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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM 10-KSB
Mark One
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- Act of 1934 [FEE REQUIRED] for the fiscal year ended December 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- of 1934 [NO FEE REQUIRED] for the transition period from ________ to
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Commission file number 000-23369
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FIX-CORP INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
DELAWARE 34-1783774
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3637 SOUTH GREEN ROAD / SUITE 201
BEACHWOOD, OHIO 44122
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (216) 292-3182
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $ 0.001 PER SHARE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year were $8,020,304.
The aggregate market value of Common Stock held by non-affiliates is
$118,710,220 based on a closing sale price of $5.00 on May 29, 1998. As of May
29, 1998, 30,308,765 shares of $.001 par value Common Stock were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24, 1990).
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes . . . No . X .
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Fix-Corp International, Inc. (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, 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 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 newly formed 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 manufacturers
window blinds from recycled polyvinyl chloride (or "PVC").
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 Part II, Item 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
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"). 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
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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 million in advance orders. As of
May 1, 1998, Pallet Technology had approximately $10 million in orders. Instead
of purchasing the recycled plastic resin pellets from Fixcor as previously
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 December 31, 1997 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 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
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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. 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 operated 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 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 from plastic resin pellets
acquired from third party suppliers. See Part I, Item 1, "DESCRIPTION OF
BUSINESS--PATENTS, TRADEMARKS AND LICENSES" and Part II, Item 6, "MANAGEMENT'S
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.
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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.
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 Part I, Item 1,
"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.
SPECIAL NOTE--FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import, constitute "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 Report. Certain of
these factors are discussed in more detail elsewhere in this Report. Given
these uncertainties, readers of this Report and investors are cautioned not to
place undue reliance on such forward-looking statements. The Company
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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
The Company has four wholly-owned subsidiaries, Fixcor, Pallet Technology, Poly
Style. 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. On a month to month basis, the
Company has leased the UV Plant, located at 9200 N.W. 102nd Street in Medley,
Florida 33170 until approximately May 31, 1998, and currently 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 expected to take place as well as at the Florida
Plant. Poly Style's operations have taken 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 Medley and North Miami Beach are suburbs. 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
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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 $.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 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" (Mr. Fixler,
a principal stockholder) 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 values of the property
at the time of the purchase.
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 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 which 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 produced 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
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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 sales 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.
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. 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 Part I,
Item 1, "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
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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 substantially encumber 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 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
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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. Generally,
the Company 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 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 Part I, Item 1, "DESCRIPTION
OF BUSINESS--RECENT DEVELOPMENTS."
PATENTS, TRADEMARKS AND LICENSES
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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 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 Part III, Item 10,
"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
12
<PAGE>
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.
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
13
<PAGE>
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 had
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.
ITEM 2. 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. In connection with the third operating line, Fixcor put
into service 7,000 of these 48,000 square feet. 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 this improvement 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.
<TABLE>
<CAPTION>
BASIS LIFE CLAIMED METHOD
<S> <C> <C> <C>
Building $1,000,000 39 years Straight-line
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<PAGE>
Equipment $11,600,000 10 years Straight-line
</TABLE>
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. Each
of Medley and North Miami Beach is a suburb of Miami, Florida. The Company
allocates space at the Florida Plant between Poly Style and Pallet Technology.
ITEM 3. 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 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
PART I, ITEM 1, "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
15
<PAGE>
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 had represented they 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 for which AMR was to be granted warrants for 2 million 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 (2) 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". 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
16
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER 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 record holders 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 was cancelled in April, 1998. See
Part III, Item 10, 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 quarter of fiscal year 1998.
<TABLE>
<CAPTION>
Quarter
Ending High Low
<S> <C> <C>
3/31/98 5 1/14 5
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
17
<PAGE>
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
</TABLE>
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.
RESTRICTED SECURITIES
A significant portion of the Company's Common Stock is held by insiders and
persons who acquired shares in private offerings. These are "restricted
securities," as that term is defined in Rule 144 promulgated under the
Securities Act. In general, Rule 144 provides that, during any three-month
period, each person holding restricted securities can sell an amount of such
securities equal to the greater of (a) 1% of the number of outstanding shares,
or (b) the average weekly reported trading volume of those securities during the
preceding four calendar week period, provided that certain conditions are met.
