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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 3
(Mark one)
/x/ Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required) For the fiscal year ended December 31, 1994
/ / Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) For the transition period from ____________
to _________________
Commission File Number: 0-16052
QUADRAX CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 05-0420158
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 HIGH POINT AVENUE 02871
PORTSMOUTH, RHODE ISLAND (Zip Code)
(Address of Principal
Executive Offices)
(401) 683-6600
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $.000009 per share
Non-Callable Class C Common Stock Purchase Warrants
(Titles of Classes)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for past 90 days. Yes No X
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in the issuer's definitive
proxy statement incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. _____
State issuer's revenues for its most recent fiscal year. $860,419
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State the aggregate market value of the voting stock held by
non-affiliates: $27,558,318, computed by reference to the closing price of the
issuer's Common Stock on March 28, 1995 as reported on the Nasdaq Small Cap
Market.
State the number of shares outstanding of each of the issuer's classes of
common equity.
As of March 28, 1995: 11,876,512 shares of Common Stock, par value $.000009
per share
311,120 Non-Callable Class C Common Stock Purchase
Warrants
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement to be delivered to
stockholders in connection with its Annual Meeting of Stockholders to be held
on May 31, 1995 are incorporated by reference in Part III.
Transitional Business Disclosure Format (check one): Yes No X
--- ---
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QUADRAX is a registered trademark of Quadrax Corporation, and CONQUEROR,
QUADRAX AXIAL TAPE, QUADRAX BIAXIAL TAPE and QUADRAX COMPOSITES are trademarks
of Quadrax Corporation. This Annual Report on Form 10-KSB also includes the
trademarks of companies other Quadrax Corporation.
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Except as otherwise noted, all information in this Annual Report on Form
10-KSB has been adjusted to reflect, on a pro forma basis, a one-for-ten
reverse stock split of Quadrax Corporation's Common Stock effected as of July
20, 1994.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
GENERAL
Quadrax Corporation ("Quadrax" or the "Company") is a development stage
company that designs, develops, fabricates and sells fiber-reinforced
thermoplastic polymer composite materials ("Quadrax Composites") and products
manufactured from Quadrax Composites. Quadrax Composites are synthetic
materials made using patented and other proprietary, as well as
non-proprietary, chemical processes and manufacturing technologies. The
Company believes that Quadrax Composites are functionally superior to other
structural substrates for most applications in which abrasion resistance and
extreme heat tolerance are not critical. Quadrax Composites' functional
advantages include high strength-to-weight ratios, chemical stability in a
variety of ambient conditions (imperviousness to rust, rot or reaction with
most commonly used chemical solvents), ease and safety of manufacture using
modified conventional heat and compression molding techniques, virtually
unlimited shelf life without special storage or handling requirements, and
recyclability.
The Company, which has been a development stage company since its
inception in March 1986, commenced limited commercial production in mid-1993.
The Company has not achieved profitability in any fiscal quarter and has been
required to raise substantial amounts of capital in order to support its
on-going development activities. Although the Company historically was
dedicated to the formatting of composite materials for defense and aerospace
markets, it began redirecting its business in 1993 and 1994 to focus on
commercial and consumer markets for value-added, high-performance products.
The Company did not generate significant revenues in fiscal 1994 (the period
from January 3, 1994 to December 31, 1994), and the Company's independent
accountants, Livingston & Haynes, P.C., have included a "going concern"
qualification in their report on the Company's financial statements for fiscal
1994, reflecting the Company's history of losses as a development stage company
and its continuing dependence on financing activities to provide the cash
needed to meet its expenses. See the Consolidated Financial Statements of the
Company set forth following page 25 of the Form 10-KSB, as previously filed.
Quadrax Corporation is organized in a holding company structure, operating
through three wholly owned subsidiaries: Quadrax Advanced Materials Systems,
Inc., Quadrax Advanced Structures, Inc. and McManis Sports Associates, Inc.
("McManis Sports"). It also wholly owns and operates Quadrax Sports, Inc. as a
marketing company. Unless the context otherwise requires, references herein to
"Quadrax" or the "Company" refer collectively to Quadrax Corporation and its
subsidiaries.
CHANGES IN CONTROL AND RELATED TRANSACTIONS
As a result of its inability to raise additional capital in the first
quarter of 1994, the Company and Applied Laser Systems ("ALS") entered into a
senior loan agreement in March 1994, under which ALS made a bridge loan of
$1,000,000 to the Company. In conjunction with the Senior Loan Agreement, the
Company's Board of Directors approved an asset acquisition agreement pursuant
to which ALS would have acquired all of the assets in exchange for ALS stock.
In May 1994 Quadrax and ALS mutually agreed to terminate its proposed
acquisition of the Company, and as a result the Company required substantial
additional capital to meet its operating expenses and continue its operations.
On July 8, 1994, Pattinson Hayton, III, through Conagher & Co., Inc.
("Conagher"), a California corporation controlled by Mr. Hayton, purchased a
majority of the Company's convertible preferred stock, $.01 par value
("Preferred Stock"), from the Company's founder and then Chief Executive
Officer, Richard A. Fisher. Conagher's ownership of the Preferred Stock enabled
it to elect three-fifths of the Company's Board of Directors
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until December 31, 1996. Thereafter, on July 11, 1994, Mr. Hayton was elected
by Conagher as a member of the Board, and was nominated to serve as Chairman.
William G. Conway and Sven Kraumanis were also elected by Conagher, pursuant to
the terms of the Preferred Stock, as members of the Company's then five-member
Board.
Contemporaneous with the acquisition of the Preferred Stock, Mr. Hayton
also agreed to purchase newly issued shares of the Company's common stock,
$.000009 par value ("Common Stock"), through Conagher. Pursuant to a stock
purchase agreement dated July 8, 1994, Conagher purchased 1,500,000 shares of
Common Stock in exchange for a $3,000,000 promissory note from Conagher (the
"July Promissory Note") payable in five equal consecutive monthly installments
beginning August 16, 1994. Thereafter, pursuant to a stock purchase agreement
dated August 26, 1994 and subsequently amended on September 16, 1994, Conagher
purchased an additional 2,250,000 shares of Common Stock in exchange for a
$4,500,000 promissory note from Conagher (the "August Promissory Note"),
payable in equal consecutive monthly installments beginning October 30, 1994.
Thus, as a result of these purchases, Conagher acquired 3,750,000 shares of
Common Stock in exchange for promissory notes aggregating $7,500,000.
In September 1994, Conagher satisfied its obligations under the July
Promissory Note by paying to the Company an aggregate of $1,742,675 and by
arranging for the discharge of notes payable and accrued interest by the
Company to ALS in the amount of $1,257,325. Conagher also made aggregate
payments of approximately $3,500,000 in connection with the August Promissory
Note. The remaining balance of approximately $1,000,000, which was due and
owing as of January 31, 1995, was not paid by Conagher.
In connection with Conagher's failure to pay the balance due on the August
Promissory Note, the Company entered into negotiations which led to a
Settlement Agreement dated February 13, 1995 with Conagher, Mr. Hayton, Richard
A. Fisher, James J. Palermo, the Company's Chief Executive Officer, and
Allied-Asian Consolidated Limited ("Allied"), a company of which Mr. Hayton is
a director and stockholder. Pursuant to the Settlement Agreement, record
ownership of the Preferred Stock owned by Conagher was transferred to Mr.
Palermo, as trustee for the holders of Common Stock. Mr. Palermo is required
to vote the Preferred Stock as directed by the holders of the Common Stock, and
as a result holders of Common Stock are now able to elect all of the Company's
directors. In conjunction with the acquisition of the Preferred Stock from
Conagher, Mr. Palermo replaced Mr. Hayton as Chairman of the Board and Mr.
Hayton resigned as a director of the Company.
To induce Mr. Hayton to surrender the Preferred Stock and to settle
outstanding obligations relating to Mr. Hayton's transactions in the Company's
securities and other obligations among the Company, Allied, Conagher, Mr.
Hayton, and Mr. Fisher, the Company agreed to issue to Allied 1,150,000
restricted shares of Common Stock. The Company, among other things, also
agreed to: (i) retain Allied or its nominee as a financial advisor and agent
pursuant to a Financial Advisor and Distribution Agreement (the "Advisor
Agreement") for the placement of a new class of preferred stock, (ii) assume
the outstanding obligations of Conagher to Mr. Fisher and indemnify and hold
harmless Conagher, Allied and Mr. Hayton against any liability thereof, (iii)
enter into employment agreements with certain Company employees, (iv) transfer
certain office leases and equipment, automobile leases and insurance policies
to Allied, (v) assume liability for the lease of an automobile, and (vi)
release Conagher, Allied and Mr. Hayton and their successors, assigns, agents
and attorneys from any and all claims. The Company also agreed to cancel
Conagher's remaining payment obligations under the August Promissory Note in
exchange for Allied's execution and delivery of a promissory note in the amount
of $621,563 (the "February Promissory Note"), payable in installments with the
final payment due on January 1, 1997.
On February 28, 1995, Allied failed to pay $150,000 due under the February
Promissory Note. The Company subsequently declared Allied to be in default on
the note and the entire principal amount due and payable. In addition, the
Company determined not to pay Allied $10,000 that Allied claimed was due March
1, 1995 under the Advisor Agreement. In connection therewith, and as discussed
further below, the Company entered into an amendment dated March 17, 1995 with
Allied, Conagher, Mr. Hayton, Mr. Palermo, and Mr. Fisher (the "First
Amendment") whereby (i) the Advisor Agreement was terminated, (ii) the Company
agreed to pay Allied 4 percent of any net proceeds realized by the Company from
the sale of any shares of any new issue of preferred stock issued
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and sold by the Company between February 13, 1995 and May 19, 1995, (iii)
Allied agreed to pay $150,000 to the Company upon execution of the First
Amendment and to deliver a promissory note to the Company in the amount of
$311,563 in exchange for the cancellation of the February Promissory Note.
Thereafter, in connection with the Company's preparation for the initial
filing of its Annual Report on Form 10-KSB, the Company and its independent
accountants reviewed payments made by Mr. Hayton when he was Chairman of the
Company. These payments were made through bank accounts (the "Funding
Accounts") established by the Company for the deposit of proceeds received from
payments by Conagher on the July and August Promissory Notes. The Funding
Accounts were under the signature authority and control of Mr. Hayton.
Payments for expenses unrelated to Company business were made using checks
drawn from the Funding Accounts. These payments included reimbursements for
undocumented travel expenses, checks drawn to Mrs. Hayton, and checks to
various attorneys who do not appear to have been engaged in work for Quadrax.
Payments also were authorized and directed by Mr. Hayton from the Funding
Accounts and otherwise to Apogee Robotics, Inc., a company that the Company
believes is controlled by Mr. Hayton. The Company has never conducted any
business with Apogee Robotics, Inc. Finally, the Company paid certain charges
incurred by Mr. Hayton that were unrelated to the business of the Company,
based upon Mr. Hayton's agreement to reimburse fully the Company for such
charges. The Company was never reimbursed for these payments. The total
amount of all payments now being reviewed by the Company is approximately
$1,400,000.
In November 1994, the Company acquired all of the outstanding stock of
McManis Sports, a development stage business organized to engage in golf
equipment manufacturing activities. Mr. Hayton was instrumental in arranging
for the acquisition of McManis Sports, which the Company purchased for cash and
a number of shares of Common Stock subject to increase in order to assure a
minimum market value of $1,100,000 at the time the shares are registered with
the Securities and Exchange Commission. The Company anticipated that, at the
time of the acquisition, the purchase price approximated the value of the net
tangible assets of McManis Sports. The Company and its independent accountants
have subsequently determined that those assets have a market value of
approximately $560,000, and the Company now believes that the development and
marketing of the product lines of McManis Sports will require more resources
than originally expected. The Company has recorded approximately $709,000 of
the purchase price of McManis Sports as goodwill representing intangible value
of designs and expertise acquired in the purchase and, consistent with
generally accepted accounting principles, will review the status of this
goodwill amount periodically.
In light of the questions concerning the purchase price related to the
acquisition of McManis Sports, the discovery of unauthorized expenditures from
the Funding Accounts, and Mr. Hayton's failure to repay the Company for certain
expenses as agreed upon, the Company was, as of the time of the initial filing
of the Company's Form 10-KSB on April 13, 1995, reviewing alternatives
available to it, including possible remedies against Mr. Hayton and Conagher.
On various occasions since the filing of the Company's Form 10-KSB on
April 13, 1995, representatives of the Company, Conagher and Allied and Mr.
Hayton met and conferred regarding certain matters discussed above, principally
issues regarding expenses incurred by or on behalf of the Company during the
Company's fiscal 1994 and the satisfaction of certain obligations under the
Settlement Agreement as amended by the First Amendment.
In the course of those meetings, Mr. Hayton made available to the Company
documentation and other evidence demonstrating, to the Company's satisfaction,
that the non-recurring financing-related expenses of $5,569,000 incurred in
fiscal 1994 were corporate expenses incurred principally in connection with the
Company's acquisitions, financing and restructuring transactions effected in
fiscal 1994. Included in this total amount were approximately $1,482,000 which
the Company incurred in connection with the termination, in May 1994, of the
proposed purchase of the Company by ALS. These expenses included the issuance
of 170,000 shares of Common Stock to the Company's investor relations
consultant, and other professional fees. Subsequent to the proposed ALS
transaction, the Company entered into certain acquisition agreements and
financing arrangements, as set forth above. In November 1994, the Company
acquired all of the outstanding stock of McManis Sports, a manufacturer
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of and marketing representative for manufacturers of golfing equipment, for
$1,465,600 in Common Stock and $109,500 in cash. In connection therewith, the
Company issued to the designee of Allied 150,000 shares of Common Stock (see
Notes 9 and 10 to the Consolidated Financial Statements) as compensation for
acting as an agent in bringing this opportunity to the Company. Also in
November 1994, the Company acquired certain assets and liabilities of Time
Sports, Inc. for approximately $360,000 in cash and notes payable to facilitate
transfer of a license to use the Wimbledon trademark. The Company issued
100,000 shares of Common Stock to the designee of Allied (see Notes 9 and 10 to
the Consolidated Financial Statements) as compensation for acting as an agent
in bringing this opportunity to the Company. The total value of the 250,000
shares of Common Stock issued to the designee of Allied as compensation in
connection with these transactions has been expensed in fiscal 1994 as a
financing-related cost (see Notes 9 and 10 to the Consolidated Financial
Statements). The Company recognizes that the acquisition of McManis Sports and
the acquisition of Time Sports, Inc. are the core business of the Company, and
the Company endorses the acquisitions and considers the acquisitions to be in
the best interests of the Company. Expenses in the amount of approximately
$3,572,000 that were previously identified by the Company (as set forth above),
due to incomplete documentation, as payments authorized by and/or related to
Mr. Hayton or Conagher, have been demonstrated to the Company's complete
satisfaction to be associated, for financial reporting purposes, with corporate
expenses incurred in connection with the restructuring of the Company, the
redemption of debt through stock issuance and miscellaneous professional fees
associated therewith. Mr. Hayton and the Company have agreed that
approximately $75,000 shall be treated, by the Company, for tax and financial
reporting purposes, as additional compensation to Mr. Hayton during fiscal
1994.
As set forth above, the Company entered into the Settlement Agreement with
Conagher, Mr. Hayton and Allied, the terms of which included the execution and
issuance of the February Promissory Note to the Company by Allied in the amount
of $621,563. On March 17, 1995, the parties to the Settlement Agreement
entered into the First Amendment, pursuant to which Allied agreed to pay to the
Company the amount of $311,563, being the balance due under the February
Promissory Note. The amount of $311,563 was calculated as follows:
<TABLE>
<S> <C>
February Promissory Note $ 621,563
less: payment February 24, 1995 (100,000)
less: payment March 17, 1995 (150,000)
less: consideration for cancellation
of financial advisor agreement (60,000)
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Balance due on February Promissory Note $ 311,563
=========
</TABLE>
THE SUM OF $311,563 WAS PAID IN FULL ON APRIL 3, 1995, AS REQUIRED.
ACCORDINGLY, ALL OF THE PAYMENT OBLIGATIONS OF ALLIED UNDER ALL OF THE
PROMISSORY NOTES ISSUED IN CONNECTION WITH THE FINANCING PROVIDED BY CONAGHER
AND ALLIED FOR THE COMPANY, AND IN CONNECTION WITH THE SETTLEMENT AGREEMENT AND
THE FIRST AMENDMENT THERETO, HAVE BEEN FULLY SATISFIED.
In light of its further investigation regarding the foregoing matters, the
Company has determined to seek no legal remedies with respect to Mr. Hayton,
Conagher or Allied regarding the purchase price paid by the Company for McManis
Sports, the purchase of Quadrax shares by Conagher and Allied, or amounts
expended by or on behalf of Mr. Hayton during his tenure as Chairman of the
Company. The financial impact on the Company of the settlement with Mr. Hayton
was fully reserved for in fiscal year 1994.
