SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark one)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934. For the fiscal year ended December 31, 1997
Or
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
Commission File Number: 0-16052
Quadrax Corporation
(Name of Small Business Issuer in Its Charter
Delaware 05-0420158
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
618 Main Street
West Warwick, Rhode Island 02893-0901
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(Address of principal executive offices) (Zip Code)
(401) 683-6600
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(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 registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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 registrant's knowledge, in the definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. X
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Issuer's revenues for the most recent fiscal year: $13,968,736.
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As of March 31, 1998, the aggregate market value of the voting and non-voting
common equity held by non-affiliates was $$1,397,778 computed by reference
to the closing price of March 31, 1998 of $0.03125 on the Nasdaq Small Cap
Market.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12,13, or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court
Yes No
As of March 31 1998, there were outstanding 44,728,914 shares of Common
Stock, par value $.000009 per share.
Transitional Business Disclosure Format (check one):
Yes No X
Documents Incorporated by Reference
None
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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.
VICTOR CORP. is a trademark of Victor Electric Wire & Cable Corp.
This Annual Report on Form 10-KSB also includes the trademarks of companies
other than Quadrax Corporation and Victor Electric Wire & Cable Corp.
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Forward Looking Statements
Information included in this Annual Report on Form 10-KSB may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements made by Quadrax Corporation (herein referred to as the
"Company" )involve known and unknown risks, uncertainties, and other
factors which may cause actual results, performance or achievements of
the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. From time to time, information provided by the Company or
statements made by its employees may contain other forward-looking
statements. Factors that could cause actual results to differ materially
from the forward-looking statements include, but are not limited to:
Bankruptcy Court actions or proceedings related to the bankruptcy, risks
associated with changes in interest rates, commodity prices and other
economic conditions, dependence on licenses, governmental regulations and
actions by governmental authorities, inability of the Company to secure
additional or sufficient financing, technological changes, intense
competition, dependence on management and the outcome of litigation to
which the Company is a party. See in particular the opening paragraphs in
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation for forward-looking statements contained herein to reflect any
change in management's expectation with regard thereto or any change in
events, conditions, circumstances or assumptions underlying such
statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business-General
Quadrax Corporation was incorporated in Delaware on March 6, 1986 and
prior to fiscal year 1995 was a development stage company. The Company
produces two distinct lines of products. The Company designs, develops,
fabricates and sells fiber-reinforced thermoplastic polymer composite
materials ("Quadrax Composites") and products manufactured from Quadrax
Composites. Also, through its subsidiary Victor Electric Wire and Cable, Corp.
("Victor"), the Company manufactures and sells electric power cordsets and
interconnect cables, primarily for original equipment manufacturers ("OEMs")of
small appliances.
Quadrax Composites are synthetic materials made using patented and other
proprietary, as well as non-proprietary, chemical processes and manufacturing
technologies. Management 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 are structural substrates made from continuous fibers (such as
carbon, Kevlar, or fiberglass), as opposed to composite materials made from
chopped fibers which tend to produce a weaker material. In addition, the
Company believes that thermoplastic Quadrax Composites are tougher and less
brittle than traditional thermoset plastics such as epoxies and polyesters.
(See Quadrax Composites-Competition.)
The Company commenced limited commercial production in mid-1993.
Although the Company historically was dedicated to the formatting of composite
materials for defense and aerospace markets, it began redirecting its business
in 1994 and 1995 to focus on commercial and consumer markets for value-added,
high-performance products such as sporting goods. The Company believes that
opportunities for thermoplastics do not currently exist in the defense and
aerospace markets, but if attractive opportunities arise in the future, the
Company will pursue them.
In May of 1996, the Company began development of a facility in Vista,
California to manufacture its graphite thermoplastic golf shafts. The Vista
plant commenced production in January 1996 and, concurrently, the Company
implemented its new marketing and sales programs described below. Accordingly,
on June 4, 1997, the Company sold McManis Sports Associates Inc. and Lion Golf
of Oregon, Inc. These companies, acquired for their manufacturing expertise
and distribution channels in November 1994 and December 1995, respectively,
were sold in a single transaction to Robert K. Cole, Lion Golf's former
principal stockholder. As consideration for the transaction, the Company's
unrecorded unsecured promissory note payable to Mr. Cole was canceled along
with the Company's five year employment agreements with Robert K. Cole as
chief executive officer of Lion Golf and Mr. James Cole as its president.
Additionally, Mr. Robert Cole and Lion Golf assumed responsibility for
approximately $1,200,000 of Lion Golf's indebtedness, including the Bank of
Cascades accounts receivable/inventory working capital line which had an
outstanding balance of approximately $449,838 at closing.
The Company acquired the Victor subsidiary in May 1997. The transaction
comprised the acquisition from Exeter Capital LP ("Exeter") of all of the
outstanding stock of Victel, Inc., a Delaware corporation ("Victel"), whose
sole asset was all the outstanding stock of Victor, a New York corporation.
Consideration paid by the Company was $710,000 cash and the assumption of
approximately $2,840,000 in existing bank debt which at closing was refinanced
by Victor's new working capital and term credit agreement with Congress
Financial Corporation ("Congress"). The three year revolving credit facility
accommodates draws up to $3,550,000 against percentages of accounts receivable
and inventory. Additionally, Victor has a $950,000 fully amortizing five year
term loan and an equipment financing facility of up to $500,000, also based on
a five year fully amortizing repayment schedule. All such loans bear interest
at prime plus one and a half percent over prime. As part of the purchase
agreement, $3,439,000 of Exeter's subordinated debt was converted to paid in
capital. The Company has guaranteed Victor's obligations to Congress.
Victor is a vertically-integrated manufacturer of electric cables drawn
from raw copper rods into fine wire and stranded into heavier cables. The
stranded cables are insulated with a PVC plastic and rubber compound and then
molded to plugs to create the finished product. Every component, except
blades (prongs) and insulating compound, is manufactured by Victor at its
plant.
Victor produces a wide variety of cordsets which are all produced in
response to a specific customer order. Victor sells its cordsets to
approximately 150 customers. Approximately 60% of Victor's sales are to
nationally recognized manufacturers.
On February 10, 1997, the Company sold $3,210,000 principal amount of 8%
Convertible Debentures due February 10, 1999, with attached warrants to
purchase 321,000 shares of the Company's common stock at an exercise price of
$0.9375 per share at any time prior to February 10, 2000, to a total of
sixteen accredited investors in a private offering pursuant to Rule 506 of
Regulation D under the Securities Act of 1933. None of the investors is a
resident of or domiciled in the United States. The debentures were sold at
their principal face amounts for cash. A selling commission of 10% of the
principal amount sold was paid to J. W. Charles, Securities, Inc.
