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DATED AUGUST 17, 1998
PROSPECTUS
FIX-CORP INTERNATIONAL, INC.
12,707,086 SHARES
COMMON STOCK
$.001 PAR VALUE
This prospectus ("Prospectus") relates to 12,707,086 shares (the "Shares") of
common stock, $.001 par value (the "Common Stock"), of Fix-Corp International,
Inc., a Delaware corporation ("Fix-Corp", the "Company", the "Small Business
Issuer" or the "Registrant"). This Prospectus is filed with the United States
Securities and Exchange Commission (the "Commission" or the "SEC") and relates
to a Registration Statement on Form SB-2 (the "Registration Statement") also
filed with the SEC. The Shares will be outstanding shares of Common Stock
acquired upon exercise of warrants or the conversion of convertible debt
securities, owned by the persons named in this Prospectus under the caption
"SELLING STOCKHOLDERS" or by pledgees, donees, transferees or other successors
in interest and permitted assigns of such selling stockholders (the "Selling
Stockholders"). The Shares were acquired by the Selling Stockholders in
connection with the exercise of warrants ("Warrants") by certain of the Selling
Stockholders and the conversion of convertible debentures ("Debentures") held by
certain of the Selling Stockholders, all of which Warrants, Debentures and
Shares, as and when issued to the Selling Stockholders, were exempt from the
registration provisions of the Securities Act. This Prospectus relates to
11,359,623 shares of Common Stock issuable upon conversion of the Debentures,
10,575,412 allocated to principal, 704,211 allocated to interest, and 80,000
allocated as Additional Shares, taking into consideration interest, adjustments
of the conversion price and the requirements of the Debenture documents, and
to 1,347,463 shares of Common Stock issuable upon exercise of the Warrants.
The Debentures and Warrants were issued in five transactions between November,
1997 and June, 1998, with each transaction having different conversion terms.
The principal amount of the Debentures, together with any accrued and unpaid
interest thereon, are convertible at any time into shares of Common Stock at
the lower of a designated conversion price (ranging from $3.31 to $4.22) or
a price determined by reference to the price of the Common Stock (either 83%
or 84% of the average closing bid prices during the 10 trading days preceding
conversion). See "SELLING STOCKHOLDERS."
The Company will not receive any of the proceeds from the sale of the Shares;
however, in consideration of issuing the Debentures and Warrants, the Company
received $18,000,000 which was used for working capital, expansion and
commencement of its principal lines of business and other general corporate
purposes. The weighted average exercise price of the outstanding Warrants is
approximately $3.26. Warrants, the exercise of which would result in the
issuance of 1,347,463 shares of Common Stock, are currently outstanding. If
all of the Warrants were exercised, and assuming it is not a cashless
exercise, the Company would receive aggregate proceeds of approximately
$4,388,947.
The Company has not made any underwriting arrangements with respect to the
Shares. The Common Stock is traded on the over the counter ("OTC") electronic
bulletin board maintained by the National Association of Securities Dealers (the
"Bulletin Board") under the symbol "FIXC". On August 4, 1998, the closing bid
and asked prices of the Common Stock as reported on the OTC Bulletin Board were
$4.00 and $4.313, respectively.
This Prospectus is to be used in connection with the sale of the Shares from
time to time by the Selling Stockholders. The Shares may be sold from time to
time by the Selling Stockholders, directly or through underwriters, dealers or
agents, in market transactions on the OTC Bulletin Board, on any other national
securities exchange or automated quotation system on which the Common Stock may
be listed or traded, including block trades or ordinary brokers transactions or
in privately negotiated transactions. The price at which any of the Shares may
be sold, and the commissions, if any, paid in connection with any sale, may be
privately negotiated, may be based on then prevailing market prices and may vary
from transaction to transaction and as a result are not currently known. See
"PLAN OF DISTRIBUTION."
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The Selling Stockholders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the 1933 Act, and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under
the 1933 Act. The Shares have not been registered for sale by the Selling
Stockholders under the securities laws of any state as of the date of this
Prospectus. Brokers or dealers effecting transactions in the Shares should
confirm the registration thereof under the securities laws of the states in
which transactions occur or the existence of any exemption from registration.
The Company will pay certain of the legal and other expenses of this offering
(estimated to be $37,500), except that the Selling Stockholders will bear the
cost of any brokerage commissions or discounts or other selling expenses
incurred by the Selling Stockholders in connection with the sale of its Shares.
The Company has agreed to indemnify the Selling Stockholders against certain
liabilities, including liabilities arising under the Securities Act. See "PLAN
OF DISTRIBUTION."
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained, or incorporated by
reference, in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Selling Stockholders. This Prospectus does not constitute an offer to
sell or the solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date hereof
or that there has been no change in the affairs of the Company since such date.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
(SEE "RISK FACTORS" BEGINNING ON PAGE 6.)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 17, 1998.
AVAILABLE INFORMATION
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This Prospectus constitutes a part of the Registration Statement filed by the
Company with the Commission under the Securities Act with respect to the
Shares offered hereby. In accordance with the rules and regulations of the
Commission, this Prospectus omits certain of the information contained in the
Registration Statement. Reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company and the Company's Common Stock. Statements contained herein concerning
the provisions of any document are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
All documents and reports subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the Shares are
referenced.
Prior to the effective date of the Form 10-SB (January 12, 1998), the Company
was not required to file reports with the Commission under the Exchange Act.
Upon the effective date of the Form 10-SB, the Company is required to file with
the Commission reports, proxy statements and other information under the
Exchange Act. The Company has filed an annual report on Form 10-KSB with the
Commission for fiscal year 1997, and the Company provided audited financial
statements to its stockholders, along with proxy materials, in anticipation of
the annual meeting of stockholders held during April, 1998. With respect to
fiscal years in which the Company is required to file an annual report with the
Commission, the Company will furnish annual reports to its stockholders which
include audited financial statements. The audited financial statements provided
to stockholders are reported on by its independent auditors. A quarterly report
containing unaudited condensed financial information for the first quarter of
each fiscal year are also provided. The Company also furnishes such other
reports from time to time as it may determine or as may be required by law.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or
oral request of such person, a copy of any or all the documents referenced
herein, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference in such documents, and any other
documents specifically referenced herein or in the Registration Statement to
which this Prospectus relates or into such other documents. Requests should
be
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addressed to: Investor Relations, 3637 South Green Road, Suite 201,
Beachwood, Ohio 44122; telephone: (216) 292-3182.
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the SEC at Seven World Trade Center, Suite 1300, New York, New York
and at Suite 1400, 500 West Madison Street, Chicago, Illinois. Copies of such
information can be obtained by mail from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Filings with the Commission made by the Company electronically through the EDGAR
system, such as the Registration Statement and the Form 10-SB (including certain
exhibits), are also available on the Commission's site on the World Wide Web, by
pointing a browser to (http://www.sec.gov/cgi-bin/srch-edgar), inserting in the
search box the phrase "fix corp international inc" and selecting the documents
identified under "Company name" as "FIX CORP INTERNATIONAL INC".
The Company's executive offices are located at 3637 South Green Road, Suite 201,
Beachwood, Ohio 44122, and its telephone number is (216) 292-3182.
RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be carefully considered in evaluating an investment in the Shares offered
by this Prospectus:
DEVELOPMENT STAGE. The Company was incorporated in October 1995 and was engaged
in corporate awards jewelry marketing and receivables financing for small
businesses until late 1996. In December 1996, the Company purchased the Heath
Resource Recovery Plant in Heath, Ohio (the "Facility") and its principal
business changed to plastics recycling. The Company is now operating
profitably, but there can be no assurance that such profitability will be
sustained. See "DESCRIPTION OF BUSINESS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
LIMITED EXPERIENCE. The Company's business strategy relies primarily on its
success in manufacturing and marketing recycled plastic resin and plastic resin
products, an area in which the Company has limited experience. The success of
its business strategy should be considered in light of the risks, expenses and
difficulties frequently encountered in entering into industries characterized by
intense competition. There can be no assurance that the Company will be able to
manufacture or market its products or proposed products, maintain or expand its
market share or achieve commercial revenues from its products or proposed
products in the future. In addition, certain aspects of the Company's business
strategy can only be implemented if Pallet Technology's business in Florida
becomes fully operational. Some of the foregoing factors are not within the
Company's control and there can be no assurance that the Company will be able to
implement its business strategy, that Pallet Technology's Florida business will
become fully operational or that the Company's business strategy will result in
profitability. See
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"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "DESCRIPTION OF BUSINESS" and the Company's financial statements
and notes thereto.
DEPENDENCE ON SIGNIFICANT CUSTOMERS. No customer of the Company's
subsidiaries purchases more than 30% of production, and the one customer that
does approach 30% is a distributor. If that customer is lost, the Company
believes that there is adequate demand for the Company's products so that the
loss of that customer would not have a material adverse effect on the
Company. However, there can be no assurances that the demand will be adequate
or that the lost distributor-customer could be replaced by other distributors
or customers. The loss of this distributor-customer or any other significant
customer could have a material adverse effect on the Company. See
"DESCRIPTION OF BUSINESS."
DEPENDENCE ON KEY SUPPLIERS. Raw materials for the Company's recycling
operations, that is, HDPE, generally are currently readily available. This may
change for various reasons. If the Company relies on a limited number of
suppliers of HDPE because, for example, the market demand for HDPE increases,
the Company's reliance on a limited number of suppliers would involve several
risks, including obtaining an adequate supply of raw materials and components in
order to manufacture or market products, increased raw material or component
costs and reduced control over pricing, quality and timely delivery. Any
interruption in the supply of raw materials or components could have a material
adverse effect on the Company. Furthermore, certain potential alternative
suppliers may have pre-existing exclusive relationships with competitors of the
Company and others which may preclude the Company from manufacturing certain of
its proposed products. See "DESCRIPTION OF BUSINESS--RAW MATERIALS."
PRICE SENSITIVITY. The Company's principal operations involve the recycling of
HDPE plastics. HDPE is a constituent ingredient of many consumer packaging
plastic products. The prices of raw materials are a function of, among other
things, the manufacturing capacity for such raw materials of such consumer
products. In the event of cost increases for raw materials, failure to achieve
corresponding sales price increases in a timely manner, sales price erosion
without a corresponding reduction in raw material costs or failure to
renegotiate favorable raw material supply contracts could have a material
adverse effect on the Company.
UNCERTAINTY OF MARKET ACCEPTANCE OF CERTAIN PROPOSED PRODUCTS. Although the
Company currently markets plastic resin, and manufactures plastic pallets at the
Facility, as defined below, the Company does not anticipate manufacturing
plastic pallet products at its Florida Plant until the third quarter of 1998.
Any unexpected developmental, regulatory or manufacturing problems could delay
the commercialization of the Company's proposed products and have a material
adverse effect on the Company and its prospects. In addition, the market
acceptance of any of the Company's proposed products, such as plastic pallets,
will be substantially dependent on the ability of the Company to demonstrate to
the business community the capabilities and perceived benefits of the Company's
proposed products as well as to sell commercial quantities of the proposed
products at acceptable prices. There can be no assurance that the Company will
be able to ultimately successfully develop plastic pallets
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or that it will be able to gain market acceptance for its plastic pallets.
See "DESCRIPTION OF BUSINESS--PALLET TECHNOLOGY."
LEVERAGE. The Company is significantly leveraged. As of March 31, 1998 the
Company's debt to equity ratio was 2.4 to 1. It has entered into security
agreements with a lender which substantially encumber all of the Company's
assets. At June 30, 1998, the Company had an aggregate of $9,719,400 in
outstanding bank loans with quarterly interest payments due of approximately
$220,000. In addition, under the terms of the Debentures, the Company is
required to provide for quarterly interest payments of $200,000 and satisfy
the principal amount of $18,000,000 in less than three years. The Company's
future operating performance and ability to service or refinance its
indebtedness will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond its control, and
consequently the Company may be unable to service all of its debt in the
future. There can be no assurance that the Company's future operating
performance will be sufficient to service such indebtedness or that the
Company will be able to refinance its indebtedness in whole or in part. The
degree to which the Company is leveraged can have significant effects on the
Company, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be limited;
(ii) a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of the principal of and interest on its existing
indebtedness, thereby reducing funds available for operations; (iii) the
agreements governing the Company's indebtedness and Debentures contain
certain restrictive covenants. The Company's ability to make scheduled
payments of the principal of, or interest on, or to refinance, its
indebtedness will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, primarily interest rate
levels and financial, competitive, business and other factors, many of which
are beyond its control. The Company has provided for all interest payments on
the Debentures when due and no defaults have occurred under any of its debt
agreements. See "DESCRIPTION OF BUSINESS; --ACQUISITION OF THE FACILITY;
- --PALLET TECHNOLOGY;" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
NEED FOR ADDITIONAL FINANCING. The Company has funded its operations to date
primarily through equity and debt financings. During the 12 month period
ended December 31, 1997 and the three month period ended March 31, 1998, in
the aggregate, the Company has raised $21,684,327 in debt financing and
$7,867,859 in equity financing. The Company does not currently anticipate
needing any additional debt (in addition to its current bank credit lines) or
capital during the next 12 month period. The Company anticipates that its
current funds from such financings, together with cash flow from operations
(if any), should be sufficient to fund the Company's operations, including
its proposed expansion, for the foreseeable future. However, there can be no
assurance that events affecting the Company's operations will not result in
the Company depleting its funds before that time. The Company may need to
raise substantial additional funds to continue to fund operating expenses or
its expansion strategy. There can be no assurance that additional financing
will be available, or, if available, that such financing will be on terms
favorable to the Company. Failure to obtain such additional financing would
have a material adverse effect on the Company. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES AS OF DECEMBER 31, 1997" and the Company's financial
statements and notes thereto.
SUBSTANTIAL INDEBTEDNESS DUE AFTER JUNE 30, 1998. At June 30, 1998, the
Company had an aggregate of $32,486,813 in outstanding indebtedness,
including $9,719,400 in bank loans, $18,000,000 in subordinated convertible
debentures, and $4,767,413 of accounts payable (which includes approximately
$450,000 to equipment vendors which the Company
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intends to pay with the proceeds of its existing credit facilities). In the
event the Company is not successful in generating revenue to service this
indebtedness or in renegotiating the terms of the loans, there can be no
assurance that the loans will not become due. In addition, there can be no
assurance that the Company will be able to service this indebtedness or to
renegotiate the terms of indebtedness on favorable terms to the Company or at
all. The failure of the Company to service this indebtedness or to
renegotiate the indebtedness would have a material adverse effect upon the
Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION--PHASE 2; --PHASE 3; --CONVERTIBLE DEBENTURES" and
"DESCRIPTION OF BUSINESS; --ACQUISITION OF THE FACILITY; --PALLET TECHNOLOGY."
COMPETITION AND RAPID TECHNOLOGICAL CHANGE. The recycling and recycled
plastics industries are subject to intense competition and rapid and
significant technological change. The Company faces competition from other
recycling and plastics companies, many of which have substantially greater
financial and other resources than the Company and, therefore, are able to
spend more than the Company in areas such as product development,
manufacturing and marketing. Although a company with greater resources will
not necessarily be able to bring a new product to market before its smaller
competitors, substantial resources enable a company to support many new
products simultaneously, thereby improving the likelihood of at least some of
its new products being among the first to make it to market. Furthermore,
certain of the Company's competitors are significantly smaller than the
Company and may, therefore, have lower fixed costs and greater operating
flexibility. Since the recycling process used by the Company involves
technology in the public domain, other firms would not need to invest in
licenses or development of new technology to compete with the Company's
recycling operations. The Company's revenues and profitability could be
adversely affected by technological change. Competitors may develop products
which may render the Company's products or proposed products uneconomical or
result in products being commercialized that may be superior to the Company's
products. In addition, alternatives to recycled plastics could be developed,
which would have a material adverse effect on the Company. See "DESCRIPTION
OF BUSINESS."
UNCERTAIN PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company relies
on a combination of licenses and trade secrets to protect its proprietary
technology, rights and know-how. There can be no assurance that such license
rights will not be infringed upon, that the Company's trade secrets will not
otherwise become known to or independently developed by competitors, that
non-disclosure agreements will not be breached, or that the Company would
have adequate remedies for any such infringement or breach. Litigation may
be necessary to enforce proprietary rights of the Company or to defend the
Company against third-party claims of infringement. Such litigation could
result in substantial cost to, and a diversion of effort by, the Company and
its management and may have a material adverse effect on the Company. The
Company currently is an exclusive and non-exclusive licensee of various
technologies and may in the future desire or be required to obtain other
licenses to develop, manufacture and market commercially viable products.
The Company's success and potential competitive advantage is dependent upon
its ability to exploit the technology under these licenses. There can be no
assurance that the Company will be able to exploit the technology covered by
these license agreements or that it will be able to do so exclusively. In
addition, there
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can be no assurance that any patents or patent applications pursuant to which
the Company has obtained licenses are valid and enforceable, or that any
licenses required to be obtained by the Company in the future will be valid
and enforceable or obtainable on commercially reasonable terms, if at all.
There can be no assurance that patent applications which underlie the
Company's licenses will result in patents being issued, or that, if issued,
the patents will afford protection against competitors with similar
technology. Although the Company is not aware of any claim against it for
infringement, the Company's ability to commercialize its products and
proposed products depends on its not infringing the proprietary rights of
competitors. Laws regarding the enforceability of intellectual property vary
from jurisdiction to jurisdiction. There can be no assurance that
intellectual property issues will be uniformly resolved, or that local laws
will provide the Company with consistent rights and benefits. In addition,
there can be no assurance that competitors will not be issued patents which
may prevent the manufacturing or marketing of the Company's products or
proposed products or require licensing and the payment of fees or royalties
by the Company in order for the Company to be able to manufacture or market
certain products. See "DESCRIPTION OF BUSINESS--PATENTS, TRADEMARKS AND
LICENSES."
ENVIRONMENTAL MATTERS. The business operations of the Company and the
ownership and operations of real property by the Company are subject to
extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment,
the handling and disposition of wastes (including solid and hazardous wastes)
or otherwise relating to the protection of the environment. As is the case
with manufacturers in general, if a release of hazardous substances occurs on
or from the Company's properties or any associated off-site disposal
location, or if contamination from prior activities is discovered at any of
the Company's properties, the Company may be held liable. From time to time,
the Company is involved in inquiries relating to compliance with
environmental laws, permits and other environmental matters. In the future,
the Company may be identified as a potentially responsible party and be
subject to liability under applicable law. No assurances can be given that
additional environmental issues will not require future expenditures.
The plastics industry, in general, and the Company also are subject to
existing and potential federal, state, local and foreign legislation designed
to reduce solid wastes by requiring, among other things, plastics to be
degradable in landfills, minimum levels of recycled content, various
recycling requirements, disposal fees and limits on the use of plastic
products. In addition, various consumer and special interest groups have
lobbied from time to time for the implementation of these and other such
similar measures. Although the Company believes that the legislation
promulgated to date and such initiatives to date have not had a material
adverse effect on the Company, there can be no assurance that any such future
legislative or regulatory efforts or future initiatives would not have a
material adverse effect on the Company. See "DESCRIPTION OF
BUSINESS--ENVIRONMENTAL MATTERS AND GOVERNMENTAL REGULATIONS."
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POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The testing,
manufacturing, and marketing of the Company's products and proposed products
involve the inherent risks of product liability claims or similar legal
theories against the Company, some of which may cause the Company to incur
significant defense costs. Although the Company currently maintains product
liability insurance coverage which it believes is adequate, there can be no
assurance that the coverage limits of its insurance are adequate or that all
such claims will be covered by insurance. In addition, these policies
generally must be renewed every year. While the Company has been able to
obtain product liability insurance in the past, there can be no assurance it
will be able to obtain insurance in the future on its products or proposed
products. Product liability insurance varies in cost, is difficult to obtain
and may not be available in the future on terms acceptable to the Company, if
it is available at all. A successful product liability claim or other
judgment against the Company in excess of its insurance coverage could have a
material adverse effect upon the Company or its reputation. See "DESCRIPTION
OF BUSINESS."
YEAR 2000 COMPLIANCE. The year 2000 compliance issue, which is common to
most companies, concerns the inability of computerized information systems to
properly recognize and process date sensitive information as the year 2000
approaches. The Company currently is working to address and resolve this
issue with respect to its computerized information systems, but has not yet
assessed the total costs. However, based on preliminary information available
to the Company, in part because the Company does not believe that its
recycling and manufacturing operations use date sensitive systems in any
material respect, such costs are not currently expected to have a material
adverse impact on the Company's financial position or results of operations
in the future.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the experience,
abilities and continued services of its current management personnel. In
particular, Mr. Fixler, its Chairman of the Board and Chief Executive
Officer, has played a significant role in the development and management of
the Company. The Company has entered into a three-year employment agreement
with Mr. Fixler commencing January 1, 1997 and has obtained a $2,500,000 key
man life insurance policy on the life of Mr. Fixler, for the benefit of the
Company. The Company has also entered into a five-year employment agreement
with each of Mr. DeLaurentiis and Mr. Kittelson. Each of Messrs. Fixler,
DeLaurentiis and Kittelson is party to an employment agreement with the
Company. Under his agreement, Mr. Fixler's salary is $200,000 in 1997,
$250,000 in 1998 and $300,000 in 1999, and he is entitled to a $2,000,000
severance benefit. Under his agreement, commencing January 1, 1997, Mr.
