indebtedness
except (i) indebtedness represented by the Notes, (ii) indebtedness which by its
terms is subordinated to the Notes pursuant to terms acceptable to the Funds in
their sole discretion in an amount less than $25,000 in the aggregate and (iii)
indebtedness for borrowed money existing on the date hereof and disclosed in
writing to the Holder, but not any extensions, renewals or replacements of such
indebtedness.
5.24. Executive Compensation. Neither the Company nor the Subsidiaries
-----------------------
shall increase any officer's compensation or bonuses, whether in the form of
cash, stock, stock equivalents or otherwise (except for bonuses guaranteed in an
employment contract but excluding any bonuses payable as severance which are
waived pursuant to Section 5.15), without the prior written consent of the
Funds, which shall not be unreasonably withheld.
5.25. Sale and Lease-Back Transactions. Neither the Company nor the
-----------------------------------
Subsidiaries shall enter into any arrangement, directly or indirectly, with any
person whereby it shall sell or transfer any property, real or personal, used or
useful in its business, whether now owned or hereafter acquired, and thereafter
rent (including intellectual property), lease or license such property or other
property which it intends to use for substantially the same purpose or purposes
as the property being sold or transferred.
5.26. Restrictions on Certain Transactions. The Company shall not sell or
------------------------------------
transfer any assets to, or purchase or acquire any assets of, or otherwise
engage in any material transaction with any Subsidiary, other than as
contemplated by this Agreement. Neither the Company nor the Subsidiaries shall
sell or transfer assets to, or purchase or acquire any assets of, or otherwise
engage in any other material transaction with (i) an officer or director of the
Company or the Subsidiaries or (ii) a holder of 5% or more of the Common Stock
of the Company or the Subsidiaries, if the effect of such transaction can
reasonably be construed by the Funds as an attempt to frustrate the repayment of
the Notes.
5.27. Limitations on Sales of Assets. Except as set forth in this
----------------------------------
Agreement, the Security Agreement, the Notes or the Warrants, neither the
Company nor the Subsidiaries shall permit or place any material restriction,
directly or indirectly, on assets or properties of the Company or the
Subsidiaries.
22
<PAGE>
5.28. No Impairment. Neither the Company nor the Subsidiaries shall, by
-------------
amendment of its charter or through reorganization, consolidation, merger,
dissolution, sale of assets or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Agreement, the
Notes, the Subsidiary Guarantee, the Warrants, or the Security Agreement but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Funds against impairment.
5.29. Agreements. The Company shall cause all members of management and all
----------
professional employees of and consultants and advisors to the Company, including
all employees and consultants and advisors involved in its research and
development, to be subject to agreements with respect to (i) nondisclosure of
confidential information, (ii) assignment of patents, trademarks, copyrights and
proprietary rights to the Company and (iii) disclosure to the Company of
inventions.
5.30. Offer and Sale of Securities. Except as set forth on Schedule 5.30,
----------------------------
neither the Company nor anyone acting on its behalf has directly or indirectly
offered the Notes or the Warrants or any part thereof or any similar security of
the Company (or any other securities convertible or exchangeable for the Notes
or the Warrants or any similar security), for sale to, or solicited any offer to
buy the same from, anyone other than the Funds. All securities of the Company
heretofore sold and issued by it were sold and issued, and the Notes or the
Warrants were offered and will be sold and issued, in compliance with all
applicable federal and state securities laws.
5.31. The Company shall use its best efforts to have the JDA execute and
file a UCC-3 termination statement with respect to the Key Bank UCC on or prior
to May 22, 1998 in all relevant jurisdictions.
6. Ranking of Note; Security. Except as provided on Schedule 6 attached
--------------------------
hereto and made a part hereof, the Company and the Subsidiaries acknowledge and
agree that the Line of Credit shall be senior to all other indebtedness or other
obligations of the Company and shall be secured by the receivables and inventory
of the Company and the Subsidiaries now owned or hereafter owned or acquired
(including, without limitation, assets are set forth on Schedule 1.1 annexed
hereto). The Company and the Subsidiaries further acknowledge and agree that
none of the Company's or the Subsidiaries creditors shall have any claim on the
Line of Credit and neither the Company nor the Subsidiaries will represent to
such creditors to the contrary. The Company and the Subsidiaries acknowledge and
agree that they shall not create or permit the imposition of any Liens on any of
their assets from and after the Effective Date.