The principal amount of each debenture is convertible into shares of the
Company's common stock with a conversion price which is the lesser of $0.9375
or 80% of the average closing bid price of the Company's common stock on the
Nasdaq SmallCap Market on the five trading days immediately preceding the date
of actual conversion, subject to a floor conversion price of $0.40 per share.
Should the conversion price be below the floor price, the Company is obligated
to convert up to 125,000 shares per $50,000 face amount per debenture, with
any remaining principal amount to be repaid in cash within 60 days of the
conversion date, together with interest at 7% per annum. At the end of the
1997 fiscal year, all but $150,000 of the convertible debentures, plus
accumulated interest, had been converted to shares of common stock of the
Company.
In August of 1997, in another transaction pursuant to Regulation D under
the Securities Act of 1933, the Company and Sovereign Partners LLP
("Sovereign") entered into a Securities Purchase Agreement for $3,500,000 of
the Company's three year Convertible Debentures and the Company issued
$1,500,000 of the debentures for net proceeds of $1,359,475. Interest is
payable at the rate of 8% per annum commencing upon the issuance date of the
debentures. The debentures are due August 4, 1999 and convertible at various
times commencing October 3, 1997, into a number of shares of common stock that
can be purchased at a price equal to seventy-five percent of the average
closing bid price of the common stock for the ten trading days immediately
preceding the date of conversion of the Debenture.
On October 7, 1997, Sovereign assigned its rights and obligations in
connection with the transaction to Dominion Capital Fund ("Dominion") to which
the Company issued an additional $750,000 of debentures which are convertible
into shares of common stock of the Company under similar terms and conditions
as outlined above. This debenture is due August 1, 1999. Also, as part of the
initial transaction, demand registration rights and warrants as described
below were granted. Dominion is obligated, subject to the filing of an
effective registration statement in connection with the transaction and
existence of certain market conditions, to purchase the remaining debentures
which would be issued with an interest rate of 4% rather than 8%. As of March
31, 1998, attempts to file an effective registration statement have not been
successful, nor have any of the Sovereign or Dominion debentures been
converted to common stock of the Company. If the Company has failed to file an
effective registration statement after 90 days from the initial issuance date,
a 2 1/2% of principal interest penalty is assessable for that period and the
Company faces further penalty interest of 2 1/2% of principal thereafter for
each thirty-day interval during the delayed filing or effectiveness of the
registration statement. The penalty interest provisions prevail except to the
extent shares issuable upon conversion of the debentures can be sold pursuant
to Rule 144 or other exemption available under the provisions of the
Securities Act of 1933 pertaining to all or a portion of the transaction.
Upon its purchase of the $1,500,000 principal amount of debentures,
Sovereign was issued 700,000 warrants to purchase 700,000 shares of common
stock of the Company. These warrants are exercisable at $0.50 for three years
from their date of issuance. Also issued in connection with the transaction
were 10,000, 3 year warrants to purchase common stock at $0.75 and 100,000
shares of the Company's common stock issued to Jeffrey Taylor and to Jesup &
Lamont Securities Corporation, respectively, as consideration for services.
On February 27,1998,(the "Petition Date") the Company filed a Voluntary
Petition under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court(see ITEM 3. LEGAL PROCEEDINGS). In connection with the
proceedings, the Company expects to file a plan of reorganization which may
comprise a sale of some or all of its plastics industry assets or result in a
business combination with third parties by either or both of the Company's
plastics and electric wire and cable divisions, or the whole Company. Victor,
the Company's wholly owned subsidiary, continues to carry on its business in
the ordinary course and is not a petitioner/debtor in the bankruptcy.
Business - Quadrax Composites
Quadrax Composites-Overview
Historically, the Company was dedicated to the formatting of composite
materials for defense and aerospace markets. As defense funding for advanced
research declined in the late 1980's and 1990's, and the market for composite
materials in the defense industry eroded, the Company began to redirect its
business toward commercial and consumer applications. Management believes that
the high strength-to-weight ratio and other functional advantages of Quadrax
Composites make them superior structural materials for a wide range of
applications: athletic and recreational equipment such as racquet frames,
lacrosse and hockey sticks, golf shafts, bicycle component parts, and panel
and frame assemblies for a wide variety of recreational vehicles; truck and
trailer components and systems; and military equipment, primarily outer body
panels and reinforcing members for aircraft, armored vehicles and marine
vessels.
Quadrax targeted sporting goods applications because it believes that
Quadrax Composites' superior performance characteristics will overcome the
challenges posed by their cost premium and customers' familiarity with more
conventional materials.
Accordingly, the Company's strategy has been to focus on the design,
development and prototyping of sporting goods products in order to demonstrate
the performance attributes of Quadrax Composites, thereby building demand for
the Company's materials. In furtherance of this strategy, in 1993 the Company
signed a joint development and manufacturing contract with a Taiwanese tennis
racquet manufacturer, Kunnan Enterprise Limited ("Kunnan"), through which
Quadrax was able to develop technologies suitable for manufacturing
value-added products from Quadrax Composites for various sporting goods
markets.
Beginning in 1994, the Company sought to accelerate the redirection of
its business through acquisitions of assets and license rights, and through
strategic arrangements with manufacturers of sporting goods and athletic
equipment. The Company currently determines, on a product-by-product basis,
whether to undertake manufacturing of a product, or to enter into a strategic
relationship with another company experienced in manufacturing such a product
and with established distribution channels in the relevant market.
In the last three fiscal years, the Company took the following steps, among
others, to redirect its business toward commercial and consumer applications:
Having acquired the exclusive rights to make and market tennis racquets
under the "Wimbledon" brand name in November 1994 from Time Sports, Inc., a
subsidiary of Kunnan, the Company began shipping its "Conqueror" racquets made
from the Company's thermoplastic material in the third quarter of 1995. In
1996, the Company relinquished its license to utilize the Wimbledon trademark
in North America for tennis racquets because of the failure of the Wimbledon
name to generate any meaningful interest in Wimbledon brand name tennis
racquets.
In February 1995, the Company entered into a joint design/exclusive
manufacturing contract with a supplier of lacrosse equipment in the United
States. In April 1995, the Company completed testing of lacrosse sticks made
from Quadrax Composites and commenced shipments. In 1996, the Company revised
its lacrosse equipment arrangement whereby the lacrosse equipment supplier was
no longer the exclusive customer for the Company's lacrosse equipment products
and began selling its lacrosse equipment to other OEMs and users of lacrosse
equipment.