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REDIRECTION OF BUSINESS
The Company historically was dedicated to the formatting of composite
materials for defense and aerospace markets. Beginning in 1993, the Company
began to redirect its business toward commercial and consumer applications.
After negotiations for the proposed sale of the Company to ALS were terminated
in May 1994, the Company sought to accelerate the redirection of its business
during the second half of fiscal 1994 through acquisitions of assets and
license rights and through strategic arrangements with manufacturers of
sporting goods and athletic equipment.
Quadrax was originally organized in March 1986 to acquire and complete the
development of the Composite Materials Interlacer, a device designed to format
thermoplastic composite tapes into continuous broad sheet goods. Sheet goods
formatted using the Composite Materials Interlacer have been among those
marketed by Quadrax under the brand name "Quadrax Biaxial Tape." The Company's
target market for Quadrax Biaxial Tape formatted on the Composite Materials
Interlacer originally consisted primarily of aerospace defense contractors
seeking a seamless composite material for use in wing skins on the advanced
design "next generation" tactical fighters then under development. The
Composite Materials Interlacer can format sheet goods up to ten feet wide and
having virtually any length, a significant advantage over other weaving
technologies, which generally cannot produce sheets wider than four feet. The
use of the Composite Materials Interlacer to date generally has been
uneconomical, however, except for a limited number of applications for
customers in the aerospace industry.
At the time of its initial public offering in July 1987, Quadrax was
focused on becoming an integral part of the advanced materials community
serving the defense industry. In subsequent years, the Company obtained
contracts from defense contractors and airframe manufacturers for the sale of
Quadrax Biaxial Tape for evaluation and test purposes.
As defense funding for advanced research was curtailed in the late 1980s
and early 1990s, a number of companies abandoned their participation in the
composite materials industry. Quadrax sought to take advantage of this
situation by acquiring manufacturing equipment and a license of related
technology in the manufacture of thermoplastic composite materials from
Phillips Petroleum Company ("Phillips") in 1992 and from Amoco Performance
Products Inc. ("Amoco"), a subsidiary of Amoco Corporation, in 1993. These
acquisitions provided Quadrax with the benefits of research and development
conducted over the course of several years, as well as additional defense
industry contacts and a database of materials performance specifications.
The Phillips and Amoco acquisitions provided Quadrax with the ability to
fabricate tape marketed under the brand name "Quadrax aXial Tape." Quadrax
aXial Tape enabled the Company to begin redirecting its business from defense
to commercial and consumer applications. Quadrax initially targeted sporting
goods applications, because it believed that the improved performance
characteristics offered by Quadrax Composites could overcome the cost premium
of its materials and the familiarity of customers with more conventional
composite materials.
In mid-1993, Quadrax signed a joint development and exclusive
manufacturing contract with Kunnan Enterprise Limited ("Kunnan"), a Taiwanese
corporation that is one of the largest manufacturers of tennis racquets in the
world. Kunnan markets products under its house brands (such as "Kennex" and
"ProKennex") and serves as an original equipment manufacturer for other
internationally recognized brands. Quadrax completed the design, development
and prototype production of tennis racquet frames made of Quadrax Composites.
In light of a soft worldwide market for tennis racquets, however, Kunnan
determined not to commit the resources necessary to bring the racquet to
market.
As a result of its joint development and manufacturing relationship with
Kunnan, Quadrax developed technologies that can be utilized for manufacturing
value-added products from Quadrax Composites for a number of sporting goods
markets. One of the Company's strategies is to focus its resources on the
design, development and prototyping of these sporting goods products in order
to demonstrate the performance attributes of Quadrax Composites and to build
demand for the Company's materials. The Company will then determine on a
product-by-
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product basis whether to undertake manufacturing of a product or component,
outsource manufacturing once commercial production levels are achieved or seek
to enter into strategic relationships with established companies with
experience in manufacturing and marketing for the relevant market.
In November 1994, Quadrax took a number of steps aimed at accelerating the
redirection of its business:
- The Company acquired from Time Sports, Inc., a subsidiary of
Kunnan, the exclusive rights to make and market tennis racquets under
the "Wimbledon" brand name and to make market certain apparel under
the "Wimbledon" brand name, all pursuant to an underlying licensing
agreement with the All-England Lawn Tennis and Croquet Club of
Wimbledon, England. In connection with the acquisition of the
Wimbledon license rights, Quadrax also acquired certain other assets
and assumed certain liabilities of Time Sports, Inc. The Company
believes that the acquisition of the Wimbledon license rights has
provided Quadrax with immediate brand name recognition within the
tennis industry.
- The Company acquired all of the stock of McManis Sports, a
recently organized development stage company that had been formed to
design and develop golf clubs. This acquisition provided the Company
with lines of golf products, including irons marketed under the "Tour
Technology" and other brand names, as well as expertise in the design
and development of golf equipment. See "Changes in Control and
Related Transactions" above.
- Quadrax signed two joint development/exclusive manufacturing
contracts with Cannondale Corporation, a manufacturer of
high-performance bicycles. These contracts call for the design,
development and production of bicycle frames, forks and other
components using Quadrax Composites. The Company currently estimates
that prototypes of these components will be completed in the second
quarter of 1995.
In February 1995, the Company entered into a joint design/exclusive
manufacturing contract with Brine, Inc., a supplier of lacrosse equipment in
the United States, under which the Company has completed testing of lacrosse
sticks and expects to commence shipments in April 1995.
Quadrax has taken preliminary steps to begin gaining recognition within
the automotive industry. During the second half of 1994, the Company sponsored
the Roger Mears Racing Team in order to demonstrate the strength and impact
resistance performance characteristics of Quadrax Composites under the
demanding conditions of stadium and off-road truck racing. Principal
components of a truck body were constructed using Quadrax Composites, and the
truck was raced by the Mears Team in the Baja 1000.
As Quadrax progresses from the development of prototypes to the production
of finished products and components, it will continue to be dependent on
outside financing sources. The Company raised approximately $5 million of
equity capital in fiscal 1994 and an additional $2.2 million through sales of
Common Stock during the first quarter of fiscal 1995. It expects to seek to
raise approximately $3 million through additional equity sales during the
remainder of 1995 and believes that these funds, together with cash provided by
revenues, will be sufficient to meet the Company's cash requirements for the
remainder of fiscal 1995. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--Financial Position, Liquidity and Capital Resources" below.
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TECHNOLOGIES
CORE TECHNOLOGIES
The core technologies underlying Quadrax Composites involve, first, the
fabrication of unidirectional continuous fiber-reinforced, thermoplastic tapes
and, second, the lay-up and consolidation of those tapes into multi-ply
laminates. These technologies are based on insights into the chemical
processes by which a variety of man-made polymer resins (plastics) can be made
to bond with continuous fibers to produce a material that is strong,
lightweight, easy to handle, and easy to shape using modified conventional heat
and compression molding techniques.
The principal fibers used in making Quadrax Composites are carbon, glass
and aramid (for example, duPont's brand of aramid fiber that it markets under
the name "Kevlar"). The principal resins used are nylon, polymethymethacrylate
(acrylic), polyetherimide, polyphenylene sulfide (PPS) and
poly-ether-ether-ketone (PEEK).
The Company is developing the ability to form its multi-ply laminates into
three-dimensional piece parts, in order to generate additional demand for the
Company's tape products.
FUNCTIONAL ADVANTAGES AND LIMITATIONS OF QUADRAX COMPOSITES
The principal functional advantage offered by Quadrax Composites is the
ability to provide equivalent strength at lower weights than competing
materials. By varying mixes of resin, fiber, fiber areal weight, resin
percentage, number of plies, and axial orientation of the different plies,
Quadrax can deliver materials that meet a wide range of minimum threshold
strength requirements at a fraction of the weight of more conventional
materials such as steel and aluminum.
Quadrax Composites use continuous fibers aligned at uniform intervals
parallel to a single axis of orientation within the polymer resin matrix,
permitting the formation of tape of virtually any length. The result is a
material that presents a uniformly high strength profile along the longitudinal
axis, making it possible to design a multiple ply material that displays very
precisely engineered structural properties along its entire planar horizon.
Quadrax Composites can be engineered to deliver a variety of other
characteristics, including chemical stability (no rust), moisture and heat
resistance (no rotting or, within certain tolerances, melting), vibration
damping, and electrical insulation. Unlike epoxy-based composite materials,
Quadrax Composites are fully recyclable. Scrap material can be ground up,
melted down and reformed using conventional compression and injection molding
techniques, retaining sufficient strength and other structural characteristics
to make it suitable for use in a wide variety of "lower tier" applications.
Quadrax Composites are thermoplastic, so they will lose their shape under
prolonged exposure to high temperatures. Like all composites, they are
fiber-reinforced and therefore subject to disintegration through abrasion that
exposes the fibers. These disadvantages are irrelevant for most structural
applications, but limit the utility of Quadrax Composites in high-temperature
applications.
APPLICATIONS
The high strength-to-weight ratio and other functional advantages of
Quadrax Composites make them superior structural materials for a wide range of
applications. The Company has targeted a number of applications for which high
strength-to-weight ratios are critical, including:
- athletic and recreational equipment, such as racquet frames,
lacrosse and hockey sticks, bats, bicycle frames, and panel and frame
assemblies for a wide variety of recreational vehicles;
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- truck and trailer components and systems; and
- military equipment, primarily outer body panels and reinforcing
members for aircraft, armored vehicles and marine vessels.
COMPETITIVE ADVANTAGES AND DISADVANTAGES
The characteristics of Quadrax Composites offer several processing
efficiencies that enable Quadrax Composites to present an attractive
price/performance profile, when measured on a total-cost-of-finished-goods
basis. These characteristics include:
- their light weight, which makes Quadrax Composites easy to move
and handle;
- structural characteristics that make them easy to form using
modified conventional cutting, thermoforming or compression molding
techniques;
- their chemical stability, which makes Quadrax Composites easy and
quick to process with virtually no restrictions on shelf life, no
lengthy cure periods, no toxicity, and no refrigerated storage
requirements; and
- for certain resins, the ability of Quadrax Composites to be
bonded through heat and pressure alone, without the need for glues or
other bonding agents.
Quadrax Composites, like most composites, are more expensive than
competing conventional materials. Quadrax Composites also suffer from
institutional resistance to working with new materials and to investing in the
re-tooling needed to integrate the materials into existing product and
production lines. The Company believes that these disadvantages will dissipate
over time as Quadrax Composites gain recognition in the marketplace and as
economies of scale lower unit costs.
See "Competition--Materials Competition" below.
MANUFACTURING AND DISTRIBUTION SYSTEMS
PRODUCTION
Materials, Machinery, Energy and Personnel. All materials, machinery,
energy and personnel needed to build and operate production facilities at
Quadrax are readily available from conventional sources, with specialized
expertise limited to the proprietary processes themselves. Raw materials
consist only of fibers and resins produced by a number of established chemical
companies and sold primarily for applications other than composites. Machinery
requirements are limited to tape fabrication lines (which are specially
assembled using conventional machinery), molds and dies (which are custom-made,
using conventional machine tool technologies) and various die cutters,
thermoformers, ovens and presses that are in common use throughout the plastics
industry.
All machinery and processes are powered by electricity, which is available
in adequate quantities from the local utility. Production personnel include
materials and process engineers, skilled and semi-skilled machine operators,
and various shop hands. The Company believes that any necessary additional
production personnel can be recruited at competitive rates from within the
existing plastics, defense and general manufacturing communities.
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<PAGE> 11
Physical Plant and Processing Systems. Production of Quadrax Composites
and pre-formed parts is a light manufacturing process. The three principal
steps in the process are:
- tape fabrication -- typically a water- and heat-based process in
which fibers are imbedded in the resin matrix;
- lay-up -- either a manual or mechanical process, depending on
design specifications, in which multiple layers of tape are assembled
to present the required strength, flexibility and other engineering
characteristics; and
- consolidation -- a heat- and pressure-based process through
which lay-ups are fused to form laminated material.
These processes typically are completed at Quadrax's manufacturing facilities
in Portsmouth, Rhode Island. See "DESCRIPTION OF PROPERTY" below.
Quadrax is developing the capacity to thermoform or compression mold
customer-specified component parts or frame assemblies on proof-of-concept,
pre-production prototype and pilot production bases at its Portsmouth facility.
Quadrax currently contemplates that it will outsource parts manufacturing once
commercial production levels are achieved.
DISTRIBUTION
Inventories. Quadrax maintains a small inventory of fabricated tape in
standard configurations at its Portsmouth facility. Sheet goods and pre-formed
parts are manufactured on a contract basis only. Finished goods (currently
limited to tennis and golf equipment) are outsourced either overseas or
domestically, and drop-shipped to the wholesale/retail distributor as orders
are received.
Delivery and Installation. Unlike thermoset composite materials systems,
Quadrax Composites do not require refrigeration or other special handling.
They can be boxed and shipped by express delivery or common carrier at standard
ground rates.
Customer Service and Support. Members of Quadrax's engineering staff are
available to visit a customer and consult on proper processing techniques or
special engineering challenges, on an as-needed basis, but generally post-sale
support is not required.
PRODUCT LINE
Quadrax fabricates and formats several standard Quadrax Composites tape
products for which data sheets have been prepared, including tape formats sold
under the brand name "Quadrax aXial Tape" and tapes sold in broad sheet format
under the brand name "Quadrax Biaxial Tape." In addition, Quadrax Composites
tape products can be customized through varying combinations of resins, fibers,
fiber areal weights and resin percentages in order to meet customers' specific
needs.
Although Quadrax's initial proprietary expertise was in the fabrication
and formatting of composite tape products, the Company is expanding its range
of know-how and capabilities to include expertise in finished goods and piece
parts for the consumer sporting goods market:
- The Company is currently marketing a high-performance tennis
racquet, the "Conqueror," under the Wimbledon brand name and expects
to commence shipments of the Conqueror in the second quarter of 1995.
The Conqueror features "Dynamic Positioning," a strategic use of
weight distribution that takes
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<PAGE> 12
advantage of the strength-to-weight advantages of Quadrax Composites.
As a result of its acquisition of Wimbledon license rights, the
Company is also marketing and selling tennis-related soft goods in
the United States under the "Wimbledon" brand name.
- The Company has completed a prototype for lacrosse stick handles
utilizing Quadrax Composites. These handles are being developed
under a joint design/exclusive manufacturing contract entered into in
February 1995 with Brine, Inc. The Company expects to commence
shipping lacrosse stick handles to Brine, Inc. in April 1995.
- The acquisition of McManis Sports provided Quadrax with golf
product lines that include irons marketed under the "Tour Technology"
and other brand names. These irons do not incorporate Quadrax
Composites. Using design and development expertise obtained in the
McManis Sports transaction, the Company has completed a prototype of
a putter produced with Quadrax Composites and is seeking to enter
into a strategic marketing relationship with a company that is
established in the golf equipment market.
- Quadrax has signed two joint development/exclusive manufacturing
contracts with Cannondale Corporation, a manufacturer of
high-performance bicycles. These contracts call for the design,
development and production of bicycle frames, forks and other
components using Quadrax Composites. The Company has
computer-engineered the design of the bicycle frames and forks, and
currently estimates that prototypes of these components will be
completed in the second quarter of 1995. If the Company is
successful in timely providing frames and forks that meet contractual
specifications, Cannondale Corporation will be contractually
obligated to purchase specified quantities of components from Quadrax
over an 18-month period. The development and production of these
components will require the Company to design and implement new
production processes different from those used in connection with the
Company's other finished goods. As a result, there can be no
assurance that the Company will be successful in meeting the
contractual specifications on a timely basis, or at all.
The Company seeks to identify, on a regular basis, additional sports equipment
that may benefit from the functional advantages of Quadrax Composites. The
Company is, for example, in the early stages of design and development of
volleyball net poles, hockey sticks and hockey skate insoles incorporating
Quadrax Composites.
In producing tennis and golf equipment, the Company intends to integrate
production vertically, from the manufacture of the feedstock materials (Quadrax
Composites) through distribution to product retailers. With respect to other
finished goods for the sporting goods markets, however, the Company currently
anticipates that it will seek to enter into strategic development and marketing
relationships, such as those with Brine, Inc. and Cannondale Corporation. This
strategy will facilitate the Company's entry into new sporting goods markets in
a cost-effective manner, by enabling the Company to focus its resources on
applications for its tape products. The Company believes that this approach
will increase demand for the Company's tape products both directly, by creating
needs for specific components and goods, and indirectly, by demonstrating the
advantages and potential of Quadrax Composites.
Quadrax continues to supply advanced composite materials systems to
branches of the United States military through three materials supply contracts
with defense contractors. Under these contracts, Quadrax Composites are being
incorporated in:
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- the F-22 "Air Superiority" tactical fighter being produced by
Lockheed Aeronautical Systems Company under contract with the United
States Air Force;
- the Seawolf class of submarines being constructed by the Electric
Boat Division of General Dynamics Corporation under contract with
theUnited States Navy; and
- the "Composite Armored Vehicle," an experimental armored troop
carrier (known as CAV) being developed by United Defense LP under
contract with the United States Army.