23
<PAGE>
7. Events of Default. The following shall each constitute an "Event of
-----------------
Default" hereunder: (a) the failure of the Company to make any payment of
principal of or interest on the Notes when due and payable;
(b) a breach of any representation, warranty, covenant, or agreement of the
Company or the Subsidiaries contained in this Agreement, the Notes, the Warrants
or the Security Agreement;
(c) the failure of the Company or the Subsidiaries to observe or perform
any covenant in this Agreement, the Notes, the Warrants or the Security
Agreement;
(d) if the Company or any of the Subsidiaries shall:
(i) admit in writing its inability to pay its debts generally as they
become due,
(ii) file a petition in bankruptcy or a petition to take advantage of any
insolvency act,
(iii) make an assignment for the benefit of its creditors,
(iv) consent to the appointment of a receiver of itself or of the whole or
any substantial part of its property,
(v) on a petition in bankruptcy filed against, be adjudicated a bankrupt,
or
(vi) file a petition or answer seeking reorganization or arrangement under
the federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state thereof;
(e) if a court of competent jurisdiction shall enter an order, judgment or
decree appointing, without the consent of the Company or the Subsidiaries, as
the case may be, a receiver of the Company or the Subsidiaries or of the whole
or any substantial part of its property, or approving a petition filed against
it seeking reorganization or arrangement of the Company or the Subsidiaries
under the federal bankruptcy laws or any other applicable law or statute of the
United States of America or any State thereof, and such order, judgment or
decree shall not be vacated or set aside or stayed within thirty (30) days
24
<PAGE>
from the date of entry thereof;
(f) if, under the provisions of any other law for the relief or aid of
debtors, any court of competent jurisdiction shall assume custody or control of
the Company or the Subsidiaries or the whole or any substantial part of its
property and such custody or control shall not be terminated or stayed within
thirty (30) days from the date of assumption of such custody or control;
(g) the liquidation, dissolution or winding up of the Company or the
Subsidiaries;
(h) a final judgment or judgments for the payment of money in excess of
$100,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction against
the Company and the Subsidiaries and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of execution thereof
shall not be procured, within 30 days from the date of entry thereof or the
Company and the Subsidiaries shall not, within such 30-day period, or such
longer period during which execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal; or
(i) if, within thirty (30) days after the commencement of an action against
the Company or the Subsidiaries (and service of process in connection therewith
on the Company or the Subsidiaries) seeking any bankruptcy, insolvency,
reorganization, liquidation or similar relief under any present or future
statute, law or regulation, such action shall not have been resolved in favor of
the Company or the Subsidiaries, as the case may be, or all orders or
proceedings thereunder affecting the property of the Company or the Subsidiaries
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within sixty (60) days after the appointment without the consent
or acquiescence of the Company or the Subsidiaries of any trustee or receiver
for all or any substantial part of the property of the Company or the
Subsidiaries, such appointment shall not have been vacated.
8. Remedies upon Default.
---------------------
(a) Upon an Event of Default, in addition to any and all remedies set forth
herein, in the Notes or at law or at equity, upon sixty (60) days notice to the
Company, the Funds shall be entitled to appoint a majority of the members of the
Board of Directors of the Company; provided, however, that after receipt of
notice of default from the Funds, the Company shall have the opportunity to cure
such Event of Default within such 60-day period, subject to the Company making a
good faith effort to cure such Event of Default. The Directors of the Company
will elect each such person selected by the Funds to the Board of Directors of
the Company by creating a new position on the Board of Directors promptly
25
<PAGE>
following such person's nomination by the Funds and shall nominate such person
for election in connection with any stockholder vote for Directors, and the
Company will use its best efforts to ensure that the stockholders of the Company
agree to vote all their securities in favor of such persons= election. The
Company agrees to vote all voting securities for which the Company holds
proxies, granting it voting discretion, or is otherwise entitled to vote, in
favor of, and to use its best efforts in all respect to cause, the election of
each such individual proposed by the Funds. In the event that a vacancy is
created on the Board of Directors at any time by the death, disability,
resignation or removal (with or without cause) of any such individual proposed
and nominated by the Funds, pursuant to this Agreement, the Company will, and
will use its best efforts to ensure that the stockholders of the Company, vote
all its voting securities to elect each individual proposed by the Funds and
approved by the Company and nominated for election by the Funds to fill such
vacancy and serve as a voting Director.