In December 1995, the Company acquired all of the outstanding stock of
Lion Golf of Oregon, Inc. ("Lion Golf"), a manufacturer and distributor of
golf clubs. The Company acquired Lion Golf to provide golf club manufacturing
expertise and distribution channels for the Company's sporting goods products.
The Company subsequently sold Lion Golf on June 4, 1997, as described above.
In May 1996, the Company commenced development of a facility in Vista,
California for manufacturing graphite thermoplastic golf shafts which are
expected to be sold to OEMs such as Taylor Made Golf Co. ("Taylor Made"), and
third party users of golf components, such as Golfsmith International, Inc.
The development of this facility (see ITEM 2. DESCRIPTION OF PROPERTY) was
completed in December 1996 and sales to third party customers commenced in
January 1997.
In June 1996, the Company acquired an 80% interest in all of the assets
of Vega, USA, a Brooklyn, New York, based manufacturer of sporting goods
equipment. The product lines purchased from Vega were mid-to-lower price
sporting goods adaptable to high volume production in the areas of hockey
sticks, snowboards, and in-line skates. The Company relocated the Vega
production equipment to its Portsmouth, Rhode Island facility. Power Stick
Manufacturing, Inc. subsequently successfully asserted a claim that the
machinery purchased from Vega used to manufacture hockey sticks belonged to
it, and the machine was returned. (see ITEM 3. LEGAL PROCEEDINGS) The Company
acquired new manufacturing equipment and recommenced manufacturing and
marketing hockey sticks to OEMs, distributors, and retailers of hockey
equipment.
The Company suspended operations of its composite materials business on
February 13, 1998, and on February 27, 1998, filed for protection from its
creditors under Chapter 11 of the Bankruptcy Code.
Quadrax Composites-Markets and Product Lines
Athletic and Recreational Equipment
The Quadrax sporting goods target market comprises serious athletes, both
professional and amateur, who are willing to pay a premium for the better
"feel" and "performance" that products made from Quadrax Composites can
deliver.
The Company has developed, manufactured and marketed a composite graphite
golf shaft made from its proprietary thermoplastic material. The golf shaft
has successfully completed a series of standard industry tests administered by
an independent testing laboratory specializing in golf clubs. The Company has
entered into a research and development contract with Taylor Made to evaluate
the thermoplastic graphite shaft, but cannot predict at this time whether
Taylor Made will ultimately enter into a manufacturing contract to produce
composite thermoplastic graphite golf shafts.
The Company has developed, manufactured and marketed bicycle parts made
from Quadrax composites such as handlebars, wheels, and forks for bicycle OEMs
such as Spinergy, Inc., ("Spinergy"), based in Wilton, Connecticut.
Additionally, the Company has marketed lacrosse stick handles utilizing
Quadrax Composites. These handles were developed under a joint
design/exclusive manufacturing contract entered into in February 1995 with an
OEM. The Company commenced shipping lacrosse stick handles to this OEM in
April 1995. In 1996, the Company revised its lacrosse equipment arrangement
whereby the OEM was no longer the exclusive customer.
In 1996, the Company manufactured and marketed a high-performance tennis
racquet, the Conqueror. This racquet was originally marketed under the
Wimbledon name. The Company commenced shipments of the Conqueror in the third
quarter of fiscal 1995. The Conqueror featured "Dynamic Positioning," a
strategic use of weight distribution that takes advantage of the
strength-to-weight advantages of Quadrax Composites. The Company introduced
several additional tennis racquet models in the first quarter of fiscal 1996,
which were made out of thermoplastic material and marketed under the Quadforce
or private labels. The Company ceased manufacturing tennis racquets in late
1996 and no longer competes in that business.
The Company supplied components and finished parts to Taylor Made and
Spinergy until production in the Company's plastics plants was curtailed after
the Petition Date.(see ITEM 3. LEGAL PROCEEDINGS)
Commercial and Industrial Materials and Components
During 1997, the Company significantly expanded its sales to the
industrial market in certain niche applications. These applications typically
require the combination of high strength, light weight, corrosion resistance,
and dimensional stability at elevated temperatures that Quadrax Composites
possess. Generally, the Company's industrial customers, such as Fuller-Kovaco
Corporation, Capital Research Equipment, Inc. and Lingol Corporation, are
aware of their market needs and know enough about thermoplastic composites'
properties to commit to the development time and investment necessary to
satisfy the materials' requirements. Occasionally, industrial customers lack
the necessary materials' knowledge and manufacturing technology to integrate
composites in their products and as a result, Quadrax often supplied its
customers with material as well as manufacturing techniques.
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.
The Company supplied raw tape, components and finished parts to its
industrial customers until production in the Company's plastic plants was
curtailed after the Petition Date. (see ITEM 3. LEGAL PROCEEDINGS)
Defense and Aerospace
Through a combination of internal initiatives and the acquisitions of
composite technology from Phillips and Amoco, Quadrax established itself as a
supplier of advanced composite materials systems to contractors to branches of
the United States military. Quadrax Composites have been incorporated in
products provided under contracts with the United States Air Force, the United
States Navy and the United States Army. Under these contracts, Quadrax
Composites have been incorporated in: the F-22 "Air Superiority" tactical
fighter produced by Lockheed Aeronautical Systems Company under contract with
the United States Air Force; the Seawolf class of submarines constructed by
the Electric Boat Division of General Dynamics Corporation under contract with
the United States Navy; and the "Composite Armored Vehicle," an experimental
armored troop carrier (known as CAV) developed by United Defense LP under
contract with the United States Army.
All defense related contracts were completed by the Company in 1995 and
the Company is currently not devoting resources to the pursuit of additional
defense business, however, Quadrax has continued 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.
Quadrax Composites-Marketing and Sales
Quadrax is one of a small number of manufacturers in the relatively new
thermoplastic composite tape market. While Quadrax has historically been
associated with defense oriented materials, Quadrax's reputation as a supplier
of advanced materials and for manufacturing sporting goods equipment has grown
quickly. In particular, Quadrax is known for its proprietary golf shaft which
was approved by the United States Golf Association in 1996. Golf clubs
equipped with Quadrax thermoplastic golf shafts are especially known for their
vibration dampening characteristics which improve performance. These
characteristics are also apparent in other products made by the Company such
as lacrosse sticks and tennis racquets. Quadrax worked to maintain and enhance
its reputation within these market sectors by periodic advertising in trade
publications, the regular submission of technical papers for publication in
professional journals and frequent attendance at industry conferences,
conventions and trade shows.