MARKETS
ATHLETIC AND RECREATIONAL EQUIPMENT
Quadrax intends to execute a two-pronged marketing strategy in the
sporting goods market. In both cases, it is pursuing the same targeted market:
serious athletes, both professional and amateur, who are willing to pay a
premium for the better "feel" that Quadrax Composites can deliver.
A high profile approach is being launched through the Conqueror tennis
racquet and tennis-related soft goods being sold under the Wimbledon brand
name. This approach may also be used to market the golf club product lines
obtained by the Company through the acquisition of McManis Sports.
A lower profile approach is being implemented through joint development
and manufacturing contracts with leading suppliers of high-performance
equipment for various games and activities. The Company is currently engaged
in a bicycle frame and fork program with Cannondale Corporation and a lacrosse
stick program with Brine, Inc.
TRUCKS AND TRANSPORTATION
The truck and transportation market represents a medium- to long-term
opportunity for Quadrax. The Company has begun to take steps to gain
recognition within the automotive industry through its sponsorship of the Roger
Mears Racing Team. The Company currently expects that it will attempt to enter
the truck and transportation market by designing and providing floor systems
for specialty trailers. If successful, the Company may then seek to migrate to
the production of other systems for general purpose truck and other heavy
equipment.
DEFENSE
Through a combination of internal initiatives and the acquisitions from
Phillips and Amoco, Quadrax has established itself as a supplier of advanced
composite materials systems to branches of the United States military. Quadrax
Composites are currently being incorporated in products provided under
contracts with the United States Air Force, the United States Navy and the
United States Army.
AEROSPACE
Quadrax continues to receive orders for unformatted Quadrax aXial Tape
from companies active in the non-defense aerospace industries. Most of these
orders have been, and any future orders are expected to be, for purposes of
testing and evaluation in connection with research and development products,
with a limited number of sales being made for commercial production purposes.
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<PAGE> 14
MARKETING AND SALES
REPUTATION
As one of a small number of fabricators in the relatively new
thermoplastic composite tapes market, Quadrax is often sought out by customers
interested in purchasing its tapes. This is particularly true in the defense
market, where Quadrax receives invitations to bid on projects in which Quadrax
Composites may be used to advantage, and in aerospace markets, where Quadrax
periodically receives unsolicited orders, usually from advanced prototyping
engineers purchasing the material for testing and evaluation. These orders
historically have not been received in volumes sufficient to support profitable
operations, and they are not expected to become profitable without an increase
in acceptance of Quadrax Composites by the market through successful marketing
of the Company's finished goods. See "Product Line" above.
Quadrax works to maintain and enhance its reputation within these market
sectors by periodic advertising in trade publication, the regular submission of
technical papers for publication in professional journals and frequent
attendance at industry conferences, conventions and trade shows.
DIRECT SALES
Quadrax's marketing and sales programs are the responsibility of its Vice
President--Sales and Marketing, who, supported by the Company's engineering
staff and other sales personnel, is charged with calling directly on top
decision makers at manufacturing companies that the Company has identified as
attractive candidates for the incorporation of components made out of Quadrax
Composites into finished goods or parts assemblies.
CONSUMER MARKETING
With the recent acquisitions of McManis Sports and the Wimbledon licensing
rights previously held by Time Sports, Inc., Quadrax has added expertise to
assist it in its efforts to begin marketing finished goods directly to
consumers. The Company contemplates that distribution of tennis and golf
equipment initially will be made through specialty retailers (such as pro
shops), with sales being supported by limited-scope promotional campaigns.
These campaigns may include sponsoring tournaments and other competitive
events, high-profile advertisements in limited circulation specialty magazines,
and other techniques calculated to associate the Quadrax name with a
performance advantage.
COMPETITION
MATERIALS COMPETITION
Thermoplastic composites (such as Quadrax Composites) compete with
conventional materials (including wood, stone, steel and aluminum), less common
metals such as titanium, and thermoset (epoxy-based) composites. The materials
considered by Quadrax to be most vulnerable to displacement are thermosets.
Thermosets are an earlier form of polymer resin/fiber matrix composite material
that are the accepted standard for a variety of sporting goods and recreational
equipment. Weight savings alone will not give thermoplastics the edge over
thermosets, but improved strength and vibration dampening qualities, combined
with the ability to achieve a strategic distribution of weight through the
precision engineering of Quadrax aXial Tape, can provide an improved "feel" and
more precise control, particularly in the critical follow-through swing. In
addition, thermoplastics are safer to manufacture and use.
Compared with metals such as steel and, to a lesser extent, aluminum and
titanium, thermoplastic composites offer substantial weight savings at
equivalent tensile and mechanical strength levels, making thermoplastic
composites easier to handle and transport. Since thermoplastic composites do
not oxidize, they do not
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<PAGE> 15
require paints or other special coatings as protection against rust or
corrosion, making them cheaper to maintain. Compared with wood and other
laminates, thermoplastic composites offer substantial weight savings and, more
importantly, structural characteristics that enable them easily to assume
almost any shape through heat and compression molding, while presenting
aesthetic and acoustic qualities comparable to wood. The primary competitive
disadvantage of thermoplastic composites is their comparatively high cost.
SUPPLIER COMPETITION
Composite materials are an emerging industry, and it is difficult to
identify those competitors that will be the most successful. A significant
part of the early discovery and development work in thermoplastic composites
was performed by major international oil companies, many of which subsequently
exited the business as the size of the defense market decreased. Three of the
largest multinational chemical companies -- E.I. du Pont de Nemours & Co.,
Imperial Chemical Industries PLC and Saint Gobain --continue to develop
composite product offerings that may compete with the Company's product
offerings. The Company faces potential competition from new companies as well
as established companies that may migrate from related industries. Many of the
Company's current and prospective competitors, including E.I. du Pont de
Nemours & Co., Imperial Chemical Industries PLC and Saint Gobain, have
significantly greater financial, manufacturing and marketing resources than the
Company. There can be no assurance that the Company's products will compete
effectively with products offered by established and new competitors of the
Company.
In general, the Company believes that it can compete effectively by
offering products with superior performance characteristics to products offered
by other suppliers at prices substantially equivalent to those charged by other
suppliers. The Company believes that its ability to compete also depends on
elements both within and outside its control, including the success and timing
of new product development and introduction by the Company and its competitors,
product performance and price, distribution and customer support. There can be
no assurance that the Company will be able to compete successfully with respect
to these factors. Although the Company believes that it has certain
technological and other advantages over its competitors, maintaining such
advantages will require continued investment by the Company in design and
development, sales and marketing and customer service and support. There can
be no assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to maintain such competitive advantages. In addition, as the Company
enters new markets, distribution channels, technical requirements and levels
and bases of competition may be different than those in the Company's current
markets and there can be no assurance that the Company will be able to compete
favorably.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters and manufacturing facilities are
located in Portsmouth, Rhode Island, in a leased building comprising
approximately 49,000 square feet. The Company has occupied all or a portion of
this building since the building was constructed in 1988. In connection with
its initial lease of the facilities, the Company acquired a one-third interest
as a limited partner in the limited partnership that owns the building and
pledged a $250,000 certificate of deposit to secure its obligations to the
institution that provided construction financing for the building.
Under the terms of a revised operating lease executed in October 1993, the
Company agreed to lease the Portsmouth building at an annual rent of
approximately $100,000 for a ten-year term expiring in 2003. The Company has
responsibility for all repairs, maintenance and operating expenses for the
building during the lease term. In connection with the execution of the
revised lease, the lender reduced the balance of the mortgage based on the
reduction in the fair market value of the building under current market
conditions. In exchange for a net reduction in the outstanding loan balance of
approximately $1 million, the Company transferred the $250,000 certificate of
deposit to the limited partnership as a capital contribution, and the limited
partnership transferred the certificate of deposit to the lender. In exchange
for the $250,000 payment from the Company, the limited
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<PAGE> 16
partnership executed a second deed of trust payable to the Company in the
amount of $250,000. Under the revised lease, Quadrax has the right to purchase
the building at any time during the lease term for a price of approximately
$1,000,000 (approximately 50% of the construction cost of the building), a
portion of which may be paid through cancellation of the second deed of trust.
The Company believes that its existing leased facilities are adequate to
meet its currently anticipated requirements and that suitable additional or
substitute facilities will be available if required.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this Amendment No. 3 to this Form 10-KSB, the Securities
and Exchange Commission is conducting two informal investigations of the
Company for activities occurring in 1994 and 1995. The following discussion is
based on information learned by the Company as a result of its involvement in
the Commission's activities. There may be other significant information
regarding these matters of which the Company is, at the time, not aware.
One inquiry, being conducted by the Commission's Denver officer, is
believed to have as its principal focus, insofar as it relates to the Company,
activities by the Company's former Chairman of the Board involving certain
transactions in the Company's stock and certain expenditures of the Company
funds, during his term as Chairman, from July 1994 through February 1995. A
second inquiry, being conducted under the supervision of the Commission's
Boston office, is believed to focus, insofar as it relates to the Company, on
certain activities involving the Company's public relations consultant
beginning January 1994. While the Company's contract with its public relations
consultant nominally extends until January 1996, the Company is no longer using
the services of the consultant to any significant degree and does not expect to
extend the contract for his services beyond the date of the current contract.
The Company has cooperated with the inquiries described above, providing
documents and other information in response to the Staff's requests. At this
time, the Company does not know what conclusions the Staff will reach or what
action, if any, the Staff will recommend to the Commission upon the termination
of the two inquiries.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse outcome
of which, in management's opinion, individually or in the aggregate, would have
a material adverse effect on the Company's results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
An Annual Meeting of Stockholders of the Company was held on October 26,
1994, at which there were present or represented by proxy at the Annual Meeting
were the holders of 3,375,179 shares of Common Stock, 446.77 shares of
Preferred Stock, and no shares of Class A preferred stock, First Series, $.01
par value, constituting 60.75%, 86.65% and 0%, respectively, of such classes of
stock outstanding and entitled to vote at the Annual Meeting. At the Annual
Meeting, the stockholders of the Company elected William G. Conway, Pattinson
Hayton, III, Sven Kraumanis, James J. Palermo and Gordon Werner as directors of
the Company and voted to amend the 1993 Stock Plan to increase the number of
shares available for award thereunder by 358,510 shares. Mr. Werner
subsequently declined to accept his directorship.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock and the Company's Non-Callable Class C Common Stock
Purchase Warrants ("Class C Warrants") trade on the Nasdaq Small Cap Market
under the symbols "QDRX" and "QDRXZ," respectively. The table below sets forth
the range of high and low bid prices for the Common Stock and the Class C
Warrants on the Nasdaq Small Cap Market for each quarter within the last two
fiscal years:
<TABLE>
<CAPTION>
Common Stock* Class C Warrants*
------------ ----------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1993:
Quarter Ended April 4, 1993 . . . . . . . $11.5625 $8.4375 $6.8750 $4.3750
Quarter Ended July 4, 1993 . . . . . . . . 11.8750 6.8750 4.3750 3.1250
Quarter Ended October 3, 1993 . . . . . . 12.1875 8.4375 6.5625 4.0625
Quarter Ended January 2, 1994 . . . . . . 10.3125 6.5625 5.6250 3.7500
Fiscal 1994:
Quarter Ended April 3, 1994 . . . . . . . 7.5000 2.5000 3.7500 2.5000
Quarter Ended July 3, 1994 . . . . . . . . 5.3750 4.3750 2.1875 2.0000
Quarter Ended September 30, 1994 . . . . . 5.1250 2.3125 2.7500 2.0000
Quarter Ended December 31, 1994 . . . . . 4.5000 2.3750 3.0000 3.0000
</TABLE>
- -----------------
* Adjusted to reflect, on a pro forma basis, a one-for-ten reverse stock split
of the Common Stock effected as of July 20, 1994.
The preceding price quotations reflect inter-dealer prices without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
As of March 28, 1995, there were 11,876,513 shares of Common Stock issued
and outstanding and held of record by approximately 1,400 stockholders.
The Company did not declare any dividends on Common Stock during fiscal
1994 or the first quarter of fiscal 1995, and does not expect to declare
dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
In 1994, the Company converted its fiscal year from a 52-53 week period
ending on the Sunday closest to December 31 to a calendar year ending December
31.
The following financial table sets forth selected financial data at
December 31, 1994, January 2, 1994, January 3, 1993, December 29, 1991, and at
December 30, 1990 and for the fiscal years then ended.
<TABLE>
<CAPTION>
(in thousand of dollars, except per share data)
Year Ended Year Ended Year Ended Year Ended Year Ended
Statement of operations data: Dec. 31, 1994 Jan. 2, 1994 Jan. 3, 1993 Dec. 29, 1991 Dec. 30, 1990
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 860 $ 1,555 $ 850 $ 756 $ 1,227
Cost of goods sold 106 987 806 --- ---
Research and development expense 1,691 2,144 1,677 1,233 3,206
Selling, general and
administrative expense 3,982 3,140 2,681 1,910 3,079
Depreciation and amortization 824 963 2,647 1,191 827
Non-recurring financing-related
expenses 5,569 --- --- --- ---
Net loss from continuing operations (11,517) (5,713) (7,266) (3,612) (5,887)
Net loss per common share from
continuing operations (2.09) (2.20) (5.43) (3.33) (6.50)
Weighted average common shares
outstanding 5,506 2,697 1,417 1,098 899
<CAPTION>
As of As of As of As of As of
Balance sheet data: Dec. 31, 1994 Jan. 2, 1994 Jan. 3, 1993 Dec. 29, 1991 Dec. 30, 1990
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $ (1,199) $ 103 $ (68) $ (685) $ 149
Total assets 7,260 4,318 5,690 3,501 5,511
Notes payable - long term --- --- 2,860 --- ---
Total stockholders' equity 3,561 3,208 653 2,259 4,503
</TABLE>
FISCAL 1994 COMPARED TO FISCAL 1993
The Company is a development stage enterprise and has completed only one
production contract to date.
The Company's net loss from continuing operations in fiscal 1994 of
$11,517,000 increased by $5,804,000 as compared to the fiscal 1993 loss from
continuing operations of $5,713,000. This increase primarily resulted from
non-recurring financing costs of $5,569,000 (see Note 9 to the Consolidated
Financial Statements) and a write-off of obsolete equipment of $190,000.
Total revenue recognized during fiscal 1994 was $860,000 compared to
$1,555,000 in fiscal 1993. The primary reason for this decrease was that the
Company substantially completed its initial production contract in fiscal 1993
and that follow-on production contracts will not generate revenues until fiscal
1995. Sales of material for evaluation and testing totaled $760,000 in fiscal
1994 compared to $430,000 in fiscal 1993.
Cost of goods sold for fiscal 1994 was $106,000, which relates to the
Company's initial production contracts completed in fiscal 1994.
Research and development expenses were $1,691,000 in fiscal 1994 as
compared to $2,144,000 in fiscal 1993, a decrease of $453,000. The reason for
this decrease is reduced development activities during the first half of fiscal
1994 and the Company's accelerated shift in strategic focus away from defense
and in favor of commercial and consumer applications in the second half of
fiscal 1994.
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Sales, general and administrative expenses of $3,982,000 in fiscal 1994
increased approximately $842,000 over fiscal 1993. This increase reflects the
addition of executive personnel, particularly in the area of sales and
marketing, and approximately $380,000 of costs related to product publicity
campaigns.
Depreciation and amortization expense decreased $139,000 in fiscal 1994.
The reason for this decrease is the non-recurrence of amortization of deferred
expense and deferred debt expense recognized in fiscal 1993 of approximately
$180,000. Included in fiscal 1994 expenses is the write-off of $190,000 of
obsolete equipment.
Interest expense increased $187,000 in fiscal 1994 to $205,000. The
primary reason for this increase was the ALS financing cost, $65,000 and the
interest paid on stock on the Regulation D debentures the Company issued during
fiscal 1994 of $132,000.
During fiscal 1994, the Company reviewed its fixed assets and equipment to
determine what was no longer usable. This review resulted in a write-off of
the net book value of such unusable assets of $190,000.
Loss on investment incurred during fiscal 1994 was negligible, a reduction
of $16,000 from fiscal 1993. During fiscal 1993, the Company realized a
$16,000 loss upon the sale of 123,400 shares of 3D Systems, Inc. stock
acquired in settlement of patent litigation involving Quadrax Laser.
Non-recurring financing related costs of $5,569,000 in fiscal 1994 as
opposed to negligible amounts in fiscal 1993 relate to the Company's
transactions with ALS and Conagher. The Company incurred costs of
approximately $1,481,000 in connection with the proposed purchase of the
Company by ALS. This agreement was terminated in May 1994; the costs here
relate primarily to the issuance of stock to its investor relations consultant
along with professional fees. Subsequent to the proposed ALS transaction, the
Company entered into a financing arrangement with Conagher. See "DESCRIPTION
OF BUSINESS--Overview--Changes in Control and Related Transactions" above and
Notes 9 and 10 to the Consolidated Financial Statements. During this
financing, which was terminated subsequent to December 31, 1994, the Company
incurred one-time costs of $4,087,000. Due to the significance of these
expenses, the fact that they are non-recurring, and that they occurred
primarily in fiscal 1994, all of these have been accrued in fiscal 1994.