One of these conditions is that the stock must be purchased for investment
purposes and held for a minimum period of one year, and in some instances even
longer. Sales of these restricted securities under Rule 144 or otherwise by
current stockholders of the Company could have a depressive effect on any
trading market for Common Stock. No predictions can be made of the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market may
adversely affect market prices, and may impair the Company's ability to raise
capital at that time through additional sale of its equity securities.
NO DIVIDENDS
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 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.
SECONDARY TRADING RESTRICTIONS
The Common Stock has been governed by a Securities and Exchange Commission rule
for "penny stocks" (defined as stocks that cost $5.00 or less per share) that
imposes additional sales
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<PAGE>
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 exempt such securities from the above rule, there is no assurance that the
Company will meet the NASDAQ listing requirements. The Company believes that
there are numerous market makers for the Common Stock, including Nash-Weiss,
Troster Singer, Sharp, Fahenstock, Wein, Paragon, Olie, National Financial,
Sherwood, Herzog, Hill, Financial American, Mager Schweitzer, G.V.R. Trading,
North American Investment, Wall Street Equities, M.H. Meyerson, Mercer-Bokert,
Comprehensive Capital, and William Frankel. The source of this list of market
makers is a broker-dealer familiar with trading of the Common Stock. Based on
discussions with that broker-dealer, the Company considers Nash-Weiss, Troster
Singer, Sharp, Fahenstock, Wein, Paragon, Herzog, Financial American, Mager
Schweitzer and M.H. Meyerson to be the principal market makers for the Common
Stock.
PRICE VOLATILITY OF THE COMPANY'S SHARES
The Common Stock is traded on the NASD OTC Electronic Bulletin Board. Because of
the limited market for Bulletin Board stocks, even mild expressions of interest
may have a profound impact upon the stock's price on any given day. Accordingly,
Bulletin Board stock customarily experience above average price fluctuations and
volatility. Accordingly, the Company's common stock should be expected to
experience substantial price changes in short periods of time, owing to the
vagaries of the Bulletin Board exchange for stocks. Even if the Company is
performing according to its plan and there is no legitimate financial component
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.
RECENT SALES OF UNREGISTERED SECURITIES
In October, 1995, pursuant to the reorganization involving the Company and
following a reverse stock split and other transactions, the outstanding shares
of Common Stock of the Company were held as follows: 3,600,000 restricted
shares held by Mr. Fixler, 201,020 restricted shares held by an affiliate and
consultant of the Company's predecessor, and 195,980 shares held by the public
shareholders of the Company's predecessor.
19
<PAGE>
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.
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 transactions reflected
therein included the following:
- 750,000 shares sold at $.50 per share.
- 125,000 shares (valued at $.42 per share) issued in consideration of
services provided by a non-affiliated party.
- 655,000 shares sold to approximately 30 purchasers at $.60 to $.65 per
share.
- 1,000,000 shares issued to secure certain bridge financing from
Generation Capital Associates (such debt was subsequently converted into
550,000 of such shares, with the balance returned to the Company).
- 1,363,000 shares issued to BLB Financing Co. to secure financing in the
amount of $485,000 (such financing was subsequently converted into shares
at $.355 per share)
The Company has been advised that it apparently did not satisfy all requirements
of the Rule 504 exemption from registration with respect to the share issuances
described above. Specifically, as the result of application of "integration"
principles or otherwise the Company exceeded the aggregate dollar limitation for
the Rule 504 exemption. The Company does not believe that any shareholders have
been harmed by reason of any such deficiencies, in that the prices at which the
shares were issued are substantially below the current market value of such
shares. Accordingly, the Company has not extended offers of recision to persons
who acquired shares in such transactions. However, the Company has taken steps,
including retention of new legal counsel, to ensure that any future offerings
made pursuant to Rule 504 will be in full compliance with the requirements of
the exemption.
In January, 1996, 350,000 shares of Common Stock were issued to Mr. Fixler
pursuant to Section 4(2) of the Securities Act, at a value of $.50 per share,
upon conversion of certain indebtedness of the Company to Mr. Fixler.