In producing high quality sporting goods equipment, and particularly golf
equipment, the Company has integrated production vertically, from the
manufacture of feedstock materials(Quadrax Composites) through distribution to
product retailers. Additionally, the Company has also taken a lower profile
approach to reach this market through joint development and manufacturing
contracts with leading suppliers of high-performance equipment for various
games and activities. For example, the Company undertook a bicycle component
part program with Spinergy, as described above. This strategy provides entry
to new markets in a cost effective manner enabling the Company to conserve its
resources for the exploration of new applications for is tape products. The
Company believes this approach increases demand for its tape products both
directly, by creating the need for specific components and goods, and
indirectly by demonstrating the advantages and potential of Quadrax
Composites.
Quadrax's marketing and sales programs have been the responsibility of
its Vice President-General Manager Advanced Materials Division, who, supported
by the Company's engineering staff and other sales personnel, is charged with
calling directly on top decision makers at manufacturing companies identified
as attractive candidates for the incorporation of components made out of
Quadrax Composites into finished goods or parts assemblies. Industrial users
of advanced materials generally buy directly from the Company and as a result
the distribution of commercial products is through sales to OEMs.
The Company considers the most effective means for the initial
distribution of its sporting goods equipment to be through specialty retailers
(such as pro shops), regional mass merchandisers as well as sales to OEMs. The
Company has also sold its thermoplastic golf shafts directly to consumers
through a telemarketing program.
Quadrax Composites-Competition
Quadrax faces competition from other materials used in the manufacture of
sporting goods and equipment, and from other suppliers of thermoplastic
composites.
Competing Materials
Sporting goods and equipment are currently manufactured from
conventional materials such as wood, stone, steel and aluminum, less common
metals such as titanium, and epoxy-based (thermoset) composites. The principal
functional advantage offered by Quadrax Composites is their 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 was able to deliver
materials that met 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 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 the reclaimed material suitable for use in a wide variety of "lower
tier" applications.
Quadrax seeks to educate the market on the competitive advantages of
its composites, including several processing efficiencies which, when measured
on a total cost of finished goods basis, enable Quadrax Composites to present
an attractive price/performance profile. Competitive qualities of Quadrax
Composites are:
-light weight, making Quadrax Composites easy to move and handle;
-structural characteristics that make them easy to form using modified
conventional cutting, thermoforming or compression molding techniques;
-chemical stability, making them 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 to be bonded through heat and pressure
alone, without the need for glues or other bonding agents.
Like most composites, however, Quadrax Composites are more expensive than
competing conventional materials. Additionally, there is institutional
resistance to working with new materials and to investment in the re-tooling
needed to integrate the materials into existing products and production lines.
The Company believes that these competitive disadvantages will dissipate over
time as the functional and processing advantages of composites generally gain
recognition in the marketplace.
Quadrax Composites are thermoplastic, so they 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.
Competing Suppliers
Products widely integrating composite materials have only recently
emerged in the plastics industry. 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 are E.I. du Pont de Nemours & Co., Imperial
Chemical Industries PLC and St. Gobain S.A. They continue to develop
composite product offerings that may compete with the Company's product
offerings. Additionally, 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
St. Gobain S.A., 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.
Additionally, there is no assurance that the Company will be able to
successfully compete with existing and newly emerging composite manufacturers.
Maintaining a competitive edge in the composites industry requires continued
investment in design and development, sales and marketing and customer service
and support, and the successful timing of new product introductions. There can
be no assurance that the Company will have sufficient resources to make such
investments. Also, as the Company enters new markets and encounters new
distribution channels and technical requirements, the level and base of
competition may be different than those currently existing. There can be no
assurance that the Company will be able to compete favorably.
Generally, management believes that if immediate, sufficient and
continued financing is available, or a business combination with an adequately
financed entity is achieved, then, subject to court confirmation of a plan of
reorganization in its Chapter 11 proceedings, the Company can compete
effectively by offering products with superior performance characteristics to
products offered by other suppliers at moderately higher prices than those
charged by such other suppliers.
Quadrax Composites-Manufacturing and Distribution
Production Materials and Machinery
All materials, machinery 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 such as Hercules, Inc., Hoechst
Celanese, Inc., and E.I. du Pont de Nemours & Co. 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.
Employees
Production personnel include materials and process engineers, skilled and
semi-skilled machine operators, and various shop hands. As of December 31,
1997 and March 31, 1998, the Company had 24 and 7 employees, respectively, of
whom 16 and 7, respectively, were full time employees. On December 12, 1997,
the Company announced the annual holiday closure of its Portsmouth, Rhode
Island and Vista, California facilities. The closure was extended by an
additional week to conserve cash and allow the Company to further explore the
prospects of certain business combinations to reorganize the Company and its
financing arrangements. After a limited start-up of its plastics manufacturing
plants in January 1988, production was curtailed in February as further
cutbacks and employee and management terminations culminated in the Company's
Chapter 11 filing on the Petition Date. (see ITEM 3. LEGAL PROCEEDINGS).
Regarding operations in its plastics divisions, the Company believes that any
necessary production personnel can be recruited at competitive rates from
within the plastics and general manufacturing industries.
Physical Plant and Procedure
The core technologies underlying Quadrax Composites involve, firstly, the
fabrication of unidirectional continuous fiber-reinforced, thermoplastic tapes
and, secondly, 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. A large portion of this technology
was licensed to Quadrax by Phillips Petroleum Company of Bartlesville,
Oklahoma on September 8, 1992.
The principal fibers used in making Quadrax Composites are carbon, glass
and aramid (for example, du Pont'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 believes that its
thermoplastic Quadrax Composites outperform thermoset composite materials due
to the use by Quadrax of continuous fibers and resins superior to traditional
epoxies and polyesters.
The Company also has the ability to form its multiply laminates into
three-dimensional piece parts in order to generate additional demand for the
Company's tape products. Examples of products made by the Company from
multiply laminates are shoe inserts and helicopter flooring.
Additionally, at the Portsmouth facility, Quadrax has the capability to
thermoform or compression mold customer specified component parts and frame
assemblies on proof-of-concept, pre-production prototype and pilot production
bases. Finished goods, such as hockey sticks, lacrosse sticks and bicycle
parts are produced in Portsmouth and shipped to OEMs to be assembled into
their products and to wholesale and retail distributors. Composite
thermoplastic graphite golf shafts are manufactured by the Company at its
Vista, California facility. The thermoplastic golf shafts are shipped to OEMs
to be assembled into their products or to wholesale and retail distributors
(also, see ITEM 2. DESCRIPTION OF PROPERTY ).
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 with raw materials acquired as
needed.