DeLaurentiis's salary is $150,000 plus raises and bonuses as determined by
the Board of Directors of the Company. Under his agreement, commencing July
16, 1998, Mr. Kittelson's salary is $125,000, plus raises and bonuses as
determined by the Board of Directors of the Company. He also has been granted
options to purchase 500,000 shares of Common Stock, with 100,000 vesting on
each anniversary of his employment agreement. The loss or reduction of
services of Mr. Fixler, Mr. DeLaurentiis, Mr. Kittelson or any other key
employee could have a material adverse effect on the Company. There is no
assurance that additional managerial assistance will not be required. The
Company's future success depends in large part upon its ability to attract
and retain highly qualified personnel. The Company faces competition for such
personnel from other companies and organizations, many of which have
significantly greater resources than the Company. There can be no assurance
that the Company will be able to attract and retain the necessary personnel
on acceptable terms or at all. See "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS," "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT," "DESCRIPTION OF BUSINESS--EMPLOYMENT AGREEMENTS," "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,' and "EXECUTIVE COMPENSATION."
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ABSENCE OF PUBLIC MARKET; VOLATILITY. There has been a limited public
trading market for the Company's Common Stock and there can be no assurance
that an active trading market will be sustained. The approximate number of
shares in the public market as of July 24, 1998 were 23,995,377. The minimum
potential number of shares to be sold pursuant to this Prospectus, as
determined based on conversion formulas and other requirements set forth in
the Debenture documents, is 12,707,086. The issuance of shares of Common Stock
on conversion of the Debentures or exercise of the Warrants and subsequent
sale pursuant to this Prospectus could dilute the Common Stock and adversely
affect the market price of the Common Stock. There can be no assurance that
the Common Stock will trade in the public market at or above its current or
any particular price. The trading price of the Common Stock could be subject
to significant fluctuations in response to variations in quarterly operating
results, even mild expressions of interest on a given day (being traded on
the OTC Bulletin Board), and other factors and such fluctuations could cause
the market price of the Common Stock to fluctuate substantially. Accordingly,
the Common Stock should be expected to experience substantial price changes
in short periods of time, owing to the vagaries of the Bulletin Board. Even
if the Company is performing according to its plan and there is no legitimate
Company-specific financial basis for this volatility, it must still be
expected that substantial percentage price swings will occur in these
securities for the foreseeable future, and percentage changes in stock
indices (such as the Dow Jones Industrial Average) could be magnified,
particularly in downward movements of the markets. In addition, the stock
markets in the United States have, from time to time, experienced significant
price and volume fluctuations that are unrelated or disproportionate to the
operating performance of individual companies. Such fluctuations may
adversely affect the price of the Common Stock. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS. The Company's Amended and Restated Certificate of Incorporation
authorizes the issuance of a maximum of 2,000,000 shares of preferred stock,
par value $.001 per share ("Preferred Stock"), with designations, rights and
preferences as set forth in the Company's Amended and Restated Certificate of
Incorporation. As a result of the foregoing, the Board of Directors can
issue, without further stockholder approval, Preferred Stock with dividend,
liquidation, conversion, voting or other rights that would adversely affect
the voting power or other rights of the holders of the Common Stock. The
issuance of Preferred Stock could, under certain circumstances, discourage,
delay or prevent a change in control of the Company. In addition, the
issuance of Preferred Stock could dilute the rights of holders of the Common
Stock and the market price of the Common Stock. Although the Company has no
plans to issue any shares of Preferred Stock, there can be no assurance that
it will not issue Preferred Stock at some future date. The Company is subject
to Delaware General Corporation Law provisions that prohibit the Company from
entering into certain business combinations without the approval of its
stockholders and, as such, could prohibit or delay mergers or other
transactions or changes in control with respect to the Company. Such
provisions, accordingly, may discourage attempts to acquire the Company. See
"DESCRIPTION OF SECURITIES."
SHARES ELIGIBLE FOR FUTURE SALE; EXERCISE OF REGISTRATION RIGHTS. Certain of
the outstanding shares of Common Stock are "restricted securities" under
Rule 144 under the Securities Act, and (except for shares purchased by
"affiliates" of the Company as such term is defined in Rule 144) would be
eligible for sale as the applicable holding periods expire. In the future,
these shares may be sold only pursuant to a registration statement under the
Securities Act or an applicable exemption, including pursuant to Rule 144.
Under Rule 144, a person who has owned Common Stock for at least one year
may, under certain circumstances,
12
<PAGE>
sell within any three-month period a number of shares of Common Stock that
does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly trading volume during the four calendar weeks
prior to such sale. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a
sale, and who has beneficially owned the restricted securities for the last
two years is entitled to sell all such shares without regard to the volume
limitations, current public information requirements, manner of sale
provisions and notice requirements. Sales or the expectation of sales of a
substantial number of shares of Common Stock in the public market by the
Selling Stockholders could adversely affect the prevailing market price of
the Common Stock, possibly having a depressive effect on any trading market
for the Common Stock, and may impair the Company's ability to raise capital
at that time through additional sale of its equity securities.
The holders of the Warrants have been granted registration rights with
respect to the 1,347,463 shares issuable upon exercise of the Warrants. The
sale, or availability for sale, of the outstanding Common Stock underlying
the Warrants in the public market by the Selling Stockholders could adversely
affect the prevailing market price of the Common Stock and could impair the
Company's ability to raise additional capital. See "DESCRIPTION OF
SECURITIES."
NO DIVIDENDS ANTICIPATED. The Company has not declared or paid any dividends
on its Common Stock and there is no assurance that the Company will pay
dividends in the future. The Company currently intends to retain future
earnings to fund the development and growth of its businesses, to repay
indebtedness and for general corporate purposes, and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. Any future
determination to declare and pay dividends will be made by the Board of
Directors of the Company in light of the Company's earnings, financial
position, capital requirements, credit agreements and such other factors as
the Board of Directors deems relevant. Any decision to pay dividends is
subject to Delaware law, under which the Company is permitted to pay cash
dividends to the Company only (i) out of the Company's capital surplus (the
excess of net assets over stated capital) or (ii) out of the net income of
the Company for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. See "DESCRIPTION OF SECURITIES."
SECONDARY TRADING RESTRICTIONS. The Common Stock is governed by a Commission
rule for "penny stocks" (defined as stocks that cost $5.00 or less per share)
that imposes additional sales practice burdens and requirements upon
broker-dealers which sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 jointly with their spouse).
For transactions covered by this penny stock rule, broker-dealers must make a
special suitability determination for the unaccredited purchaser and receive
the purchaser's written agreement to the transaction prior to the sale.
Consequently, the penny stock rule may affect the ability of broker-dealers
to sell the Company's securities and also may affect the ability of persons
now owning or subsequently acquiring the Company's securities to resell such
securities in any trading market that may develop. Although the Company's
goal is to have its securities included in the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), which would
13
<PAGE>
exempt such securities from the above rule, there is no assurance that the
Company will meet the NASDAQ listing requirements.
RESTATEMENT OF FINANCIAL STATEMENTS. In connection with the Company's initial
registration of Common Stock on Form 10-SB/A, General Form for Registration
of Securities of Small Business Issuers under Section 12(b) or (g) of the
Securities Exchange Act of 1934, as amended, filed November 13, 1997
(effective January 12, 1998), as amended November 17, 1997, December 22,
1997, March 2, 1997 and July 15, 1997 with the Commission (File No.
000-23369), the financial statements for the years ended December 31, 1996
and December 31, 1997 have been restated to reflect the value of shares
issued to Mr. Fixler as a "related party" and principal stockholder, as an
expense in the period ended December 31, 1996. Previously, this has been
included as part of the capitalized cost of the Facility, as defined below.
The restated purchase price of $3,400,000 has been reallocated on the same
basis as the components of the appraised fair market value of the Facility at
the time of purchase. See "DESCRIPTION OF BUSINESS--ACQUISITION OF THE
FACILITY."
SPECIAL NOTE--FORWARD-LOOKING STATEMENTS
Certain statements contained in this Registration Statement, including,
without limitation, statements containing the words "believes,"
"anticipates," "expects," "estimates," "intends" and words of similar import,
are intended to identify such expressions as "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: international, national and local
general economic and market conditions; demographic changes; the size and
growth of the plastic packaging markets for both consumer and industrial
uses; the ability of the Company to sustain, manage or forecast its growth;
the ability of the Company to successfully make and integrate acquisitions;
raw material costs and availability; new product development and
introduction; existing government regulations and changes in, or the failure
to comply with, government regulations; adverse publicity; competition; the
loss of significant customers or suppliers; fluctuations and difficulty in
forecasting operating results; changes in business strategy or development
plans; business disruptions; the ability to attract and retain qualified
personnel; the ability to protect technology; and other factors referenced in
this Prospectus. Certain of these factors are discussed in more detail
elsewhere in "RISK FACTORS." Given these uncertainties, readers of this
Registration Statement and investors are cautioned to consider carefully
these factors in addition to the other information set forth in this
Prospectus, and not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors
or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Stockholders as of July 24, 1998,
and the number of shares of Common Stock covered by this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
SHARES NUMBER OF
BENEFICIALLY MAXIMUM SHARES
OWNED PRIOR NUMBER OF BENEFICIALLY
TO SHARES OWNED AFTER PERCENT OF
SELLING STOCKHOLDER OFFERING(1) OFFERED(2) OFFERING(3) OUTSTANDING(3)
------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
JNC Opportunity Fund 4,491,838 8,487,260 0 0
Ltd.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
JNC Strategic Fund 554,774 1,056,352 0 0
Ltd.
Diversified Strategies 1,668,557 3,163,474 0 0
Fund, L.P.
Totals: 6,715,169 12,707,086 0 0
</TABLE>
(1) Includes (i) the number of shares of Common Stock issuable upon
conversion of Debentures assuming conversion at the conversion formula
prices in effect on July 24, 1998 (which prices will fluctuate from time
to time based on changes in the market price of the Common Stock and
provisions in the formula for determining the conversion prices), (ii)
the number of shares of Common Stock issuable upon exercise in full of
the Warrants, and (iii) 80,000 shares of Common Stock (the "Additional
Shares") issued to the Selling Stockholders in lieu of certain penalties
arising out of the Debenture documents because of delays in the
effectiveness of the Registration Statement of which this Prospectus
constitutes a part. The Debentures and the Warrants were issued by the
Company to certain Selling Stockholders in October, 1997, November,
1997, January, 1998, March, 1998, April, 1998 and June, 1998, in
transactions exempt from the registration requirements of the Securities
Act. The Warrants were issued to the Selling Stockholders for the
following number of shares of Common Stock: JNC Opportunity Fund Ltd. -
922,690; JNC Strategic Fund Ltd. - 318,810; and Diversified Strategies
Fund, L.P. -105,963.
(2) Includes shares of Common Stock denoted herein as being beneficially
owned by the Selling Stockholders and the shares of Common Stock which
may be issued as payment of interest under the Debentures. Because the
number of shares of Common Stock issuable upon conversion of the
Debentures and as payment of interest thereon is dependent in part upon
the market price of the Common Stock prior to a conversion, the actual
number of shares of Common Stock that will be issued in respect of such
conversions or interest payments and, consequently, offered for sale
under this Registration Statement, cannot be determined at this time.
The Company has, however, contractually also agreed to include herein
5,991,917 shares of Common Stock (200% of the number of shares issuable
upon conversion of Debentures assuming conversion at the conversion
formula prices in effect on July 24, 1998) to cover the Additional Shares
and the shares of Common Stock issuable upon conversion of the Debentures
(including payment of interest thereon) and exercise of the Warrants.
The shares to be sold shall include, in addition to the numbers
indicated, any additional shares of Common Stock of the Company that
become issuable in connection with the Shares by reason of any stock
dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration that results in an
increase in the number of outstanding shares of the Company's Common
Stock.
(3) Assumes sale of all shares of Common Stock offered hereby.
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell all or a portion of the
Shares on the OTC Bulletin Board, in privately negotiated transactions or
otherwise, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. The Shares may be sold by the Selling Stockholders by one or more of
the following methods, without limitation: (a) block trades in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus, (c) an
exchange distribution
15
<PAGE>
in accordance with the rules of such exchange, (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers,
(e) privately negotiated transactions, (f) short sales and (g) a combination
of any such methods of sale. In effecting sales, brokers and dealers engaged
by the Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from the
Selling Stockholders (or, if any such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser) in amounts to be negotiated
which are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such Shares at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Selling
Stockholder, to purchase as principal any unsold Shares at the price required
to fulfill the broker-dealer commitment to the Selling Stockholders.
Broker-dealers who acquire Shares as principal may thereafter resell such
Shares from time to time in transactions (which may involve block
transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at
prices then related to the then-current market price or in negotiated
transactions and, in connection with such resales, may pay to or receive from
the purchasers of such Shares commissions as described above. The Selling
Stockholders may also sell the Shares in accordance with Rule 144 under the
Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the Shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
From time to time the Selling Stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith or in settlement of securities loans. If the Selling
Stockholders engage in such transactions, the conversion price may be
affected. From time to time the Selling Stockholders may pledge their Shares
pursuant to the margin provisions of its customer agreements with its
brokers. Upon a default by the Selling Stockholders, the broker may offer and
sell the pledged Shares from time to time.
The Company is required to pay all fees and expenses incident to the
registration of the Shares, including fees and disbursements (not to exceed
an aggregate of $5,000) of counsel to the Selling Stockholders. The Company
has agreed to indemnify the Selling Stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
LEGAL PROCEEDINGS
The Company is from time to time made a party to legal proceedings arising in
the ordinary course of business. The Company does not believe that the
results of such legal proceedings, even if unfavorable to the Company, will
have a materially adverse impact on its financial condition or the results of
its operations.
16
<PAGE>
The Company is a third party defendant in a lawsuit pending in the Common
Pleas Court of Cuyahoga County, Ohio, GLOBAL INVESTMENTS & ADVISORY
GROUP, INC. V. 3DM, LIMITED LIABILITY CO., ET AL. V. FIX-CORP INTERNATIONAL,
ET AL. This proceeding began on approximately July 9, 1997 when the Company
was served with a third party complaint filed by 3DM, Limited Liability Co.
("3DM") on May 12, 1997. This case arises out of the relationship between
the Company and 3DM, which the Company believes has been terminated and
settled, and the relationship between 3DM and Quantum in connection with the
acquisition of the Facility. See "DESCRIPTION OF BUSINESS," and "DESCRIPTION
OF BUSINESS--ACQUISITION OF THE FACILITY". The latter relationship was the
subject of prior litigation in which the Company was also joined as a party
defendant with 3DM. The Company subsequently was dismissed from this earlier
litigation. 3DM did not bring any claim against the Company in the prior
litigation, and a default judgment was entered against 3DM and its principals
on the matter of its breach of its agreement with Quantum. In its claim
against the Company, 3DM seeks compensatory damages in excess of $25,000 and
attorney fees in each of Counts I through VII of the third party complaint
and punitive damages in excess of $25,000 and attorney fees in Count VIII
although 3DM has served an amended demand increasing its damage demand to
$1,000,000. On February 2, 1998 the Company filed a motion to dismiss the
third party complaint filed against the Company for failure to state a claim
and for the reason that the Company is not a proper subject of a third party
complaint under the applicable rules of civil procedure. The motion to
dismiss was overruled by the court without any further decision. However, the
Company and Mr. Fixler were granted the right to file a counterclaim against
3DM and its principals, and that counterclaim was filed on April 9, 1998. 3DM
and its principals have filed an answer. The Company does not believe that
the pending litigation involving 3DM will have a material adverse effect on
the Company or its operations. The Court has referred this case to
non-binding mediation, scheduled for late July, 1998. Depositions have been
given and some settlement discussions have taken place.
In March and April, 1996, a person purporting to represent an entity known as
AMR Group ("AMR") approached the Company and represented that AMR could
assist the Company with private placements of its securities. As a result,
certain non-exclusive memorandum-type agreements were entered into by and
between the Company and AMR, one being an Investor Agreement (the "Investor
Agreement") and the other being a Consulting Agreement (the "Consulting
Agreement"). The terms of the Investor Agreement are vague. The understanding
of the Company was that AMR would provide assistance in financial
structuring, debt and/or equity funding, private and public placements and
negotiation strategies, in consideration of which AMR was to be granted
warrants for 2,000,000 shares (500,000 shares at each of the following
exercise prices: $0.05, $1.00; $3.00; and $5.00). Under the Consulting
Agreement, AMR was to receive a fee based on financing from a source
originated by AMR. AMR did not provide any of the services for which the
Company contracted and the agreements were deemed to be terminated by the
Company. After virtually no contact in two years, in January and February,
1998, AMR contacted the Company and asserted a right to exercise certain
warrants. The Company maintained its position that any agreements with AMR
had terminated due to non-performance. In addition, a check of the records of
the Ohio Secretary of State's indicates that no entity, trade name or
fictitious name has ever been registered under the name "AMR Group".
17
<PAGE>
AMR filed an action against the Company and Mr. Fixler in the Common Pleas
Court of Cuyahoga County, Ohio alleging damages and requesting specific
performance as to certain alleged warrants and/or stock options. Based on the
Company's position that the alleged agreement contained an arbitration
clause, AMR dismissed its complaint and indicated that it would commence, and
did commence, an arbitration proceeding with respect to this matter. Prior to
commencement of the litigation, AMR through its attorney forwarded a letter
which contained statements which the Company and Mr. Fixler deemed to be
improper and actionable. In relation to this matter, the Company filed an
answer and counterclaim and a cross claim naming additional parties, whom the
Company believes were partners or joint venturers of AMR at the time of its
initial dealings with the Company and Mr. Fixler. This matter is pending as
an arbitration before the American Arbitration Association. Due to the need
to name additional parties, a declaratory judgment action is required to be
filed in a Common Pleas Court of competent jurisdiction in order to determine
additional parties who will be subject to the arbitration.
As of July 1, 1998 and for approximately eight months, the Company had been
in discussions with Paul Parshall, an affiliate and consultant of the
Company's predecessor, in connection with infirmities in the organization,
corporate structure and share issuances of that predecessor. No complaint has
been filed in this matter. However, the parties have been involved in ongoing
conversations. The Company has provided settlement documents for review by
Mr. Parshall's attorney. The Company was led to believe that Mr. Parshall was
considering settling the case, but he has since abandoned those efforts. The
Company is conferring with counsel regarding further action on this matter.
The 201,020 shares issued (upon the Company's Delaware incorporation) to Mr.
Parshall and a company affiliated with him have been noted on the Company's
records as being subject to cancellation and are not included in the number
of shares indicated in this Registration Statement as outstanding as of June
30, 1998. The Company has notified its transfer agent accordingly.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
MARK FIXLER, 42, is the Company's Chief Executive Officer and the Chairman of
its Board of Directors. Prior to founding Fix-Corp International, Inc., Mr.
Fixler served as President of several retail businesses chiefly engaged in
the jewelry business. He was President of Richard's Jewelers, Inc. from
November, 1989 until October, 1994. From October, 1994 to October, 1995 Mr.
Fixler was President of Fix-Corp International, Inc., an Ohio corporation and
a predecessor of the Company. He is currently President of the Village
Counsel of his home community, Mayfield Village, Ohio. See "EXECUTIVE
COMPENSATION."
GARY M. DELAURENTIIS, 53, is the President of the Company and President of
Fixcor. Mr. DeLaurentiis joined the Company after it acquired the Facility.
Mr. DeLaurentiis has 21 years of management experience and 10 years of
experience in the plastic resin industry. Prior to joining the Company, he
operated his own consulting firm, GMD & Associates, from June, 1995 to
December, 1996. Prior to being a consultant, from 1991 to June, 1995, Mr.
DeLaurentiis developed another start-up company in the plastic resin field,
ANEW Corporation, which was subsequently sold. Mr. DeLaurentiis also
negotiated with the Chinese government to develop a
18
<PAGE>
plastic recycling plant as part of a pilot project in a Free Trade Zone of
Southern China. This occurred when he was employed by RPX Resins, Inc.,
another firm which he founded and managed from 1987 to 1992.
ROGER A. KITTELSON, 53, is Chief Financial Officer of the Company, a position
to which he was appointed as of June 15, 1998. From 1992 to 1998, Mr.
Kittelson was Vice President of Finance, Chief Financial Officer and
Secretary of The Garber Company and Special Packaging Inc., each a Delaware
corporation with its principal office located in Ashland, Ohio, and
previously subsidiaries of GAR Holding Corp. and now subsidiaries of
Caraustar Industries, Inc., a company headquartered in Austell, Georgia. The
Garber Company manufactures printed folding cartons, and Special Packaging
Inc. performs custom manufacturing and special custom packaging Mr. Kittelson
is a certified public accountant. Prior to joining those companies, Mr.
Kittelson owned and operated plastics companies. Previously he was a partner
with Arthur Andersen, an international public accounting and management
consulting firm.