During the period July, 1996 through September, 1997, pursuant to Section 4(2)
of the Securities Act, the Company issued approximately 2,400,000 shares of
Common Stock to various consulting firms (and individuals affiliated therewith)
in consideration of consulting services. The valuation of the shares varied
principally with market values at the times of the transactions, with discounts
due to the restricted nature of the shares.
20
<PAGE>
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.
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, and which were
eventually exercised at that price.
In December, 1996 and July, 1997 in connection with debt financings 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 $0.125 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. 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 in a transaction exempt
from registration under Section 4(2) of the Securities Act, a total of 783,000
shares of Common Stock.
In April, 1997, 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.
From June, 1997 through September, 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 1,100,000 shares of Common Stock were issued pursuant to
exercise of such rights.
In August, 1997, pursuant to Section 4(2) of the Securities Act 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.
In July through September, 1997, pursuant to various private placement
transactions under Section 4(2) of the Securities Act, the Company sold
approximately 2,000,000 shares of Common Stock to 33 purchasers at prices
ranging from $.35 to $1.30 per share.
In March, 1998, in a transaction exempt from registration under Section 4(2) of
the Securities Act, the Company offered and sold to one purchaser 100,000 shares
of Common Stock at $3.00 per share.
In April and May, 1998, pursuant to Rule 506 of Regulation D, the Company sold
138,000 shares of Common Stock to 15 purchasers at a price of $3.625 per share.
21
<PAGE>
In June, 1998, the Company issued to three purchasers 50,000 shares of Common
Stock in connection with the purchase of the assets of Plastic Recovery Systems
of Alberta, Canada, in a transaction exempt from registration under Section 4(2)
of the Securities Act.
All of the share transactions summarized above were made directly by the Company
without use of an underwriter or placement agent and without payment of
commissions or other remuneration. In each case the aggregate sales proceeds,
after payment of offering expenses in immaterial amounts, were applied to the
working capital of the Company or to specific equipment purchases.
With respect to the exemption from registration of issuance of securities
claimed under Section 4(2) of the Securities Act, neither the Company nor any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or advertising. Prior to making any offer or sale, the
Company had reasonable grounds to believe and believed that each prospective
investor was capable of evaluating the merits and risks of the investment and
was able to bear the economic risk of the investment. Each purchaser represented
in writing that he was acquiring the securities for investment for his own
account, and agreed that the securities would not be sold without registration
under the Securities Act or exemption therefrom. Except for securities issued
under Rule 504, the certificates of which bear no restrictive legend, a legend
was placed on each certificate stating that the securities have not been
registered under the Securities Act and setting forth the restrictions on their
transferability.
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 5 lowest 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 by the holders of shares of Common Stock issuable upon
conversion of the debentures and payment of interest thereon and exercise of the
warrants.
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
22
<PAGE>
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, 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, 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, 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 exercise of such
warrants.
Each of the debenture transactions requires that the Registration Statement on
Form SB-2, or amendments to it, be effective within a designated time after the
dates of issuance of the debentures and warrants. Under the terms of each
applicable convertible debenture purchase agreement, certain interest and
conversion rate liquidated damages accrue each month that effectiveness is
delayed. In March, 1998 with respect to the debentures issued in November, 1997
the Company agreed to issue 10,000 shares of the Company's Common Stock, and in
April, 1998 with respect to those debentures, the Company agreed to issue 20,000
shares of the Company's Common Stock, to the debenture holders in lieu of those
liquidated damages, in transactions exempt from registration under Section 4(2)
of the Securities Act. These 30,000 shares were issued during the second
quarter of fiscal year 1998. In connection with the
23
<PAGE>
debentures issued in June, 1998, and in lieu of certain penalties for failure to
timely effect the Registration Statement on Form SB-2 and the amendment thereto
required by the debenture agreements dated November, 1997 and January, March,
April and June, 1998, the Company issued, on a pro-rata basis, to the debenture
purchasers 50,000 shares of Common Stock, in a transaction exempt from
registration under Section 4(2) of the Securities Act.
In March, 1998, in a transaction exempt from registration under Section 4(2) of
the Securities Act, the Company offered and sold to one purchaser 100,000 shares
of Common Stock at $3.00 per share.