FISCAL 1993 COMPARED TO FISCAL 1992
The Company is a development stage enterprise and has completed only one
production contract to date.
The Company's net loss from continuing operations in fiscal 1993 of
$5,713,480 decreased by $1,552,643 as compared to the fiscal 1992 net loss from
continuing operations of $7,266,123. This reduction resulted primarily from an
improvement in gross margin on production contracts of approximately $771,000
and reductions in depreciation and amortization expense of approximately
$1,684,000, offset by increases in research and development expenses of
approximately $467,000 and selling, general and administrative expenses of
$459,000. Another reason for the decrease in net loss was the establishment in
fiscal 1992 of a $500,000 net loss reserve for contract overruns on the Seawolf
project which the Company expected to be incurred in fiscal 1993.
Sales of material for testing and evaluation in fiscal 1993 were $430,000,
an increase of approximately $190,000 (80%) compared to fiscal 1992. This
increase was principally the result of sales of the Company's unidirectional
tape products acquired in the fourth quarter of fiscal 1992 and revenues
generated from developmental efforts for recreational products. Sales from
production contracts in fiscal 1993 were $1,098,000, which represented an
increase of $952,000 compared to fiscal 1992. The Company completed its first
major production contract in the second quarter of fiscal 1993 and recorded
sales from a smaller production contract during the fourth quarter of fiscal
1993.
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<PAGE> 20
The Company recognized no research income during fiscal 1993. During
fiscal 1992, the Company completed a $250,000 research contract performed
pursuant to settlement of litigation. The balance of monies recorded as
research income in fiscal year 1992, $181,846, primarily represents monies the
Company recognized as grant income.
Cost of goods sold for fiscal 1993 of $987,000 reflect costs incurred on
production contracts during fiscal 1993, offset by the reversal of a $500,000
loss reserve established in fiscal 1992 for estimated losses on a subsurface
naval vessel contract realized in fiscal 1993 and a $145,000 provision for a
loss reserve on an athletic shoe program for sales to be made in fiscal 1994.
The forecasted loss on the shoe program is attributable to production start-up
costs in excess of those forecast and greater than expected scrap rates.
The Company believes that manufacturing economies, particularly as they
relate to scrap materials, realized in the manufacture of laminates for the
subsurface naval vessel contract and for the shoe program will significantly
reduce the cost of raw materials and the amount of rework required on future
such programs. In addition, since the Phillips acquisition, the Company is
vertically integrated and therefore, if cost effective, can use its own
materials for these and other production programs. Moreover, the Company is
currently negotiating revised specifications for these programs which, if
accepted, will reduce manufacturing costs. Accordingly, the Company projects
that it will realize a positive gross margin on future such production
contracts, if awarded.
Research and development expenses increased by $467,000 (28%) to
$2,144,000 primarily attributable to salaries for new applications development
and processing engineers and increased spending for development projects
relating to sporting goods products.
Selling, general and administration expenses for fiscal 1993 increased by
approximately $459,000 (17%) to $3,140,000. Selling and marketing expenses
increased by $733,000, attributable principally to increases in payroll and
payroll related expenses resulting from the hiring of additional sales and
marketing personnel and the redirection of members of the Company's engineering
staff to support the sales effort ($464,000), increased professional and
consulting fees ($103,000), increased travel expenses ($85,000) and increased
sample expenses ($32,000). General and administration expenses decreased by
$274,000, attributable principally to reduced fees for investment banking and
financial relations services ($169,000), the non-recurrence of certain state
license fees ($162,000) and reduction in commission expenses ($34,000), offset
by an increase ($95,000) for directors and officers liability insurance.
Interest expense incurred in fiscal 1993 of $18,000 was $137,000 less than
fiscal 1992. Interest expense in fiscal 1992 was primarily attributable to the
Company's Senior Convertible Notes (issued in April 1992 and converted into
Class A Preferred Stock in July 1992).
Depreciation and amortization in fiscal 1993 decreased by $1,684,000 to
$963,000. This decrease is attributable to a reduction in unearned
compensation on compensatory stock options ($1,160,000) which had resulted from
an acceleration of vesting provisions in fiscal 1992, a reduction in the
amortization of deferred debt expense related to the issuance of debt during
fiscal 1992 ($259,000), a decrease in amortization of deferred expenses
($158,000) and $171,000 related to the acceleration of amortization for
certain braiding patent acquisition costs, offset by increased depreciation for
machinery and equipment placed in service during fiscal 1993 ($64,000).
Other expense for fiscal 1993 of $16,000 reflects a $19,000 loss realized
of the sale of 3D Systems, Inc. stock acquired in settlement of the Quadrax
Laser patent litigation. In fiscal 1992, other expense of $149,000 reflected
an adjustment to the market value of the 3D stock.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had total assets of $7.3 million and
shareholder's equity of $3.6 million. Current assets were approximately $2.0
million and current liabilities were approximately 3.2 million.
20
<PAGE> 21
Working capital was approximately a deficit of $1.2 million, which was an
decrease of approximately $1.3 million from January 2, 1994, when working
capital was approximately $100,000. The decrease in working capital resulted
primarily from the Company's establishment of a $717,000 reserve for financing
costs related to the termination of the Company's relationship with Mr. Hayton
in February 1995, and related professional fees. The Company's assumption of
liabilities of Wimbledon and McManis Sports pursuant to the Company's
acquisition of these businesses, also contributed to the decrease in working
capital.
During fiscal 1994, inventory increased $960,464, from $311,322 on January
2, 1994 to $1,271,786 at December 31, 1994. This increase was a result of the
Company booking its acquisition of Wimbledon and McManis (and their approximate
inventories of $530,000 and $100,000, respectively), as of December 31, 1994.
The Company also had some build-up in inventories due to the stockpiling of
product in preparation for the commencement of production on the E-A-R project
and the ongoing requirements of the F-22 project.
Accounts payable also increased during fiscal 1994 from $383,672 at
January 2, 1994, to $1,166,178 at December 31, 1994 as a result of the
Company's assumption of approximately $600,000 in liabilities of Wimbledon and
McManis Sports pursuant to the Company's acquisitions of these businesses.
Accounts payables also increased because of the build-up in inventory that
occurred in fiscal 1994.
Accrued expenses increased during fiscal 1994 from $580,815 at January 2,
1994, to $1,547,986 at December 31, 1994. This increase was caused primarily
by the establishment of a $717,000 reserve for financing costs related to the
termination of the Company's relationship with Mr. Hayton in February 1995, and
related professional fees.
In fiscal 1994, capital expenditures were insignificant. The Company
anticipates capital expenditures in 1995 will be approximately $375,000 which
will be paid for through equipment leasing programs and from funds raised
through the private placement of the Company's common stock.
As a result of its inability to raise additional capital in the first
quarter of fiscal 1994, the Board of Directors of the Company approved an asset
acquisition agreement pursuant to which ALS would have acquired all of the
assets of the Company in exchange for ALS stock. Negotiations for this
acquisition were terminated in May 1994, and the Company subsequently was party
to financings and other transactions that resulted in a change and control of
the Company. See "DESCRIPTION OF BUSINESS--Overview--Changes in Control and
Related Transactions" above.
The Company generated revenues of approximately $860,000 in fiscal 1994,
and as a result, operations were not a source of funds or liquidity for the
Company. As a development stage company, Quadrax continues to rely on
financing activities for the cash required to fund its operations. Net funds
provided by financing activities in fiscal 1994, after giving effect to the
repayment of debt, totalled $5,893,000, as compared with $4,510,000 in fiscal
1993 and $6,817,000 in fiscal 1992.
The Company believes that proceeds of approximately $3,000,000 from
additional equity sales, together with funds provided by operations and cash on
hand (approximately $1,000,000 at April 13, 1995), will be sufficient to meet
the Company's cash requirements through the end of fiscal 1995. The Company
also believes, based on negotiations prior to the date of filing of this Annual
Report on Form 10-KSB, that it will be able to sell additional shares of its
stock in amounts sufficient to generate proceeds of $3,000,000.
The Company received a going concern qualification from its outside
independent auditors on its fiscal 1994 audited financial statements. While
the Company believes it has made and will continue to make substantial progress
towards achieving profitability, the results to date have not yet been
sufficient to negate the auditors' qualifications. The Company's management is
of the opinion that it will be able to continue to raise money from
21
<PAGE> 22
outside third party sources in sufficient amounts to support its operations
until the time that the forecasted revenues for future periods materialize from
programs in which the Company is involved. There is no assurance that the
Company's efforts to raise money will be successful or that the forecasts will
be achieved. It is difficult for the Company to predict with accuracy the
point at which the Company will no longer require a going concern qualification
due to the difficulty of predicting accurately the amount of revenues that the
Company will generate, the amount of expenses that will be required by its
operations, and the Company's ability to raise additional capital. The Company
believes, however, that under its current business plan, its revenues and
earnings will be sufficient to make the going concern qualification unnecessary
by December 31, 1996.
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements of the Company as of December 31,
1994 and January 2, 1994 and for the fiscal years ended December 31, 1994,
January 2, 1994 and January 3, 1994 are set forth following page 24 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On September 27, 1994, the Board of Directors of Quadrax, upon the
recommendation of management, voted to appoint Arthur Andersen LLP ("Arthur
Andersen") to act as independent auditors for the Company for fiscal 1994,
replacing Ernst & Young LLP ("Ernst & Young"). Ernst & Young had audited the
Company's books and records for fiscal 1993 and had audited the Company's books
and records and performed other accounting services for the Company since
January 8, 1988. During fiscal 1993 and 1992, and for subsequent interim
periods in fiscal 1994, there were no disagreements between Quadrax and Ernst &
Young on any matter of accounting principles or practices, financial statement
disclosures, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Ernst & Young, would have caused such firm to
make reference thereto in its report on the financial statements for such years
and periods. None of the audit reports of Ernst & Young for any period,
including fiscal 1993 and 1992, contained an adverse opinion or a disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope, or
accounting principles, except that such reports for fiscal 1993 and 1992
contained explanatory language as to the Company's ability to continue as a
going concern for reasons stated therein, including the fact that the Company
was a development stage company that since inception has expended cash in
excess of cash generated from operations and that additional financing would be
needed to support future operations. The change in accountants from Ernst &
Young to Arthur Andersen was the subject of a Current Report on Form 8-K dated
September 21, 1994, as amended.
On October 26, 1994, the Board of Directors of Quadrax, upon the
recommendation of management, voted to appoint Livingston & Haynes, P.C. to act
as independent auditors for the Company for fiscal 1994, replacing Arthur
Andersen. Arthur Andersen, which had agreed to act as independent auditors for
the Company, after having been appointed by the Board on September 27, 1994,
notified the Company by certified letter received by the Company on October 21,
1994 that such firm had reconsidered its acceptance for policy reasons. Arthur
Andersen had not commenced work on the audit beyond a physical review of
inventory, and had no differences of opinion with the Company concerning its
financial reports. There are no disagreements with Arthur Andersen on any
matter of accounting principle or practices, financial statement disclosure, or
auditing scope or procedure. The change in accountants from Arthur Andersen to
Livingston & Haynes, P.C. was the subject of a Current Report on Form 8-K dated
October 21, 1994.
22
<PAGE> 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information with respect to this item may be found in the sections
captioned "Directors and Executive Officers" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" appearing in the definitive Proxy
Statement to be delivered to stockholders in connection with the Company's
Annual Meeting of Stockholders to be held on May 24, 1995. Such information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information with respect to this item may be found in the section
captioned "Remuneration of Executive Officers and Directors" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held on May 24, 1995. Such
information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
appearing in the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 24, 1995.
Such information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item may be found in the section
captioned "Certain Relationships and Related Transactions" appearing in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders to be held on May 24, 1995. Such
information is incorporated herein by reference. See also "DESCRIPTION OF
BUSINESS--Changes in Control and Related Transactions."
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements. Reference is made to the listing on page F-1
for a list of all financial statements and financial statement schedules filed
as part of this report.
(b) Reports on Form 8-K. The following Current Reports on Form 8-K were
filed with the Securities and Exchange Commission during the last quarter of
fiscal 1994:
- On October 13, 1994, the Company filed a Form 8-K containing a copy
of a press release of the Company with respect to the trading volume
in the Common Stock.
- On October 21, 1994, the Company filed a Form 8-K with respect to a
change in its accountants from Arthur Andersen LLP to Livingston &
Haynes, P.C.
23
<PAGE> 24
- On April 10, 1995, the Company filed a Form 8-K dated November 14,
1994 with respect to the acquisition of McManis Sports and the
Wimbledon license rights.
(c) Exhibits. The Exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the Exhibit Index beginning
on page E-1.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUADRAX CORPORATION
By: /s/ JAMES J. PALERMO Date: January 17, 1996
--------------------------
James J. Palermo, Chairman
By: /s/ EDWARD A. STOLTENBERG Date: January 17, 1996
--------------------------
Edward A. Stoltenberg,
Chief Financial Officer, Treasurer
<PAGE> 26
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended.(15)
3.2 By-laws of the Company, as amended.(4)
4.1 Excerpt from Certificate of Incorporation of the Company,
as amended, as to rights of holders of Common Stock.(15)
4.2 Specimen Certificate for Common Stock.(15)
4.3 Specimen Certificate for Class C Warrants.(6)
4.4 Form of Warrant Agreement with American Stock Transfer &
Trust Company, as Warrant Agent for Class C Warrants.(5)
10.1 Form of Proprietary Information and Invention Agreement
executed by certain employees of the Company.(1)
10.2 1989 Non-Qualified Stock Option Plan.(7)
10.3 1993 Stock Plan.(10)
10.4 1994 Non-Qualified Stock Option Plan.(15)
10.5 Patent and Technology License Agreement between the
Company and the Joss Company.(2)
10.6(a) Agreement and Certificate of Limited Partnership of A.S.C.
Development, Inc./Quadrax Corporation Limited Partnership
as General Partner with the Company as Limited Partner
dated June 28, 1988.(3)
10.6(b) Building Sub-Lease dated October 5, 1993 between the
Company and A.S.C. Development, Inc./Quadrax Corporation,
L.P. (a Rhode Island limited partnership).(11)
10.6(c) Second Amendment to Limited Partnership Agreement and
Certificate of A.S.C. Development, Inc./Quadrax
Corporation Limited Partnership as General Partner with
Quadrax Corporation as Limited Partner dated October 7,
1993.(11)
10.7 Amendment to partnership agreement dated September 21,
1988 between the Company and A.S.C. Development, Inc.(3)
10.8 Equipment Sales Agreement between the Company and Phillips
Petroleum Company dated September 9, 1992.(8)
10.9 License Agreement between the Company and Phillips
Petroleum Company dated September 8, 1992.(8)
</TABLE>
E-1
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C>
10.10 Stock Purchase Warrant issued by the Company to
Emanuel and Company dated November 27, 1991
(similar warrant for 250,000 shares, dated March 3, 1992,
also issued to Emanuel and Company). (6)
10.11 Form of Class D Warrant issued in connection with the
1992 Private Placement of 10% Unsecured Promissory Notes.(8)
10.12 Form of Class F Warrant issued in connection with the
1993 Private Placement of stock and warrants.(8)
10.13 Stock Purchase Warrant issued by the Company to George Beyts
and Stock Purchase Warrant issued by the Company to
Mohammed Manzur, each dated December 1, 1994.(15)
10.14 Unit Purchase Option dated September 1, 1992, between the
Company and D.H. Blair Investment Banking Corporation.(9)
10.15 Consulting Agreement dated January 20, 1994, between
the Company and Liviakis Financial Communications, as
amended as of May 13, 1994.(11)
10.16 Letter Agreement dated March 3, 1993 between the Company
and First Flushing Securities, Inc. to pay warrant solicitation
fee upon exercise of the Company's Class D, E and F Warrants.(11)
10.17 Release, Settlement and Severance Agreement dated July 5, 1994
among the Company and its subsidiaries, Richard A. Fisher
and Andrew J. MacGowan. (12)
10.18 Stock Purchase Agreement between the Company and
Conagher & Co. Inc., dated July 8, 1994, and as amended
November 15, 1994.(13)
10.19 Stock Purchase Agreement between the Company
and Conagher & Co. Inc., dated August 26, 1994.(13)
10.20 Amendment Stock Purchase Agreement between the
Company and Conagher & Co. Inc., dated September 16, 1994.(13)
10.21 Severance Agreement between the Company and
Richard A. Fisher dated September 30, 1994. (13)
10.22 Key Employee Agreement dated October 13, 1994 between
the Company and Terry Lanning. (15)
10.23 Key Employee Agreement dated August 9, 1994 between
the Company and James J. Palermo. (15)
10.24 Key Employee Agreement dated September 26, 1994 between
the Company and David Park.(15)
</TABLE>
E-2
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C>
10.25 Agreement for the Purchase and Sale of Common Stock
dated November 14, 1994 between the Selling Stockholders
of McManis Sports Associates, Inc. named therein and
the Company.(14)
10.26 Asset Purchase Agreement dated November 17, 1994
between the Company and Time Sports, Inc.(14)
10.27(a) Conversion Agreement, Settlement and Release dated
September 15, 1994 by and among the Company, Kuo Yu Chiang
and Hinckley, Allen & Snyder, as escrow agent.(15)
10.27(b) Conversion Agreement, Settlement and Release dated
September 15, 1994 by and among the Company, Li-Chiun Chiang
and Hinckley, Allen & Snyder, as escrow agent. (15)
10.27(c) Conversion Agreement dated September 15, 1994 by and
among the Company, Franklyn B. Neville and Hinckley,
Allen & Snyder, as escrow agent.(15)
10.27(d) Conversion Agreement and Release dated December 30, 1994
by and among the Company, the holders of Original Preferred
Stock named therein and Hinckley, Allen & Snyder, as
escrow agent (collated).(15)
10.28(a) Agreement for the Creation of a Voting Trust in Settlement
of Claims and Liabilities dated February 13, 1995 by and among
Allied-Asian Consolidated Limited, the Company,
Conagher & Co., Inc., Pattinson Hayton, III,
Richard A. Fisher and James J. Palermo. (15)
10.28(b) Declaration of Trust "The Quadrax Preferred Stock Voting
Trust" dated February 13, 1995 by and among Allied-Asian
Consolidated Limited and James J. Palermo, for the benefit of
the Holders of the Common Stock of the Company.(15)
10.28(c) Letter Agreement dated March 17, 1995 among the Company,
Allied-Asian Consolidated Limited, Conagher & Co., Inc.,
Pattinson Hayton, III, Richard A. Fisher and James J.Palermo.(15)
10.29(d) Second Amendment to Agreement for the Creation of a Voting
Trust in settlement of claims and liabilities. (16)
21.1 List of Subsidiary Corporations.(16)
28.1 Licensing Opportunity Summary - Quadrax Biaxial Thermoplastic
Prepreg for Structural Applications, prepared by Arthur D.