ANDREW I. PRESS, 49, is Treasurer and Director of the Company. He was Chief
Financial Officer of the Company from August 6, 1997 through June 16, 1998.
Mr. Press is a certified public accountant, and for the past ten years has
been affiliated with Bick-Fredman & Co. CPA's. He also has served as officer
and director of a Ohio-based venture capital company. He is a member of the
American Institute of C.P.A.'s ("AICPA") and the Ohio Society of C.P.A.'s
("OSCPA") and serves on AICPA's Small Business Taxation Committee and OSCPA's
State Taxation Committee. In addition to being a public speaker in the areas
of financial and tax planing, Mr. Press is presently a member of the Board of
Trustees and Treasurer for the Multiple Sclerosis Society of N.E. Ohio.
The Board of Directors is composed of six individuals, Mr. Fixler, Mr.
DeLaurentiis, Mr. Press, Michael DiSanto, Mr. Noll and Lawrence C. Schmelzer.
A brief biography of Messrs. DiSanto, Noll and Schmelzer follows. Messrs.
Press, DiSanto and Noll are serving their first term, having been elected at
the annual meeting of the Company's stockholders on April 22, 1998. Messrs.
Fixler, DeLaurentiis and Schmelzer were re-elected at that meeting. Each of
the directors is serving a one-year term expiring at the annual meeting of
the Company's stockholders in 1999.
MICHAEL DISANTO, 52, is owner and President of DiSanto Enterprises Inc., a
land development company established in 1994. From 1978 to 1994, Mr. DiSanto
was president of Transco Construction Co. Inc., a building and development
company which specialized in custom home construction and developing
communities. Mr. DiSanto received a Bachelor of Business Administration from
Ohio University in 1969. He is a member of the Builder Industry Association
of Cleveland and sits on the Committee for Land Developers. Mr. DiSanto has
also applied his business expertise to the ownership of several restaurants
in the Cleveland and Atlanta areas.
S. DARWIN NOLL, 77, is Chairman and Chief Executive Officer of Cardinal
American Corporation, with which he has been affiliated for over 50 years.
During his work career, he served in executive capacities at 17 manufacturing
plants world wide. He has also served on the boards of Vocational Guidance
Services, Youth Opportunities Unlimited at the Cleveland Health
19
<PAGE>
Museum, The Achievement Center for Children, St. Vincent Charity Hospital,
The Jewish Community Federation and the Cleveland 500 Foundation. Mr. Noll
was recently appointed to the Board of the Palm Beach Fellowship of
Christians & Jews, Inc. In May 1994, Mr. Noll was granted an Honorary Doctor
of Laws Degree from John Carroll University.
LAWRENCE C. SCHMELZER, 61, is the retired Chairman of 1st Cleveland
Securities, Inc., a full service brokerage firm in Cleveland, Ohio, and held
that position from 1991 to 1998. He is a graduate of the Wharton School of
Finance and he has also studied at the New York Institute of Finance, the
London School of Economics and New York University. Mr. Schmelzer has been
active in the securities industry since 1959, with experience in venture
capital funding, portfolio management, mergers and acquisitions. Through
family partnership, he is also active in commercial real estate investment
and management.
None of the directors currently receives compensation from the Company for
his service in such capacity. Directors are reimbursed for their reasonable
out-of-pocket expenses in connection with attending meetings of the Board and
its committees.
The Board of Directors has two committees comprised of members thereof.
Following the April 22, 1998 annual meeting of the stockholders, the Board
created two standing committees, a Compensation Committee and an Audit
Committee.
COMPENSATION COMMITTEE. The Compensation Committee makes recommendations to
the Board of Directors concerning compensation, including incentive
arrangements, of the Company's officers and key employees and others. The
members of the Compensation Committee are Messrs. DeLaurentiis, Press and
Schmelzer.
AUDIT COMMITTEE. The Audit Committee (i) reviews the accounting and
financial reporting practices of the Company and the adequacy of its system
of internal controls, (ii) reviews the scope and results of any outside audit
of the Company and the fees therefor, and (iii) makes recommendations to the
Board of Directors or management concerning auditing and accounting matters
and the selection of outside auditors. The members of the Audit Committee
are Messrs. Noll, Press and DiSanto.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
principal stockholders, defined as parties that own five percent or more of
the common stock, as of July 24, 1998.
COMMON STOCK
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Percent of
Beneficial Owner Ownership Class
<S> <C> <C>
Mark Fixler 4,576,392 15.15%
3637 South Green Road
20
<PAGE>
Suite 201
Beachwood, Ohio 44122
Gordon Brothers Capital, 2,390,300* 8.0%*
LLC(1)
126 East 56th Street
New York, New York 10022
Encore Capital Management 6,715,169 18.23%
L.L.C.(2)
12007 Sunrise Valley Drive
Suite 460
Reston, Virginia 20191
</TABLE>
(1) As a member of a group consisting of Gordon Brothers Capital, LLC and
affiliated individuals. Information based solely on Schedule 13G filed
on May 11, 1998, SEC File Number 005-53999.
(2) Information based solely on Schedule 13D filed on August 3, 1998. Encore
Capital Management L.L.C., a Delaware limited liability company and a
registered investment adviser under the Investment Adviser Act of 1940,
acts as investment adviser to each of JNC Opportunity Fund Ltd.
(4,491,838 shares), JNC Strategic Fund Ltd. (1,668,858 shares) and
Diversified Strategies Fund L.P. (554,774 shares).
The following table sets forth information with respect to the beneficial
ownership of the Common Stock by the Directors of the Company and the
Directors and officers of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class
<S> <C> <C>
Mark Fixler 4,576,392 15.15%
3637 South Green Road
Suite 201
Beachwood, Ohio 44122
All Directors and Officers 6,422,890 21.23%*
as a Group
</TABLE>
* Includes 200,000 shares which are subject to options granted by the Company
to Mr. Aisenberg, which are exercisable during the term of his current
employment agreement with the Company.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000,000 shares of
Common Stock with a par value of $0.001 per share, and 2,000,000 shares of
Preferred Stock with a par value of $0.001 per share.
COMMON STOCK
30,218,269 shares of Common Stock were issued and outstanding as of June 30,
1998.
Holders of the Common Stock do not have preemptive rights to purchase additional
shares of Common Stock or other subscription rights. The Common Stock carries
no conversion rights and is not subject to redemption or to any sinking fund
provisions. All shares of Common Stock are entitled to share equally in
dividends from sources legally available therefor when, as and if declared by
the Board of Directors and, upon liquidation or dissolution of the Company,
whether
21
<PAGE>
voluntary or involuntary, to share equally in the assets of the Company
available for distribution to stockholders. The Board of Directors is
authorized to issue additional shares of Common Stock on such terms and
conditions and for such consideration as the Board may deem appropriate
without further stockholder action. Reference is made to the Company's
Amended and Restated Certificate of Incorporation and Bylaws which are
exhibits to this Registration Statement, as well as to the applicable
statutes of the State of Delaware for a more complete description concerning
the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share, either in
person or by proxy, on all matters that may be voted on by the owners thereof
at meetings of the stockholders. Since the shares of Common Stock do not have
cumulative voting rights, the holders of more than 50% of the shares voting
for the election of directors can elect all the directors and, in such event,
the holders of the remaining shares will not be able to elect any person to
the Board of Directors. At the Company's annual meeting held in May, 1997,
the stockholders approved a provision whereby a quorum shall be deemed
present for the conduct of business at either an annual meeting of the
stockholders or at a special meeting of the stockholders with only one-third
of the outstanding shares represented, either in person or through proxy.
PREFERRED STOCK
No shares of preferred stock of the Company (the "Preferred Stock") were
issued and outstanding as of October 1, 1997. Shares of Preferred Stock were
issued during the second and third quarters of fiscal year 1997, but all have
been converted to Common Stock by the holders thereof. No shares of Preferred
Stock have been issued since the third quarter of fiscal year 1997.
Subject to the Company's Amended and Restated Certificate of Incorporation
and the Delaware General Corporation Law, the terms of one or more classes or
series of Preferred Stock, including dividend rights, conversion prices,
voting rights, redemption prices and similar matters will be determined by
the Board of Directors.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES.
Officers and directors of the Company are indemnified by the Company in
accordance with Article X of its Amended and Restated Certificate of
Incorporation, and Article VI of its Bylaws, under each, to the maximum
extent permissible by law. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the Delaware General
Corporation Law or the provisions of the Company's Amended and Restated
Certificate of Incorporation or Bylaws, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for the indemnification against
such liabilities (other than the payment by the Company of expenses incurred
or paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in
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the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
DESCRIPTION OF BUSINESS
The Company was organized under the laws of the state of Delaware on October
27, 1995. A predecessor of the Company was initially incorporated on August
11, 1995 under the laws of the state of Utah and under the name Lifechoice,
Inc. The acquisition by the Company of a company organized by Mark Fixler,
the Company's Chief Executive Officer and Chairman of its Board of Directors,
involved several events in or about October, 1995, including the following:
(i) the Company changed its name from Lifechoice, Inc. to Fix-Corp
International, Inc.; (ii) Mr. Fixler assumed control of the Company with 90%
of its then-outstanding common stock; (iii) the Company was redomiciled from
being a corporation organized under Utah law to one organized in Delaware;
and (iv) the Company was transformed, from being a public shell (under its
prior name) with shareholders but no operations or assets, to a corporation
with the operations described below.
The Company's principal business is the manufacturing of recycled plastic (in
particular, high-density polyethylene or "HDPE") resin, through its
wholly-owned subsidiary, Fixcor Industries, Inc. ("Fixcor"), a Delaware
corporation incorporated on December 17, 1996. During January, 1998 the
Company commenced the manufacturing of plastic pallets from recycled resin
through its wholly-owned subsidiary, Pallet Technology, Inc. ("Pallet
Technology"), a Delaware corporation incorporated on July 7, 1997. Pallet
Technology was originally incorporated under the name Palletech, Inc. but
amended its certificate of incorporation on December 15, 1997 to change its
name to Pallet Technologies, Inc. and again amended its certificate of
incorporation on April 9, 1998 to change its name to Pallet Technology, Inc.
During February, 1998, the Company acquired, through its wholly-owned
subsidiary, Poly Style Industries, Inc. ("Poly Style"), a Delaware
corporation incorporated on February 18, 1998, substantially all of the
assets of a business that manufactures window blinds from recycled polyvinyl
chloride (or "PVC"). During June, 1998, in connection with the acquisition of
the assets of a Canadian oil container recycling company, the Company formed
two additional subsidiaries, the Company's wholly-owned subsidiary Fixcor
Recovery System, Inc. ("FRS-Delaware"), a Delaware corporation incorporated
on June 11, 1998, and FRS-Delaware's wholly-owned subsidiary Fixcor Recovery
Systems Ltd. ("FRS-Alberta"), an Alberta, Canada corporation incorporated on
June 15, 1998.
The Company also markets jewelry products for corporate awards and gifts and
extends financing to small businesses collateralized by purchase orders.
These two businesses constituted substantially all of the businesses of the
Company prior to the end of fiscal year 1996. During fiscal year 1997,
however, revenues from these businesses constituted less than 7% of the
Company's total revenues, with more than 93% of its revenues generated by the
manufacturing of recycled plastic resin. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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In December, 1996, the Company acquired a recycling plant in Heath, Ohio,
also known as the Heath Resource Recovery Plant (the "Facility"), from
Quantum Chemical Corporation ("Quantum"). Quantum was not and is not
affiliated with the Company or Mr. Fixler. In connection with this
acquisition, in December, 1996, the Company formed Fixcor to own and operate
the Facility. On January 8, 1997, the first processing line at the Facility
became operational. During July, 1997, the Company formed Pallet Technology
to manufacture plastic pallets from recycled plastic resin. The Company
expects that it will dedicate significantly less resources to the corporate
awards jewelry marketing and purchase order financing businesses, that the
plastic recycling business will continue to grow, and that the operations of
Fixcor and Pallet Technology will generate a greater percentage and,
eventually, substantially all of the revenue of the Company in fiscal year
1998, such that the Company is considered primarily to be in the plastic
recycling and recycled products business.
RECENT DEVELOPMENTS
The equipment ordered for Pallet Technology's initial operations at the
Facility was delivered in December, 1997 and installation commenced within
the first week after delivery. Installation was complete and limited
production began during January, 1998. Production was at full capacity by the
end of February, 1998, with the date of first revenue occurring in March,
1998. As of February 10, 1998, Pallet Technology had approximately $5,000,000
in advance orders. As of May 1, 1998, Pallet Technology had approximately
$10,000,000 in orders. Instead of purchasing the recycled plastic resin
pellets from Fixcor as previously contemplated and disclosed, Pallet
Technology, from the commencement of its operations, has been purchasing
resin pellets from unaffiliated third parties at market rates. These resin
pellets are currently readily available and Pallet Technology believes that
they will continue to be readily available for the foreseeable future.
The Company's corporate awards jewelry marketing business activity is still
continuing on a limited basis. Revenues from corporate awards jewelry
marketing business for fiscal year 1997 were approximately 3.9% of the
Company's revenue. The purchase order financing business is being phased out.
As of September 30, 1997 the aggregate principal of the purchase order
financing contracts was approximately $800,000, and as of May 31, 1998 this
amount was reduced to approximately $30,000, and the Company is not entering
and does not intend to enter into any additional purchase order financing
arrangements. Revenues from purchase order financing business for fiscal year
1997 were approximately 2.2% of the Company's revenue.
The Company has no current plans to spin-off the Facility's operations in an
initial public offering. Discussion of a spin-off in the notes to the
Financial Statements for fiscal year 1996 was based on long-range options
considered by the Company. (See note 8 to those financial statements.)
Management views a spin-off as an alternative for future consideration, but
has no present plan to pursue that alternative.
There has been a material change in the cost of raw material since December 31,
1997. As occurred during the fourth quarter of fiscal year 1997, the per pound
cost of raw material has decreased for both mixed and natural raw material. For
mixed raw material, the decrease has
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been from a range of $0.23 to $0.32 during fiscal year 1997 to a range of
$0.23 to $0.28 during the first three months of fiscal year 1998. For natural
raw material, the decrease has been from a range of $0.30 to $0.42 during
1997 to a range of $0.30 to $0.35 during the first three months of 1998.
Management believes that this change is attributable to a decline in demand.
(Fixcor's resin prices have declined correspondingly, so that its margins
have remained relatively consistent.)
In February, 1998, the Company entered into an agreement (the "UV Agreement")
with Universal Vinyl Corp. ("UV"), a Florida corporation, as seller, and
Yoram Aisenberg and Avraham Weinstein, each a principal of both Nitro and UV,
jointly and severally as guarantors of UV's obligations. Under the UV
Agreement, once certain conditions were satisfied, on February 28, 1998, the
Company acquired substantially all of the assets of UV, whose operations were
located at a plant in Medley, Florida, a suburb of Miami. The purchase price
of these assets was $1.04 million, (which represents the estimated fair
market value of the assets acquired). The source of funds for this acquisition
is cash on hand, arising from the various capital raising activities of the
Company.
The Company intends to utilize the assets acquired under the UV Agreement
through its wholly-owned subsidiary, Poly Style. Poly Style operates those
assets at UV's location (the "UV Plant"), and will continue to do so until it
moves those operations to other space (the "Florida Plant") leased in North
Miami Beach, Florida. The lease of the Florida Plant was executed in April,
1998. Pallet Technology equipment has been delivered to the Florida Plant
and is expected to be operational during the third quarter of fiscal year
1998. Poly Style's operations are expected to continue at the UV Plant for
several months, but are expected to be moved to the Florida Plant before the
end of fiscal year 1998.
The operations, as to which the assets acquired from UV relate, consist of
the manufacturing of plastic vertical blinds from extruded PVC. PVC is
purchased from third party suppliers at market rates, averaging approximately
$0.80 per pound, a price that has not recently materially fluctuated. The
Company believes that this raw material is readily available. Poly Style's
customers are expected to be wholesale fabricators. Its competition consists
primarily of Hunter-Douglas Corp., Laserlight Inc. and Graber Inc. The
Company does not believe that the UV Plant was, or the Florida Plant is,
subject to any environmental regulations the annual cost of compliance with
which was or would be material. Mr. Aisenberg was named President of Poly
Style.
In addition to being the President of UV and Poly Style, Mr. Aisenberg is a
director of Nitro Plastic Technologies of Israel ("Nitro"). Nitro owns the
proprietary injection molding process licensed to and used by Pallet
Technology in manufacturing pallets. In February, 1998, Nitro, Mr. Aisenberg
and Pallet Technology entered into the First Amended Licensing and Marketing
Agreement under which the royalty rate of $2.50 per pallet sold under Pallet
Technology's original agreement with Nitro is reduced to $0.50 during the
first five years and $0.25 during the next five years. Pallet Technology, in
addition to continuing its operations at the Facility, has ordered and,
during approximately the third quarter of fiscal 1998 expects to install at
the Florida Plant equipment, and to commence the production of pallets. See
"DESCRIPTION OF BUSINESS--PATENTS, TRADEMARKS AND LICENSES" and "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--PHASE 3."
In June, 1998, the following management changes occurred. Mr. Fixler
resigned from his position as President of the Company, but retained his
positions as Chief Executive Officer and Chairman of the Board. Gary M.
DeLaurentiis was promoted to President of the Company. Andrew I. Press
resigned from his position as Chief Financial Officer of the Company, but
retained his positions as Treasurer and Director and as a member of
committees of the Board of Directors of the Company. Roger A. Kittelson
joined the Company as Chief Financial Officer.
In June, 1998, all credit facilities being provided by Gordon Brothers
Capital, LLC were refinanced through a credit facility with Coast Business
Credit, a division of Southern Pacific Bank, a commercial lender with an
office located in Los Angeles, California. This financing was in the amount
of $20,000,000 and was secured by a security interest in all of the
Company's, Fixcor's, Pallet Technology's and Poly Style's receivables,
inventory, equipment, investment property and general intangibles. Each of
the Company, Fixcor and Pallet Technology also provided cross guarantees
under this financing agreement. This financing arrangement included a
$10,000,000 term loan, a $5,000,000 line of credit for accounts receivables
and a $5,000,000 credit facility for new equipment purchases. (Copies of the
principal documents evidencing this financing and guarantee are exhibits to
this Registration Statement.)
In June, 1998, the Company, through its wholly-owned subsidiary FRS-Delaware
and FRS-Delaware's wholly-owned subsidiary FRS-Alberta, acquired the assets
of a Canadian oil container recycling company, Plastic Recovery Systems for
cash and stock. These operations are intended to compliment the oil-container
recycling business that Fixcor is developing in the United States. See
"DESCRIPTION OF BUSINESS--CALIFORNIA GRANT AND ALLIED SIGNAL AGREEMENT."
In connection with the Company's initial registration of the Common Stock,
the financial statements for the years ended December 31, 1996 and 1997 have
been restated to reflect the value of shares issued to a "related party" (a
principal shareholder) as an expense in the period ended December 31, 1996;
previously this had been included as part of the capitalized cost of the
Facility. The restated purchase price of $3,400,000 has been reallocated on
the same basis as the components of the appraised fair market value of the
Facility at the time of the purchase.
THE COMPANY
The Company has four wholly-owned subsidiaries, Fixcor, Pallet Technology, Poly
Style and FRS-Delaware. FRS-Delaware, in turn, has one wholly-owned subsidiary,
FRS-Alberta. Fixcor owns and operates the Facility, located in the Mid-Ohio
Industrial Park at 1835 James Parkway in Heath, Ohio 43056. The Company leases
the UV Plant, located at 9200 N.W. 102nd Street in Medley, Florida 33170, on a
month to month basis, from an unrelated third party. The Company leases the
Florida Plant, located at 120 Northeast 179th Street, North Miami Beach, Florida
from B-K-N Corporation, an Ohio corporation, in which S. Darwin Noll, a director
of the Company, owns a controlling interest. Pallet Technology's operations take
place at the Facility, and are also
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expected to take place at the Florida Plant. Poly Style's operations take
place at the UV Plant, but are expected to be moved to the Florida Plant
before the end of fiscal year 1998. The closest major metropolitan area to
the Facility is Columbus, Ohio, about 30 miles away. The closest major
metropolitan area to the Florida Plant is Miami, Florida, of which North
Miami Beach is a suburb. Within the plastics industry, the Company intends to
establish itself as a high volume supplier of recycled HDPE resin.
Simultaneously, the Company intends to pursue a program of vertical
integration whereby it has the capacity to utilize recycled plastic resin
pellets and fabricate a value-added plastic end product. Management has
contemplated from time to time a spin-off of certain of its operations.
However, the Company has taken no material action to pursue a spin-off, does
not currently contemplate a spin-off, and no assurances can be made that a
spin-off or similar transaction will occur. (See note 8 to the Financial
Statements for fiscal year 1996.)
ACQUISITION OF THE FACILITY
In December, 1996, the Company consummated the acquisition of the Facility
pursuant to the Purchase and Sale Agreement (the "Quantum Agreement"). The
Facility was acquired from Quantum, a Virginia corporation with its principal
place of business located in Cincinnati, Ohio. The Facility includes a
stand-alone post-consumer plastic recycling operation involving two parallel
recycling lines inside a 50,000 square foot building on its own plot of
ground with access to an adjoining railroad spur and truck scale, plus
various other support equipment.