In April and May, 1998, pursuant to Rule 506 of Regulation D, the Company
offered and sold to 12 purchasers 121,000 shares of Common Stock at $3.625 per
share.
The Company is subject to an administrative order (the "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 Section
1707.44(C)(1), Ohio Revised Code (sales of securities not registered or exempt
from registration), and Section 1707.44(B)(1) (false representations in a
registration application). 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.
ITEM 6. 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.
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.
24
<PAGE>
For the years 1996 and 1997, no bad debt provision was deemed necessary since in
the opinion of management all trade receivables are collectible including the
insignificant amount of purchase order financing receivables outstanding as of
December 31, 1997, $30,000.
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 contains three
operating lines. 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
Part I, Item 1, "DESCRIPTION OF BUSINESS, --RECENT DEVELOPMENTS, --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
25
<PAGE>
was $4.0 million. 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 1998 revenues 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 Brothers
Capital, LLC was refinanced through Coast in June, 1998. See Part I, Item 1,
"DESCRIPTION OF BUSINESS, --RECENT DEVELOPMENTS, --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 at the UV Plant, 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 are being moved to the Florida Plant. See Part I, Item 1, DESCRIPTION
OF BUSINESS--RECENT DEVELOPMENTS.
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, Palletech 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 50 percent. The reduction in revenues
reflects a change in the orientation of the Company from financing sales to
manufacturing resin and resin products. During the fourth quarter of 1997,
26
<PAGE>
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 48%. This increase in volume
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 first quarter of 1998, and the
profitability of the Poly-Style operations. Gross margins for these entities
are summarized below:
<TABLE>
<CAPTION>
SALES COST OF GOODS GROSS 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 518,068 198,002 320,066
</TABLE>
27
<PAGE>
TECHNOLOGY
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 $12.0 million. (An additional $3,000,000 in debentures were
sold in April, 1998, and an additional $3,000,000 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.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 1997 AND AS OF MARCH 31,1998
The Company's cash balance increased by $6,671,081 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 date Pallet Technologies had ordered its
equipment, making a commitment of approximately at least $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 the discussion of the "CONVERTIBLE DEBENTURES" below.
28
<PAGE>
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 (the
"October Debentures"). The purchasers also received warrants to purchase an
aggregate 331,400 shares of Common Stock. On November 25, 1997, pursuant to an
Amended and Restated Convertible Debenture Purchase Agreement and collateral
documents, the same two purchasers, in exchange for the October Debentures and
an additional $4,000,000 in the aggregate, purchased an aggregate principal
amount of $8,000,000 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. 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 received
additional 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.
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 (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. Except in limited circumstances, the
conversion rights are subject to an aggregate limit of 4.9% of the Company's
outstanding Common Stock.
29
<PAGE>
In March, 1998, the Company issued to JNC Strategic Fund Ltd. $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 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. Except in limited circumstances, the
conversion rights are subject to an aggregate limit of 4.9% of the Company's
outstanding Common Stock.
In April, 1998, the Company issued to JNC Strategic Fund Ltd. $3,000,000
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) $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. Except in limited circumstances, the
conversion rights are subject to an aggregate limit of 4.9% of the Company's
outstanding Common Stock.
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. Except in limited
circumstances, the conversion rights are subject to an aggregate limit of 4.9%
of the Company's outstanding Common Stock.
The debenture transaction documents include additional representations,
warranties, covenants and default provisions not atypical for such financings.
The principal October 24, 1997, November 25, 1997 and January 22, 1998 debenture
transaction documents are attached to the Company's prior filings with the
Commission of the Registration Statement on Form 10-SB/A, or the Registration
Statement on Form SB-2 relating to the registration of shares issuable upon
conversion of the Debentures and exercise of the warrants.
YEAR 2000 COMPLIANCE
30
<PAGE>
Many computer systems currently record years in a two-digit format. Such
systems, if not modified, will be unable to recognize and property 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 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.
31
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
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.
32
<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.
33
<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.
34
<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.
35
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 this Registration Statement. The Company has had no material disagreements
with its accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
MARK FIXLER, 42, is the Company's Chief Executive Officer and President 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 Part I, Item 6,
EXECUTIVE COMPENSATION.