Little, Inc.(5)
</TABLE>
- -------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1, File No. 33-14275, filed May 19, 1987.
E-3
<PAGE> 29
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-14275, filed July 1, 1987.
(3) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended January 1, 1989.
(4) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1989.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-2, File No. 33-40089, filed April 19, 1991.
(6) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form S-3, File No. 33-48998, filed June 24, 1991.
(7) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-3, File No. 33-48998, filed August 31,
1992.
(8) Incorporated by reference from Amendment No. 3 to the Company's
Registration Statement on Form S-3, File No. 33-48998, filed September 23,
1992.
(9) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended January 3, 1993.
(10) Incorporated by reference from the Company's Registration Statement on Form
S-3, File No. 33-66348 filed October 8, 1993.
(11) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended January 2, 1994.
(12) Incorporated by reference from the Company's Form 10-Q for the fiscal
quarter ended July 3, 1994.
(13) Incorporated by reference from the Company's Form 10-Q for the fiscal
quarter ended September 30, 1994.
(14) Incorporated by reference from the Company's Form 8-K dated as of November
14, 1994.
(15) Incorporated by reference from the Company's Amendment No. 1 to Form 10-K/A
for the fiscal year ended December 31, 1994, filed April 25, 1995.
(16) Incorporated by reference from the Company's Amendment No. 2 to Form
10-K/A for the fiscal year ended December 31, 1994, filed June 9, 1995
E-4
<PAGE> 30
QUADRAX CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Livingston & Haynes, P.C., Independent Accountants . . . . . . . . . F-2
Report of Ernst & Young, LLP, Independent Accountants . . . . . . . . . . . . . F-3
Consolidated Balance Sheets at December 31, 1994 and January 2, 1994 . . . . . F-4
Consolidated Statements of Operations for the fiscal years ended December 31,
1994, January 2, 1994 and January 3, 1993 . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for
fiscal years ended December 31, 1994, January 2, 1994 and January 3, 1993 . . F-7
Consolidated Statements of Cash Flows for the fiscal years ended December 31,
1994, January 2, 1994 and January 3, 1993 . . . . . . . . . . . . . . . . . . F-11
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F-14
</TABLE>
F-1
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Quadrax Corporation:
We have audited the accompanying consolidated balance sheet of Quadrax
Corporation (a development stage corporation) and subsidiaries at December 31,
1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. We have also examined the
consolidated statements of operations, shareholder's equity and cash flows for
the period March 6, 1986 to December 31, 1994, insofar as they relate to the
year ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quadrax
Corporation and subsidiaries at December 31, 1994, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1,
the Company is a development state company that since inception has expended
cash in excess of cash generated from operations. Additionally, the Company has
not achieved sufficient revenues to support future operations without additional
financing. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management plans in regard to these matters are
also described in Note 1. The 1994 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
LIVINGSTON & HAYNES, P.C.
Wellesley Hills, Massachusetts
April 6, 1995
F-2
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quadrax Corporation
We have audited the accompanying consolidated balance sheet of Quadrax
Corporation (a development stage company) as of January 2, 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended January 2, 1994, and for the period
March 6, 1986 to January 2, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quadrax Corporation at January 2, 1994 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
January 2, 1994, and for the period March 6, 1986 to January 2, 1994, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1,
the Company is a development stage company that since inception has expended
cash in excess of cash generated from operations. Additionally, the Company has
not achieved sufficient revenues to support future operations without additional
financing. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management plans in regard to these matters are
also described in Note 1. The 1993 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Providence, Rhode Island
February 25, 1994
F-3
<PAGE> 33
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1994 1994
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . $382,721 $668,781
Accounts receivable . . . . . . . . . . 224,180 139,140
Inventories:
Raw materials . . . . . . . . . . . . 1,059,213 120,067
Work in process . . . . . . . . . . . 212,573 191,255
------- -------
1,271,786 311,322
Investments, at market value . . . . . -- 11,550
Other current assets . . . . . . . . . 81,756 81,499
------ ------
TOTAL CURRENT ASSETS . . . . . . 1,960,443 1,212,292
--------- ---------
Property and equipment, at cost:
Machinery and equipment . . . . . . . . 3,875,955 3,448,965
Office equipment . . . . . . . . . . . 689,944 663,900
Leasehold improvements . . . . . . . . 1,035,513 1,000,187
--------- ---------
5,601,412 5,113,052
Less accumulated depreciation and
amortization . . . . . . . . . . . . 2,984,104 2,601,974
--------- ---------
NET PROPERTY AND EQUIPMENT . . . 2,617,308 2,511,078
--------- ---------
Receivables from officers and employees
(Note 11) . . . . . . . . . . . . . . . 54,728 162,070
Non-competition agreement (Note 11) . . . 641,250 --
Goodwill (Note 8) . . . . . . . . . . . . 709,142 --
Other assets . . . . . . . . . . . . . . 507,855 269,000
License agreement (Note 8) . . . . . . . 600,000 --
Patents, less amortization of $28,627 and
$21,145 . . . . . . . . . . . . . . . . 169,437 163,417
------- -------
TOTAL ASSETS . . . . . . . . . . $7,260,163 $4,317,857
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 34
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1994 1994
------------ -----------
<S> <C> <C>
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $1,166,178 $383,672
Accrued expenses (Note 3) . . . . . . . . . . . . . . . . 1,547,986 580,815
Note payable to related party (Note 11) . . . . . . . . . 135,000 --
Loss contract reserve . . . . . . . . . . . . . . . . . . -- 145,000
Notes payable (Note 13) . . . . . . . . . . . . . . . . . 310,000 --
---------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 3,159,164 1,109,487
Commitments and contingencies (Note 6) . . . . . . . . . . -- --
Note payable to related party (Note 11) . . . . . . . . . . 540,000 --
---------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . 3,699,164 1,109,487
--------- -----------
Stockholders' equity (Note 4):
Original convertible preferred stock, $.01 par value; 1,172
shares authorized, 688 and 1,045 issued at December 31, 1994
and January 2, 1994, respectively . . . . . . . . . . . . 7 10
Class A convertible preferred stock, $.01 par value;
10,000,000 shares authorized, 1,800,074 shares issued at
January 2, 1994 . . . . . . . . . . . . . . . . . . . . . -- 18,001
Common stock, $.000009 par value, 90,000,000 shares
authorized at December 31, 1994 and January 2, 1994 . . . 92 322
Additional paid-in capital . . . . . . . . . . . . . . . 48,356,319 36,146,539
Deficit accumulated during development stage . . . . . . (44,090,478) (32,524,341)
------------ -----------
4,265,940 3,640,531
Less:
Treasury stock, at cost:
Original convertible preferred stock, 172 shares; common
stock, 32,036 shares . . . . . . . . . . . . . . . . . (243,009) (243,009)
Unearned compensation and deferred expenses . . . . . . (123,932) (189,152)
Note receivable for option (Note 11) . . . . . . . . . (338,000) --
--------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 3,560,999 3,208,370
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . $7,260,163 $4,317,857
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 35
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED CUMULATIVE
------------------------------------------ MARCH 6, 1986
DECEMBER 31, JANUARY 2, JANUARY 3, TO DECEMBER 31,
1994 1994 1993 1994
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales--production contracts (Note 12) . . . . $73,990 $1,097,624 $145,688 $1,317,302
Sale of materials for evaluation and
testing . . . . . . . . . . . . . . . . . . 760,009 429,688 239,260 2,686,161
Research income . . . . . . . . . . . . . . . -- -- 431,846 1,322,339
Interest income . . . . . . . . . . . . . . . -- 24,098 31,486 1,391,362
Other income . . . . . . . . . . . . . . . . 26,420 3,738 1,444 68,408
------ ----- ----- ------
TOTAL REVENUE . . . . . . . . . . . . 860,419 1,555,148 849,724 6,785,572
Expenses:
Cost of goods sold (Note 12) . . . . . . . . 106,453 986,830 806,357 1,899,640
Research and development . . . . . . . . . . 1,690,871 2,143,514 1,676,805 13,425,818
Selling, general and administrative . . . . . 3,981,999 3,140,311 2,681,408 19,183,316
Depreciation and amortization . . . . . . . . 824,298 963,366 2,647,038 6,888,149
Interest . . . . . . . . . . . . . . . . . . 204,700 18,432 155,064 450,139
Loss on investment . . . . . . . . . . . . . -- 16,175 149,175 165,350
Non-recurring financing related expenses
(Note 9) . . . . . . . . . . . . . . . . . 5,568,733 -- -- 5,568,733
--------- --------- --------- ---------
TOTAL EXPENSES . . . . . . . . . . . . 12,377,054 7,268,628 8,115,847 47,581,145
---------- --------- --------- ----------
NET LOSS FROM CONTINUING OPERATIONS . (11,516,635) (5,713,480) (7,266,123) (40,795,573)
Discontinued operations:
Loss from discontinued operations . . . . . -- -- (66,928) (2,509,968)
Loss on disposal of laser segment . . . . . -- -- -- (579,848)
------------- ------------ ------------ ---------
NET LOSS . . . . . . . . . . . . . . . $(11,516,635) $(5,713,480) $(7,333,051) $(43,885,389)
============= ============ ============ =============
Per common share:
Net loss from continuing operations . . . . $(2.09) $(2.15)* $(5.13)*
Loss from discontinued operations . . . . . -- -- (.05)*
------- -------- ------
NET LOSS . . . . . . . . . . . . . . . $(2.09) $(2.15)* $(5.18)*
======= ======== ========
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . 5,506,121 2,697,081* 1,417,024*
========= ========== ==========
</TABLE>
* Adjusted for 1 for 10 reverse split, effective July 20, 1994.
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 36
QUADRAX CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
SHARES OUTSTANDING COMMON SHARES PREFERRED STOCK ADDITIONAL
------------------- ----------------------- ------------------ COMMON PAID IN
ORIGINAL SERIES A ISSUED OUTSTANDING ORIGINAL CLASS A STOCK CAPITAL
-------- -------- ------ ----------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock... 1,652 1,652 $148,197
Acquisitions and
retirement
of common stock....... (230) (230) $16 (52,199)
Net loss for the
period ............... (2)
-------- -------- ---------- ----------- -------- ------- ------- ----------
Balances, December 31,
1986 ................. 1,422 1,422 14 95,998
Stock split,
approximately
1,100-for-one......... 1,573,849 1,573,849 2 (2)
Issuance of preferred
stock................. 1,172 $12
Issuance of common
stock in
initial public
offering.............. 3,450,000 3,450,000 31 4,739,991
Shares acquired for
treasury, at cost..... (172) (231,527)
Net loss for the year..
-------- -------- ---------- ----------- -------- ------- ------- ----------
Balances, January 3,
1988.................. 1,000 5,025,271 4,793,744 12 47 4,835,987
Exercise of 1,000
options............... 1,000 1,000 360
Exercise of common
stock Class A warrants 3,445,500 3,445,500 27 8,658,894
Exercise of common
stock Class B warrants 200 200 800
Net loss for the year
-------- -------- ---------- ----------- -------- ------- ------- ----------
Balances, January 1,
1989................. 1,000 8,471,971 8,240,444 12 74 13,496,041
Exercise of 25,793
options.............. 25,793 25,793 13,910
Issuance of 1,000
shares of common stock 1,000 1,000 2,750
Issuance of 153,900
shares of common stock 153,900 153,900 1 423,224
Unearned compensation
associated with the
grant of 362,174 shares
of common stock options 746,305
Net loss for the year
-------- -------- ---------- ----------- -------- ------- ------- ----------
Balances, December
31, 1989.............. 1,000 8,652,664 8,421,137 12 75 14,682,230
Exercise of common
stock Class B warrants 1,554,693 1,554,693 15 4,436,339
Repurchase of common
stock Class A warrants (225)
Unearned compensation
associated with the
grant of 155,000
shares of common
stock options......... 161,250
Amortization of
unearned compensation.
Net loss for the year
-------- -------- ---------- ----------- -------- ------- ------- ----------
Balances, December 30, 1990 1,000 10,207,357 9,975,830 $12 $90 $19,279,594
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT TREASURY DEFERRED UNEARNED FROM
STAGE STOCK EXPENSE COMPENSATION OFFICERS TOTAL
------------- ---------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock... $148,213
Acquisitions and
retirement
of common stock....... (52,201)
Net loss for the
period ............... $(350,218) (350,218)
------------- ---------- ---------- ----------- -------- -----------
Balances, December 31,
1986 ................. (350,218) (254,206)
Stock split,
approximately
1,100-for-one.........
Issuance of preferred
stock................. 12
Issuance of common
stock in
initial public
offering.............. 4,740,022
Shares acquired for
treasury, at cost..... $(175,000) (175,000)
Net loss for the year.. (1,031,185) (1,031,185)
------------- ---------- ---------- ----------- -------- -----------
Balances, January 3,
1988.................. (1,381,403) (175,000) 3,279,643
Exercise of 1,000
options............... 360
Exercise of common
stock Class A warrants 8,658,921
Exercise of common
stock Class B warrants 800
Net loss for the year (1,873,248) (1,873,248)
------------- ---------- ---------- ----------- -------- -----------
Balances, January 1,
1989................. (3,254,651) (175,000) 10,066,476
Exercise of 25,793
options.............. 13,910
Issuance of 1,000
shares of common stock 2,750
Issuance of 153,900
shares of common stock 423,225
Unearned compensation
associated with the
grant of 362,174 shares
of common stock options $(746,305)
Net loss for the year (3,545,650) (3,545,650)
------------- ---------- ---------- ----------- -------- -----------
Balances, December
31, 1989.............. (6,800,301) (175,000) (746,305) 6,960,711
Exercise of common
stock Class B warrants 4,436,354
Repurchase of common
stock Class A warrants (225)
Unearned compensation
associated with the
grant of 155,000
shares of common
stock options......... (161,250)
Amortization of
unearned compensation. 253,054 253,054
Net loss for the year (7,146,542) (7,146,542)
------------- ---------- ---------- ----------- -------- -----------
Balances, December 30, 1990 $(13,946,843) $(175,000) $(654,501) $4,503,352
</TABLE>
F-7
<PAGE> 37
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
<TABLE>
<CAPTION>
SHARES OUTSTANDING COMMON SHARES PREFERRED STOCK
----------------------- ------------------------- --------------------- COMMON
ORIGINAL SERIES A ISSUED OUTSTANDING ORIGINAL CLASS A STOCK
-------- -------- ------ ----------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December
30, 1990 ............. 1,000 10,207,357 9,975,830 $12 $90
Sale of common
stock in conjunction
with rights offering.. 2,593,659 2,593,659 23
Common stock issued
for services to be
performed............. 444,900 444,900 4
Unearned
compensation
associated with
the grant of
1,707,500 shares
common stock
of options............
Forfeiture of
unearned
compensation in
the form of 215,000
common stock
options...............