In connection with the acquisition of the Facility, the Company obtained
bridge financing from Gordon Brothers Capital Corporation, a commercial
lender with its principal place of business located in Boston, Massachusetts.
This bridge financing was in the amount of $2,500,000 and was secured by a
first mortgage on the Facility and a security interest in all inventory,
accounts receivables and contracts with customers. Mr. Fixler also guaranteed
the Company's obligations under the bridge financing agreement.
Upon consummation of the purchase of the Facility and prior to the securing
of permanent financing, the Company entered into a formal Acquisition
Agreement (the "Acquisition Agreement") under which the Company conveyed the
Facility to Fixcor in connection with its original subscription to all of the
shares of common stock of Fixcor. Mr. Fixler was also a party to this
Acquisition Agreement. Before the Company acquired the Facility under the
Quantum Agreement, he had a non-written option to purchase the Facility. He
waived his option to purchase and this waiver allowed the Company to make the
acquisition. In addition, he personally guaranteed the bridge financing for
the purchase of the Facility, and the Company issued to him 6,063,036 shares
of common stock of the Company (the "Common Stock"), valued at $3,638,000, or
$0.60 per share, all of which were restricted shares. Mr. Fixler was
principally responsible for representing the Company in these transactions.
Since Mr. Fixler was also a principal shareholder of the Company, the value
of the shares issued to him in connection with this transaction has been
charged to expense for the year ended December 31, 1996.
In May, 1997, Fixcor secured financing for the Facility from NationsCredit
Commercial Corporation. This consisted of revolving loans up to $7,000,000 for
inventory and account
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receivable financing, permanent financing, and equipment acquisition. This
financing included a mortgage security agreement which encumbered
substantially all of the assets of the Facility. Mr. Fixler was the
guarantor of this facility in an amount up to $750,000 plus expenses.
OPERATIONS AT THE FACILITY
The Facility produces post-consumer high density polyethylene (HDPE) plastic
resin pellets. The Facility has three recycling lines to clean and wash the
raw material and five extrusion lines that are capable of producing
approximately 66,000,000 to 72,000,000 pounds of post-consumer plastic resin
per year. The Company expects that the average selling price of this resin
can be maintained for the foreseeable future at approximately the current
levels, resulting in annual gross sales of approximately $20,000,000 to
$25,000,000 per year with all processing lines operating.
The manufacturing process is substantially automated and is generally capable
of running 24 hours per day, permitting Fixcor to utilize three shifts.
Fixcor's current production (i.e., output that it expects to produce through
approximately the end of the second quarter of fiscal year 1998) is sold out.
With the third line operating since October, 1997, Fixcor expects its
capacity to come closer to meeting the demand for the HDPE resin. The Company
believes that it can sell all of the resin that the Facility can and will
produce in the near future. Company management believes that the recycling of
HDPE is not generally a seasonal business, either with respect to the supply
of raw materials or with respect to customers' demand. The demand is one that
the Company believes is not currently being met. While Fixcor's business is
not concentrated on any one region of the United States, and while it has no
current plans to do so, the Company believes that it may be advantageous in
the future to expand by opening plants in other regions of the United States
to be closer to suppliers and customers. The Company expects, and has made
plans, to expand the Facility during fiscal year 1998. Fixcor currently has
no material sales directly or indirectly to foreign customers. Its customers
are generally companies with annual sales revenue of between $50,000,000 and
$250,000,000. In addition, management believes that Fixcor enjoys a
competitive advantage over its competitors due to an advantageous rate for
electric power from Ohio Power. Fixcor owns its own substation that regulates
and supplies its power. The national rate charged to commercial customers is
$0.09 per kilowatt hour. Fixcor pays $0.032 per kilowatt hour for use at the
Facility. This differential translates into a cost of $0.011 per pound of
plastic produced. In addition, the Facility has its own waste water treatment
plant. This permits the Facility to recycle 50% to 75% of the water that it
consumes per day and aids in lowering the cost of producing resin pellets.
The Facility is designed to produce recycled HDPE. HDPE is a constituent
ingredient of many consumer packaging plastic products. The prices of raw
materials are a function of, among other things, the manufacturing capacity
for such raw materials of such consumer products. In the event of cost
increases for raw materials, failure to achieve corresponding sales price
increases in a timely manner, sales price erosion without a corresponding
reduction in raw material costs or failure to renegotiate favorable raw
material supply contracts could have a material adverse effect on the
Company.
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PALLET TECHNOLOGY
Pallet Technology, a subsidiary formed in July, 1997, specializes in the
production of plastic pallets. Pallet Technology has installed in the
Facility a specialized, state-of-the-art injection molding machine which
transforms resin pellets into plastic pallets. This will enable the Company
to be less dependent on commodity pricing and instead achieve pricing which
reflects the value added properties of a finished good. The pallets will be
produced from recycled plastic resin obtained from third parties at market
rates or from Fixcor. Pallet Technology completed engineering work, ordered,
received, and installed equipment at the Facility, and operations commenced
in February, 1998. Pallet Technology also has ordered comparable equipment
for installation at the Florida Plant. See "DESCRIPTION OF BUSINESS--RECENT
DEVELOPMENTS" for more information regarding Pallet Technology. The Company
believes that plastic possesses numerous advantages over wood, the material
currently used for pallets: plastic is extremely durable, has historically
been less expensive, possesses greater strength, will serve for a much longer
term of service and, when its life is over, can itself be recycled.
In July, 1997, the Company, Fixcor and Pallet Technology, as borrowers,
secured financing from Gordon Brothers Capital Corporation, in the form of a
$3,500,000 line of credit, intended to finance the acquisition of equipment
for use in the operations of Pallet Technology. This credit facility is
secured by substantially all of the assets of the Company and its
subsidiaries. Mr. Fixler is the guarantor of this line of credit in an amount
up to $1,000,000. All financing from NationsCredit Commercial Corporation was
refinanced through Gordon Brothers Capital, LLC (successor to Gordon Brothers
Capital Corporation) in December, 1997. This resulted in the Company, Fixcor
and Pallet Technology being the borrowers on a revolving credit facility in
the principal amount of $7,000,000, $3,500,000 of which principal matures in
October, 1998. In June, 1998, all financing through Gordon Brothers Capital,
LLC was refinanced through Coast by a credit facility in the amount of
$20,000,000. Coast did not require that Mr. Fixler provide a guarantee in
connection with this credit facility, but each of the borrowers
cross-guaranteed the obligations of the others.
LEVERAGE
As discussed above, the Company is significantly leveraged. It has entered
into security agreements which encumber substantially all of the Company's
assets. The Company's future operating performance and ability to service or
refinance its indebtedness will be subject to future economic conditions and
to financial, business and other factors, many of which are beyond its
control, and consequently the Company may be unable to service all of its
debt in the future. There can be no assurance that the Company's future
operating performance will be sufficient to service such indebtedness or that
the Company will be able to refinance its indebtedness in whole or in part.
The degree to which the Company is leveraged can have significant effects on
the Company, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be limited;
(ii) a substantial portion of the Company's cash flow from operations will be
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dedicated to the payment of the principal of and interest on its existing
indebtedness, thereby reducing funds available for operations; (iii) the
agreements governing the Company's indebtedness and convertible debentures
contain certain restrictive covenants. The Company's ability to make
scheduled payments of the principal of, or interest on, or to refinance, its
indebtedness will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, primarily interest rate
levels and financial, competitive, business and other factors, many of which
are beyond its control.
CUSTOMERS
Fixcor ships the resin it produces to its customers by rail and truck. During
1998, the Company has paid approximately $23,000 per month under a railcar
lease agreement for rail shipments. During 1997, these monthly payments
averaged approximately $2,700. The resin is used by Fixcor's customers for
manufacturing plastic pipe and for containers for household cleaners such as
laundry detergent and bleach (but not for containers of items for human
consumption). Generally, in manufacturing the plastic containers from the
resin, customers mix the resin with other materials, but do not do so in the
manufacturing of plastic pipe.
Fixcor's accounts receivable, as well as its accounts payable, are generally
due within 30 days of invoice. The Company believes that this is consistent
with industry practice. Fixcor's operations and budget account for the delay
between paying for the raw materials and being paid for the resin produced.
Again, the Company believes that this is consistent with industry practice.
No customer of Fixcor purchases 40% or more of Fixcor's production. The one
customer that approaches purchasing 40% of the production is a wholesale
distributor, to whom Fixcor sells resin for further distribution. No other
customer purchases more than 10% of Fixcor's production.
Pallet Technology's operations commenced during January, 1998, and its
revenues commenced during the first quarter of fiscal year 1998. No customer
of Pallet Technology purchases more than 10% of Pallet Technology's
production, except that Pallet Technology has committed to deliver to Nitro
for Nitro to distribute 225,000 pallets during 1998. Pallet Technology also
entered into a distribution agreement with Advanced Environmental Products,
LLC for that company to purchase and distribute 350,000 pallets during 1998,
and 500,000 during each of the following two years. Each of those 1998
commitments may exceed 10% of Pallet Technology's 1998 production, depending
on actual production levels. Otherwise, the Company generally sells its
production through purchase orders. These purchase orders are solicited or
received from interested parties by representatives of the Company's
subsidiaries making direct and indirect contact with potential consumers of
resin and pallet products.
Customers of Pallet Technology are, and management expects that those customers
will continue to be, closed-loop warehouses and distribution centers, such as
large retailers who are directly involved in much of the manufacturing,
warehousing and retail distribution of their products. No customer purchases, or
has placed a purchase order in a quantity that would make that customer a
purchaser of 10% or more of Pallet Technology's production. Pallet Technology
received advance purchase orders for pallets produced by Pallet Technology in
amounts in excess of $5,000,000. As of June 1, Pallet Technology had
approximately $10,000,000 in orders. The
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Company expects to ship Pallet Technology's products through traditional rail
and truck channels.
RAW MATERIALS
Polyethylene constitutes the principal raw material used in the recycling of
plastic processed by the Company's subsidiaries. This raw material must be
sorted and baled before it can be utilized. Generally, there has been no
problem obtaining sorted and baled HDPE raw materials, which are available
from a wide variety of suppliers, including but not limited to major waste
haulers and landfills. PVC, the raw material used by Poly Style, is readily
available and the price does not materially fluctuate. Costs for these raw
materials used by Fixcor tend to fluctuate with various economic factors
which generally affect the Company and its competitors. The availability of
raw materials was adequate in 1996 and 1997 and management expects it to
remain adequate throughout 1998. Since Fixcor had no operations during 1996,
it has no direct information with respect to the price of raw materials
during that year. Based on discussions with current suppliers, it appears
that the cost of raw materials was approximately the same as the cost that
the Company incurred during 1997, and the first quarter of 1998. The Company
believes that there is adequate inventory of raw materials to meet Fixcor's
production requirements, and that its practices are consistent with industry
norms. See "DESCRIPTION OF BUSINESS--RECENT DEVELOPMENTS."
PATENTS, TRADEMARKS AND LICENSES
Pallet Technology has entered into a Licensing and Marketing Agreement with
Nitro. Under that agreement, Pallet Technology is the sub-licensee of
certain proprietary injection molding technology for the manufacturing of
plastic pallets and other products from recycled plastic. The Company
believes that otherwise it and its subsidiaries have all rights necessary to
carry on their operations. In particular, in connection with the acquisition
of the Facility from Quantum, the Company purchased equipment and other
tangible assets that it believes are necessary for Fixcor's operations. The
Company is not the holder of any letters patent, trademark or copyright
registrations, and has not applied for any of the foregoing. Pallet
Technology uses the trademark "POWER-PAL 2000" with respect to its pallets,
but has not registered or applied for registration of that trademark.
CALIFORNIA GRANT AND ALLIED SIGNAL AGREEMENT
In June, 1997, the Company was awarded a $256,868 research grant from the
Integrated Waste Management Board of the State of California to develop a
solution to the problems associated with non-recyclable HDPE motor oil
containers, which have historically been sent to landfills. The solution will
involve the separation of the remaining oil from the "empty" container, and
then the recycling of the HDPE container and the separate recycling of the
remaining oil. To do this, in September, 1997, Fixcor entered into a license
agreement with The Federal Manufacturing & Technologies business unit of
AlliedSignal Inc. ("AlliedSignal") under which AlliedSignal licenses to
Fixcor certain technology (as to which United States letters patent were
issued after the date of the agreement) and Fixcor pays a license fee and
ongoing royalties based
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principally on products sold arising out of use of the licensed technology.
The Company expects that a prototype of equipment using this technology will
be available for limited use by the end of the third quarter of fiscal year
1998.
The Company has not spent significant amounts on research and development in
the past and, except for the grant from the State of California, does not
expect its research and development budget in the future to be material.
EMPLOYMENT AGREEMENTS
Mr. Fixler has entered into a written employment agreement with the Company
with a term of three years commencing January 1, 1997 . Gary M. DeLaurentiis
has entered into an employment agreement with the Company with a term of five
years commencing January 1, 1997. Mr. Aisenberg has entered into a written
employment agreement with the Company with a term of five years commencing
March 5, 1998. Mr. Kittelson has entered into a written employment agreement
with the Company with a term of five years commencing July 16, 1998. See
"EXECUTIVE COMPENSATION." No other employees have written employment or
collective bargaining agreements with the Company or any of its subsidiaries.
COMPETITION
Fixcor sells a commodity (recycled HDPE plastic) in a commodity market. As
is true with all commodity markets, this market is highly competitive,
although Fixcor has experienced no difficulty in running at full capacity and
selling its full production. Nevertheless, many of its competitors are
considerably larger than the Company and have substantially greater financial
and other resources than the Company, while others are significantly smaller
with lower fixed costs and greater operating flexibility. The Company has
approximately 15 competitors.
ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION
The business operations of the Company and the ownership and operations of
real property by the Company are subject to extensive and changing federal,
state, local and foreign environmental laws and regulations pertaining to the
discharge of materials into the environment, the handling and disposition of
wastes (including solid and hazardous wastes) or otherwise relating to the
protection of the environment. Management believes that the Company and its
subsidiaries are in compliance with all applicable environmental laws and
regulations, and no change with respect to this compliance has occurred since
December 31, 1997. As is the case with manufacturers in general, if a release
of hazardous substances occurs on or from the Company's properties or any
associated offsite disposal location, or if contamination from prior
activities is discovered at any of the Company's properties, the Company may
be held liable. From time to time, the Company is involved in inquiries
relating to compliance with environmental laws, permits and other
environmental matters. In the future, the Company may be identified as a
potentially responsible party and be subject to liability under applicable
law. No assurances can be given that additional environmental issues will not
require future expenditures.
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<PAGE>
The plastics industry, in general, and the Company also are subject to
existing and potential federal, state, local and foreign legislation designed
to reduce solid wastes by requiring, among other things, plastics to be
degradable in landfills, minimum levels of recycled content, various
recycling requirements, disposal fees and limits on the use of plastic
products. In addition, various consumer and special interest groups have
lobbied from time to time for the implementation of these and other such
similar measures. Although the Company believes that the legislation
promulgated to date and such initiatives to date have not had a material
adverse effect on the Company, there can be no assurance that any such future
legislative or regulatory efforts or future initiatives would not have a
material adverse effect on the Company.
Fixcor's current expenses for compliance with environmental laws and
regulations is approximately $300,000 per year, primarily the cost of water
treatment. Two environmental "Phase I" examinations were done in connection
with the purchase of the Facility and the reports from those examinations did
not reveal any contamination.
Fixcor has made no material capital expenditures, and expects to make none,
for environmental control facilities in connection with its operations at the
Facility, and Pallet Technology expects to make none in connection with its
operations at the Facility or the Florida Plant, and Poly Style expects to
make none in connection with its operations at the Florida Plant.
The United States Food and Drug Administration (the "FDA") regulates the
content of direct-contact food containers and packages, including containers
and packages made from recycled plastics and paper products. The FDA
currently limits the amount of recycled materials that can be used in such
containers and packages.
EMPLOYEES
As of June 26, 1998, the Company and its subsidiaries had a total of
approximately 169 employees, all of whom were full-time employees. Of these,
Fixcor had approximately 128 production personnel and a support staff of 10,
and Pallet Technology had 12 production personnel, at the Facility. The
Company had another four employees at its headquarters office in Beachwood.
Poly Style has approximately 15 employees at the UV Plant. The Company has no
collective bargaining agreement with its employees and no union represents
them. There have been no interruptions or curtailments of operations due to
labor disputes and the Company believes that relations with its and its
subsidiaries' employees are good.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEVELOPMENT STAGE ACTIVITIES
In December, 1996, the Company formed Fixcor, a wholly-owned subsidiary. This
entity acquired the Facility, a stand-alone post-consumer plastic recycling
operation. The acquisition significantly changed the focus of the Company
from corporate awards jewelry marketing and financing to the manufacturing of
plastic resin.
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<PAGE>
With this acquisition, the Company's business plan may be divided into five
phases based upon the services performed, the products produced, and the
products and services to be performed and produced.
Note 2(C.) to the December 31, 1996 audited financial statements indicates
that for the year ended December 31, 1995, the Company incurred a bad debt of
$962,471. This charge to earnings related to the Company's Purchase Order
Financing business. As a result of an uncollectible financing, the Company
incurred this expense. After incurring this loss, the Company changed the
procedures it utilized to secure its interest in these transactions to
preclude any future losses. In fact, no losses have been incurred in these
transactions since 1995.
For the years 1996 and 1997, no bad debt provision was deemed necessary
since, in the opinion of management, all trade receivables are collectible.
PHASE 1
This phase of the business plan relates to the source of the Company's
revenues prior to acquisition of the Facility now owned and operated by
Fixcor. The sources of these revenues were corporate awards jewelry marketing
and the extension of financing to small businesses collateralized by purchase
orders.
PHASE 2
With the acquisition of the Facility in Heath, Ohio, the Company, through its
wholly-owned subsidiary, became the owner and operator of a stand-alone
post-consumer plastic recycling operation. This operation now contains three
operating lines for cleaning and washing the raw material and five extrusion
lines for producing post-consumer plastic resin. The first became
operational January 8, 1997, the second March 4, 1997, and the third October
22, 1997. Since the acquisition of this Facility, the corporate awards
jewelry marketing and the financing of purchase orders has become an
immaterial portion of the revenues and operations of the Company. Funding of
the Facility acquisition was made by obtaining bridge financing in the amount
of $2,500,000 from Gordon Brothers Capital Corporation and $900,000 in cash.
The bridge financing was secured by a mortgage on the Facility, and a
security interest in all inventory, accounts receivables and contracts with
customers, and a personal guarantee of Mr. Fixler. On May 14, 1997, the
Company replaced this bridge financing with permanent financing from
NationsCredit Commercial Corporation for up to $7,000,000. This financing
consisted of a security agreement on all of Fixcor's assets, and a credit
line based upon a percentage of inventory and accounts receivable. All
financing from NationsCredit Commercial Corporation was refinanced through
Gordon Brothers Capital, LLC (successor to Gordon Brothers Capital
Corporation) in December, 1997. This resulted in the Company, Fixcor and
Pallet Technology being the borrowers on a revolving credit facility in the
principal amount of $7,000,000, $3,500,000 of which principal matures in
October, 1998. All financing with Gordon Brothers Capital, LLC was
refinanced through Coast in June, 1998. See "DESCRIPTION OF BUSINESS,
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- --RECENT DEVELOPMENT, --THE COMPANY, --ACQUISITION OF THE FACILITY and --PALLET
TECHNOLOGY."
PHASE 3
On July 7, 1997, the Company formed another wholly-owned subsidiary, Pallet
Technology. The purpose of this subsidiary is to specialize in the
production of plastic pallets. Pallet Technology has ordered a specialized,
state-of-the-art, injection molding machine which transforms resin pellets,
produced by Fixcor, into plastic pallets. Installation of this equipment was
completed during January, 1998 and it was operating at substantially full
capacity by the end of the first quarter of fiscal year 1998. The approximate
cost of the equipment, molds, transportation and installation of the
equipment for Pallet Technology's operation at the Facility was $4,000,000.
The approximate cost of equipment, transportation and installation at the
Florida Plant is expected to be approximately $3,000,000. The total cost of
molds, which has not yet been determined, is not included in this amount. The
cost of the standard pallet mold is approximately $700,000, and additional
molds are on order. Not taking into consideration Pallet Technology's
operations at the Florida Plant, which the Company expects to commence during
the third quarter of fiscal year 1998, the Company conservatively estimates
that Pallet Technology revenues for 1998 will be $10.0 to 13.0 million.
With Pallet Technology operations running at the Florida Plant, the Company
estimates that total 1998 revenues from pallet sales will be $15.0 to 20.0
million. Permanent financing for the Pallet Technology equipment for
installation at the Facility was secured from Gordon Brothers Capital
Corporation. All financing with Gordon Brother Capital, LLC was refinanced
through Coast in June, 1998. See "DESCRIPTION OF BUSINESS, --RECENT
DEVELOPMENT, --THE COMPANY, --ACQUISITION OF THE FACILITY and --PALLET
TECHNOLOGY."