GARY M. DELAURENTIIS, 53, is the President of Fixcor and a Vice President of the
Company. 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 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
36
<PAGE>
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.
BOARD OF DIRECTORS
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 each 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 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.
37
<PAGE>
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.
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.
SIGNIFICANT EMPLOYEES
The only person who is not an executive officer but who is expected by the
Company to make a significant contribution to the business of the Company is Mr.
Aisenberg. He 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. Mr. Aisenberg has been
a Director of Nitro since 1995 and has been President of UV since 1987. In
these capacities, he has extensive experience in the fields of engineering and
plastics.
DEPENDENCE ON MANAGEMENT
The Company's success is principally dependent on its current management
personnel for the operation of its business. In particular, Mr. Fixler, its
President and Chief Executive Officer and Chairman of its Board of Directors,
has played a significant role in the development and management of the Company.
There is no assurance that additional managerial assistance will not be
required. The Company has entered into an employment agreement with each of Mr.
Fixler and Mr. DeLaurentiis. If the Company should lose the services of either
Mr. Fixler or Mr. DeLaurentiis, the Company may be significantly affected.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
None of Messrs. Fixler, Press, DeLaurentiis, DiSanto, Noll or Schmelzer were
required to file reports required by section 16(a) of the Exchange Act during
fiscal year 1997 or prior years. The Company expects to include information as
to filings required in 1998 in material filed with respect to years subsequent
to fiscal year 1997.
38
<PAGE>
ITEM 10. 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 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 $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
$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 President of Fixcor and Vice President of the
Company. 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 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.
39
<PAGE>
The Company currently has no stock appreciation rights, long-term incentive,
stock option plans or similar benefit plans for its executives or other
employees.
ITEM 11. 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 May 29, 1998.
<TABLE>
<CAPTION>
COMMON STOCK
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Ownership Percent of Class
<S> <C> <C>
Mark Fixler 4,644,392 15.4%
3637 South Green Road
Suite 201
Beachwood, Ohio 44122
Gordon Brothers Capital, LLC* 2,390,300* 8.0%*
126 East 56th Street
New York, New York 10022
</TABLE>
*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.
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
of Beneficial Owner of Beneficial Ownership Percent of Class
<S> <C> <C>
Mark Fixler 4,644,392 15.4%
3637 South Green Road
Suite 201
Beachwood, Ohio 44122
All Directors and Officers
as a Group 6,490,892* 21.67%*
</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.
40
<PAGE>
ITEM 12. 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 has 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 $.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 has 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 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 matures in October, 1998. 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
41
<PAGE>
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 $2.0 million on its facility with Gordon Brothers
Capital, LLC. See Part I, Item 1, DESCRIPTION OF BUSINESS, --ACQUISITION OF THE
FACILITY, --PALLET TECHNOLOGY; Part II, Item 5, MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS, --RECENT SALES OF UNREGISTERED SECURITIES; PART II,
ITEM 6, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, --PHASE 2, --PHASE 3, --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 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 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 Part I, Item 1, DESCRIPTION OF BUSINESS--RECENT DEVELOPMENTS.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits
<TABLE>
<CAPTION>
Exhibit Names of Date of
No. Name of Document Parties to Document Document
<S> <C> <C> <C>
2.1 (1) Acquisition Agreement Fix-Corp, Inc. and 10/95
Lifechoice,
2.2 (1) Purchase and Sale Agreement Quantum Chemical 08/14/96
Corporation and Fix-Corp
International, Inc.
2.3 (1) Amendment No. 1 to Quantum Chemical 10/29/96
Purchase and Sale Agreement Corporation and Fix-Corp
Agreement International, Inc.
42
<PAGE>
2.4 (1) Acquisition Agreement Fix-Corp International, 04/16/97
Inc., Fixcor Industries,
Inc. and Mark Fixler
3.1 (1) Amended and Restated Fix-Corp International, 05/27/97
Articles of Incorporation Inc.
3.2 (1) Bylaws Fix-Corp International, 11/14/95
Inc.
3.3 (1) Original Certificate of Fix-Corp International, 10/24/95
Incorporation of the Inc.