(b) Upon an Event of Default, in addition to any and all remedies set forth
herein, in the Notes or at law or at equity, upon ninety (90) days notice to the
Company, the Funds shall have the right (the "Repayment Right") upon demand (the
date of each such demand being referred to as a "Demand Date"), to require the
Company to immediately repay to the Funds, the outstanding principal and
interest of the Notes on the Demand Date, in shares of Common Stock valued at
the last sale price of the Common Stock on the business day prior to the Demand
Date or, in case no such reported sales take place on such day, the average of
the last reported bid and asked prices of the Common Stock on such day, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on any such exchange, the representative closing bid price of the Common Stock
as reported by the NASDAQ Bulletin Board ("NASDAQ"), or other similar
organization if NASDAQ is no longer reporting such information, or if not so
available, the fair market price of the Common Stock as determined in good faith
by the Board of Directors; provided, however, that after receipt of notice of
default from the Funds, the Company shall have the opportunity to cure such
default within such 90-day period, subject to the Company making a good faith
effort to cure such Event of Default.
9. Indemnification. The Company and the Subsidiaries shall indemnify and
---------------
hold harmless the each of the Funds and each of their respective partners,
affiliates, shareholders, directors, officers, agents, advisors,
representatives, employees, counsel and controlling persons within the meaning
of Section 15 of the Securities Act of 1933, as amended, and the successors and
assigns of any of the foregoing against any and all losses, liabilities, claims,
damages and expenses whatsoever (and all actions in respect thereof), and to
reimburse each of the Funds for legal fees and related expenses as incurred
(including, but not limited to the costs of giving testimony or furnishing
documents in response to a subpoena or otherwise, the costs of investigating,
preparing, pursuing or defending any such action or claim whether or not pending
or threatened and whether or not either Fund is a party thereto), in so far as
such losses, liabilities, claims, damages or expenses arise out of, relate to,
are incurred
26
<PAGE>
in connection with or are in any way a result of (i) the transactions
contemplated by this Agreement, the Notes, the Warrants, the Subsidiary
Guarantee or the Security Agreement including any modifications or future
additions to such agreement or documents and related activities prior to the
date hereof, (ii) any act by the Funds taken in connection with this Agreement,
the Notes, the Warrants, the Subsidiary Guarantee or the Security Agreement
(iii) a breach of any representation, warranty, covenant, or agreement of the
Company or the Subsidiaries contained in this Agreement, the Notes, the
Warrants, the Subsidiary Guarantee or the Security Agreement (iv) the employment
by the Company or the Subsidiaries of any device, scheme or artifice to defraud,
or the engaging by the Company or the Subsidiaries in any act, practice or
course of business which operates or would operate as a fraud or deceit, or any
conspiracy with respect thereto, in connection with the sale of the Notes or
Warrants or (v) any untrue statement or alleged untrue statement of a material
fact contained in this Agreement, the Security Agreement, the Subsidiary
Guarantee, the Notes and Warrants or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading; (vi) any action
taken (or omitted to be taken) by the Company or the Subsidiaries or (vii) any
action or proceeding relating to this Agreement, the Warrants, the Notes, the
Subsidiary Guarantee and the Security Agreement and the relationship between the
Company, the Subsidiaries and the Funds.
10. Modification. This Agreement may not be modified, amended or waived in
------------
any manner except by an instrument in writing signed by Paramount Capital Asset
Management, Inc., the Investment Manager of the Trust and the General Partner of
the Partnership, the Company and the Subsidiaries. The waiver by either party of
compliance with any provision of this Agreement by the other party shall not
operate or be construed as a waiver of such party of a provision of this
Agreement.
11. Miscellaneous.
-------------
11.1. Termination; Survival of Representations, Warranties and Covenants.
---------------------------------------------------------------------
Except as otherwise provided for in this Agreement all representations,
warranties, covenants and agreements contained in this Agreement, or in any
document, exhibit, schedule or certificate by any party delivered in connection
herewith shall survive the execution and delivery of this Agreement and the
Effective Date and the consummation of the transactions contemplated hereby,
regardless of any investigation made by the Funds or on their behalf.
11.2 Expenses. The Company and the Subsidiaries shall pay all of their own
--------
expenses in connection with this Agreement and the transactions contemplated
herein. The Company agrees to pay promptly and hold the Funds harmless against
liability for the payment of all expenses incurred by the Company and the Funds
in connection with all costs and expenses under this Agreement, the Notes, the
Warrants and the Security Agreement,
27
<PAGE>
including without limitation, the costs of preparing, printing and filing with
the Commission any registration statement and amendments, post-effective
amendments, and supplements thereto, preparing, printing and delivering exhibits
thereto and copies of the preliminary, final and supplemental prospectuses. In
addition to the indemnification obligation contained in Section 10, and not to
be conditioned upon, any amounts due and/or owing to the Funds by the Company
pursuant to any of the provisions contained above, the Company hereby agrees to
reimburse to the Funds, immediately upon demand made by the Funds all direct
costs associated with entering into, and performance of, this Agreement, the
funding of the Line of Credit and any transactions contemplated hereby including
any bank or legal fees or charges associated therewith.