Customer Service and Support
The Company has made available members of its engineering staff to visit
its customers and to consult on proper processing techniques or special
engineering challenges, on an as-needed basis. Generally post-sale support is
not required.
Quadrax Composites-Research and Development
During the fiscal years ended December 31, 1997 and December 31,1996,
the Company estimates that its expenditures for research and development in
connection with Quadrax Composites were approximately $1,117,000 and $810,000,
respectively.
Business - Victor Electric Wire and Cable
Victor-Overview
Victor, located in West Warwick, Rhode Island, was established in 1945 and
has for over fifty years been a vertically-integrated manufacturer of electric
power cordsets and interconnect cables, primarily for OEMs of small appliances.
Victor-Markets and Product Lines
Victor produces a wide variety of power supply cords (cordsets), insulated
wire (bulk wire) and molded cable assemblies. All Victor's products are
produced only after customer orders are received and then in response to the
customer's unique specifications. Wire products are supplied in a variety of
colors and can be terminated by many styles of plugs and connections. The wire
is rated for use in various temperature ranges up to 105C and plugs are
available with designs for varied stress capacities.
Victor sells its products to approximately 150 customers. Currently,
approximately 60% of sales are to nationally recognized OEMs such as Black and
Decker, Hamilton Beach\Proctor-Silex, Bunn-O-Matic, Kirby, West Bend and
Toastmaster, all manufacturers of small appliances for consumer use. The
balance of sales are to a combination of electronic, medical and interconnect
device manufacturers. During the year ended December 31, 1997, two customers
each accounted for more than 10% of total sales, with sales to both customers
totaling approximately 35% of total sales. Victor presently relies on corporate
purchase agreements, letters of intent and blanket orders for its one to three
year production schedules. Victor's plans for future growth depend on the
continued existence of these relationships with existing customers.
Victor-Marketing and Sales
Victor sells primarily through nine sales representative organizations.
Additionally, numerous "house" accounts are managed by an inside sales group.
Victor's business is historically seasonal, with sales strongest in the
months of May through September as its customers place orders for goods to be
sold by them during the year-end holiday buying season. Accordingly, net
revenues for Victor are typically strongest in the second and third quarters.
As Victor's profitability significantly depends on sales made in the second and
third quarters, Victor's operations could be materially adversely affected by
an economic downturn in any second or third quarter. Net revenues in other
quarters are generally lower and vary significantly as a result of customers'
requirements for new types of electric power cordsets and other factors.
There can be no assurance that the Victor subsidiary will achieve
consistent profitability on a quarterly or an annual basis. Victor's management
plans to target new market segments and develop new products to reduce
seasonality and increase total sales.
Victor-Competition
Victor has been ISO 9002 certified since December of 1996. Victor
competes by means of aggressive pricing, new product development, high quality
products and exceptional service. To sustain its competitive edge Victor has
implemented statistical process controls, total quality management and
continuous improvement programs. Included with products purchased from Victor
are access to its engineering resources and assured immediate staff response to
customers' needs. As an additional tool to maximize service and performance,
Victor has developed and uses Electronic Data Interchange (EDI) capabilities.
Victor's principal domestic competitors are General Cable, Multilec,
Belden, Leviton and Komar. There are numerous overseas competitors as well,
principally in Mexico and China. Many of such competitors are larger and
better financed than Victor, and have significantly greater manufacturing and
marketing resources than does Victor. Victor believes that its
long-established reputation for quality and reliable delivery are key
competitive assets.
Victor-Manufacturing and Distribution
Production Materials and Machinery
Victor's key raw material ingredients are copper and insulating compound
(consisting of PVC and rubber). All such materials are commodities available
from several sources. However, being commodities, the prices for both raw
copper and plastic resins are volatile and respond to both general economic
conditions, and supply and demand conditions for commodities specifically.
The Company is dependent on third party relationships with several
suppliers of the raw materials necessary to its business. Victor maintains
medium term supply arrangements for all its projected copper requirements in
the form of purchase orders issued to copper suppliers covering projected eight
month requirements. Victor does not presently have any long-term supply
agreements with its suppliers of plastic and does not anticipate the execution
of any long-term agreements with these suppliers in the future. Victor's
management believes the copper purchase orders serve to reasonably reduce
Victor's risks but there can be no assurance that this approach will be
effective to adequately insulate Victor against all copper price fluctuations.
Regarding the supply of insulating compounds, management believes that it has
alternative sources available to it in the event that its requirements change
or its current suppliers are unable or unwilling to fulfill its needs.
Nevertheless, there can be no assurance that alternative suppliers will be
available upon terms comparable to its existing arrangements.
Employees
At March 31, 1998, Victor employed 266 employees of whom 201 are
represented by the International Brotherhood of Electrical Workers. Victor and
the union executed a three-year collective bargaining agreement in late April,
1997. Although management considers its labor relations to be excellent there
can be no assurance that Victor will be able to renew such agreement after its
expiration or if it is renewed that such renewal will be on terms as favorable
to Victor as those currently in existence. In addition, Victor's operations
could be materially adversely affected in the event an extended strike is
called by the union.
Physical Plant and Procedure
Victor's plant is laid out to accommodate the mass production and light
manufacturing processes involved in the fabrication of custom cordsets. Spools
of 5/16" raw copper rod are delivered to the premises below grade for initial
treatment. The raw copper rods are drawn into fine wire whereafter the fine
wire is stranded and spun into heavier cables of varied thickness, depending
upon customer specifications. Victor's wire drawing operation is capable of
producing 80,000 pounds of stranded copper wire weekly. Spools of the refined
stranded cables are then moved up to the middle level of the plant where they
are insulated with a PVC plastic and rubber compound. At the upper level of
the plant, the insulated wire is cut to lengths and molded to plugs to create
the finished product. The goods are then packaged for shipping. Every
component, except the blades (prongs) and PVC plastic and rubber compound used
to insulate the wire, is manufactured by Victor at its plant. Victor has a
variety of over 300 molds and the capability to process over 1,500,000 cordsets
per week. All the machinery used by Victor in its manufacturing process is
made of standard components for which replacement parts are readily
available.(Also, see ITEM 2. DESCRIPTION OF PROPERTY)
Victor distributes its finished products to its primarily OEM customers
by shipping directly from its plant. Customers' very large orders can be
temporarily warehoused at Victor's facilities and shipped upon request.
Inventories
Because Victor's distribution is primarily to OEMs and production is in
response to specific orders, inventories of finished goods are limited and
averaged approximately $700,000 throughout the 1997 fiscal year. Raw material
inventories averaged approximately $800,000 throughout the same period.