Amortization of
unearned
compensation and
deferred expenses.....
Net loss for the
year..................
----- ------- ----- ------ ----- ------ -----
Balances, December
29, 1991.............. 1,000 13,245,916 13,014,389 12 117
Common stock issued
for services to be
performed............. 100,000 100,000 1
Common stock issued
for services performed 100,000 100,000 1
Issuance of Series
A preferred stock
upon conversion of
convertible
debt, net of
expenses ............. 7,970,989 $79,710
Exercise of 107,455
shares of common
stock options......... 107,455 107,455 1
Exercise of
lenders' warrants..... 93,286 93,286 1
Conversion of
preferred stock to
common stock
Original
preferred............ (51) 90,605 90,605 (1) 1
Series A
preferred............ (5,850,766) 5,850,766 5,850,766 (58,508) 55
Exercise of
warrants issued
for services
rendered ............. 172,727 172,727 1
Issuance of stock
options for
services performed....
Exercise of stock
options ............. 10,000 10,000
Forfeiture of
unearned
compensation in
the form of
30,000 common
stock options .......
Amortization of
unearned
compensation and
deferred
expenses .............
Dividend paid on
Class A
preferred stock....... 106,008 1,060
Net loss for the
year..................
----- ------- ----- ------ ----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
ADDITIONAL DURING THE RECEIVABLE
PAID IN DEVELOPMENT TREASURY DEFERRED UNEARNED FROM
CAPITAL STAGE STOCK EXPENSE COMPENSATION OFFICERS TOTAL
------- ----- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December
30, 1990 ............. $19,279,594 $(13,946,843) $(175,000) $(654,501) $4,503,352
Sale of common
stock in conjunction
with rights offering.. 2,684,194 2,684,217
Common stock issued
for services to be
performed............. 365,071 (351,325) 13,750
Unearned
compensation
associated with
the grant of
1,707,500 shares
common stock
of options............ 1,216,594 (1,216,594)
Forfeiture of
unearned
compensation in
the form of 215,000
common stock
options............... (400,000) 400,000
Amortization of
unearned
compensation and
deferred expenses..... 152,000 281,480 433,480
Net loss for the
year.................. (5,375,380) (5,375,380)
----------- ------------- ---------- --------- ----------- --------- ----------
Balances, December
29, 1991.............. 23,145,453 (19,322,223) (175,000) (199,325) (1,189,615) 2,259,419
Common stock issued
for services to be
performed............. 99,999 (100,000)
Common stock issued
for services performed 84,374 84,375
Issuance of Series
A preferred stock
upon conversion of
convertible
debt, net of
expenses ............. 3,973,552 4,053,262
Exercise of 107,455
shares of common
stock options......... 53,726 (53,727)
Exercise of
lenders' warrants..... 55,970 55,971
Conversion of
preferred stock to
common stock
Original
preferred............
Series A
preferred............ 58,453
Exercise of
warrants issued
for services
rendered ............. 94,999 95,000
Issuance of stock
options for
services performed.... 6,812 6,812
Exercise of stock
options ............. 1,000 1,000
Forfeiture of
unearned
compensation in
the form of
30,000 common
stock options ....... (21,375) 21,375
Amortization of
unearned
compensation and
deferred
expenses ............. 261,825 1,168,240 1,430,065
Dividend paid on
Class A
preferred stock....... 57,244 (58,306) (2)
Net loss for the
year.................. (7,333,051) (7,333,051)
----------- ------------- ---------- --------- ----------- --------- -----------
</TABLE>
F-8
<PAGE> 38
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
<TABLE>
<CAPTION>
SHARES
OUTSTANDING COMMON SHARES PREFERRED STOCK ADDITIONAL
---------------------- ---------------------- ------------------ COMMON PAID IN
ORIGINAL SERIES A ISSUED OUTSTANDING ORIGINAL CLASS A STOCK CAPITAL
-------- -------- ------ ----------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 3, 1993 . . . 949 2,226,231 19,770,755 19,539,228 $11 $22,262 $178 $27,610,207
Common stock issued
for services to
be performed . . . . 100,000 100,000 1 88,999
Common stock issued
for services
performed . . . . . 170,096 170,096 2 161,936
Issuance of common
stock in private
placement, net
of expenses . . . . . 8,195,269 8,195,269 74 4,740,305
Issuance of common
stock in overseas
offering pursuant to
Regulation S, net
of expenses . . . . . 2,058,459 2,058,459 19 1,170,235
Exercise of common
stock Class B warrants,
net of expenses . . . 3,891,488 3,891,488 35 1,768,202
Exercise of 270,000
shares of common
stock options . . . . 270,000 270,000 2 26,998
Conversion of
preferred stock
to common stock
Original
perferred . . . . . . (76) 136,837 136,837 (1) 1
Series A
preferred . . . . . . (603,032) 603,032 603,032 (6,030) 5 6,025
Exercise of
warrants
issued for
services
rendered . . . . . . 552,273 552,273 5 303,745
Amortization of
unearned
compensation and
deferred expenses . .
Dividend paid on
Class A preferred
stock . . . . . . . . 176,875 1,769 95,512
Unearned compensation
associated wtih the
grant of 1,500,000
shares of common
stock options . . . . 174,375
Interest receivable
on notes receivable-
officers . . . . . .
Shares acquired for
treasury upon
settlement
of officer's
indebtedness . . . . (88,828)
Net loss for the
year . . . . . . . . .
---- --------- ---------- ---------- ---- ------- ----- -----------
Balances, January
2, 1994 . . . . . . . 873 1,800,074 35,748,209 35,427,854 $10 $18,001 $322 $36,146,539
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT TREASURY DEFERRED UNEARNED FROM
STAGE STOCK EXPENSE COMPENSATION OFFICERS TOTAL
----- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 3, 1993 . . . $(26,713,580) $(175,000) $(37,500) $(53,727) $652,851
Common stock issued
for services to
be performed . . . . (89,000)
Common stock issued
for services
performed . . . . . 161,938
Issuance of common
stock in private
placement, net
of expenses . . . . . 4,740,379
Issuance of common
stock in overseas
offering pursuant to
Regulation S, net
of expenses . . . . . 1,170,254
Exercise of common
stock Class B warrants,
net of expenses . . . 1,768,237
Exercise of 270,000
shares of common
stock options . . . . (10,000) 17,000
Conversion of
preferred stock
to common stock
Original
perferred . . . . . .
Series A
preferred . . . . . .
Exercise of
warrants
issued for
services
rendered . . . . . . 303,750
Amortization of
unearned
compensation and
deferred expenses . . 104,250 $7,473 111,723
Dividend paid on
Class A preferred
stock . . . . . . . . (97,281)
Unearned compensation
associated wtih the
grant of 1,500,000
shares of common
stock options . . . . (174,375)
Interest receivable
on notes receivable-
officers . . . . . . (4,282) (4,282)
Shares acquired for
treasury upon
settlement
of officer's
indebtedness . . . . (68,009) 68,009
Net loss for the
year . . . . . . . . . (5,713,480) (5,713,480)
------------- --------- -------- --------- ------- -----------
Balances, January
2, 1994 . . . . . . . $(32,524,341) $(243,009) $(22,250) $(166,902) $3,208,370
</TABLE>
F-9
<PAGE> 39
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
<TABLE>
<CAPTION>
SHARES
OUTSTANDING COMMON SHARES PREFERRED STOCK ADDITIONAL
------------------ ------------------------- -------------------- COMMON PAID IN
ORIGINAL SERIES A ISSUED OUTSTANDING ORIGINAL CLASS A STOCK CAPITAL
-------- -------- ------ ----------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reflect 1-for-10
reverse stock
split............. (31,885,068) (31,885,068) $(287) $287
Common stock issued
for services
performed......... 556,199 556,199 5 2,218,608
Issuance of common
stock for
financing services
(Note 9) ......... 625,000 625,000 6 1,528,607
Issuance of common
stock in private
placement to
Conagher Co., Inc.
net of monies not
paid as of December
31, 1994, of
$1,606,878........ 3,750,000 3,750,000 34 5,893,088
Exercise of 240,000
shares of common
stock options..... 240,000 240,000 2 337,998
Conversion of
preferred stock
to common stock
Original preferred (357) 63,725 63,725 $(3) 3
Series A preferred (1,800,074) 402,351 402,351 $(18,001) 4 67,499
Conversion of
previously
granted compensatory
options to market
value options...... (174,375)
Amortization of
unearned
compensation and
deferred expenses..
Warrants Exercised 5,835
Issuance of stock for
commissions (Notes 8
& 9).............. 250,000 250,000 2 499,998
Issuance of stock for
acquisitions of
assets............ 450,000 450,000 4 1,699,996
Interest paid on
Regulation D
convertible
debentures........ 48,200 48,200 0 132,236
Net loss for the year
--- ----------- ---------- --------- -- -- --- ----------
Balances, December 31,
1994.............. 516 10,249,066 9,928,261 $7 $0 $92 $48,356,319
=== =========== ========== ========= == == === ===========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT TREASURY DEFERRED UNEARNED FROM
STAGE STOCK EXPENSE COMPENSATION OFFICERS TOTAL
----- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Reflect 1-for-10
reverse stock
split.............
Common stock issued
for services
performed......... $(171,599) $2,047,014
Issuance of common
stock for
financing services
(Note 9) ......... 1,528,613
Issuance of common
stock in private
placement to
Conagher Co., Inc.
net of monies not
paid as of December
31, 1994, of
$1,606,878........ 5,893,122
Exercise of 240,000
shares of common
stock options..... (338,000)
Conversion of
preferred stock
to common stock
Original preferred
Series A preferred $(49,502)
Conversion of
previously
granted compensatory
options to market
value options...... $166,902 (7,473)
Amortization of
unearned
compensation and
deferred expenses.. $69,917 917
Warrants Exercised 5,835
Issuance of stock for
commissions (Notes 8
& 9).............. 500,000
Issuance of stock for
acquisitions of
assets............ 1,700,000
Interest paid on
Regulation D
convertible
debentures........ 132,236
Net loss for the year (11,516,635) (11,516,635)
------------- ---------- ---------- -------- ---------- ------------
Balances, December 31,
1994.............. $(44,090,478) $(243,009) $(123,932) $(338,000) $3,560,999
============= ========== ========== ======== ========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-10
<PAGE> 40
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED CUMULATIVE
------------------------------------------- MARCH 6, 1986
DECEMBER 31, JANUARY 2, JANUARY 3, TO DECEMBER 31,
1994 1994 1993 1994
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(11,516,635) $(5,713,480) $(7,333,051) $(43,885,389)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of fixed
assets................................. 798,106 721,977 571,804 3,696,462
Amortization of intangibles.............. 7,482 7,266 263,960 676,276
Amortization of unearned compensation.... (7,473) 7,473 1,168,240 1,702,774
Amortization of deferred expense......... 33,750 104,250 261,825 551,825
Amortization of deferred financing cost.. 69,917 122,400 381,209 573,526
Common stock issued for expenses......... 2,047,014 161,938 91,187 2,313,889
Common stock issued for financing
related expenses (Note 9).............. 2,028,607 -- -- 2,028,607
Common stock issued for interest......... 132,236 -- -- 132,236
Loss on retirement of fixed assets....... -- -- -- 74,089
Loss on disposal of laser segment........ -- -- -- 579,848
Loss on investment....................... 11,550 16,175 149,175 176,900
Cancellation of indebtedness (Note 11)... 107,342 107,342 71,561 286,245
Provision for loss contract (Note 12).... (145,000) (355,000) 500,000 --
Effect on cash flows of changes in
assets and liabilities, net of effects
of businesses acquired:
Accounts receivable and other.......... 94,049 49,960 (118,396) (270,364)
Inventories............................ (330,464) 140,504 (383,021) (935,037)
Prepaid expenses and other............. (257) 303,652 (323,730) (37,344)
Receivables from officers and
employees............................ -- 19,418 (90,346) 39,657
Accounts payable....................... 382,506 142,879 (296,720) 1,088,367
Accrued expenses....................... 967,171 (226,531) 477,457 1,502,986
------- --------- ------- ---------
Net cash used in operating activities...... $(5,320,099) $(4,389,777) $(4,608,846) $(29,704,447)
============ ============ ============ =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-11
<PAGE> 41
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED CUMULATIVE
------------------------------------------ MARCH 6, 1986
DECEMBER 31, JANUARY 2, JANUARY 3, TO DECEMBER 31,
1994 1994 1993 1994
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Notes receivable--officers and
employees........................... $-- $-- $-- $(90,783)
Investments........................... -- 134,775 13,325 148,100
Capital expenditures.................. (388,396) (617,315) (1,164,436) (6,410,936)
Other intangible assets............... (111,357) (18,811) (21,397) (874,492)
Payments for businesses acquired, net
of cash acquired.................... (359,172) -- -- (400,029)
--------- -- -- ---------
Net cash used in investing activities. (858,925) (501,351) (1,172,508) (7,628,140)
--------- --------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of common
stock warrant....................... -- 303,750 150,971 13,550,571
Proceeds from exercise of common
stock options....................... -- 17,000 1,000 32,270
Net proceeds from rights offering..... -- -- -- 2,684,217
Sales of common stock................. -- -- -- 98,762
Issuance of preferred stock........... -- -- -- 12
Net proceeds from initial public
offering............................ -- -- -- 4,740,022
Net proceeds from sale of stock and
warrants............................ 4,932,964 4,818,870 -- 9,811,834
Issuance of debt, net of costs........ 1,491,000 -- 7,034,653 8,521,653
Repayment of debt..................... (531,000) (629,409) (369,622) (1,549,031)
Shares acquired for treasury stock.... -- -- -- (175,000)
Dividend payment on preferred stock
(Class A)........................... -- -- (2) (2)
--------- --------- ---------- ----------
Net cash provided by financing
activities.......................... 5,892,964 4,510,211 6,817,000 37,715,308
--------- --------- --------- ----------
Net increase (decrease) in cash and
cash equivalents.................... (286,060) (380,917) 1,035,646 382,721
Cash and cash equivalents at
beginning of period................. 668,781 1,049,698 14,052 --
------- --------- ------ --------
Cash and cash equivalents at end of
period.............................. $382,721 $668,781 $1,049,698 $382,721
======== ======== ========== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-12
<PAGE> 42
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF SIGNIFICANT NONCASH TRANSACTIONS:
1992:
The Company issued notes for costs associated with Class A convertible
preferred stock of $554,000.
Common stock was issued for consulting services totaling $91,187.
The Company converted $4,080,000 of Notes to Class A convertible
preferred stock.
Warrants with a value of $55,821 were issued to settle a dispute.
1993:
Common stock was issued for consulting services totaling $161,938.
Common stock totaling $369,764 was issued for commission earned in
connection with a private offering of common stock and warrants.
The Company accepted the tender of notes payable totaling $2,860,000
into units in the Company's private placement of common stock and warrants.
1994:
Common stock was issued for consulting services, commissions and
expenses totaling $4,075,621.
Common stock was issued to ALS for debt reduction and accrued interest
totaling $958,094.
The Company agreed to issue common stock valued at $600,000 to acquire
the right to use the Wimbledon trademark license in the United States.
Common stock was issued to acquire assets which were valued at
$1,100,000.
The Company entered into a non-competition agreement with its founder
and former chairman and chief executive officer for $675,000.
Company stock was issued to pay interest on Regulation D debentures in
the amount of $132,236. Interest paid was $14,220, $166,262 and $49,013 for
1994, 1993 and 1992, respectively.
See accompanying notes to the consolidated financial statements.
F-13
<PAGE> 43
QUADRAX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. DEVELOPMENT STAGE COMPANY
The consolidated financial statements include the accounts of Quadrax
Corporation (the Company) and its wholly-owned subsidiaries. All intercompany
transactions have been eliminated.
The Company was incorporated in the State of Delaware on March 6, 1986,
for the purpose of converting and selling composite materials.
The consolidated financial statements have been prepared on a
going-concern basis. The Company is a development stage company that from its
inception, through December 31, 1994, has expended cash in excess of cash
generated from operations. Additionally, the Company has not achieved sufficient
revenues to support future operations. Management believes that to continue as a
going concern the Company will require additional financing and anticipates
adequate additional financing will be available in fiscal 1995. The 1994
consolidated financial statements do not include any adjustments related to the
uncertainty of future financing. As of April 1995, the Company has raised
approximately $2,200,000 from the sale of its common stock in exempt
transactions with private parties and believes that sufficient additional funds
will be available to meet its cash needs in 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company converted its fiscal year, effective December 31, 1994, from
a 52-53 week period ending on the Sunday closest to December 31 to a calendar
year ending December 31. The fiscal year ended January 3, 1993 was a 53 week
year. All references to years in these notes to consolidated financial
statements represent fiscal years unless otherwise noted.
Revenue Recognition
Revenues received from research contracts, grants and uncompleted
contracts are recognized to reflect the stage of completion of the project. The
Company does not use the cost of completion method of accounting. Estimated
losses are accrued at the time that it is determined a loss will be incurred in
completing the contract. Sales of materials for evaluation and testing to
third party customers are recognized at the time of shipment from the Company's
manufacturing facilities.