Company
10.1 (1) Employment Contract Fix-Corp International, 01/01/97
Inc. and Mark Fixler
10.2 (1) Employment Agreement Fix-Corp International, 01/01/97
Inc. and Gary DeLaurentiis
10.3 (1) Loan and Security Agreement NationsCredit Commercial 05/14/97
Corporation through its
NationsCredit Commercial
Funding Division, Lender
and Fixcor Industries,
Inc., Borrower
10.4 (1) Guaranty NationsCredit Commercial 05/14/97
Corporation through its
NationsCredit Commercial
Funding Division, Lender
and Fixcor Industries,
Inc., Borrower, and Mark
Fixler, Guarantor
10.5 (1) First Amendment to Loan and NationsCredit Commercial 07/16/97
Security Agreement Corporation through its
NationsCredit Commercial
Funding Division, Lender
and Fixcor Industries,
Inc., Borrower
10.6 (1) Term Note Palletech Inc., Fixcor 07/09/97
Industries, Inc. and Fix-
Corp International, Inc.,
43
<PAGE>
Borrowers and Gordon
Brothers Capital
Corporation, Lender
10.7 (1) Loan and Security Agreement Palletech Inc., Fixcor 07/09/97
Industries, Inc. and Fix-
Corp International, Inc.,
Borrowers and Gordon
Brothers Capital
Corporation, Lender
10.8 (1) Purchase Warrant and Fix-Corp International, 07/09/97
Agreement Inc. and Gordon Brothers
Capital Corporation
10.9 (1) Intercreditor Agreement Gordon Brothers Capital 07/09/97
Corporation and
NationsCredit Commercial
Corporation, through its
NationsCredit Commercial
Funding Division
10.10(1) License and Marketing Nitro Plastics Technologies 07/07/97
Agreement of Israel and Palletech
Inc.
10.11(1) Patent License Agreement Fixcor Industries, Inc. and 09/25/97
AlliedSignal, Inc.
10.12(1) Convertible Debenture Fix-Corp International, 10/24/97
Purchase Agreement Inc., JNC Opportunity Fund
Ltd. and Diversified
Strategies Fund, L.P.
10.13(2) 6% Convertible Debenture Fix-Corp International, 10/24/97
Due October 24, 2000 Inc. and Holder
10.14(2) Registration Rights Fix-Corp International, 10/24/97
Agreement Inc., JNC Opportunity fund
Ltd., and Diversified
Strategies Fund, L.P.
10.15(2) Escrow Agreement Fix-Corp International, 10/24/97
Inc., JNC Opportunity Fund
Ltd., Diversified
44
<PAGE>
Strategies Fund, L.P. and
Robinson Silverman Pearce
Aronsohn & Berman LLP
10.16(2) Warrant Fix-Corp International, 10/24/97
Inc. and Holder
10.17(1) Loan and Security Agreement Gordon Brothers Capital 12/16/96
Corporation and, Fix-Corp
International, Inc.
10.18(2) Amended and Restated Fix-Corp International, 11/25/97
Convertible Debenture Inc., JNC Opportunity Fund
Purchase Agreement Ltd. and Diversified
Strategies Fund, L.P.
10.19(2) Amended and Restated Fix-Corp International, 11/25/97
Registration Rights Inc., JNC Opportunity Fund
Agreement Ltd. and Diversified
Strategies Fund, L.P.
10.20(2) Escrow Agreement Fix-Corp International, 11/25/97
Inc., JNC Opportunity Fund
Ltd., Diversified
Strategies Fund, L.P. and
Robinson, Silverman,
Pearce, Aronsohn & Berman
LLP
10.21(1) Convertible Debenture Fix-Corp International, 1/22/98
Purchase Agreement Inc., JNC Opportunity Fund
Ltd. and Diversified
Strategies Fund, L.P.
10.22(1) $2,000,000 4% Convertible Fix-Corp International, 1/22/98
Debenture Due January 22, Inc. and JNC Opportunity
2001 Fund Ltd.
10.23(1) $500,000 4% Convertible Fix-Corp International, 1/22/98
Debenture Due January 22, Inc. and Diversified
2001 Strategies Fund, L.P.
10.24(1) Registration Rights Fix-Corp International, 1/22/98
Agreement Inc., JNC Opportunity Fund
Ltd. and Diversified
45
<PAGE>
Strategies Fund, L.P.