Victor-Intellectual Property
Victor has been awarded several patents in its fifty-year history, one of
which remains in effect. Victor also holds several trademarks. While Victor's
trademarks are widely recognized in the industry, management does not consider
its intellectual property assets to be material to the business. Victor does
not require any licensed technology from any third party.
Victor-Governmental Regulations and Environmental Compliance
Victor's quality control laboratories have been certified by UL and CSA
to perform specific follow-up tests. Additionally, the laboratories can perform
complete compliance testing to all pertinent UL, CSA and ASTM standards,
including the standards applicable to the hospital applications of Victor's
cordsets (Green Dot Standards).
The Company believes that Victor's light manufacturing processes have no
untreated environmentally unsound by-products, practices or side effects.
Certain outmoded petroleum product storage procedures have been reviewed by
current management and negotiations regarding site remediation are underway
among Victor, the landlord, and the Rhode Island Department of Environmental
Management. Neither the costs nor effects of necessary remedial work will
materially impact Victor's operations. Victor's portion of the cost of the
remediation is estimated between $125,000 and $150,000.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains three manufacturing facilities. One facility is
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 and until February 27,
1998, when the Company's executive offices were relocated to surplus office
space at the Victor plant, the building contained the Company's headquarters.
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 construction lender.
Under the terms of a revised operating lease executed in October 1993, the
Company agreed to lease the Portsmouth building for approximately $100,000 a
year 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 decline in the fair market
value of the building. 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
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.
During 1997, the Company became several months in arrears on its rental
payments for this facility. At that time, the Company was notified by its
landlord that the first mortgage holder intended to foreclose the landlord's
interest in the property, evict the Company for non-payment of rent and sell
the building. Eviction proceedings commenced in February 1998 are stayed as a
result of the Company's Chapter 11 filing on the Petition Date. At Fiscal 1997
year end, the Company wrote off the second deed and trust in the amount of
$250,000 as a result of the foregoing circumstances. (see ITEM 3. LEGAL
PROCEEDINGS).
The Company's second manufacturing facility is for composite graphite
thermoplastic golf shaft production and is located in Vista, California in a
leased one story concrete tilt-up building of approximately 10,000 square feet.
The rent on this building approximates $65,000 annually under a lease that
extends to April 2001.
The Victor subsidiary operates out of a three to four story, single
location, leased facility in West Warwick, Rhode Island, containing
approximately 200,000 square feet of manufacturing and office space. Victor
has been located in this facility for approximately 50 years. The Company
believes the facility to be adequate to meet Victor's office and production
needs for the foreseeable future. The facility is leased from a third-party
landlord on a "triple net" basis at an annual base rental of approximately
$240,000. Such lease expires December 31, 2001.
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
On the Petition Date, the Company filed a Voluntary Petition under Case
No. 11-98-10799 in the United States Bankruptcy Court in the District of Rhode
Island. Concurrently, the Company ceased its manufacturing operations at its
Portsmouth, Rhode Island and Vista, California plastic industry plants and
relocated its executive offices to surplus office space at its Victor plant in
West Warwick, Rhode Island. Victor's electric and wire cable business continued
in the ordinary course and Victor is not a petitioner or debtor in the
bankruptcy filing. Upon filing the Petition, the Company became a Debtor-in-
Possesstion and its management focused on developing the Company's plan of
reorganization. Accordingly, several claims which were the subject of
pre-petition litigation were stayed and those claims, together with claims
arising from several pre-petition defaults and claims from events of default
caused by the filing of the petition should be resolved during the bankruptcy
proceedings. The Bankruptcy Case itself should be resolved by either a
dismissal of the petition, a confirmation of a plan of reorganization proposed
by the Company, its creditors or a third party, or a conversion of the case to
a liquidation under Chapter 7 of the Code.
During the bankruptcy, the Company is prohibited from paying, and
creditors are prohibited from attempting to collect, claims or debts arising
prior to the Petition Date without approval of the Bankruptcy Court. The
consummation of a plan of reorganization is the principal objective of the
Company's bankruptcy. A plan of reorganization sets forth the means for
satisfying claims and interests in the Company, including the liabilities
subject to comprise. The consummation of a plan of reorganization for the
Company will require the requisite vote of impaired creditors and interest
holders in accordance with the provisions of the Bankruptcy Code and
confirmation of the plan by the Bankruptcy Court. Although the Company expects
to propose a Chapter 11 plan of reorganization in 1998, there can be no
assurance at this time that a plan of reorganization will be proposed by the
Company, or approved by the creditors, or confirmed by the Bankruptcy Court, or
that such plan will be consummated. After the expiration of the Company's
exclusivity period for filing such a plan, creditors of the Company have the
right to propose alternative plans of reorganization. Notwithstanding the
substantial assets of the Company, a portion of which may be available for
distribution on a pro rata basis to the Company's equity security holders
following an asset sale for the benefit of creditors which may form part of any
plan of reorganization, substantial likelihood exists that, immediately
following such distribution, material dilution or elimination of the equity of
existing shareholders may occur.
On January 1997, the Company was named as a defendant in the lawsuit of
Power Stick Manufacturing, Inc. ("Power Stick") v. Quadrax Corporation, No. CA
97-CV0020-T, United States District Court of Rhode Island. Power Stick claimed
that the hockey stick pultrusion machine which the Company purchased in June
1996 from Vega USA rightfully belonged to Power Stick. The suit was determined
adversely by a jury in June, 1997. Under the judgment, the Company was ordered
to turn over possession of the hockey stick pultrusion machine to Power Stick.
This was done on July 7, 1997. In addition, the jury awarded Power Stick
damages of $150,000. The court has not entered this damage verdict, pending
completion of the second phase of the suit which is limited to Power Stick's
claims of patent infringement against the Company. In connection with this
award of damages, on December 22, 1997, Power Stick obtained a Writ of
Attachment regarding the shares of Victor indirectly owned by Quadrax. No
execution proceedings have been commenced in connection with this Writ and the
shares comprising ownership of Victor remain in the custody of Congress, to
whom they are pledged by the Company as collateral for the Company's guarantee
of Victor's borrowings. The proceedings were stayed on the Petition Date
pending developments in the Bankruptcy Court.
On January 7, 1998, the Company was served with a verified complaint and
motion for pre-judgment attachment in the lawsuit of David Evans ("Evans")
filed in the Newport County Rhode Island Superior Court under Case No. CA
No.98-49. The complaint alleges that Evans was dismissed in violation of the
Rhode Island Civil Rights Act and that by its conduct the Company negligently
inflicted mental distress on Evans. The Company dismissed Evans for cause and
intends to vigorously defend the suit and the related attachment proceedings.