PHASE 4
During September, 1997, the Company's wholly-owned subsidiary, Fixcor,
entered into an agreement with AlliedSignal. Under this licensing agreement,
Fixcor is entitled to utilize technology owned by Allied in the recovery of
oil and plastic from shredded motor oil containers. This process produces
two useable products from a previous waste stream. The Company expects to
commence these operations during fiscal year 1998. The agreement requires
Fixcor to pay royalties to Allied based upon the volume of recycling
performed by Fixcor under these licenses.
PHASE 5
During February, 1998, the Company's wholly-owned subsidiary, Poly Style
entered into the UV Agreement, under which Poly Style acquired substantially
all of the assets of UV for a purchase price of approximately $1.04 million.
Poly Style manufactures plastic vertical window blinds from extruded PVC.
Poly Style's operations commenced shortly after the acquisition at the UV
Plant and have been moved to the Florida Plant. See "DESCRIPTION OF
BUSINESS--RECENT DEVELOPMENTS."
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, AS COMPARED TO
THE YEAR ENDED DECEMBER 31, 1997
Substantially all revenues for fiscal year 1996 were from corporate awards
jewelry marketing, and financing of purchase orders. The Company had no
revenues for this period from the Fixcor, Pallet Technology or Poly Style
operations.
Revenues for the twelve months in fiscal year 1996 from the purchase order
financing were $510,779 versus $191,795 for the twelve months in fiscal year
1997, a decrease of approximately 60 percent. The reduction in revenues
reflects a change in the orientation of the Company from financing and sales
to manufacturing resin and resin products. During the fourth quarter of 1997,
financing of purchase orders declined to the point that only one receivable
was outstanding related to this activity at December 31, 1997, and the
balance of that receivable was only $30,000.
Revenues from merchandise sales for the year ended December 31, 1996, were
$232,824. These revenues for the year ended December 31, 1997 were $346,326
resulting in an annualized increase in sales of 49%. This increased volume
of sales is expected to continue during 1998. Although the Company is
expending limited time and resources in this operation, as a result of
contacts developed in prior years, the revenues from these sales continue to
have limited growth.
For the year ended December 31, 1997, the revenues of Fixcor were $7,708,051.
Cost of goods sold on these sales was $4,428,519 resulting in a gross margin
of 42%. This operation was the primary focus of the Company for fiscal year
1997 and the first quarter of 1998. With the addition of another resin
processing line during October, 1997, and future expansion plans, it is
expected that revenues in 1998 will be substantially higher than those in
1997.
General and administrative expenses for the year ended December 31, 1996,
were $491,383 compared with $2,045,767 for the year ended December 31, 1997.
This increase is a result of gearing up the Fixcor operations. It includes
salaries and direct compensation related to the production and operation of
the Facility, fees and expenses incurred related to third party borrowings
and the sale of equity shares in the Company, and the professional fees
necessary to meet regulatory commitments.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1997, AS COMPARED TO
THE QUARTER ENDED MARCH 31, 1998
A review of the first quarter of fiscal year 1998 as compared to the results
of operations from the same period in 1997 indicates that the Company has
continued to grow and improved its profitability. Gross margins for the
first quarter of 1998 were $2,358,234 versus $530,586 for the prior year.
This growth is a result of increased resin sales from expanded capacity and
operations at the Facility, the startup and sales of plastic pallets by
Pallet Technology during the latter part of the
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<PAGE>
first quarter of 1998, and the profitability of the Poly Style operations.
Gross margins for these entities are summarized below:
<TABLE>
Caption
COST OF GROSS
SALES GOODS MARGIN
SOLD
<S> <C> <C> <C>
COMPANY 100,340 42,190 58,150
FIXCOR 3,486,573 1,549,771 1,936,802
POLY STYLE 72,026 28,810 43,216
PALLET TECHNOLOGY 518,068 198,002 320,066
</TABLE>
Another source of income for the period related from the increased value of
funds invested in marketable securities. As a result of these gains, the
Company recognized $600,000 of income from this source.
During the quarter, additional long-term financing was obtained in two forms.
First, the Company borrowed an additional $2,000,000 on its facility with the
Gordon Brothers Capital Corporation. These monies were used to fund the
Company's growing working capital needs. These needs are a result of
increased production and sales with their impact of requiring the Company to
incur increasing receivable and inventory balances.
Another source of financing was the receipt of $4,000,000 in the form of
subordinated convertible debentures. These debentures bring the total amount
of this form of debt to $12,000,000. (An additional $3,000,000 in debentures
were sold in April, 1998, and an additional $3,000,000 in debentures were
sold in June, 1998.) These monies are used to fund the long-term growth needs
of the Company. These needs include additional equipment and building
expansions to accommodate the growth of the Company. During 1997 and the
first quarter of fiscal year 1998, the Company incurred approximately
$16,000,000 for the purchase and installation of additional plant equipment,
none from affiliated or related parties. Of this, approximately $7,000,000
was for improvements to and additional equipment used at the Facility in the
manufacturing of recycled plastic resin. An additional $8,000,000 was for the
purchase and installation of equipment and related tooling for Pallet
Technology's operations at the Facility and at the Florida Plant used in the
manufacture of plastic pallets from recycled resin. Also, during the first
quarter of fiscal year 1998, approximately $1,000,000 was paid for the
purchase of equipment in connection with the acquisition of Poly Style in
Florida.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 1997
The Company's cash balance increased by $6,671,080 to $6,895,619 from
December 31, 1996 to December 31, 1997 and working capital increased by
$7,068,275 to $14,302,066 from December 31, 1996 to December 31, 1997. The
increases are the result of three occurrences. First, funds were generated
by internal operations and formula borrowings on inventories (up to 55%) and
receivables (up to 85%). The second source of funds was from the issuance of
capital stock. During the nine months ended September 30, 1997, 3,490,986
shares were issued resulting in additional funds of $4,751,475. The third
source of funds was from the issuance of convertible debentures. These monies
were used to acquire additional equipment and fund working capital needs in
Fixcor's operations.
As of March 31, 1998, other than ordering and installing equipment for use by
Pallet Technology at the Florida Plant in capital expenditures and
commitments therefor were minimal. As of that
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date Pallet Technologies had ordered its equipment, making a commitment of
approximately $3,700,000. This additional equipment for Pallet Technology's
operations at the Florida Plant is expected to be installed during the second
and third quarters of fiscal year 1998. Management believes that the present
cash balances and funding available through the permanent financing and line
of credit will be sufficient to meet the needs of the Fixcor operations.
However, additional funding may be necessary with regard to the Pallet
Technology operations in connection with their commencement during the second
and third quarters of fiscal year 1998, and in connection with the
commencement of PolyStyles operations during that period. Management is
working with financial institutions to ensure that sufficient monies are
available to meet these needs, and it is believed that those monies will be
available. See "DESCRIPTION OF BUSINESS--RECENT DEVELOPMENTS," and the
discussion of the "CONVERTIBLE DEBENTURES" below.
CONVERTIBLE DEBENTURES
On October 24, 1997, pursuant to a Convertible Debenture Purchase Agreement,
the Company issued and sold in a private placement to JNC Opportunity Fund
Ltd. $4,000,000 principal amount of Debentures and to Diversified Strategies
Fund, L.P. $1,000,000 principal amount of Debentures, each bearing interest
at the rate of 6% per annum, payable quarterly in arrears, and due October
24, 2000 (collectively the "October Debentures"). On November 25, 1997,
pursuant to an Amended and Restated Convertible Debenture Purchase Agreement
and collateral documents, JNC Opportunity Fund Ltd, in exchange for its
October Debentures and an additional $3,000,000 received principal amount of
$7,000,000 of the Company's 5% convertible debentures, due November 25, 2000,
and Diversified Strategies Fund, L.P., in exchange for its October
Debentures, received principal amount of $1,000,000 of the Company's 5%
convertible debentures, due November 25, 2000. The Company used the net
proceeds of the transactions primarily for the acquisition of equipment for
the start-up and expansion of Pallet Technology and Fixcor operations. The
principal amount of the Debentures, together with any accrued and unpaid
interest thereon, are convertible at any time into shares of Common Stock at
a conversion price equal to the lesser of (i) $3.91 (110% of the average
closing bid price for the 5 trading days preceding closing), or (ii) 84%
(previously 85% under the October documents) of the average of the 5 lowest
closing bid prices during the 10 trading days preceding conversion.
The purchasers also received warrants to purchase an aggregate 331,400 (JNC
Opportunity Fund Ltd. - 265,120, and Diversified Strategies Fund, L.P. -
66,280) shares of Common Stock at an exercise price equal to $3.91 per share,
exercisable at any time through October 24, 2000. JNC Opportunity Fund Ltd.
received additional warrants to purchase 198,840 shares of Common Stock at
that same price, exercisable at any time through November 25, 2000. The
Company has reserved authorized shares of Common Stock sufficient to cover
conversion of Debentures (and payment of interest thereon in shares of Common
Stock) and the exercise of the warrants, and is required to effect and
maintain for three years a registration statement under the Securities Act
covering resales by the holders of such shares following conversion of
Debentures (and payment of interest thereon in shares of Common Stock) and
exercise of warrants.
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<PAGE>
In January, 1998, the Company issued to JNC Opportunity Fund Ltd $2,000,000,
and to Diversified Strategies Fund, L.P. $500,000, principal amount of
three-year, 4% convertible debentures due January 22, 2001, convertible
(together with interest thereon) at any time into shares of Common Stock at a
conversion price equal to the lesser of (i) $3.34, or (ii) 83% of the average
of the 5 lowest closing bid prices for the 10 trading days preceding
conversion. The purchasers also received warrants to purchase an aggregate
198,413 shares of Common Stock at an exercise price equal to $3.34 per share.
The warrants are exercisable at any time through January 22, 2001. The
Company is required to amend the Registration Statement on Form SB-2 to
include resale by the holders of shares issuable upon conversion of such
debentures and payment of interest thereon and exercise of such warrants.
In March, 1998, the Company issued to JNC Strategic Fund Ltd. $1,500,000
aggregate principal amount of three-year, 4% convertible debentures due March
11, 2001, convertible (together with interest thereon) at any time into
shares of Common Stock at a conversion price equal to the lesser of (i)
$3.31, or (ii) 83% of the average of the 5 lowest closing bid prices for the
10 trading days preceding conversion. The purchaser also received warrants to
purchase an aggregate 126,268 shares of Common Stock at an exercise price
equal to $3.31 per share. The warrants are exercisable at any time through
March 11, 2001. The Company is required to amend the Registration Statement
on Form SB-2 to include resale by the holders of shares issuable upon
conversion of such debentures and payment of interest thereon and exercise of
such warrants.
In April, 1998, the Company issued to JNC Strategic Fund Ltd. $3,000,000
aggregate principal amount of three-year, 4% convertible debentures due April
8, 2001, convertible (together with interest thereon) at any time into shares
of Common Stock at a conversion price equal to the lesser of (i) $4.22, or
(ii) 83% of the average of the 5 lowest closing bid prices for the 10 trading
days preceding conversion. The purchaser also received warrants to purchase
an aggregate 192,542 shares of Common Stock at an exercise price equal to
$4.22 per share. The warrants are exercisable at any time through April 8,
2001. The Company is required to amend the Registration Statement on Form
SB-2 to include resale by the holders of shares issuable upon conversion of
such debentures and payment of interest thereon and exercise of such
warrants.
In June, 1998, the Company issued to JNC Opportunity Fund Ltd. $3,000,000
aggregate principal amount of three-year, 4% convertible debentures due June
25, 2001, convertible (together with interest thereon) at any time into
shares of Common Stock at a conversion price equal to the lesser of (i)
$4.00, or (ii) 83% of the average of the 5 lowest closing bid prices for the
10 trading days preceding conversion. The purchaser also received warrants to
purchase an aggregate 300,000 shares of Common Stock at an exercise price
equal to $4.00 per share. The warrants are exercisable at any time through
June 25, 2001. The Company is required to amend the Registration Statement
on Form SB-2 to include resale by the holders of shares issuable upon
conversion of such debentures and payment of interest thereon and exercise of
such warrants.
The debenture transaction documents include additional representations,
warranties, covenants and default provisions often customary for such
financings.
The Debenture holders have, as part of the Debenture transaction agreements,
agreed with the Company not to convert Debentures or exercise Warrants to the
extent such conversion or exercise would result in such holder beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act
and the rules thereunder) in excess of 4.999% of the then issued and
outstanding Shares, including Shares issuable upon conversion of the
Debentures held by such holder; provided that a holder may waive such
restriction as to itself upon 75 days prior notice to the Company. Each
holder has provided the Company with notice of its respective waivers of the
restrictions described above. The Company and the Debenture holders have
agreed that the 4.999% limitation will no longer be applicable 75 days from
the Debenture holders' waiver of such provision, which waiver has been
previously submitted by the Debenture holders.
YEAR 2000 COMPLIANCE
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<PAGE>
Many computer systems currently record years in a two-digit format. Such
systems, if not modified, will be unable to recognize and properly process
information with dates beyond the year 1999. The potential problems arising
out of this inability are commonly referred to as the "Year 2000 Issue" and
will affect virtually all companies, government agencies and other
organizations.
During 1997, the Company performed an assessment of its computer systems to
determine whether or not they were in compliance with Year 2000 requirements.
As of December 31, 1997, the Company does not believe that any operations
include systems that do not comply with Year 2000 requirements in any
material respect, and that any costs to bring such non-complying systems into
compliance will be immaterial to the Company's business, operations and
financial condition. The Company expects to incur and expense such costs, if
any, to general and administrative during 1998.
DESCRIPTION OF PROPERTY
The Facility is located in an industrial park which is about three miles from
Interstate 70 and two miles from U.S. Highway 40, within the city limits of
Heath (Licking County), Ohio. The closest metropolitan area is Columbus,
Ohio, about 30 miles away. There is vacant land to the north which has been
zoned for additional industrial buildings. The site is approximately 10
acres.
The Facility was constructed in 1991 and includes approximately 48,000 square
feet of space for manufacturing and an additional 1,643 square feet for a
finished office area. There is also a concrete slab in the rear with a
portion of it covered by a canopy. The site is served by a railroad spur to
the south.
Fixcor holds the title to the real estate and real estate improvements
constituting the Facility. To secure its permanent financing, Fixcor granted
the lender a continuing security interest in all of Fixcor's property,
including the Facility.
The book value of the Facility represented more than 10% of the total assets
of the Company as of the end of fiscal year 1997. Currently, the only planned
material renovation, improvement or further development of the Facility is an
expansion of the Facility as to which the Company is in the planning stages.
The estimated cost of the Pallet Technology improvements was approximately
$4,000,000, financed by cash on hand, primarily using certain of the proceeds
of the convertible debentures. The Company believes that the value of the
real estate and improvements at the Facility are subject to general economic
conditions. In the opinion of management, the Facility is adequately covered
by insurance. The Company has no current plans to lease out any portion of
the Facility. With respect to each component of the Facility upon which
depreciation is taken, the following table sets forth the projected federal
tax basis, life claimed and method for purposes of depreciation.
BASIS LIFE CLAIMED METHOD
----- ------------ ------
40
<PAGE>
Building $1,000,000 39 years Straight-line
Equipment $11,600,000 10 years Straight-line
The projected realty tax rate on the Facility is $51.90 per $1,000 of
valuation. The land is valued at $87,500. The gross annual real estate tax
is approximately $4,500 per year which is reduced by rebates to a net amount
of approximately $3,300.
The Company leases 1,147 sq. ft. of office space at 3637 South Green Road,
Suite 201, Beachwood, Ohio 44122 at a lease rate of $1,383 per month. The
lease has a term of three years commencing November 15, 1997. Beachwood is a
suburb of Cleveland, Ohio.
The Company leases the UV Plant in Medley, Florida on a month to month basis,
and, by the end of fiscal year 1998 plans to move into the Florida Plant. The
Florida Plant, located at 120 Northeast 179th Street, North Miami Beach,
Florida, consists of approximately 65,000 sq. ft. of space. This lease
commenced April 17, 1998, has a term of 10 years, and the lease rate is
$24,375 per month. The lease also grants the Company an option to buy the
Florida Plant during the first five years of the term. The UV Plant is
located in Medley, Florida, and the Florida Plant is located in North Miami
Beach, Florida. North Miami Beach is a suburb of Miami, Florida.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996, the Company loaned $26,000 to Fix-Sports, Inc., a company
partially owned by Mr. Fixler . This note bears interest at 10% per year and
is collateralized by 52,000 shares of the Company's Common Stock. Otherwise,
no director, officer, promoter or control person is, or has been, in debt to
the Company. Mr. Fixler guaranteed certain bridge and permanent financing of
the Company.
Upon consummation of the purchase of the Facility and prior to the securing
of permanent financing, the Company entered into a formal Acquisition
Agreement (the "Acquisition Agreement") under which the Company conveyed the
Facility to Fixcor in connection with its original subscription to all of the
shares of common stock of Fixcor. Mr. Fixler was also a party to this
Acquisition Agreement. Before the Company acquired the Facility under the
Quantum Agreement, he had a non-written option to purchase the Facility. He
waived his option to purchase and this waiver allowed the Company to make the
acquisition. In addition, he personally guaranteed the bridge financing for
the purchase of the Facility, and the Company issued to him 6,063,036 shares
of Common Stock (valued at $3,638,000 or $0.60 per share), all of which were
restricted shares. Since Mr. Fixler was also a principal shareholder of the
Company, the value of the shares issued to him in connection with this
transaction has been charged to expense for the year ended December 31, 1996.
Mr. Fixler also guaranteed up to $1,000,000 of the July, 1997 financing from
Gordon Brothers Capital Corporation.
In April, 1998 the Company entered into a lease with B-K-N Corporation, an
Ohio corporation, in which Mr. Noll, a Director of the Company, holds a
controlling interest, for the Florida Plant. The lease commenced April 17,
1998, is for a term of 10 years with a monthly rent payment of $24,375 and
includes an option to purchase during the first five years of the term. The
security
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<PAGE>
deposit was made in the form of a demand note for $48,750. The Company
believes that the terms of that lease are at least as favorable to the
Company as the terms that would be agreed to by an unrelated party for
comparable property.
Gordon Brothers Capital, LLC, reported to be part of a group holding more
than five percent of the outstanding shares of Common Stock, has entered into
various lending and related relationships with the Company. Gordon Brothers
Capital, LLC has loaned funds or provided credit facilities to the Company.
In April, 1997, Gordon Brothers Capital, LLC's predecessor, Gordon Brothers
Capital Corporation provided bridge financing in connection with the
acquisition of the Facility in the amount of $2,500,000. In July, 1997,
Gordon Brothers Capital Corporation provided a $3,500,000 secured line of
credit, intended to finance the acquisition of equipment for use in the
operations of Pallet Technology. In addition, all financing from
NationsCredit Commercial Corporation (originally incurred by in May, 1997)
was refinanced through Gordon Brothers Capital, LLC in December, 1997. This
resulted in the Company, Fixcor and Pallet Technology being the borrowers on
a revolving credit facility in the principal amount of $7,000,000, $3,500,000
of which principal was to mature in October, 1998. In June, 1998, all
financing by Gordon Brothers Capital, LLC was refinanced through Coast. In
December, 1996 and July, 1997 in connection with debt financings from Gordon
Brothers Capital Corporation, the Company granted to Gordon Brothers Capital
Corporation warrants for the purchase of an aggregate of 1,000,000 shares of
Common Stock at an exercise price of $0.125 per share, which warrants were
exercised in November, 1997. Certain "piggyback" and other registration
rights with respect to the warrant shares were also granted to Gordon
Brothers Capital Corporation. During 1997, Gordon Brother Capital Corporation
exercised rights to convert $350,000 of the bridge notes, including certain
interest accruals, into, and the Company issued, a total of 783,000 shares of
Common Stock. Finally, during the first quarter of 1998, the Company borrowed
an additional $2,000,000 on its facility with Gordon Brothers Capital, LLC.
See "DESCRIPTION OF BUSINESS, --ACQUISITION OF THE FACILITY, and --PALLET
TECHNOLOGY;" "MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS;" "RECENT SALES OF UNREGISTERED SECURITIES;"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, --PHASE 2, --PHASE 3, and --RESULTS OF OPERATIONS FOR THE QUARTER
ENDED MARCH 31, 1997 AS COMPARED TO THE QUARTER ENDED MARCH 31, 1998."
In February, 1998, the Company entered into the UV Agreement with UV and
Messrs. Aisenberg and Weinstein, jointly and severally as guarantors of UV's
obligations. Mr. Aisenberg is President of Poly Style and Vice President of
Development of the Company. Mr. Aisenberg continues to be the President of
UV, and a director of Nitro. Nitro owns the proprietary injection molding
process licensed to and used by Pallet Technology in manufacturing pallets.
In February, 1998, Nitro, Mr. Aisenberg and Pallet Technology also entered
into the First Amended Licensing and Marketing Agreement under which the
royalty rate of $2.50 per pallet sold under Pallet Technology's original
agreement with Nitro is reduced to $0.50 during the first five years and
$0.25 during the next five years. See "DESCRIPTION OF BUSINESS--RECENT
DEVELOPMENTS."