10.25(1) Warrant Fix-Corp International, 1/22/98
Inc. and JNC Opportunity
Fund Ltd.
10.26(1) Warrant Fix-Corp International, 1/22/98
Inc. and Diversified
Strategies Fund, L.P.
10.27(1) Escrow Agreement Fix-Corp International, 1/22/98
Inc., JNC Opportunity Fund
Ltd., Diversified
Strategies Fund, L.P. and
Robinson, Silverman,
Pearce, Aronsohn & Berman
LLP
10.28(1) Agreement for Sale of Universal Vinyl Corp., 2/3/98
Business Assets Yoram Aisenberg, Avraham
Weinstein and Fix-Corp
International, Inc.
10.29(1) First Amended Licensing and Nitro Plastics Technologies 2/98
Marketing Agreement of Israel, Yoram Aisenberg
and Pallet Technology, Inc.
10.30(3) Employment Contract Yoram Aisenberg and Fix- 3/5/98
Corp International, Inc.
10.31(3) Convertible Debenture Fix-Corp International, 3/11/98
Purchase Agreement Inc. and JNC Strategic Fund
Ltd.
10.32(3) 4% Convertible Debenture Fix-Corp International, 3/11/98
Due March 11, 2001 Inc. and JNC Strategic Fund
Ltd.
10.33(3) Registration Rights Fix-Corp International, 3/11/98
Agreement Inc. and JNC Strategic Fund
Ltd.
10.34(3) Warrant Fix-Corp International, 3/11/98
Inc. and JNC Strategic Fund
Ltd.
46
<PAGE>
10.35(3) Escrow Agreement Fix-Corp International, 3/11/98
Inc., JNC Strategic Fund
Ltd., and Robinson,
Silverman, Pearce, Aronsohn
& Berman LLP
10.36(3) Convertible Debenture Fix-Corp International, 4/8/98
Purchase Agreement Inc. and JNC Strategic Fund
Ltd.
10.37(3) 4% Convertible Debenture Fix-Corp International, 4/8/98
Due April 8, 2001 Inc. and JNC Strategic Fund
Ltd.
10.38(3) Registration Rights Fix-Corp International, 4/8/98
Agreement Inc. and JNC Strategic Fund
Ltd.
10.39(3) Warrant Fix-Corp International, 4/8/98
Inc. and JNC Strategic Fund
Ltd.
10.40(3) Escrow Agreement Fix-Corp International, 4/8/98
Inc., JNC Strategic Fund
Ltd., and Robinson,
Silverman, Pearce, Aronsohn
& Berman LLP
10.41(3) Standard Industrial Lease B-K-N Corporation and Fix- 4/17/98
Corp International, Inc.
10.42(1) Loan and Security Agreement Fix-Corp International, 6/8/98
Inc., Fixcor Industries,
Inc., Pallet Technology,
Inc. and Poly Style
Industries, Inc. as
Borrower, and Coast
Business Credit, a division
of Southern Pacific Bank
10.43(1) Continuing Guaranty Fix-Corp International, 6/8/98
Inc., as Guarantor, and
Fixcor Industries, Inc.,
Pallet Technology, Inc. and
47
<PAGE>
Poly Style Industries,
Inc., as Borrower, and
Coast Business credit, a
division of Southern
Pacific Bank
10.44(1) Continuing Guaranty Fixcor Industries, Inc., as 6/898
Guarantor, and Pallet
Technology, Inc. and Poly
Style Industries, Inc. as
Borrower, and Coast
Business Credit, a division
of Southern Pacific Bank
10.45(1) Continuing Guaranty Pallet Technology, Inc., as 6/8/98
Guarantor, and Fixcor
Industries, Inc. and Poly
Style, Inc., as Borrower,
and Coast Business Credit,
a division of Southern
Pacific Bank
10.46(1) Continuing Guaranty Poly Style Industries, 6/8/98
Inc., as Guarantor, and
Fixcor Industries, Inc. and
Pallet Technology, Inc., as
Borrower, and Coast
Business Credit, a division
of Southern Pacific Bank
10.47(1) Convertible Debenture Fix-Corp International, 6/25/98
Purchase Agreement Inc. and JNC Opportunity
Fund Ltd.