The action has been stayed under the Bankruptcy proceedings as described above.
On February 3, 1998, the Company received a demand from Michael Dorf
("Dorf"), a former employee, in connection with an employment separation
agreement pursuant to which $15,211.54 was due to Dorf on December 12, 1997.
The demand was accompanied by a Petition For Appointment of A Receiver pursuant
to the provisions of R.I.G.L Section 7-1.1-90 filed in the Newport, SC Rhode
Island State Superior Court under No. 98-0039. A hearing in respect of the
issues did not occur prior to the Company's Bankruptcy filing and the
proceeding has been stayed as described above.
On February 9, 1998, the Company was served with a complaint in the
lawsuit of Timothy P. MacDonald ("MacDonald") and Sinapi Law Associates, Ltd.
filed in the Providence, Superior Court under Case No. 98-0555. The complaint,
which joins the Company's Chairman as a defendant, alleges that the defendants
breached a settlement agreement in connection with earlier litigation by
MacDonald against the Company for his alleged wrongful dismissal. The Sinapi
law firm's claim against the Company is for payment of MacDonald's legal fees
to which the Company had agreed as part of the settlement agreement. The
plaintiffs seek compensatory damages, punitive damages and interest as
contemplated by R.I.G.L. Section 9-1-50. The Company and the Chairman answered
the claim and the proceeding was stayed pending developments in the Company's
Bankruptcy petition as described above.
On February 20, 1998, the Company was served with a complaint in the
lawsuit of Lasalle National Bank filed in the Newport, SC Rhode Island District
Court, Second Division. The plaintiff landlord seeks repossession of the
Company's Portsmouth, Rhode Island premises for non-payment of rent. No hearing
occurred in respect of the issues and the proceeding was stayed pending
developments in the Company's Bankruptcy petition as described above.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
March 31, 1998, the Company is not currently a party to any legal proceedings,
other than those mentioned in this ITEM 3. LEGAL PROCEEDINGS, the adverse
outcome of which, in management's opinion, would individually or in the
aggregate have a material adverse effect on the Company's results of operations
or financial position.
Victor was a co-defendant in Mickle v. Cooper Industries, Inc. et al,
(USDC PA No. 97-3572) a lawsuit brought by an employee of a company who was
allegedly injured while using a soldering iron in the course of her employment
when it shorted and she received an electrical shock. The case was dismissed
with prejudice on March 12, 1998 at no cost to Victor.
Victor is subject to product liability litigation on a recurring basis
from persons suffering shocks from electrical appliances and other product
failures. Victor maintains insurance coverage against such liabilities in
amounts which, in the opinion of management, are adequate against the risks
assumed. Victor's litigation is not stayed or otherwise affected by the
Company's Chapter 11 Petition and court proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
PART II
ITEM 5. MARKET FOR 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
("Nasdaq") 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 Nasdaq for each quarter within the
last two fiscal years:
Common Stock Class C Warrants
High Bid Low Bid High Bid Low Bid
Fiscal 1997:
Quarter Ended March 31, 1997 $ 1.5000 $ 0.5000 $ 2.5000 $ 1.0000
Quarter Ended June 30, 1997 0.7813 0.3750 1.0000 0.5000
Quarter Ended September 30,1997 0.6875 0.4063 0.7500 0.5000
Quarter Ended December 31,1997 0.3700 0.0300 0.7500 0.0300
Fiscal 1996:
Quarter Ended March 31, 1996 $ 1.3438 $ 0.6563 $ 1.6250 $ 1.1875
Quarter Ended June 30, 1996 2.0625 0.9688 3.2500 1.2500
Quarter Ended September 30,1996 1.8750 0.6875 2.2500 1.0000
Quarter Ended December 31, 1996 1.2500 0.6875 2.3750 1.2500
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 December 31, 1997, there were 44,728,914 shares of Common Stock issued
and outstanding and held of record by approximately 1,400 stockholders.
Effective the Petition Date, the Company's Nasdaq trading symbol was
suffixed by the additional letter, "Q", to identify its Debtor-in-Possesstion
status. Subsequently, and at the Company's request, Nasdaq ceased to quote the
price and volume of trades of the Company's securities. Enhanced listing
standards for Nasdaq have an effective date of February 25, 1998. These
standards require companies whose stock trades are quoted by Nasdaq to have a
minimum tangible net worth of $2,000,000 and a minimum bid price of $1.00 per
share for their common stock. The Company was put on notice of noncompliance
and advised that de-listing would follow unless it met the $1.00 minimum stock
price requirement. On April 15, 1997, at the Company's request, the trading in
the common stock was delisted by Nasdaq.
Subject to provisions of federal and state securities laws, rules and
regulations, trades may be transacted through private or brokered transactions
and on the NASDAQ Electronic Bulletin Board or the "Pink Sheets" service
operated by the National Quotation Bureau.
Dividend Policy
The Company has never paid cash dividends and it does not anticipate that
it will pay cash dividends on its Common Stock or alter its dividend policy in
the foreseeable future. The payment of dividends on the Common Stock by the
Company will depend upon the outcome of the bankruptcy case, on its earnings
and financial condition, and such other factors as the Board of Directors of
the Company may consider relevant. The Company currently intends to retain any
earnings to fund the Company's ongoing cash requirements.
For a description of unregistered securities sold within the last fiscal
year refer to ITEM 1. DESCRIPTION OF BUSINESS: Business General, where
issuances of the Company's Convertible Securities are discussed.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain matters discussed in this
section and elsewhere in this Form 10-KSB are forward-looking statements. These
forward-looking statements involve risks and uncertainties including, but not
limited to, economic conditions, product demand and industry capacity,
competition, the outcome of Bankruptcy Court proceedings and other risks.
Bankruptcy Filing
Since the Petition Date, the Company has been operating as a Debtor-in-
Possesstion under Chapter 11 of the Bankruptcy Code. Accordingly, several
claims which were the subject of pre-petition litigation were stayed and those
claims together with claims arising from several pre-petition defaults and
events of default caused by the filing of the petition should be resolved in
the bankruptcy proceedings. The bankruptcy case itself will be resolved by
either a dismissal of the petition, a confirmation of a plan of reorganization
proposed by the Company, its creditors or a third party, or a conversion of the
case to a liquidation under Chapter 7 of the Code.