42
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter ("OTC") on the
Electronic Bulletin Board (the "Bulletin Board") maintained by the National
Association of Securities Dealers ("NASD") under the Symbol "FIXC."
As of June 30, 1998, 30,218,269 shares of Common Stock were issued and
outstanding, and there were approximately 525 holders of record of Common
Stock. As of that date, no shares of Preferred Stock were issued and
outstanding.
Mr. Aisenberg holds an option to purchase 200,000 shares of Common Stock
under his employment agreement with the Company. Mr. Kittelson holds an
option to purchase 500,000 shares of Common Stock, none of which are
currently vested, under his employment agreement and his incentive stock
option agreement with the Company, each dated July 16, 1998. The option to
purchase 4,000,000 shares of Common Stock previously held by Mr. Fixler were
cancelled in April, 1998. See "EXECUTIVE COMPENSATION."
The following table sets forth the range of high and low sales prices for the
Common Stock on the OTC Bulletin Board for each quarter for fiscal years 1996
and 1997, and the first and second quarters of fiscal year 1998.
QUARTER
ENDING HIGH LOW
6/30/98 6-1/2 3-3/8
3/31/98 4-5/16 2-11/16
12/31/97 4-5/8 2-11/16
9/30/97 4-1/4 1-3/8
6/30/97 3/4 1/2
3/31/97 7/8 1/2
12/31/96 15/16 7/16
9/30/96 13/16 5/8
6/30/96 1-9/16 11/16
3/31/96 1-1/2 13/16
The source of this information is America Online quotation services and
broker-dealers making a market in the Company's Common Stock. These prices
reflect inter-dealer prices, without retail markup, mark-down or commission
and may not represent actual transactions.
The Company has not declared or paid any dividends on its Common Stock and
there is no assurance that the Company will pay dividends in the future. The
Company currently intends to retain future earnings to fund the development
and growth of its businesses, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. Any future determination to declare and pay
dividends will be made by the Board of Directors of the Company in light of
the Company's earnings,
43
<PAGE>
financial position, capital requirements, credit agreements and such other
factors as the Board of Directors deems relevant. Any decision to pay
dividends is subject to Delaware law, under which the Company is permitted to
pay cash dividends only (i) out of the Company's capital surplus (the excess
of net assets over stated capital) or (ii) out of the net income of the
Company for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
EXECUTIVE COMPENSATION
Mr. Fixler is party to a three year employment contract with the Company
dated January 1, 1997. Under this agreement, the Company pays him a salary
of $200,000 during the first year, $250,000 during the second year and
$300,000 during the final year. In addition, Mr. Fixler receives a car
allowance and reasonable car phone expenses, plus other benefits customarily
given to executive officers. Under this agreement, Mr. Fixler was also
granted an option to purchase 4,000,000 shares of common stock of the Company
at a fixed price of $.50 per share. This option was exercisable at any time
during the employment period. Finally, in the event of a consolidation with,
or purchase of assets by, another company or termination of employment for
any other reason, Mr. Fixler is entitled to a $2,000,000 severance benefit.
Prior to 1997, Mr. Fixler was not subject to a written employment agreement
with the Company. He was paid a salary of $119,000 in 1996 and $64,000 in
1995. In April, 1998, Mr. Fixler surrendered, relinquished and waived any and
all rights to the option to purchase 4,000,000 shares of common stock of the
Company under his employment agreement, and the Board of Directors of the
Company accepted that surrender, and cancelled that option.
Mr. DeLaurentiis is party to a five year employment contract with the Company
dated January 1, 1997. Under this agreement, the Company pays him a salary
of $150,000 per year. He is also eligible for annual bonuses subject to the
approval of the Board of Directors of the Company. In addition, Mr.
DeLaurentiis receives a car allowance and other benefits customarily given to
executive officers. He is President of the Company and President of Fixcor.
He was not employed by the Company or Fixcor during fiscal year 1996.
Mr. Aisenberg is party to a five year employment contract with the Company
dated March 5, 1998, pursuant to which Mr. Aisenberg serves as Vice President
of Development of the Company and President of Poly Style, at an annual
salary of $150,000. Under that agreement, Mr. Aisenberg was granted an option
to purchase 200,000 shares of common stock of the Company at a price of $3.05
per share, exercisable at any time during the employment period. Mr.
Aisenberg is also entitled to expense reimbursement and other benefits
customarily given to executive officers, and to a $150,000 severance benefit
if the employment agreement is terminated prematurely.
Mr. Kittelson is party to a five year employment contract with the Company dated
July 16, 1998. Under this agreement, the Company pays him a salary of $125,000
per year. He is also eligible for annual bonuses and raises subject to the
approval of the Board of Directors of the Company. In addition, Mr. Kittelson
receives a car allowance and other benefits customarily given to executive
officers. He is Chief Financial Officer of the Company. He was not employed by
the Company during fiscal year 1996 or 1997. Pursuant to his employment
agreement, and his
44
<PAGE>
incentive stock option agreement, each dated July 16, 1998, Mr. Kittelson was
granted an option to purchase 500,000 shares of common stock of the Company
at a price of $4.18 per share, with the option to 100,000 of those 500,000
shares vesting on each anniversary of those agreements.
The Company currently has no stock appreciation rights, long-term incentive,
stock option plans or similar benefit plans for its executives or other
employees.
FINANCIAL STATEMENTS
The audited financial statements of the Company as of December 31, 1996 and
as of December 31, 1997 included in the Prospectus have been audited by
Harmon & Company, CPA, Inc., Columbus, Ohio, an independent public accounting
firm, as indicated in its report with respect thereto, and are included
herein in reliance upon the authority of Harmon & Company, CPA, Inc. as an
expert in accounting and auditing and in giving said reports.
LEGAL MATTERS
The validity of the securities offered by the Prospectus is being passed upon
for the Company by Bricker & Eckler LLP, 100 South Third Street, Columbus, Ohio
43215-4291.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company did not engage an independent accountant until during fiscal year
1997, when it engaged Harmon & Company, CPA, Inc., Columbus, Ohio, generally,
and in particular for purposes of preparing the Financial Statements included
with the Form 10-SB. The Company has had no material disagreements with its
accountants.
45
<PAGE>
PART F/S
The Company's Financial Statements and Independent Auditor's Report for the
fiscal years ending December 31, 1997 and December 31, 1996, and unaudited
consolidated balance sheet and consolidated income statement and statement of
retained earnings for the three month period ending March 31, 1998, are
included.
46
<PAGE>
----------------------------------
Fix-Corp International, Inc.
and Subsidiaries
Consolidated Financial Statements
&
Independent Auditor's Report
December 31, 1996 & 1997
----------------------------------
----------------------------------
Harmon & Company, CPA, Inc.
Columbus, Ohio
----------------------------------
<PAGE>
----------------------------------
Fix-Corp International, Inc.
and Subsidiaries
----------------------------------
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statement of Changes in Stockholders' Equity. . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . .6
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . .7
</TABLE>
-1-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors of
Fix-Corp International, Inc.
We have audited the accompanying Consolidated Balance Sheets of Fix-Corp
International, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, cash flow, and stockholders'
equity for the years then ended, all as restated, see Note 4. These financial
statements are the responsibility of the management of Fix-Corp International,
Inc.. Our responsibility is to express an opinion on these financial statements
based on our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 and 1997 financial statements referred to above
present fairly, in all material respects, the financial position of Fix-Corp
International, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Harmon & Company, CPA, Inc.
- ----------------------------
Harmon & Company, CPA, Inc.
March 26, 1998
Except as for Note 4, as to which the date is July 10, 1998
-2-
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(As Restated, See Note 4)
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $224,539 $6,895,619
Investment in Marketable Securities 130,692 108,287
Trade Accounts Receivable, net 88,763 1,309,503
Other Receivables - 0 - 334,000
Purchase Order Financing Contracts 221,672 30,000
Inventory 96,002 2,910,220
Prepaid Expenses - 0 - 45,285
---------- -----------
Total Current Assets 761,668 11,632,914
---------- -----------
PROPERTY, PLANT & EQUIPMENT
Land & Land Held for Development 100,000 100,000
Buildings 1,000,000 1,000,000
Plant Equipment 2,392,000 13,350,841
Office Furniture & Fixtures 22,500 37,655
---------- -----------
3,514,500 14,488,496
Less Accumulated Depreciation and Amortization (6,428) (680,310)
---------- -----------
Total Property, Plant & Equipment 3,508,072 13,808,186
---------- -----------
DEFERRED INCOME TAXES 412,150 820,050
---------- -----------
OTHER ASSETS & DEFERRED CHARGES 692,226 1,228,948
---------- -----------
Total Assets $5,374,116 $27,490,098
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-Term Borrowings $3,548,000 $320,000
Equipment Purchase Contracts - 0 - 1,875,000
Accounts Payable 68,008 2,064,137
Accrued Expenses 44,317 148,406
Current Portion of Long-Term Debt - 0 - 3,500,000
---------- -----------
Total Current Liabilities 3,660,325 7,907,543
---------- -----------
LONG-TERM DEBT
4% Convertible Debentures - 0 - 8,000,000
$7,000,000 Revolving Term Note - 0 - 6,780,489
---------- -----------
- 0 - 14,780,489
Less Current Portion of Long-Term Debt - 0 - (3,500,000)
---------- -----------
Total Long-Term Debt - 0 - 11,280,489
---------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value,
2,000,000 shares authorized, (0- shares
issued and outstanding) - 0 - - 0 -
Common Stock, par value $.001 per share,
100,000,000 shares authorized,
20,974,024 and 30,058,289 issued and
outstanding in 1996 and 1997 20,974 30,058
Additional Paid in Capital 6,345,529 13,904,304
Unrealized Holding Loss on Investments (68,673) (21,173)
Retained Earnings (Deficit) (4,584,039) (5,611,123)
---------- -----------
Total Stockholders' Equity 1,713,791 8,302,066
---------- -----------
Total Liabilities and Stockholders' Equity $5,374,116 $27,490,098
---------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(As Restated, See Note 4)
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
<S> <C> <C>
REVENUE
Sales, net $232,824 $8,020,304
Fees on Purchase Order Contract Financing 408,337 191,795
Commission & Shared Finance Fees 102,442 157,711
----------- -----------
Total Revenue 743,603 8,369,810
----------- -----------
COST OF SALES AND CONTRACT FINANCING OPERATIONS
Cost of Sales & Plant Operating Costs 89,403 6,799,548
Consulting Fees & Shared Commissions 42,939 37,181
Interest Expense, Contract Financing 250,822 156,100
----------- -----------
Cost of Sales and Contract Financing Operations 383,164 6,992,829
----------- -----------
Gross Profit 360,439 1,376,981
----------- -----------
OPERATING EXPENSES
Administrative Salaries, Wages and Related Costs 277,317 436,372
Value of Shares Issued to a Related Party 3,638,000 - 0 -
Depreciation & Amortization 19,514 728,044
Legal & Professional, including Consulting Fees 98,513 309,453
Other General & Administrative 96,039 571,898
----------- -----------
Total Expenses 4,129,383 2,045,767
----------- -----------
Operating Income (Loss) (3,768,944) (668,786)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Income - 0 - 85,498
Interest Expense and Financing Costs, Other (32,730) (820,707)
Other Expense - 0 - (30,989)
----------- -----------
(32,730) (766,198)
----------- -----------
Net (Loss) Before Income Taxes (3,801,674) (1,434,984)
----------- -----------
LESS PROVISION FOR DEFERRED INCOME TAXES
Federal (43,000) (332,000)
State (9,850) (75,900)
----------- -----------
Total Deferred Income Taxes (52,850) (407,900)
----------- -----------
Net Loss ($3,748,824) ($1,027,084)
----------- -----------
NET LOSS PER COMMON SHARE
Basic (0.267) (0.039)
----------- -----------
Diluted (0.208) (0.034)
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,040,040 26,139,451
----------- -----------
Diluted 18,040,040 30,139,451
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(As Restated, See Note 4)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
------------ Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 7,106,056 $711 $641,230 ($835,215) ($193,274)
Issuance of shares to a related party in connection
with the acquisition of Ohio Resources Recovery
Plant 6,063,036 606 3,637,394 3,638,000
Private Placement of Common Stock, net of
related issuance cost 6,204,932 620 1,605,782 1,606,402
Issuance of shares to secure bridge financing and
held in escrow subject to loan agreements 1,600,000 160 480,000 480,160
Net loss for the period (3,748,824) (3,748,824)
-----------------------------------------------------------------------
Balances at December 31, 1996 20,974,024 $2,097 $6,364,406 ($4,584,039) $1,782,464
Adjustment to reflect change in par value - 0 - 18,877 (18,877) - 0 - - 0 -
-----------------------------------------------------------------------
Balances at December 31, 1996 as restated 20,974,024 $20,974 $6,345,529 ($4,584,039) 1,782,464
-----------------------------------------------------------------------
Unrealized Holding Loss on Investments (68,673)
------------
$1,713,791
------------
Preferred Stock Private Placement Proceeds:
Issuance of Common Stock upon conversion 1,925,000 1,925 1,923,075 1,925,000
Proceeds from excercise of related warranrts 1,925,000 1,925 1,923,075 1,925,000
Proceeds from various Private Placement
Offerings including shares issued for services
and financing costs 3,980,265 3,980 2,396,814 2,400,794
Proceeds from exercise of warrants 500,000 500 62,000 62,500
Cancellation and reissuance of common shares issued
in 1996 to secure bridge financing 183,000 183 546,342 546,525
Acquistion of Equipment 571,000 571 707,469 708,040
Net loss for the period (1,027,084) (1,027,084)
-----------------------------------------------------------------------
30,058,289 $30,058 $13,904,304 ($5,611,123) $8,323,239
---------------------------------------------------------
Unrealized Holding Loss on Investments (21,173)
------------
$8,302,066
------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(As Restated, See Note 4)
<TABLE>
<CAPTION>
12/31/96 12/31/97
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) ($3,748,824) ($1,027,084)
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation & Amortization Expense 19,514 728,044
Value of Shares Issued to a Related Party 3,638,000 - 0 -
Investment in Marketable Securities (199,365) 22,405
(Increase) Decrease in Trade Accounts Receivables (29,327) (1,220,740)
(Increase) Decrease in Other Receivables - 0 - (334,000)
(Increase) Decrease in Purchase Order Financing
Contracts (148,872) 191,672
(Increase) in Inventory (96,002) (2,814,218)
(Increase) in Prepaid Expenses - 0 - (45,285)
(Increase) in Deferred Tax Asset (52,850) (407,900)
Increase in Equipment Purchase Contracts - 0 - 1,875,000
Increase (Decrease) in Accounts Payable (45,176) 1,996,130
Increase in Accrued Expenses 3,718 104,089
----- -------
Net Cash Provided (Used) by
Operating Activities (659,184) (931,887)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Land & Land Held for Development (100,000) - 0 -
Purchase of Buildings (1,000,000) - 0 -
Purchase of Plant Equipment (2,392,000) (10,250,801)
Purchase of Office Furniture & Fixtures - 0 - (15,156)
Additions to Other Assets (632,700) (471,859)
-------- -------
Net Cash Provided (Used) by
Investing Activities (4,124,700) (10,737,816)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Stock 1,606,402 6,438,294
Proceeds (Payments) on Short-Term Borrowings 3,330,000 (2,398,000)
Proceeds from Convertible Debentures - 0 - 8,000,000
Proceeds from Gordon Brothers Financings 198,161 6,780,489
Payments on Long-Term Debt (160,000) - 0 -
-------- -----
Net Cash Provided (Used) by
Financing Activities 4,974,563 18,340,783
--------- -----------
Net Income Increase (Decrease) in Cash $190,679 6,671,080
-------- ---------
Cash at Beginning of Period $33,860 $224,539
------ -------
Cash at End of Period $224,539 $6,895,619
-------- ----------
SUPPLEMENTAL DISCLOSURES
INTEREST PAID, EXCLUDING PURCHASE ORDER
CONTRACT FINANCING $32,730 $368,832
------- -------
ISSUANCE OF COMMON STOCK FOR:
Equipment - 0 - 708,040
Conversion of Notes Payable - 0 - 350,000
Interest Expense - 0 - 73,125
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE>
Fix-Corp International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997 & 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF THE BUSINESS - Fix-Corp International,
Inc. ("Fix-Corp") was organized under the laws of the state of Delaware on
October 27, 1995. A predecessor of the Company was initially incorporated on
August 11,1995 under the laws of the state of Utah and under the name
Lifechoice, Inc. The acquisition by the Company of a company organized by
Mark Fixler, the Company's Chief Executive Officer, President and Chairman of
its Board of Directors, involved several events in or about October, 1995,
including the following: (i) the Company changed its name from Lifechoice,
Inc. to Fix-Corp International, Inc.; (ii) Mr. Fixler assumed control of the
Company with 90% of its then-outstanding common stock; (iii) the Company was
redomiciled from being a corporation organized under Utah law to one
organized in Delaware; and (iv) the Company was transformed, from being a
public shell (under its prior name) with shareholders but no operations or
assets, to a corporation with the operations described below.
The Company's principal business is the manufacturing of recycled
plastic (in particular, high-density polyethylene or "HDPE") resin, through
its wholly-owned subsidiary, Fixcor Industries, Inc. ("Fixcor"), a Delaware
corporation incorporated on December 17, 1996. During January, 1998 the
Company commenced the manufacturing of plastic pallets from recycled resin
through its wholly-owned subsidiary, Pallet Technologies, Inc., a Delaware
corporation, incorporated on July 7, 1997. Pallet Technologies was
originally incorporated under the name Palletech, Inc. but amended its
certificate of incorporation on December 15, 1997 to change its name.
The Company also markets jewelry products for corporate awards and gifts
and extends financing to small businesses collateralized by purchase orders.
These two businesses constituted substantially all of the businesses of the
Company prior to the end of fiscal year 1996. During the fiscal year 1997,
however, revenues from these businesses constituted less than 10% of the
Company's total revenues, with more than 90% of its revenues generated by the
manufacturing of recycled plastic resin.
In December, 1996, the Company acquired a recycling plant in Heath,
Ohio, also known as the Heath Resource Recovery Plant, from Quantum Chemical
Corporation. In connection with this acquisition, in December, 1996, the
Company formed Fixcor to own and operate the Facility. On January 8, 1997,
the first processing line at the Facility became operational. During July,
1997, the Company formed Pallet Technologies to manufacture plastic pallets
from recycled plastic resin. The Company expects that it will dedicate
significantly less resources to the corporate awards jewelry marketing and
purchase order financing businesses, that the plastic recycling business will
continue to grow, and that the operations of Fixcor and Pallet Technologies
will generate a greater percentage and, eventually, substantially all of the
revenue of the Company in fiscal year 1998, such that the Company is
considered primarily to be in the plastic recycling and recycled products
business.
The following is a summary of significant accounting policies followed
in the preparation of these consolidated financial statements. The financial
statements and notes are the representation of the Company's Management, who
is responsible for their integrity and objectivity. The policies conform to
generally accepted accounting principles and have been consistently applied.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
-7-
<PAGE>
PRINCIPLES OF CONSOLIDATION - The financial statements include the
accounts of Fix-Corp International, Inc. and its wholly-owned subsidiaries
Fixcor Industries, Inc. and Pallet Technologies, Inc.. All significant
intercompany balances and transactions have been eliminated.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS - Effective in 1996, Fix-Corp
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under Statement No. 115,
debt and marketable equity securities are required to be classified in one of
three categories: trading, available-for-sale, or held to maturity. Fix-Corp's
equity securities qualify under the provisions of Statement No. 115 as
available-for-sale. Such securities are recorded at fair value, unrealized
holding gains and losses, net of the related tax effect, are not reflected in
earnings but are reported as a separate component of stockholders' equity until
realized. A decline in the market value of an available-for-sale security below
cost that is deemed other than temporary is charged to earnings and results in
the establishment of a new cost basis for the security.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
requires that long-lived assets held and used by a company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 also
establishes the procedures for review of recoverability, and measurement of
impairment, if necessary, of long-lived assets. Fix-Corp, with the acquisition
of the Heath Resource Recovery plant, adopted SFAS No.121 and determined that no
impairment provision of the carrying cost of the plant was necessary.
CASH AND CASH EQUIVALENTS - Cash includes cash equivalents. The Company
considers all highly liquid with an original maturity of three months or less
to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - It is the opinion of Management that
all accounts receivable are collectible, therefore an allowance for doubtful
accounts is not necessary.
INVENTORY - Inventory is stated at the lower of cost or market, using the
First-in, First-out, (FIFO), method of accounting, and consists of plastic
recycled products.
PROPERTY, PLANT AND EQUIPMENT - Property and equipment are stated at
cost. Costs of maintenance and repairs are charged to expense as incurred.