10.48(1) 4% Convertible Debenture Fix-Corp International, 6/25/98
Due June 25, 2001 Inc. and JNC Opportunity
Fund Ltd.
10.49(1) Registration Rights Fix-Corp International, 6/25/98
Agreement Inc. and JNC Opportunity
Fund Ltd.
10.50(1) Warrant Fix-Corp International, 6/25/98
Inc. and JNC Opportunity
Fund Ltd.
48
<PAGE>
10.51(1) Letter Agreement Fix-Corp International, 6/25/98
Inc., JNC Opportunity Fund
Ltd., JNC Strategic Fund
Ltd. Diversified Strategies
Fund, L.P.
10.52(2) Executive Employment Fix-Corp International, 7/16/98
Agreement Chief Inc. and Roger
Financial Officer Kittelson
10.53(2) Incentive Stock Fix-Corp International, 7/16/98
Option Agreement Inc. and Roger
Kittelson
27(4) Financial Data Schedule
</TABLE>
(1) Filed with the Registration Statement on Form 10-SB, as amended on Form
10-SB/A by the Company on November 17, 1997, on December 22, 1997, on March 2,
1998, and on July 15, 1998, each with SEC File No. 000-23369, and effective by
lapse of time on January 12, 1998.
(2) Filed with the Registration Statement on Form SB-2 filed by the Company on
January 20, 1998, as amended on Form SB-2 filed by the Company on July 27, 1998,
each with SEC File No. 333-44551.
(3) Filed with the Annual Report on form 10-KSB filed by the Company on June 2,
1998, SEC File No. 333-23369.
(4) Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K during were filed during the last quarter of the
period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIX-CORP INTERNATIONAL, INC.
By /s/ Mark Fixler July 27, 1998
Mark Fixler, -------------
Chief Executive Officer and President
49
<PAGE>
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Mark Fixler July 27, 1998
- -------------------------- -------------
Mark Fixler, Chief Executive Officer
and Director
/s/ Roger A. Kittelson July 27, 1998
- -------------------------- -------------
Roger A. Kittelson, Chief Financial Officer
/s/ Andrew I. Press July 27, 1998
- -------------------------- -------------
Andrew I. Press, Treasurer
and Director
July , 1998
- -------------------------- -------------
Gary M. DeLaurentiis,
President and Director
/s/ Michael DiSanto July 27, 1998
- -------------------------- -------------
Michael DiSanto, Director
July , 1998
- -------------------------- -------------
S. Darwin Noll, Director
/s/ Lawrence C. Schmelzer July 27, 1998
- -------------------------- -------------
Lawrence C. Schmelzer, Director
50
<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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income at December
31, 1996 and 1997 and the balance sheets and statements of income at December
31, 1996 and 1997 of the Company's 1997 Annual Report to Stockholders and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 224,539 6,895,619
<SECURITIES> 130,692 108,287
<RECEIVABLES> 88,763 1,643,503
<ALLOWANCES> 0 0
<INVENTORY> 96,002 2,910,220
<CURRENT-ASSETS> 761,668 11,632,914
<PP&E> 3,514,500 14,488,496
<DEPRECIATION> (6,428) (680,310)
<TOTAL-ASSETS> 5,374,116 27,490,098
<CURRENT-LIABILITIES> 3,660,325 7,907,543
<BONDS> 0 11,280,489
0 0
0 0
<COMMON> 20,974 30,058
<OTHER-SE> 1,692,817 8,272,008
<TOTAL-LIABILITY-AND-EQUITY> 5,374,116 27,490,098
<SALES> 232,824 8,020,304
<TOTAL-REVENUES> 510,779 435,004
<CGS> (383,164) (6,992,829)
<TOTAL-COSTS> (4,199,383) (2,045,767)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (32,730) (820,707)
<INCOME-PRETAX> 3,801,674 (1,434,984)
<INCOME-TAX> (52,850) (407,900)
<INCOME-CONTINUING> (3,748,824) (1,027,084)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,748,824) (1,027,084)
<EPS-PRIMARY> (0.267) (0.039)
<EPS-DILUTED> (0.208) (0.034)
</TABLE>