Cash Equivalents
The Company considers all short term investments, consisting of money
market funds and certificates of deposits, with original maturities of three
months or less, to be cash equivalents for purposes of the statements of cash
flows.
Accounts Receivable
The Company performs periodic credit evaluations and generally does not
require collateral.
F-14
<PAGE> 44
Inventories
Inventories are valued at the lower of first-in, first-out cost or
market. Market for raw materials is determined based on replacement cost; market
for work-in-process is determined based on net realizable value.
Property and Equipment
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets, ranging from three to five years. Amortization of
leasehold improvements is provided on the straight-line method over the
remaining term of the lease.
Patents
The Company capitalizes certain patent costs related to patent
applications. The costs of these assets are amortized using the straight-line
method over the lesser of the useful life of the asset or its statutory life.
Costs relating to patent applications are written off to expense at the time
such costs are deemed to have no continuing value. During 1992, the Company
accelerated and fully amortized certain patents and technology totaling
$197,000.
Goodwill
The Company has classified as goodwill the cost in excess of the fair
value of the net assets of companies acquired in purchase transactions. Goodwill
is amortized on a straight-line method over 15 years. The carrying value of
goodwill is evaluated in relation to the operating performance of the underlying
business. Adjustments are made if the sum of expected future net undiscounted
cash flows is less than book value.
Research and Development
Research and development costs are expensed as incurred. These expenses
include costs related to product development, engineering and other wages,
overhead and materials used. All costs associated with revenues from sale of
materials for evaluation and testing and research income have been classified as
research and development.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes." The Company adopted the
provisions of the new standard in its financial statements for the year ended
January 3, 1993. Prior year financial statements were not restated and there was
no cumulative effect of adopting the new standard.
Under Statement 109, the liability method is used in accounting for
income taxes. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
as well as net operating loss carryforwards and are measured using the enacted
tax rates and laws that will be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization. Prior to the adoption of Statement
109, income tax expense was determined using the deferred method.
Net Loss Per Common Share
Net loss per common share is based on net loss, after the allowance for
dividends on preferred stock outstanding, divided by the weighted average number
of common shares outstanding during the period. No effect has been given to
outstanding stock options and warrants and to the conversion of preferred stock
F-15
<PAGE> 45
since the effect would be antidilutive. Net loss per common share has been
retroactively adjusted for 1-for-10 reverse split effective July 20, 1994.
Employee Benefit Plan
Effective February 1, 1993, the Company implemented a deferred
compensation plan under Section 401(k) of the Internal Revenue Code (the Plan).
Under the Plan, eligible employees are permitted to contribute up to 15% of
their gross salary, subject to certain limitations imposed by law. The Company
matches one quarter of the first 6% of employee contributions up to a maximum of
$500 per employee. Company contributions to the Plan were approximately $7,000
and $13,000 for the years ended December 31, 1994 and January 2, 1994,
respectively.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1994 1994
------------ ----------
<S> <C> <C>
Payroll................................... $239,451 $139,774
Professional fees......................... 555,022 123,986
Insurance................................. 46,531 40,414
Research grant............................ -0- 20,000
Royalties and license fees................ 212,000 162,000
Expenses and professional fees related to
financing arrangements (Note 9)......... 400,000 -0-
Other..................................... 94,982 94,641
------ ------
$1,547,986 $580,815
========== ========
</TABLE>
4. STOCKHOLDERS' EQUITY
On July 20, 1994, the Company amended its Certificate of Incorporation
to provide for a 1-for-10 reverse split, effective July 20, 1994. All number of
shares of common stock and related per share amounts in the accompanying
consolidated financial statements (except for the consolidated statements of
changes in stockholders' equity (deficiency)), and notes thereto have been
adjusted to reflect this reverse split. The consolidated statements of changes
in stockholders' equity (deficiency) have been adjusted to reflect this reverse
split beginning with fiscal year 1994.
Original Convertible Preferred Stock
On April 24, 1987, the stockholders of the Company authorized the
issuance of 1,172 shares of convertible preferred stock, $.01 par value per
share. The terms of the convertible preferred stock permit the holders to elect
three-fifths of the Company's Board of Directors until December 31, 1996. Each
share of convertible preferred stock is convertible into 178.5 shares of common
stock at the option of the holder. Holders of convertible preferred stock have
no other voting rights and are not entitled to receive any dividends, but have a
liquidation preference of $.01 per share upon dissolution.
Effective December 31, 1994, 196.58 shares of convertible preferred
stock were converted into 35,090 shares of common stock by the five holders
thereof, who were issued an additional 40,000 shares of restricted common stock
in connection with this transaction. In addition, on March 20, 1995, an
additional share of convertible preferred stock was converted into 178 shares of
common stock. All of the remaining convertible preferred stock has been conveyed
to a trust to be voted at the direction of the common stockholders.
F-16
<PAGE> 46
Class A Convertible Preferred Stock
During the first quarter of 1992, the Company initiated a private
placement of 25,000 units of its 10% senior convertible notes. The notes were
convertible into a new issue of the Company's Class A convertible preferred
stock on the date that the new issuance was approved by the stockholders. The
notes were convertible into preferred stock at a rate of $5.50 per share; the
preferred stock is convertible into common stock on a ten shares for one share
basis. On July 20, 1992, the Company issued 560,005 shares of Class A preferred
stock (the First Series) upon conversion of $3,080,000 of the Company's senior
convertible notes. On September 8, 1992, the Company issued an additional
237,093 shares of the First Series in connection with a $1.0 million private
placement.
As of September 15, 1994, all of the Class A convertible preferred
stock, 1,800,074 shares including all accrued stock dividends due and payable,
was converted into 402,351 new shares of the Company's common stock. The holders
of the Class A convertible preferred stock also received 47,251 Class C
warrants.
Initial Public Offering and Common Stock Warrants
On July 7, 1987, the Company consummated an initial public offering
(IPO) of 1,150,000 units, (including the exercise of the underwriter's
over-allotment option for 150,000 units in September 1987). Each unit consisted
of 0.30 shares of the Company's common stock and 0.30 Redeemable Class A Common
Stock Purchase Warrants (the Class A warrants). Net proceeds from the IPO
amounted to approximately $4,740,000, some of which were used to repay
short-term debt and purchase treasury stock.
On April 22, 1988, 344,455 Class A warrants were exercised at a per
warrant exercise price of $26.25 resulting in the issuance of 344,455 shares of
common stock and 344,455 Class B warrants. The proceeds from the exercise of the
Class A warrants amounted to approximately $8,660,000, net of related costs of
approximately $385,000. Each Class B warrant initially entitled the holder to
purchase one share of common stock at an exercise price of $40.00 per share.
During 1988, 20 Class B warrants were exercised. During 1990, 110 Class B
warrants were exercised. Pursuant to a warrant reduction offer in 1990, a total
of 155,359 Class B warrants were exercised at the reduced price of $30.00 per
share of common stock. Proceeds from the exercise of the Class B warrants
amounted to approximately $4,436,000, net of related costs of approximately
$230,000. The remaining 1,890,607 Class B warrants expired March 31, 1993.
The Company issued warrants to purchase 20,000 shares of the Company's
common stock to the licensor of the Composite Materials Interlacer (CMI). During
1989, warrants as to 103 shares were exercised at $16.70 per share. The
remaining warrants expired in July 1992.
As consideration for short-term financing prior to the IPO, the Company
issued warrants to purchase 14,000 shares of the Company's common stock at an
exercise price of $7.00 per share. The warrants provided certain anti-dilutive
rights which reduced the exercise price to $6.00 per share and increased the
number of shares of common stock purchasable upon exercise of each warrant by a
multiple of 1.166. In October 1992, 8,000 warrants were exercised resulting in
the issuance of 9,329 shares of common stock. Proceeds from the exercise
amounted to approximately $56,000. The remaining warrants expired in October
1992.
Subsequent Equity Offerings and Common Stock Warrants
In August 1991, the Company completed a rights offering to its
shareholders in which 862,226 units were sold at $3.30 per unit. Each unit
consisted of 0.30 shares of common stock and 0.10 Class C warrant to purchase
shares at $14.60 per share. Net proceeds from the Rights Offering amounted to
approximately $2,684,000. The 86,223 Class C warrants issued in conjunction with
the rights offering, with adjustment for dilution, enable the holders to
purchase, in the aggregate, 158,338 shares of common stock at an exercise price
of $7.95 per share. The Class C warrants expire in July 2001.
F-17
<PAGE> 47
During 1991 and the first quarter of 1992, the Company raised interim
capital by engaging in three private offerings for a total of $1,042,000. In
conjunction with the 1991 offering, the Company issued warrants to purchase a
total of 45,000 shares of common stock at exercise prices ranging from $13.30 to
$14.60 per share. The warrants expire in July 2001. These warrants contain
anti-dilution provisions, which adjust the exercise price and the number of
shares of common stock issuable upon exercise. With adjustment for dilution,
holders may purchase, in the aggregate, 56,999 shares of common stock at the per
share exercise price of $10.50 per share. In addition, the holders of these
warrants were entitled to convert these warrants to 60,799 Class C warrants at
an exercise price of $11.20 per share which has happened for a total
consideration to the Company of $680,950.
In connection with the Company's offering of senior convertible notes in
1992, D. H. Blair & Co., Inc. (Blair), the Company's placement agent for the
initial public offering in 1987, asserted a right of first refusal to act as
placement agent for the offering of senior convertible notes. To settle this
dispute, and in exchange for a general release from Blair of any other claims it
may have against the Company, the Company issued a "Unit Purchase Option" to
Blair in December 1992. The Unit Purchase Option entitles Blair to purchase
6,466 units for $16.50 per unit. Each unit consists of 3 shares of common stock
and an A warrant entitling the holder to purchase a unit, which consists of 3
shares of common stock and a B warrant. The B warrant entitles the holder to
purchase 3 shares of common stock. The A warrant is exercisable at $17.00 per
share, and the B warrant is exercisable at $23.70 per share. The Company granted
to Blair, or its assignee, certain "demand" and "piggyback" registration rights
regarding the securities comprising the Unit Purchase Option. The Unit Purchase
Option, the A Warrants and the B Warrants expire on September 1, 1997.
The Company valued the Unit Purchase Option at $167,463. It accounted
for the option as follows:
<TABLE>
<S> <C>
Expenses related to the issuance of Series A Preferred
Stock, i.e., costs of raising capital in the amount of.... $111,642
Amortization of deferred expense in fiscal year 1992........ 55,821
------
Total............................................. $167,463
========
</TABLE>
In conjunction with offerings in December 1991, and the first quarter of
1992, the Company issued 25,200 Class C warrants. With adjustment for dilution,
these Class C warrants entitle holders to purchase 46,277 shares of common stock
at an exercise price of $1.83 per share.
During the fourth quarter of 1992, the Company engaged in a $3,225,000
private offering of 10% short-term notes and Class D warrants (including
$250,000 in notes paid as commission to the placement agent). In connection with
the notes, the Company incurred debt issuance costs of $306,000 of which
$122,400 were deferred at January 3, 1993, and recognized as interest expense in
1993.
In May 1993, the Company closed a $4,890,000 private placement of common
stock and warrants for the purchase of common stock. Subscribers and the
placement agent received a total of 819,527 shares of common stock, Class E and
Class F warrants. The Class E warrants have expired. The Class F warrants are
exercisable at $15.00 per share and expire on March 31, 1997. Of the $4,890,000
in proceeds, $2,860,000 resulted from the conversion of 10% notes issued in
1992. The Company paid $365,000 in cash to those holders of the 10% notes who
chose not to convert. In connection with this offering, the Company issued
67,230 shares to an agent for placement services. Subsequent to this private
placement, the Company issued an additional 30,000 Class E and F warrants.
In September 1993, the Company closed a $1,338,000 offering of common
stock to a selected group of non-U.S. persons within the meaning of Regulation
S. A total of 205,846 shares were issued to subscribers.
In the fourth quarter of 1993, the Company issued 389,149 shares of its
common stock for proceeds of approximately $1,946,000 in connection with a Class
E warrant reduction offer. During the period of the
F-18
<PAGE> 48
offering, the Company temporarily reduced the exercise price of its Class E
warrants to $5.00 per share.
During the fourth quarter of 1994, in conjunction with the Conagher &
Co., Inc., financing, (Notes 9 and 10), the Company issued warrants to purchase
270,000 shares of its common stock to Manbey Partners. These warrants are
exercisable at $3.00 per share commencing December 1, 1995, and expire on
November 30, 1999.
A summary of shares issuable upon exercise of warrants at December 31,
1994, is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
CLASS SHARES PRICE DATE
----------------------------------- --------- ------- --------------
<S> <C> <C> <C>
Class C (traded OTC as QDRXZ*)..... 484,716 $1.83 July 2001
Class D............................ 322,500 5.50 October 1998
Class F............................ 849,527 15.00 December 1995
D.H. Blair Unit Purchase Option ... 19,398 5.50 September 1997
D.H. Blair "A" Warrants............ 19,398 17.00 September 1997
D.H. Blair "B" Warrants............ 19,398 23.70 September 1997
Emanuel Co. Warrants............... 23,000 5.50 March 1997
The Wall Street Group.............. 13,913 7.19 May 1998
Manbey Partners.................... 270,000 3.00 November 1999
---------
Total................... 2,021,850
=========
</TABLE>
- --------------
* There is a total of 263,949 warrants outstanding with each warrant
entitling the holder to purchase 1.8364 shares of common stock
On January 20, 1994, the Company entered into an agreement with a
consultant pursuant to which the consultant agreed to provide financial
communications and merger acquisition services. Pursuant to this agreement, the
Company agreed to issue the consultant 390,000 shares of common stock over a two
year period. As of December 31, 1994, the Company had issued 310,555 shares of
common stock to the consultant.
Supplemental Loss Per Share
Supplemental loss per share was $2.00 for fiscal 1993 based upon
2,866,484 weighted average shares of common stock outstanding. Supplemental
loss per share gives effect to actual conversions of convertible securities and
repayment of debt as if they had occurred at the beginning of fiscal 1993.
5. STOCK OPTION PLANS
The Company has three stock option plans; a 1989 Plan, a 1993 Plan and a
1994 Plan. The 1989 Plan has been terminated except with respect to options to
purchase 139,106 shares of common stock which are outstanding.
The 1993 Plan provides for the grant of options to purchase stock in the
form of incentive stock options, non-qualified stock options and stock
appreciation rights. As of December 31, 1994, the stockholders of the Company
had authorized the issuance of 615,710 options pursuant to the 1993 Plan.
During 1994, the Company adopted a Non-Qualified Stock Option Plan which
permits the issuance of up to 500,000 shares of the Company's common stock to
key executives. Under the terms of the plan, options granted are non-qualified
stock options and are issued at prices as determined by the Company's Board of
Directors. Options granted under the Plan are exercisable as determined by the
Board of Directors of the Company. As of December 31, 1994, the Board of
Directors had authorized the issuance of 438,000 options pursuant to the 1994
Plan.
F-19
<PAGE> 49
Also during 1994, the Company terminated the 1987 Incentive Stock Plan.
Stock Option activity for the three prior years is summarized as
follows:
<TABLE>
<CAPTION>
PRICE PER
OPTIONS SHARE
------- -------------
<S> <C> <C>
Outstanding at December 29, 1991..... 259,057 $1.00 to $41.90
Granted............................ 260,460 $8.40
Exercised.......................... (11,746) $1.00 to $ 5.00
Canceled and forfeited (46,962) $1.00 to $41.90
------- ---------------
Outstanding at January 3, 1993....... 460,809 $1.00 to $40.00
Granted............................ 273,025 $5.40 to $ 8.80
Exercised.......................... (27,000) $ 1.00
Canceled and forfeited............. (25,895) $8.40 to $28.80
------- ---------------
Outstanding at January 2, 1994....... 680,939 $1.00 to $40.00
Granted............................ 1,371,197 $2.00 to $ 3.13
Exercised.......................... (240,000) $1.00 to $ 1.56
Canceled and forfeited............. (539,433) $1.00 to $40.00
------- ---------------
Outstanding at December 31, 1994..... 1,272,703 $1.00 to $ 8.00
========= ===============
</TABLE>
At December 31, 1994, options to purchase 932,149 shares were
exercisable under all option plans.
6. COMMITMENTS
At December 31, 1994, the Company has outstanding employment agreements
with four senior officers and two other personnel. One agreement for one senior
officer expires on December 31, 1996 and provides for a base salary of $150,000
with severance pay in the amount of $37,500. The other three agreements for
senior officers expire on September 30, 1996 and provide for base compensation
ranging from $90,000 to $119,000 and severance pay equal to one-half of base
compensations. The Company recorded approximately $39,000 in fiscal 1994 for
compensation expense for 200,000 shares of common stock issued to Mr. Palermo
pursuant to his employment contract. $39,000 represents the amount of the total
compensation expense ($462,500), amortized over five years, which is
attributable to approximately five months (from August 9, 1994 to December 31,
1994). $462,500 represents the market value of 200,000 shares of the Company's
common stock on the day of the option grants
The Company has a commitment, under the agreement to acquire the
outstanding stock of McManis Sports Associates (Note 8) to issue additional
shares of common stock if, at the date of registration of the 250,000 shares
issued, the average market value for the previous thirty days is less than $4.40
per share.