Major improvements and renewals, in general, are capitalized. Acquisitions to
fixed assets are depreciated on the straight-line method. The estimated useful
lives used in computing depreciation were changed subsequent to the issuance of
this report. The dollar effect of the change is minor in nature, as
substantially all assets affected were acquired in late December, 1996, not
placed in service during the year and therefor no depreciation expense was
recorded. The following is a summary of applicable lives:
<TABLE>
<CAPTION>
Life in Years Life in Years
Description As Previously As Changed
Reported
- -----------------------------------------------------------------------------------
<S> <C> <C>
Buildings 10-25 years 39 years
Plant Machinery and Equipment 5-10 years 10 years
Office Furniture and Fixtures 5-7 years 10 years
</TABLE>
Depreciation charged against operations for the years ended December 31,
1996 and 1997 were $3,214 and $675,382, respectively.
ORGANIZATIONAL COSTS - Organizational costs are being amortized over a
period of 60 months and is presented net of accumulated amortization of $32,600
and $48,900 in 1996 and 1997, respectively. Amortization expense charged against
operations for the years ended December 31, 1996 and 1997 $16,300 and $16,300,
respectively.
-8-
<PAGE>
DEFERRED TAXES AND INCOME TAXES - During 1995, the Company adopted
Financial Accounting Standards No. 109, "Accounting for Income Taxes" and all
years presented reflect the adoption of this method, the total effect of which
was the recording of a deferred tax asset of $412,150 and $820,050 in 1996 and
1997, respectively, net of a valuation allowances of $137,500 and $137,500 in
1996 and 1997, respectively, which arises solely from the estimated future
benefit of the net operating loss carry-forward of approximately $2,233,300.
REVENUE RECOGNITION - Revenue from sales is generally recognized upon
shipment, provided that no significant vendor obligations remain and collection
of the resulting receivable is deemed probable. Fees on purchase order contract
financing, commissions and shared finance fees are recognized upon finalization
and collection of the related financing project.
LOSS PER COMMON SHARE - As of December 31, 1996 and 1997, loss per common
share and common share equivalent were computed by dividing the net loss by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year.
NOTE 2 - INVESTMENT IN MARKETABLE SECURITIES
Effective in 1996, Fix-Corp adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under Statement No. 115, debt and marketable equity securities
are required to be classified in one of three categories: trading,
available-for-sale, or held to maturity. Fix-Corp's equity securities qualify
under the provisions of Statement No. 115 as available-for-sale. Such
securities are recorded at fair value, unrealized holding gains and losses,
net of the related tax effect, are not reflected in earnings but are reported
as a separate component of stockholders' equity until realized. A decline in
the market value of an available-for-sale security below cost that is deemed
other than temporary is charged to earnings and results in the establishment
of a new cost basis for the security. The unrealized holding loss on
investments of $68,673 and $21,173 was recognized directly to capital in 1996
and 1997, respectively.
NOTE 3 - INVENTORY
Inventory is stated at the lower of cost or market, using the First-in,
First-out, (FIFO), method of accounting, and consists of plastic recycled
products. Inventories at December 31, by major classification, were as follows:
<TABLE>
<CAPTION>
1996 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Raw Materials $96,002 $2,457,209
Work in Process - 0 - 86,210
Finished Goods - 0 - 303,990
Supplies & Chemicals - 0 - 62,811
------- ----------
Total Inventory $96,002 $2,910,220
------- ----------
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
PLANT PURCHASE AND SALE AGREEMENT - On December 16, 1996 the Company
acquired, subject to a certain Purchase and Sale Agreement, a plant in Central
Ohio, hereinafter referred to as the "Resource Recovery" plant. The assets
consist of a post-consumer plastic recycling operation involving two parallel
recycling lines under a single roofed structure on its own plot of ground with a
permanent easement for ingress and egress to an adjoining railroad spur and
truck scale and various other support equipment permitting this business to
function as an independent entity.
-9-
<PAGE>
In connection with the Company's initial registration of its securities it
has restated the financial statements for the years ended December 31, 1996 and
1997, to reflect the value of shares issued to a "related party" (a principal
shareholder) as an expense in the period ended December 31, 1996; previously
this had been included as part of the capitalized cost of the Resource Recovery
plant. The restated purchase price of $3,400,000 has been reallocated on the
same basis as the components of the appraised fair market values of the property
at the time of the purchase.
<TABLE>
<CAPTION>
The allocation of the revised capitalized are as follows: Amount
- --------------------------------------------------------------------------------
<S> <C>
Land & Land held for Development $100,000
Buildings 1,000,000
Plant Equipment 2,300,000
---------
Total $3,400,000
----------
</TABLE>
As more fully described in Note 7, included in the acquisition of the
Resource Recovery plant was a Track Lease Agreement for 200' of railroad siding
(including land) for the sole purpose of the storage of railroad cars owned,
leased or consigned to the Company. The term of the lease is for a period of ten
(10) years beginning August 14, 1996 and expiring August 14, 2006, with an
option for an additional ten (10) years expiring August 14, 2016. Annual
rentals, paid in advance, are $1,000 per year.
<TABLE>
<CAPTION>
The purchase was financed as follows Amount
- -------------------------------------------------------------------------------
<S> <C>
Cash $900,000
Secured Equipment Loan 2,500,000
---------
Total Payments $3,400,000
----------
</TABLE>
At closing, the Company received a general warranty deed for the ground
and its improvements (i.e. the physical plant), and a bill of sale for the
remainder of the assets. The seller extended no express or implied warranties
for the equipment transferred and disclaimed any implied warranty of
merchantability and implied warranty of fitness for a particular purpose. The
seller did stipulate however, that the plant was not subject to any contract or
agreement with any labor union or linked to any collective bargaining agreement,
and that the plant was not subject to any employee benefit or retirement
programs. In addition, the seller agreed to provide personnel to consult with
Fix-Corp for up to one year and assist in re-starting the facility. In addition,
all blueprints, customer lists, drawings and equipment specifications were made
available.
In August, 1997, the Company issued 471,000 shares of Common Stock (at a
value of $1.24 per share) in consideration of an equipment purchase from a
commercial enterprise.
Pallet Technologies has ordered a specialized, state-of-the-art,
injection molding machine which transforms resin pellets, produced by Fixcor,
into plastic pellets. Installation of this equipment was completed during
January, 1998 and management expects to have it operating at full capacity by
the end of the first quarter of fiscal year 1998. The approximate cost of
the equipment, molds, transportation and installation of the equipment for
Pallet Technologies' operation at the Facility is $4,000,000, and the
approximate cost of equipment, transportation and installation at the Florida
Plant, more fully described in Note 13, is expected to be $3,000,000, in
addition to approximately $1,000,000, for the cost of molds. Permanent
financing for the Pallet Technologies equipment for installation at the
Facility was secured from Gordon Brothers Capital Corp.
-10-
<PAGE>
NOTE 5 - OTHER ASSETS AND DEFERRED CHARGES
<TABLE>
<CAPTION>
Other Assets and Deferred Charges consist of the 1996 1997
following:
- -------------------------------------------------------------------------------
<S> <C> <C>
Unamortized Debt Issue Costs (net of accumulated
amortization of $-0- and $532,593 in 1996 and 1997, $480,000 $894,082
respectively)
Deferred Preoperating Plant Startup Costs (net of
accumulated amortization of $-0- and $36,362 in 36,750 145,060
1996 and 1997, respectively
Disputed Finance Deposit Claim, net of valuation
allowance of $30,000 in 1997 90,000 60,000
License Agreement -0- 30,000
Note Receivable from Affiliated Company 26,000 26,000
Organizational Costs (net of accumulated
amortization of $32,600 and $48,900 in 1996 and 48,900 32,600
1997, respectively)
Deposits 900 31,530
Other Assets 9,676 9,676
----- -----
Total Other Assets and Deferred Charges $692,226 $1,228,948
-------- ----------
</TABLE>
UNAMORTIZED DEBT ISSUE COSTS - Unamortized Debt Issue Costs consists of
legal and accounting fees, printing costs and other expenses associated with
issuance of debt and financing instruments, including the Convertible
Debentures. The costs are being amortized over the life of the related financing
instrument. Amortization expense charged to operations was $-0- and $36,362 in
1996 and 1997, respectively
NOTE RECEIVABLE FROM AFFILIATED COMPANY - The Note Receivable from
Affiliated Company results from a loan to Fix-Sports, Inc., a company partially
owned by the Company's President. The note bears interest at 10% and is signed
personally by the President and collateralized by 52,000 shares of the Company's
common stock.
DISPUTED FINANCE DEPOSIT CLAIM - The Disputed Finance Deposit Claim
results from a deposit that the Company placed with a finance company in order
to obtain financing for the Resource Recovery acquisition. No consideration was
received and the Company intends to pursue action to recover the deposit. The
Company's counsel believes that they have a legitimate collectible claim.
DEFERRED PREOPERATING PLANT STARTUP COSTS - Deferred preoperating plant
startup costs consists of certain consulting, labor and maintenance costs
incurred by the Company subsequent to the acquisition of the Resource Recovery
plant, more fully described in Note 4. The deferred costs will be amortized over
a three (3) year period starting on the date that the plant became fully
operational in February, 1997.
PATENTS, TRADEMARKS AND LICENSES - Pallet Technologies has entered
into a Licensing and Marketing Agreement with Nitro Plastics Technologies.
Under that agreement, Pallet Technologies is the sub-licensee of certain
proprietary injection molding technology for the manufacturing of plastic
pallets and other products from recycled plastic. Pallet Technologies uses the
trademark POWER-PAL 2000U with respect to its pallets, but has not registered
or applied for registration of that trademark.
In February, 1998, Nitro, Mr. Aisenberg and Pallet Technologies entered
into the First Amended Licensing and Marketing Agreement under which the royalty
rate of $2.50 per pallet sold under Pallet Technologies' original agreement with
Nitro is reduced to $0.50 during the first five years and $0.25 during the next
five years.
-11-
<PAGE>
CALIFORNIA GRANT AND ALLIED SIGNAL AGREEMENT - In June, 1997, the
Company was awarded a $256,868 research grant from the Integrated Waste
Management Board of the State of California to develop a solution to the
problems associated with non-recyclable HDPE motor oil containers, which have
historically been sent to landfills. The solution will involve the separation
of the remaining oil from the "empty" container, and then the recycling of the
HDPE container and the separate recycling of the remaining oil. To do this, in
September, 1997, Fixcor entered into a license agreement with The Federal
Manufacturing & Technologies business unit of AlliedSignal Inc. under which
AlliedSignal licenses to Fixcor certain technology and Fixcor pays a license fee
and ongoing royalties based principally on sales of products sold arising out of
use of the licensed technology.
NOTE 6 - DEFERRED TAXES AND INCOME TAXES
As more fully described in Note 1, the Company adopted Financial Accounting
Standards No. 109, "Accounting for Income Taxes" and all years presented
reflect the adoption of this method. The deferred tax asset of $820,050, net of
a valuation allowance of $137,500, which arises solely from the estimated future
benefit of the net operating loss carry-forward of approximately $6,351,300.
<TABLE>
<CAPTION>
The components of the deferred tax asset are as 1996 1997
follows:
- ---------------------------------------------------------------------------------
<S> <C> <C>
Tax asset arising form net operating loss
carryforward:
Federal $447,375 $779,375
State 102,275 178,175
------- -------
Total Deferred Tax Asset 549,650 957,550
Less valuation for deferred tax assets (137,500) (137,500)
--------- ---------
Deferred Taxes - net $412,150 $820,050
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
The components of the provision for taxes were as 1996 1997
follows:
- ---------------------------------------------------------------------------------
<S> <C> <C>
Provision for Deferred Taxes:
Federal $57,250 $332,000
State 13,100 75,900
Valuation allowance (17,500) - 0 -
-------- -----
Total $52,850 $407,900
------- --------
------- --------
</TABLE>
The amounts and expiration dates of the net operating loss carryforward
available to the Company at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Amount Expiration
Date
- --------------------------------------------------------------------------------
<S> <C> <C>
Loss for the year ended December 31, 1995 $1,114,642 2010
Loss for the year ended December 31, 1996 3,801,674 2011
Loss for the year ended December 31, 1997 1,434,984 2012
---------
Total Net Operating Loss Carryforward $6,351,300
----------
</TABLE>
-12-
<PAGE>
NOTE 7 - SHORT-TERM BORROWINGS
Short-Term Borrowings at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Secured Equipment Note Payable $2,500,000 $- 0 -
Convertible Bridge Financing Notes Payable 250,000 - 0 -
6.07% Convertible Bridge Financing Notes Payable 200,000 - 0 -
Notes Payable to Shareholders 418,000 180,000
12% Note Payable 80,000 80,000
Notes Payable to Others 100,000 60,000
------- --------
$3,548,000 $320,000
---------- --------
</TABLE>
SECURED EQUIPMENT LOAN PAYABLE - At December 31, 1996 the Company was a
party to a Loan and Security Agreement with Gordon Brothers Capital Corporation,
a Delaware company, and Mark Fixler, a principal shareholder, President and CEO,
personally. The loan was for $2,500,000 bearing interest at 12 1/2% and was
secured by an Open-End Mortgage to the premises located at 1835 James Parkway,
Heath, Ohio, namely the post consumer plastics recycling facility or Resource
Recovery plant.
As part of that agreement, Gordon Brothers was entitled to purchase from
the Company after December 16, 1997 but before December 16, 1999, five hundred
thousand (500,000) shares of the Company's $.001 value common stock at a price
of twenty-five cents ($0.25) per share. Such shares under option are
restricted shares. Gordon Brothers Capital Corporation exercised their option
during 1997.
In addition to this Open-End Mortgage, Gordon Brothers was granted a
security interest, including a lien on and a pledge of all inventory, all
accounts and accounts receivables, contract rights, and all customer lists and
goodwill. Mr. Fixler has been required to sign as a guarantor for Fix-Corp
International. The schedule of payments required under the Loan portion of this
agreement was defined so as to allow a modest initial payment, then a payment of
approximately $79,734 for the next five months, followed by a payment of
$123,000, then $250,000, then $394,000 for the final four months.
The loan contract contained a number of Negative Covenants, including but
not limited to, certain limitations on the issuance any additional evidences of
indebtedness; the creation, assumption, guarantee of indebtedness in addition
to the indebtedness of the lender; there can be no sale or transfer of ownership
without the lender's prior written consent; and the borrower was barred from
making any loans or advances to any individual or officer of the Borrower. In
addition, the Company is prohibited from paying Dividends without the prior
written permission of the lender and may not make any investments without the
lender's prior written permission; the Borrower may not merge or consolidate
with or into any other corporation; the Borrower may not sell, lease or dispose
of its assets without the lender's prior written consent and the Borrower may
not grant any security interest in or mortgage of any of its properties that are
included in the lender's collateral. Finally, the Borrower is barred from
engaging in any business other then the business in which it is currently
engaged or a business reasonably allied thereto.
In May, 1997, Fixcor secured financing for the Facility from NationsCredit
Commercial Corporation. This consisted of revolving loans up to $7,000,000 for
inventory and account receivable financing, permanent financing, and equipment
acquisition. This financing included a mortgage security agreement which
encumbered substantially all of the assets of the Facility. Mr. Fixler is the
guarantor of this facility in an amount up to $750,000 plus expenses. Certain
proceeds of this loan were used to retire the previously described Secured
Equipment Loan Payable Gordon Brothers.
-13-
<PAGE>
BRIDGE FINANCING NOTES PAYABLE - During 1996 and subject to a certain
"Confidential Private Placement Memorandum", more fully described in Note 10,
the Company sold $250,000 in Bridge Notes to qualified accredited investors.
The proceeds of the Bridge Notes were used for the purpose of acquiring the
Resource Recovery plant. The note holders are entitled to a twenty-two (22%)
percent return on investment as well as an stock dividend of eighteen (18%)
percent of monies invested at $.50 per share or 18,000 shares of common stock,
which was issued and held in escrow. The Company retained the right to
"repurchase" the shares upon payment of the notes. The term of the loan is
generally 120 to 180 days from closing.
On December 11, 1996, for value received, the Company promised to pay to
the order of Generation Capital Associates, a non affiliated New York limited
partnership or its assigns, the principal amount of two hundred thousand
dollars ($200,000). The principal thereof and any unpaid accrued interest
thereon became due and payable on June 31, 1997. The note bears interest at the
rate of 6.07% percent per annum on the outstanding principal balance, payable
quarterly commencing January 1, 1997.
During 1997, $350,000 of the bridge notes, including certain interest
accruals were converted into a total of 783,000 shares of common stock. In
addition, certain warrants related to these debt instruments were exercised
resulting in the issuance of 1,000,000 shares of common stock for $125,000.
NOTES PAYABLE - The proceeds of the notes have generally been used for
working capital and purchase order financing contracts. The notes are generally
short-term renewable notes bearing interest at 1% per month. All notes are
current.
NOTE 8 - LONG-TERM DEBT
CONVERTIBLE DEBENTURES - On October 24, 1997, pursuant to a Convertible
Debenture Purchase Agreement, the Company issued and sold in a private placement
to two institutional investors an aggregate $5,000,000 principal amount of
Debentures bearing interest at the rate of 6% per annum, payable quarterly in
arrears, and due October 24, 2000.
On November 25, 1997, pursuant to an Amended and Restated Convertible
Debenture Purchase Agreement and collateral documents, the interest rate to the
October Debentures was reduced to 5% (retaining the original October 24, 1997
effective date of the October Debentures), and the Company issued new Debentures
in the principal amount of $3,000,000 to one of the October, 1997 investors,
bearing a rate of 5% per annum, payable quarterly in arrears, and due November
25, 2000.
The Company expects to use the net proceeds of the transactions primarily
for the acquisition of equipment for the start-up and expansion of Pallet
Technologies and Fixcor operations. The principal amount of the Debentures,
together with any accrued and unpaid interest thereon, are convertible at any
time into shares of Common Stock at a conversion price equal to the lesser of
(1) $3.91 (110% of the average closing bid price for the 5 trading days
preceding closing), or (2) 84% (previously 85% under the October documents) of
the average of the 5 lowest closing bid prices during the 10 trading days
preceding conversion. Except in limited circumstances, the conversion rights
are subject to an aggregate limit of 4.9% of the Company's outstanding Common
Stock.
The purchasers also received warrants to purchase an aggregate 331,400
shares of Common Stock at an exercise price equal to $3.91 per share. The
warrants are exercisable at any time through October 24, 2000. One of the
purchasers also received warrants to purchase an aggregate 198,840 shares of
Common Stock at that same price, exercisable at any time through November 25,
2000. The Company has reserved authorized shares of Common Stock sufficient to
cover conversion of Debentures (and payment of interest thereon in shares of
Common Stock) and the exercise of the warrants, and is required to effect and
maintain for three years a registration statement under the Securities Act
covering resales by the holders of such shares following conversion of
Debentures (and payment of interest thereon in shares of Common Stock) and
exercise of warrants.
-14-
<PAGE>
In January, 1998, the Company issued to the same two purchasers $2,500,000
aggregate principal amount of three-year, 4% convertible debentures, convertible
(together with interest thereon) at any time into shares of Common Stock at a
conversion price equal to the lesser of (1) $3.34, or (2) 83% of the average of
the 5 lowest closing bid prices for 'the 10 trading days preceding conversion.
The purchasers also received warrants to purchase an aggregate 198,413 shares of
Common Stock at an exercise price equal to $3.34 per share. The warrants are
exercisable at any time through January 22, 2001. The Company is required to
amend the Registration Statement on Form SB-2 to include resale by the holders
of shares issuable upon conversion of such debentures and exercise of such
warrants.
Under generally the same terms and conditions in March, 1998, the Company
issued to the same two purchasers $1,500,000 aggregate principal amount of
three-year, 4% convertible debentures, convertible (together with interest
thereon) at any time into shares of Common Stock at a conversion price as
previously defined. The Company is required to amend the Registration Statement
on Form SB-2 to include resale by the holders of shares issuable upon conversion
of such debentures and exercise of such warrants.
The debenture transaction documents include additional representations,
warranties, covenants and default provisions not atypical for such financings.
$7,000,000 REVOLVING-TERM NOTE - In July, 1997, the Company, Fixcor and
Pallet Technologies, as borrowers, secured financing from Gordon Brothers
Capital Corp., in the form of a $3,500,000 line of credit, bearing interest at
12%, the proceeds of which are intended to finance the acquisition of equipment
for use in the operations of Pallet Technologies. In addition, the lenders also
received warrants to purchase 500,000 shares of Common Stock at an exercise
price equal to $.125 per share. This facility is secured by substantially all
of the assets of the Company and its subsidiaries. Mr. Fixler is the guarantor
of this line of credit in an amount up to $1,000,000.
All financing from NationsCredit Commercial Corporation was refinanced
through Gordon Brothers Capital, LLC (successor to Gordon Brothers Capital
Corp.) in December, 1997. This resulted in the Company, Fixcor and Pallet
Technologies being the borrowers on a revolving credit facility in the principal
amount of $7,000,000, $3,500,000 of which principal matures in October, 1998.
NOTE 9 - LEASE COMMITMENTS
On October 17, 1997, the Company entered into a three (3) year lease for
office space that houses the corporate offices, purchase order and merchandise
sales segments of the business. Rent expense under prior lease arrangements
amounted to $10,800 for the year ended December 31, 1996. Monthly rentals
through December 31, 1997 are $1,393 per month.