11.3. Amendments and Waivers. This Agreement and all exhibits and schedules
----------------------
hereto set forth the entire agreement and understanding among the parties as to
the subject matter hereof and merges and supersedes all prior discussions,
agreements and understandings of any and every nature among them. This Agreement
may be amended only by mutual written agreement of the Company, the Subsidiaries
and the holders of a majority of principal amount of the Notes, and the Company
or the Subsidiaries may take any action herein prohibited or omit to take any
action herein required to be performed by it, and any breach of any covenant,
agreement, warranty or representation may be waived, only if the Company or the
Subsidiaries, as the case may be, has obtained the written consent or waiver of
the holders of a majority of principal value of the Notes. No course of dealing
between or among any persons having any interest in this Agreement will be
deemed effective to modify, amend or discharge any part of this Agreement or any
rights or obligations of any person under or by reason of this Agreement.
11.4. Successors and Assigns. This Agreement may not be assigned by the
-----------------------
Company or the Subsidiaries except with the prior written consent of the Funds.
This Agreement shall be binding upon and inure to the benefit of the Company and
the Subsidiaries and their permitted successors and assigns, and the Funds and
their successors and assigns. The provisions hereof which are for the Funds=
benefit as holders of the Notes and the Warrants are also for the benefit of,
and enforceable by, any subsequent holder of such Notes and Warrants.
11.5. Notices. All notices, demands and other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given personally or when mailed by
certified or registered mail, return receipt requested and postage prepaid, and
addressed to the addresses of the respective parties set forth below or to such
changed addresses as such parties may have fixed by notice; provided, however,
that any notice of change of address shall be effective only upon receipt:
28
<PAGE>
If to the Company or the Subsidiaries:
Conversion Technologies International, Inc.
3452 Lake Lynda Drive
Orlando, Florida 32817
Attn: William Amt
If to the Partnership or the Trust:
Paramount Capital Asset Management, Inc.
787 Seventh Avenue
New York, NY 10019
Attn: Michael Weiss
11.6. Governing Law. The validity, performance, construction and effect o
-------------
this Agreement shall be governed by the internal laws of the State of New York
without giving effect to such State's principles of conflict of laws.
11.7. Counterparts. This Agreement may be executed in any number of
------------
counterparts and, notwithstanding that any of the parties did not execute the
same counterpart, each of such counterparts shall, for all purposes, be deemed
an original, and all such counterparts shall constitute one and the same
instrument binding on all of the parties thereto.
11.8. Headings. The headings of the Sections hereof are inserted as a
--------
matter of convenience and for reference only and in no way define, limit or
describe the scope of this Agreement or the meaning of any provision hereof.
11.9. Severability. In the event that any provision of this Agreement or
------------
the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless the provision held
invalid shall substantially impair the benefit of the remaining portion of this
Agreement.
11.10. Freedom of Action. (a) Nothing herein shall restrict or otherwise
-----------------
limit Paramount Capital Asset Management, Inc., the Partnership or the Trust
from performing similar or dissimilar services for any other party or on their
own account and nothing herein shall require Paramount Capital Asset Management,
Inc., the Partnership or the Trust to make any opportunity available to or
introduction to, or on behalf of, the Company or the Subsidiaries. As used in
this Section 11.10, the Funds shall mean either and both of the Funds and their
affiliates (excluding the Company and the Subsidiaries as affiliates of the
Funds). The provisions of this Section 11.10 shall be enforceable to the fullest
extent permitted by law.
29
<PAGE>
11.11. Actions by Funds. Any actions permitted to be taken by the
------------------
Partnership or the Trust and any consents required to be obtained from the same
under this Agreement, may be taken or given only by, in the case of consents or
actions requiring approval of the Partnership or the Trust, by the Partnership
or the Trust, and in all other cases, only by holders of a majority of (a) in
the case of the Notes, the face amount of the principal and (b) in the case of
the Warrants, the number of underlying shares of Common Stock, and if such
holders or Funds constituting a majority the ("Majority Holders") as set forth
in (a) or (b) above or the Partnership or Trust take any action or grant any
consent, such action or consent shall be deemed given or taken by all holders or
the Funds' who shall be bound by the decision or action taken by the Majority
Holders or the Partnership or the Trust without any liability on the part of the
Majority Holders or the Partnership or the Trust to any other holder or Funds of
securities hereto.