Rent expense amounted to approximately $133,000, $222,000, and $302,000
in fiscal 1994, 1993, and 1992, respectively.
Minimum rental payments under operating leases in future years are as
follows:
<TABLE>
<S> <C>
1995.......... $208,716
1996.......... $164,241
1997.......... $157,885
1998.......... $145,325
1999.......... $132,009
Thereafter.... $411,362
</TABLE>
F-20
<PAGE> 50
7. INCOME TAXES
Due to net losses incurred by the Company in each year since its
inception, no provision for income taxes has been recorded. The Company has net
operating loss carryforwards in the amount of approximately $37,540,000 and
$27,773,000, and research and development tax credit carryforwards in the amount
of $325,000 and $265,000 at December 31, 1994 and January 2, 1994, respectively.
These carryforwards expire at various times from 2002 to 2009. The utilization
of these carryforwards may be limited by Internal Revenue Code Section 382.
Under Section 382, losses and other carryforwards are limited whenever a Company
experiences a greater than 50% change in ownership. The amount, if any, of such
limitation has not been determined at this time.
The relationship of tax expense to loss before income taxes differs from
the U.S. statutory rate primarily because of the net operating loss
carryforward. A valuation allowance has been recognized to offset net deferred
tax assets which consist primarily of the tax benefits associated with the net
operating losses, since the realization of tax benefits of net operating loss
carryforward is not assured. The valuation allowance has been increased by
$4,109,000 and $3,427,000 in 1994 and 1993, respectively, to recognize the
increases in deferred tax benefits that may not be fully realized prior to
expiration.
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 2,
1994 1994
------------ ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss............. $15,677,000 $11,598,000
Other.......................... 1,700,000 1,640,000
--------- ---------
17,377,000 13,238,000
Less valuation allowance.... (17,192,000) (13,083,000)
------------ ------------
Total deferred tax assets........ 185,000 155,000
Deferred tax liabilities:
Other.......................... (185,000) (155,000)
--------- ---------
Total deferred tax liabilities... (185,000) (155,000)
--------- ---------
Net deferred taxes............... $-0- $-0-
==== ====
</TABLE>
8. ACQUISITIONS
In November, 1994, the Company acquired all of the outstanding stock of
McManis Sports Associates, a manufacturer of and marketing representative for
golf equipment, for $1,465,600 in common stock of the Company and $109,500 in
cash. Included therein, the Company issued to Ablewood European Services,
Limited, 150,000 shares of common stock (see Notes 9 and 10) as compensation for
acting as an agent in bringing this opportunity to the Company. The Company
issued 250,000 shares of common stock to the former shareholders of McManis (the
"McManis Shareholders"). In addition, the Company agreed to issue additional
shares to the McManis Shareholders if on the date that the supplemental
registration goes effective, the average market price for the Company's common
stock for the preceding 30 trading days is less than $4.40 per share. In such
event, the Company will issue to each McManis Shareholder additional shares
sufficient to restore the value of such McManis Shareholder's holdings in the
Company to an amount equal to the number of shares issued to such McManis
Shareholder at closing, multiplied by 4.40.
The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the assets acquired
based on their estimated fair values. This treatment results in approximately
$709,100 of cost in excess of assets acquired based on their estimated fair
values as of December 31, 1994. This excess of $709,100, net of the common stock
issued to Ablewood European Services, Limited will be amortized on a
straight-line basis over 15 years. McManis Sports Associates is a development
stage business and did not have significant operations in fiscal 1994.
Therefore, no results of operations have been included in the Company's
financials for the year ended December 31, 1994.
F-21
<PAGE> 51
A summary of the assets acquired from McManis Sports Associates at December 31,
1994 is as follows:
<TABLE>
<S> <C>
Current assets................................. $149,100
Other assets, primarily molds and equipment.... 416,900
Intangibles, primarily goodwill................ 709,100
-------
$1,275,100
==========
</TABLE>
In November, 1994, the Company acquired the exclusive right to utilize
the Wimbledon trademark in the United States for tennis rackets, and in North
America for certain apparel for $600,000 by the issuance of 200,000 shares of
its common stock. This asset is being recorded on the books of the Company as an
intangible asset.
Also in November, 1994, the Company acquired certain assets and
liabilities of Time Sports for approximately $360,000 in cash and notes payable
to facilitate transfer of the Wimbledon license. The Company also issued to
Ablewood European Services, Limited, 100,000 shares of common stock (see Notes 9
and 10), as compensation for acting as an agent in bringing this opportunity to
the Company. This acquisition is being accounted for as a purchase of assets.
Accordingly, the purchase price was allocated to the assets acquired based on
their estimated net realizable values.
The Time Sports assets acquired at December 31, 1994 are as follows:
<TABLE>
<S> <C>
Current assets..................... $660,000
Equipmen........................... 100,000
Liabilities assumed................ (400,000)
---------
Net value of assets................ $360,000
========
</TABLE>
The 250,000 shares of stock issued to Ablewood European Services,
Limited as compensation for acting as the Company's agent for the Company
acquiring McManis Sports Associates, certain assets and liabilities of Time
Sports and the trademark rights has been expensed in fiscal 1994 as a financing
cost (Notes 9 and 10).
9. FINANCING RELATED EXPENSES
Financing related costs during fiscal 1994 were incurred in connection
with two transactions that the Company entered into during the fiscal year which
were subsequently terminated. The first financing transaction was a proposed
acquisition of the Company by Applied Laser Systems (ALS). The cost of the
termination of this agreement was approximately $1,482,000 and consisted of
170,000 shares of common stock issued to the Company's investor relations
consultant and other professional costs. The second financing transaction was
the Conagher & Co., Inc. funding relationship which was terminated in February,
1995, (Note 10). The expenses incurred during this relationship were as follows:
<TABLE>
<S> <C>
Non-recurring expenses incurred in maintaining the office of
Pattinson Hayton, III, the Company's former Chairman, during July
through December 1994................................................... $1,133,000
Reserve for advances made to Apogee Robotics Inc., at the
direction of Pattinson Hayton, III, the Company's former Chairman, from
August to October, 1994................................................. 365,000
Reserve for expenses incurred for maintenance of the office of
Pattinson Hayton, III, the Company's former Chairman, in fiscal 1995.... 300,000
Common stock issued to consultants at the direction of
Pattinson Hayton, III, the Company's former Chairman.................... 1,689,000
Other miscellaneous professional fees incurred in ending the
relationship with Conagher & Co., Inc................................... 100,000
Common stock issued at the direction of Pattinson Hayton, III,
the Company's former Chairman, for commissions payable in connection with
</TABLE>
F-22
<PAGE> 52
<TABLE>
<S> <C>
the acquisition of McManis Sport Associates, the assets of Time Sports,
Inc. and the Wimbledon trademark license (Note 8)....................... 500,000
-------
Total Conagher & Co., Inc. financing costs................................ 4,087,000
ALS financing costs....................................................... 1,482,000
---------
Total financing related expenses................................ $5,569,000
==========
</TABLE>
10. CHANGES IN CONTROL
On February 13, 1995, the Company entered into an agreement with
Pattinson Hayton, III, the Company's former Chairman, and two of his affiliated
companies, Conagher & Co., Inc., a California corporation (Conagher), and
Allied-Asian Consolidated Limited, a Hong Kong corporation (Allied-Asian)
pursuant to which Mr. Hayton caused voting control over the corporation to be
returned to its common stockholders in exchange for, among other things:
- a reduction in amount and an extension of the time for payment of certain
notes due from Conagher for the purchase of common stock of the Company;
- the issuance to Allied-Asian, or its nominees, of 1,150,000 shares of
common stock of the Company, in restricted form; and
- the assumption by the Company of certain outstanding obligations owed by
Conagher and guaranteed by Mr. Hayton, personally, to Richard A. Fisher
(see Note 11), the founder and former Chief Executive Officer of the
Company.
Mr. Hayton had acquired financial and voting control over the Company in
July, 1994, when Conagher purchased 1,500,000 restricted shares of the Company's
common stock for an aggregate price of $3 million, and also purchased from Mr.
Fisher approximately 62% of the Company's original preferred stock (the Control
Block), which gave Conagher the right to elect 3/5 of the members of the
Company's Board of Directors.
In connection with these transactions, Mr. Hayton reconstituted the
Board of Directors, and had himself elected Chairman. Mr. Fisher resigned as
Chairman and subsequently terminated his employment with the Company due to the
change in control of the Company, although he remains available under an
agreement with the Company to consult with the Company as needed.
Subsequently, in September, 1994, Conagher purchased an additional
2,250,000 shares for an additional $4.5 million, bringing its total commitment
to $7.5 million for 3,750,000 shares. Each of these stock purchases were paid
for through promissory notes issued by Conagher. The stock was re-sold by
Conagher to various off-shore investors in a series of transactions that
Conagher advised the Company had been structured by Conagher to comply with the
exemption from registration available pursuant to Regulation S promulgated by
the Securities and Exchange Commission under the Securities Act of 1933.
Conagher failed to meet the payment schedule under its promissory notes
to the Company, although it did pay its initial note in full ahead of final
maturity, in large part because Conagher assumed the Company's obligations to
Applied Laser Systems in the amount of approximately $1,300,000. By December,
1994, Conagher was sufficiently delinquent on its second note that the Company's
operations were suffering from a shortage of working capital. Subsequent to
January 31, 1995, Conagher missed the final payment due, the Board of Directors
demanded, and received, Mr. Hayton's resignation as Chairman and a member of the
Board of Directors of the Company and the surrender by Conagher of its Control
Block in exchange for the consideration described above.
During the approximately 7 month period in which Mr. Hayton controlled
the Company, he directed substantial resources away from the Company's core
business and into activities that the current management was either unaware of
or did not endorse and does not consider indicative of the Company's
F-23
<PAGE> 53
ongoing operations. These included the hiring of various "consultants" and
various product promotional campaigns that management does not believe were in
the best interests of the Company or its stockholders. In the wake of Mr.
Hayton's relinquishing of control, these activities have ceased. In order to
present an accurate representation of the Company's ongoing cost of continuing
operations, management has reported these items, as well as certain expenses
associated with the terminated Applied Laser Systems transaction, as a
separate line item entitled "Financing Related Expenses" on its Statement of
Operations. The effects of the termination agreement with Mr. Hayton were
fully accounted for in the fiscal year December 31, 1994.
11. RELATED PARTY TRANSACTIONS
In connection with the change of control (Note 10), the Company's
founder resigned as a director and chief executive officer in September, 1994
and the Company retained him as a consultant at the rate of $6,250 per month
which may be increased based on level of effort under a contract that extends
through December 31, 1996; secured a non-competition agreement extending for a
five year period for a fee of $675,000 payable over five years; accelerated the
cancellation of certain amounts due from him in the amount of approximately
$40,000; and agreed to accept payment for stock to be acquired by him upon
exercise of stock options in promissory notes payable over five years.
During fiscal 1994, the former chief executive officer exercised options
covering 240,000 shares of the Company's common stock, delivering notes
therefor aggregating $338,000.
The Company has also entered into a severance agreement with its former
chief executive officer which provides for the continuing payment of certain
benefits, including medical and life insurance.
In connection with the repurchasing of the voting control over the
Company from Pattinson Hayton, III and his affiliated corporate entities (Note
10), the Company assumed the obligation of Conagher & Co. to pay the former
chief executive officer $750,000 for the convertible preferred stock which he
had previously sold to Conagher & Co. The note is payable in monthly
installments of $75,000 plus interest, over a 10 month period commencing April
1995, provided that payments are not due if the Company does not have working
capital of at least $500,000, and provided further that additional payments are
due if the Company receives certain levels of additional equity financing.
During 1988, the Company entered into a limited partnership agreement
and, accordingly, has a one-third interest in a limited partnership that is the
lessor of the Company's operating facility. In 1992, the Company pledged a
$250,000 certificate of deposit as security for rent under a lease that secures
a mortgage loan agreement entered into by the limited partnership in connection
with the construction of the facility. In October 1993, the Company executed a
revised lease which extended the lease through 2003, significantly reduced the
Company's annual lease payments, and modified the Company's option to purchase
the building. In connection with the executed lease, the lender reduced the
balance of the mortgage based on the reduction in the fair market value of the
building under current market conditions. In exchange for the reduced loan
balance, the Company transferred the $250,000 certificate of deposit to the
limited partnership as a capital contribution, and the limited partnership
transferred the certificate of deposit to the lender. In exchange for the
$250,000 payment from the Company, the limited partnership executed a second
deed of trust payable to the Company in the amount of $250,000. The Company's
investment in the limited partnership is carried at cost.
The Company has made advances to certain directors and officers. In
November 1992, these individuals provided their personal guarantees of a
performance bond for the Company's submarine laminate contract totaling
approximately $1,173,000. The guarantees were several in nature. In addition,
these individuals agreed to provide similar guarantees, if required, for bonds
assuring the Company's performance of other contracts. There is no dollar limit
on the amount of guarantees these individuals agreed to provide.
F-24
<PAGE> 54
In partial consideration of the submarine laminate contract guarantee
and the agreement to guarantee, the Company agreed to cancel the existing notes
and security agreements, classified the unpaid amounts as advances and approved
a schedule providing for the cancellation of the indebtedness ending in January
1995 (25% effective January 1, 1993, 37.5% effective January 1, 1994, and 37.5%
effective January 1, 1995). The total amount of advances and accrued interest to
be canceled was $286,244. As of January 2, 1994, 62.5% of these amounts were
canceled in accordance with the schedule as noted above. The remaining 37.5% of
the related party indebtedness was either canceled or fully reserved for the in
the fiscal year December 31, 1994.
On February 28, 1992, these individuals exercised 10,746 stock options,
at an exercise price of $5.00 per share. The Company accepted unsecured notes
totaling $53,727 as payment. These notes have been included as a reduction of
stockholders' equity at January 3, 1993. On July 14, 1993, an officer/director
exercised 10,000 stock options at an option price of $1.00 per share. With
consent of the Board of Directors, these individuals tendered 8,883 shares of
the Company's common stock in full payment for the unsecured notes of $53,727,
employee advances of $10,000 and interest receivable on the notes of $4,282. The
shares were retained by the Company as treasury stock.
During 1992, the Company granted $50,000 to Stanford University for the
development of thermoplastic composite processing technologies. Dr. Stephen
Tsai, a former director of the Company, is a professor at Stanford University.
12. PRODUCTION CONTRACTS
During the fourth quarter of 1992, the Company began its first
production scale contract totaling approximately $1,173,000. During fiscal
1992, the Company recorded revenues of approximately $145,700 and cost of goods
sold of approximately $806,400 relating to this contract. Included in the cost
of goods sold is a charge of $500,000 representing the estimated costs in excess
of revenues to complete this contract.
During the fourth quarter of 1993, the Company began its second
production scale contract totaling approximately $117,000. During fiscal 1993,
the Company recorded revenues of approximately $64,700 and cost of goods sold of
approximately $326,300 relating to this contract. Included in the cost of goods
sold is a charge of $145,000 representing the estimated costs in excess of
revenues to complete the contract. This contract was completed in the second
quarter of fiscal 1994 and no new production contracts were commenced during the
balance of fiscal 1994. The Company commenced and completed two production
contracts in fiscal 1995.
13. NOTES PAYABLE
The Company's notes payable consist of notes due totaling $310,000; one
is a non-interest bearing note for $250,000 due regarding the acquisition of
certain assets and liabilities of Time Sports, (see Note 8); the others are 10%
interest bearing notes totaling $60,000 due to the holders of subordinated
debentures issued by the Company pursuant to Regulation D.
F-25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-03-1994
<PERIOD-END> DEC-31-1994
<CASH> 382,721
<SECURITIES> 0
<RECEIVABLES> 224,180
<ALLOWANCES> 0
<INVENTORY> 1,271,786
<CURRENT-ASSETS> 1,960,443
<PP&E> 5,601,412
<DEPRECIATION> 2,984,104
<TOTAL-ASSETS> 7,260,163
<CURRENT-LIABILITIES> 3,159,164
<BONDS> 0
0
7
<COMMON> 92
<OTHER-SE> 48,356,319
<TOTAL-LIABILITY-AND-EQUITY> 7,260,163
<SALES> 833,999
<TOTAL-REVENUES> 860,419
<CGS> 106,453
<TOTAL-COSTS> 106,453
<OTHER-EXPENSES> 11,205,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,700
<INCOME-PRETAX> (11,516,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,516,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,516,635)
<EPS-PRIMARY> (2.09)
<EPS-DILUTED> (2.09)
</TABLE>