During 1997, the Company entered into a "Federal Railcar Master Car Leasing
Agreement and Service Contract" to facilitate shipments to customers. The
various rental agreements are for up to twenty (20) cars and are generally for a
term of one (1) year and renewable at the option of the Company. Rent expense
under the various contracts amounted to $20,411 for the year ended December 31,
1997. Monthly rentals through December 31, 1997 were approximately $2,700 per
month. Subsequent to December 31, 1997, the Company accepted additional cars
and rentals under the master agreement which increased to approximately $23,000
per month.
Pursuant to a certain Purchase and Sale Agreement, more fully described in
Note 4, involving the acquisition of the Resource Recovery plant in Heath, Ohio,
the Company entered into a Track Lease Agreement for 200' of railroad siding
(including land) for the sole purpose of the storage of railroad cars owned,
leased or consigned to the Company. The term of the lease is for a period of ten
(10) years beginning August 14, 1996 and expiring August 14, 2006, with an
option for an additional ten (10) years expiring August 14, 2016. Annual
rentals, paid in advance, are $1,000 per year.
-15-
<PAGE>
On August 5, 1997, to facilitate a planned increase in inventory, the
Company entered into a one (1) year lease for 73,000 square feet of warehouse
space at a monthly rental of $15,330. Rental expense for the year ended December
31, 1997 amounted to $76,650.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - Mr. Fixler is party to a three year employment
contract with the Company dated January 1,1997. Under this agreement, the
Company pays him a salary of $200,000 during the first year, $250,000 during the
second year and $300,000 during the final year. In addition, Mr. Fixler
receives a car allowance and reasonable car phone expenses, plus other benefits
customarily given to executive officers. Under this agreement, Mr. Fixler is
also granted an option to purchase 4,000,000 shares of common stock of the
Company at a fixed price of $.50 per share and this option may be exercised at
any time during the employment period. Finally, in the event of a consolidation
or purchase of assets to another company or termination of employment for any
other reason, Mr. Fixler is entitled to a $2,000,000 severance benefit. Prior
to 1997, Mr. Fixler was not subject to a written employment agreement with the
Company. He was paid a salary of $119,000 in 1996 and $200,000 in 1997.
Mr. DeLaurentiis, President of Fix-Cor Industries, is party to a five year
employment contract with the Company dated January 1,1997. Under this
agreement, the Company pays him a salary of $125,000 per year. He is also
eligible for annual bonuses subject to the approval of the Board of Directors of
the Company. In addition, Mr. DeLaurentiis receives a car allowance and other
benefits customarily given to executive officers. He is also a Vice President
of the Company. He was not employed by the Company or Fixcor during fiscal year
1996.
LEGAL PROCEEDINGS - The Company is from time to time made a party to
legal proceedings arising in the ordinary course of business. The Company does
not believe that the results of such legal proceedings, even if unfavorable to
the Company, will have a materially adverse impact on its financial condition or
the results of its operations.
The Company is subject to an administrative order issued in August, 1997 by
the Ohio Division of Securities, and relating to certain matters deemed to
constitute violations of Ohio securities laws. The Company was ordered to
'cease and desist' from acts and practices found to violate the Ohio Revised
Code as to the sales of securities. There were no further restrictions imposed
pursuant to the Order. The Company believes that such violations resulted
principally from miscommunication between the Company and its legal counsel at
the time as to certain information communicated to the Ohio Division of
Securities in connection with an application for registration by description
filed in December, 1995 with respect to sales of the Company's common stock in
Ohio. The Company believes that it is in compliance with the Order.
NOTE 11 - STOCKHOLDERS' EQUITY
DESCRIPTION OF SECURITIES - The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock with a par value of $0.001 per
share, and 2,000,000 shares of Preferred Stock with a par value of $0.001 per
share. 30,053,289 shares of Common Stock were issued and outstanding as of
December 31, 1997..
PREFERRED STOCK - No shares of preferred stock of the Company (the
"Preferred Stock") were issued and outstanding as of December 31, 1997. Shares
of Preferred Stock were issued during the second and third quarters of fiscal
year 1997, but all have been converted to Common Stock by the holders thereof.
RECENT SALES OF UNREGISTERED SECURITIES - During the period November,
1995 through August, 1996, pursuant to Rule 504 of Regulation D, the Company
offered and sold to approximately 160 purchasers 2,000,000 shares of Common
Stock at $.50 per share.
-16-
<PAGE>
During the period November, 1996 through May, 1997, the Company issued
approximately 4,000,000 additional shares of Common Stock for various purposes
and consideration. The Company treated all such issuances as exempt from
registration under Rule 504 of Regulation D, and the major transactions
reflected therein included the following:
(1.) In 1997, the Company sold 3,980,265 shares sold for approximately
$2,400,000 or $.60 per share.
(2.) 550,000 shares issued to secure certain bridge financing from
Generation Capital Associates..
(3.) In September, 1996, pursuant to Section 4(2) of the Securities Act the
Company sold to six purchasers 575,000 shares of Common Stock at a
purchase price of $.50 per share.
(4.) In December, 1996 in connection with certain bridge financing in the
amount of $200,000, the Company granted to Generation Capital
Associates, a New York limited partnership, warrants for the purchase
of an aggregate of 100,000 shares of Common Stock at an exercise price
of $.65 per share, which were eventually exercised at that price.
(5.) In December, 1996 and July, 1997 in connection with debt financing
from Gordon Brothers Capital Corporation and pursuant to Section 4(2)
of the Securities Act, the Company granted to the lender warrants for
the purchase of an aggregate of 1,000,000 shares of Common Stock at an
exercise price of $.125 per share, which the lender exercised in
November, 1997. Certain 'piggyback' and other registration rights
with respect to the warrant shares were also granted to Gordon
Brothers Capital Corporation.
(6.) In 1996 pursuant to the Acquisition Agreement, the Company issued to
Mr. Fixler 6,063,036 shares of Common Stock (at a value of $.60 per
share) in a transaction exempt from registration under Section 4(2) of
the Securities Act.
(7.) From June, 1997 to October 1, 1997, pursuant to an offering under
Section 4(2) of the Securities Act, the Company sold 1,925,000 shares
of Preferred Stock at $1.00 per share. Each share of Preferred Stock
was convertible into one share of Common Stock, and as of October
1,1997 all of the Preferred Stock had been converted into 1,925,000
shares of Common Stock. In addition, holders of Preferred Stock were
granted rights to acquire additional shares of Common Stock at $1.00
per share, and 1,925,000 shares of Common Stock were issued pursuant
to exercise of such rights.
(8.) In August, 1997, pursuant to Section 4(2) of the Securities Act the
Company issued 571,000 shares of Common Stock (at a value of $1.24 per
share) in consideration of an equipment purchase from a commercial
enterprise.
(9.) In November, 1997, pursuant to Rule 506 of Regulation D, the Company
issued to two institutional investors $8,000,000 aggregate principal
amount of three-year 5% convertible debentures. The transaction
reflected a reissuance of $5,000,000 convertible debentures in
exchange for similar debentures issued to the same purchasers in
October, 1997, and a new issuance of $3,000,000 convertible debentures
to one of such purchasers. The principal amount of the debentures,
together with any accrued and unpaid interest thereon, are convertible
at any time into shares of Common Stock at a conversion price equal to
the lesser of (i) $3.91 (110% of the average closing bid price for the
5 trading days preceding closing), or (ii) 84% of the average of the
slowest closing bid prices during the 10 trading days preceding
conversion. The purchasers also received warrants to purchase an
aggregate 530,240 shares of Common Stock at an exercise price equal to
$3.91 per share. The warrants are exercisable at any time through
October 24, 2000 (as to 331,400 shares) and November 25,2000 (as to
198,840 shares). Pursuant to the terms of the debentures and
warrants, the Company has filed with the SEC a Registration Statement
on Form SB-2 with respect to resale
-17-
<PAGE>
by the holders of shares of Common Stock issuable upon
conversion of the debentures and exercise of the warrants.
(10.) In January, 1998, pursuant to Rule 506 of Regulation D, the
Company issued to the same two purchasers $2,500,000 aggregate
principal amount of three-year, 4% convertible debentures,
convertible (together with interest thereon) at any time into
shares of Common Stock at a conversion price equal to the lesser
of (i) $3.34, or (ii) 83% of the average of the 5 lowest closing
bid prices for the 10 trading days preceding conversion. The
purchasers also received warrants to purchase an aggregate
198,413 shares of Common Stock at an exercise price equal to
$3.34 per share. The warrants are exercisable at any time
through January 22, 2001. The Company is required to amend the
Registration Statement on Form SB-2 to include resale by the
holders of shares issuable upon conversion of such debentures and
exercise of such warrants.
STOCK OPTION - An employment agreement was executed on January 3, 1997
with Mark Fixler, the Company's President, CEO and principal shareholder that
includes, among other provisions, an Option to the Employee to purchase four
million shares of stock at the fixed price of fifty cents per share. This Option
can be exercised at any time during the employment period. The Company is
similarly obligated to purchase $2 million dollars of Key Man Insurance.
NOTE 12 - SEGMENT INFORMATION
The Company's corporate awards jewelry marketing business activity is still
continuing on a limited basis. Revenues from corporate awards jewelry marketing
business for fiscal year 1997 were approximately 2.3% of the Company's revenue.
The purchase order financing business is being phased out. As of December 31,
1997 the aggregate principal of the purchase order financing contracts was
reduced to approximately $30,000, and the Company is not entering and does not
intend to enter into any additional purchase order financing arrangements.
Revenues from the purchase order financing business for fiscal year 1997 were
approximately 4% of the Company's revenue.
NOTE 13 - SUBSEQUENT EVENTS
POLY STYLE INDUSTRIES, INC - In February, 1998, the Company entered into
an agreement on February 3, 1998 with Universal Vinyl Corp. ("UV"), a Florida
corporation, as seller, and Yoram Aisenberg and Avraham Weinstein, jointly and
severally as guarantors of UV's obligations. Under the UV Agreement, certain
conditions having been satisfied, on February 28, 1998, the Company acquired the
assets of UV, whose operations are located at a plant in Medley, Florida, a
suburb of Miami. The purchase price of these assets is $1.04 million. The
source of funds for this acquisition is cash on hand, arising from the various
capital raising activities of the Company.
The Company intends to utilize the assets acquired under the UV Agreement
through its wholly-owned subsidiary, Poly Style Industries, Inc. ("Poly Style"),
incorporated under Delaware law on February 18, 1998. The Company intends that
Poly Style will move and operate those assets to and at space to be identified
and to be leased in Medley, Florida. The lease and relocation is not expected to
be finalized until approximately the end of April, 1998.
In addition to being the President of UV, Mr. Aisenberg is a director of
Nitro Plastic Technologies of Israel ("Nitro"). Nitro owns the proprietary
injection molding process licensed to and used by Pallet Technologies in
manufacturing pallets. In February, 1998, Nitro, Mr. Aisenberg and Pallet
Technologies entered into the First Amended Licensing and Marketing Agreement
under which the the royalty rate of $2.50 per pallet sold under Pallet
Technologies' original agreement with Nitro is reduced to $0.50 during the first
five years and $0.25 during the next five years. Pallet Technologies, in
addition to continuing its operations at the Facility, has ordered (at an
aggregate installed cost of approximately $4.0 million) and, during
approximately the third quarter of fiscal 1998 expects to install equipment at
the Florida Plant, and to commence the production of pallets from plastic resin
pellets acquired from third party suppliers.
-18-
<PAGE>
PALLET TECHNOLOGIES, INC - During January, 1998 the Company commenced the
manufacturing of plastic pallets from recycled resin through its wholly-owned
subsidiary, Pallet Technologies, Inc., a Delaware corporation, incorporated on
July 7, 1997. Pallet Technologies was originally incorporated under the name
Palletech, Inc. but amended its certificate of incorporation on December 15,
1997 to change its name.
CONVERTIBLE DEBENTURES - In January, 1998, the Company issued to the
same two purchasers $2,500,000 aggregate principal amount of three-year, 4%
convertible debentures, convertible (together with interest thereon) at any time
into shares of Common Stock at a conversion price equal to the lesser of (1)
$3.34, or (2) 83% of the average of the 5 lowest closing bid prices for 'the 10
trading days preceding conversion. The purchasers also received warrants to
purchase an aggregate 198,413 shares of Common Stock at an exercise price equal
to $3.34 per share. The warrants are exercisable at any time through January
22, 2001. The Company is required to amend the Registration Statement on Form
SB-2 to include resale by the holders of shares issuable upon conversion of such
debentures and exercise of such warrants.
Under generally the same terms and conditions in March, 1998, the Company
issued to the same two purchasers $1,500,000 aggregate principal amount of
three-year, 4% convertible debentures, convertible (together with interest
thereon) at any time into shares of Common Stock at a conversion price as
previously defined. The Company is required to amend the Registration Statement
on Form SB-2 to include resale by the holders of shares issuable upon conversion
of such debentures and exercise of such warrants.
-19-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(AS RESTATED, SEE ITEM 2.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 3/31/98 3/31/97 12/31/97
---------- ---------- ----------
CURRENT ASSETS (UNAUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C>
CASH $2,827,887 $362,078 $6,895,619
INVESTMENT IN MARKETABLE SECURITIES 712,047 121,085 108,287
TRADE ACCOUNTS RECEIVABLE 2,895,877 930,390 1,643,503
INVENTORIES 4,477,939 147,053 2,910,220
OTHER CURRENT ASSETS 132,695 386,649 75,285
---------- ---------- ----------
TOTAL CURRENT ASSETS 11,046,445 1,947,255 11,632,914
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
LAND AND LAND HELD FOR DEVELOPMENT 100,000 100,000 100,000
BUILDINGS 1,044,659 1,000,000 1,000,000
EQUIPMENT 18,442,453 2,414,500 13,388,496
---------- ---------- ----------
19,587,112 2,514,500 14,488,496
LESS ACCUMULATED DEPREC./AMORT. (980,310) (107,928) (680,310)
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT - NET 18,606,802 3,406,572 13,808,186
OTHER ASSETS
DEFERRED INCOME TAXES 820,050 412,150 820,050
OTHER ASSETS AND DEFERRED CHARGES 1,526,285 527,164 1,228,948
---------- ---------- ----------
TOTAL OTHER ASSETS 2,346,335 939,314 2,048,998
---------- ---------- ----------
TOTAL ASSETS $31,999,582 $6,293,141 $27,490,098
----------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM BORROWINGS $285,000 $3,774,723 $320,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,279,085 587,777 4,087,543
CURRENT PORTION OF LONG-TERM DEBT 0 0 3,500,000
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,564,085 4,362,500 7,907,543
---------- ---------- -----------
LONG-TERM DEBT 9,399,327 0 3,280,489
SUBORDINATED CONVERTIBLE DEBENTURES 12,000,000 0 8,000,000
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $.001 PAR VALUE, 2,000,000
SHARES AUTHORIZED, -0- SHARES ISSUED OR OUTSTANDING 0 0 0
COMMON STOCK, $.001 PAR VALUE, 100,000,000
SHARES AUTHORIZED AND 30,158,269 ISSUED AND
OUTSTANDING AS OF 3/31/98 30,158 2,129 30,058
ADDITIONAL PAID-IN CAPITAL 14,204,204 6,686,374 13,904,304
UNREALIZED LOSS ON INVESTMENTS (21,173) (68,673) (21,173)
RETAINED EARNINGS (DEFICIT) (5,177,019) (4,689,189) (5,611,123)
TOTAL STOCKHOLDERS' EQUITY 9,036,170 1,930,641 8,302,066
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $31,999.58 $6,293,141 $27,490,098
---------- ---------- -----------
</TABLE>
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QTR ENDED QTR ENDED YEAR ENDED
3/31/98 3/31/97 12/31/99
--------- ------- ---------
(UNAUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C>
REVENUE
SALES, NET $4,177,007 $1,168,530 $8,020,304
COST OF SALES
COST OF SALES $1,818,773 637,944 6,907,858
---------- ---------- -----------
GROSS PROFIT 2,358,234 530,586 1,112,446
--------- ---------- -----------
OPERATING EXPENSES
SALARIES, WAGES AND RELATED COSTS 291,242 293,676 436,372
DEPRECIATION AND AMORTIZATION 300,000 101,500 751,500
LEGAL, PROFESSIONAL AND CONSULTING FEES 138,585 30,239 346,633
OTHER GENERAL AND ADMINISTRATIVE 1,403,585 242,913 627,222
--------- ---------- -----------
TOTAL OPERATING EXPENSES 2,133,412 668,328 2,161,727
--------- ---------- -----------
OPERATING INCOME (LOSS) 224,822 (137,742) (1,049,281)
--------- ---------- -----------
OTHER INCOME (EXPENSE)
INTEREST INCOME (EXPENSE) AND
FINANCING COSTS-NET 309,282 32,592 (385,703)
--------- ---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 534,104 (105,150) (1,434,984)
PROVISIONS FOR INCOME TAXES 100,000 0 (407,900)
--------- ---------- ----------
NET INCOME (LOSS) $434,104 ($105,150) $1,027,084)
--------- ---------- ----------
BASIC EARNINGS (LOSS PER COMMON SHARE $0.017 ($0.007) ($0.039)
DILUTED EARNINGS (LOSS PER COMMON SHARE $0.014 ($0.006) ($0.34)
</TABLE>
2
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCK
COMMON STOCK PAID-IN EARNINGS HOLDERS
SHARES AMOUNT CAPITAL (DEFICIT) BOUNTY
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996, AS RESTATED 20,974,024 $20,974 $6,345,529 ($4,584,039) $1,782,464
PREFERRED STOCK PLACEMENT PROCEEDS:
ISSUANCE OF COMMON STOCK UPON CONVERSION 1,925,000 1,925 1,923,075 1,925,000
PROCEEDS FROM EXERCISE OF RELATED WARRANTS 1,925,000 1,925 1,923,075 1,925,000
PROCEEDS FROM SALE OF RESTRICTED SHARES 3,980,265 3,980 2,396,814 2,400,794
PROCEEDS FROM EXERCISE OF WARRANTS 500,000 500 62,000 62,500
CANCELLATION AND REISSUANCE OF COMMON SHARES
ISSUED IN 1996 TO SECURE BRIDGE FINANCING 183,000 183 546,342 546,525
ACQUISITION OF EQUIPMENT 571,000 571 707,469 708,040
NET (LOSS) FOR THE PERIOD (1,027,084) (1,027,084)
--------- --------- --------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 30,058,289 30,058 13,904,304 (5,611,123) 8,323,239
PROCEEDS FROM SALE OF RESTRICTED SHARES 300,000 100 299,900 300,000
NET INCOME FOR THE PERIOD 434,104 434,104
BALANCES AT MARCH 31, 1998 30,358,289 $30,158 $14,204,204 ($5,177,019) (9,057,343)
---------- --------- ----------- ---------- ----------
UNREALIZED HOLDING LOSS ON INVESTMENTS (21,173)
$9,036,170
----------
</TABLE>
3
<PAGE>
FIX-CORP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
QUARTER 12 MONTHS
ENDED ENDED
3/31/98 12/31/97
---------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS $434,104 ($1,027,084)
---------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION EXPENSE 300,000 728,044
(INCREASE) IN INVESTMENT IN MARKETABLE SECURITIES (603,760) 22,405
(INCREASE) IN ACCOUNTS RECEIVABLE (1,222,374) (1,363,068)
(INCREASE) IN INVENTORIES (1,567,719) (2,814,218)
(INCREASE) IN OTHER CURRENT ASSETS (87,410) (45,285)
(INCREASE) IN OTHER ASSETS (317,337) (407,900)
(DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (2,808,458) 3,975,219
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (5,872,954) (931,887)
---------- ----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
PURCHASE OF EQUIPMENT (5,098,616) (10,737,816)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
(PAYMENTS) ON NOTES PAYABLE (35,000) 0
PROCEEDS FROM SALE OF STOCK 300,000 6,438,294
PROCEEDS FROM BORROWINGS 2,638,838 3,902,489
PROCEEDS FROM CONVERTIBLE DEBENTURES 4,000,000 8,000,000
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,903,838 18,340,783
---------- ----------
NET CASH (DECREASE) (4,067,732) 6,671,080
---------- ----------
CASH AT BEGINNING OF PERIOD 6,895,619 224,539
---------- ----------
CASH AT END OF PERIOD $2,827,887 $6,895,619
---------- ----------
</TABLE>
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
- --------
<S> <C>
Available Information and
Information Incorporated by Reference 4
Risk Factors 6
Special Note--Forward-Looking Statements 14
Selling Stockholders 14
Plan of Distribution 15
Legal Proceedings 16
Directors, Executive Officers, Promoters and Control Persons 18
Security Ownership of Certain Beneficial Owners and Management 20
Description of Securities 21
Disclosure of Commission Position of Indemnification for
Securities Act Liabilities 22
Description of Business 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations 33
Description of Property 40
Certain Relationship and Related Transactions 41
Market Price of and Dividends on the Registrant's Common
Equity and Other Stockholder Matters 43
Executive Compensation 44
Financial Statements 45
Legal Matters 45
Changes in and Disagreements with Accountants 45
</TABLE>
47