11.12 Consent to Jurisdiction. The parties hereto irrevocably consent to
-----------------------
the jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out of
or relating to this Agreement, any document or instrument delivered pursuant to,
in connection with or simultaneously with this Agreement, or a breach of this
Agreement or any such document or instrument. In any such action or proceeding,
each party hereto waives personal service of any summons, complaint or other
process and agrees that service thereof may be made in accordance with Section
11.12. Within 30 days after such service, or such other time as may be mutually
agreed upon in writing by the attorneys for the parties to such action or
proceeding, the party so served shall appear or answer such summons, complaint
or other process.
11.13 Further Assurances. The Company and the Subsidiaries agree, at their
------------------
expense, to execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and take all such actions as the Funds may
from time to time request to better assure, preserve, protect and perfect the
security interest (the "Security Interest") in the Company's and the
Subsidiaries' receivables and inventory and the rights and remedies created
hereby, including the payment of any fees and taxes required in connection with
the execution and delivery of this Agreement, the granting of the Security
Interest and the filing of any financing statements, UCC-1's or other documents
in connection herewith.
30
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their respective duly authorized representatives as of the day and
year first written above.
THE ARIES FUND, A CAYMAN ISLAND TRUST THE ARIES DOMESTIC FUND, L.P.
By: its Investment Manager, PARAMOUNT By: its General Partner, PARAMOUNT
CAPITAL ASSET MANAGEMENT, INC. CAPITAL ASSET MANAGEMENT, INC.
By:/s/Lindsay A. Rosenwald, M.D. By:/s/Lindsay A. Rosenwald, M.D.
--------------------------------- --------------------------------
Name: Lindsay A. Rosenwald, M.D. Name: Lindsay A. Rosenwald, M.D.
Title: President Title: President
CONVERSION TECHNOLOGIES DUNKIRK INTERNATIONAL GLASS
INTERNATIONAL, INC. AND CERAMICS CORPORATION
By:/s/William L. Amt By:/s/William L. Amt
--------------------------------- -------------------------------
Name: William L. Amt Name: William L. Amt
Title: President and Chief Executive Officer Title: President and Chief
Executive Officer
ADVANCED PARTICLE TECHNOLOGIES,
INC.
By:/s/William L. Amt
---------------------------------
Name: William L. Amt
Title: President and Chief Executive Officer
31
Exhibit 11
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Statement of Computation of Basic Net Income (Loss) Per Share
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1998 1991 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (336,016) $(1,261,690) $(2,449,199) $(4,446,865)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
------------ ------------ ------------ -----------
Loss before extraordinary item
attributable to common shareholders (336,016) (1,261,690) (4,022,699) (4,446,865)
Weighted average number of
common shares outstanding 4,799,186 4,799,186 4,799,186 4,765,031
=========== =========== =========== ===========
Loss per common share before
extraordinary item (0.07) (0.26) (.84) (0.93)
Extraordinary item -- -- 6,354,356 --
=========== =========== =========== ===========
Income per share from
extraordinary item -- -- 1.33 --
=========== =========== =========== ===========
Net income (loss) (336,016) (1,261,690) 3,905,157 (4,446,865)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
------------ ------------ ------------ -----------
Net income (loss) attributable
to common shareholders (336,016) (1,261,690) 2,331,657 (4,446,865)
=========== =========== =========== ===========
Net income (loss) per
common share (0.07) (0.26) 0.49 (0.93)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000923978
<NAME> 6fumxso@
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 297,940
<SECURITIES> 0
<RECEIVABLES> 324,259
<ALLOWANCES> 18,000
<INVENTORY> 577,559
<CURRENT-ASSETS> 1,385,994
<PP&E> 8,640,118
<DEPRECIATION> 2,057,292
<TOTAL-ASSETS> 8,055,989
<CURRENT-LIABILITIES> 3,631,035
<BONDS> 1,837,271
0
553
<COMMON> 1,385
<OTHER-SE> 2,585,745
<TOTAL-LIABILITY-AND-EQUITY> 8,055,989
<SALES> 1,582,296
<TOTAL-REVENUES> 1,582,296
<CGS> 1,996,885
<TOTAL-COSTS> 3,611,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419,733
<INCOME-PRETAX> (2,449,199)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,449,199)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,354,356
<CHANGES> 0
<NET-INCOME> 3,905,157
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