A bankruptcy petition was filed in order to obtain an opportunity to
reorganize the Company. The Company expects to reorganize its affairs under
the protection of Chapter 11 through a plan of reorganization. Although
management expects to file a plan of reorganization in 1998, there can be no
assurance at this time that a plan of reorganization will be proposed by the
Company, or approved by the creditors, or confirmed by the Bankruptcy Court, or
that such plan will be consummated. After the expiration of the Company's
exclusivity period for such filings, creditors of the Company have the right to
propose alternative plans of reorganization. Any plan of reorganization, among
other things, is likely to result in material dilution or elimination of the
equity of existing shareholders.
During the Chapter 11 filing, the Company is prohibited from paying, and
creditors are prohibited from attempting to collect, claims or debts arising
pre-petition without approval of the Bankruptcy Court. The consummation of a
plan of reorganization is the principal objective of the Company's Chapter 11
case. A plan of reorganization sets forth the means for satisfying claims and
interests in the Company, including liabilities subject to compromise.
The consummation of a plan of reorganization for the Company in accordance
with the provisions of the bankruptcy code will require the requisite vote of
impaired creditors and interest holders in accordance with the Provisions of
the Bankruptcy Code and confirmation of the plan by the Bankruptcy Court.
(Also, see Note 1 to the Consolidated Financial Statements Subsequent Events)
Competition
As the Company enters the sporting goods and recreational equipment
market, it faces competition from other materials used in the manufacture of
such goods and equipment, and from other suppliers of thermoplastic composites.
Quadrax's success in entering this market will largely depend upon its ability
to displace other materials currently in use. If the Company is unsuccessful
in creating a niche within the sporting goods and recreational equipment market
by convincing the market of the strategic benefits of thermoplastic composites,
the Company would be adversely affected. Many of the companies whose product
offerings compete with Quadrax's product offerings have significantly greater
financial, manufacturing, and marketing resources than Quadrax. The Company
also faces competition from suppliers of similar products who do not use
thermoplastic material.
Development of Distribution Channels
Success in the sporting goods and recreational equipment market will also
hinge on the Company's ability to develop distribution channels, including both
retailers and distributors, and there can be no assurance that the Company will
be able to effectively develop such channels.
Continued Investment
Maintaining the Company's technological and strategic advantages over its
competitors 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.
Technological Advances
The Company's ability to maintain a competitive edge by making
technological advances ahead of its competition will have a significant impact
on the success of the Company.
Outside Financing
The Company believes that it will need significant outside financing over
the next five years. There can be no assurance that it will be able to obtain
such financing.
The following financial tables sets forth selected financial data at
December 31, 1997 and at December 31, 1996 and for the fiscal years then ended.
Dollars in thousands, except per share data
Year Ended
---------------------------------------------
Statement of operations data: December 31, December 31,
1997 1996
Total Revenue $13,968 $ 3,207
------- ----------
Cost of goods sold 13,922 4,115
Research and development expense 1,117 810
Selling, general & administrative expense 5,967 4,996
Litigation & restructuring expense 1,270 1,325
Interest expense 2,002 1,881
Interest income (47) (70)
Other, expenses (income), net 200 (290)
---------- -----------
Total expenses(net of interest & other income) 24,431 12,767
========== ===========
Net loss from continuing operations $ (10,463) $ (9,560)
=========== ============
Net loss per common share from
continuing operations $ (0.26) $ (0.40)
Weighted average common shares outstanding 39,751 23,922
December 31,
1997 1996
----------- ---------
Balance Sheet Data:
Working capital $ (1,642) $ 686
Total assets 10,443 7,300
Long term liabilities 5,899 1,761
Total stockholders' equity (deficit) (2,065) 2,691
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company's net loss from continuing operations in fiscal 1997 of
$10,463,000 increased by $903,000 as compared to the fiscal 1996 loss of
$9,560,000. This increase primarily resulted from a net loss from the start
up of the golf operation on the West Coast approximating $1,791,000, and
increased corporate costs of approximately $854,000, and the write off of
the 2nd mortgage on the Portsmouth, Rhode Island facility amounting to
$250,000, offset by the favorable impact on net earnings of $2,125,000
resulting from the disposition of Lion Golf.
Total revenues recognized during fiscal 1997 were $13,968,000 as
compared to $3,207,000 in fiscal 1996. This increase over fiscal 1996 of
$10,761,000 results primarily from the Company successfully completing its
acquisition of Victor Electric Wire & Cable Corp. ("Victor") in May of
fiscal 1997. Victor's sales reflected in the fiscal 1997 period amounted to
$11,446,000. A second factor contributing to the sales increase were the
increased sales of Quadrax Advanced Materials products of approximately
$1,000,000 in 1997. Offsetting the sales increases in 1997 was the decrease
in sales associated with the disposition of Lion Golf of approximately
$1,685,000. Lion Golf was sold by the Company in fiscal 1997 and a portion
of the revenues reflected in 1997 of approximately $920,000 will not be
repeated in the future.
Cost of goods sold for fiscal 1997, $13,922,000 reflect costs
associated with the consumer products that the Company shipped in the 1997
period along with costs related to Victor's revenues reported in 1997 as a
result of the acquisition thereof. As compared to the $4,115,000 spent
during the 1996 fiscal year, this is an increase of $9,807,000. Victor's
costs of goods sold reflected in 1997, accounts for approximately
$10,053,000 of the increase over fiscal 1996. The fiscal 1997 Quadrax
Advanced Materials product costs increased over fiscal 1996 by approximately
$1,560,000. Significant factors that impacted Quadrax Advanced Materials
product costs and thereby impacted margins during 1997 were: low volume of
sales of products being introduced to the market place; manufacturing
inefficiencies associated with new production processes; and fixed
manufacturing costs which are unabsorbed due to low volume. Increased sales
volume would lessen the impact of these factors. Part of the increase was
caused by the lower gross profit margin associated with the consumer related
products sold in 1997 compared to the higher gross profit margin of the
defense related products sold in fiscal 1996. The Company's negative gross
profit in 1996 arose as a result of the continuing progress of shifting from
a development stage company to an operating company. The above increases in
cost of goods sold were offset by the decrease in costs of approximately
$1,806,000 resulting from the disposition of Lion golf in fiscal 1997.
Research and development costs increased by approximately $307,000 to
$1,117,000 in fiscal 1997 from $810,000 in fiscal 1996. The primary reason for
this increase is that the Company was capitalizing product development costs in
the 1996 period relating to the development of the golf shaft manufacturing
facility in Vista, California. In the 1997 period, the Company commenced
production and facility and operating costs were charged to operations.
During fiscal 1997, the Company's selling, general and administrative
costs ("SG&A') were $5,967,000, a increase of approximately $971,000 from
$4,996,000 in fiscal 1996. The most significant change in SG&A in fiscal 1997
came from Victor which was acquired in fiscal 1997 and is responsible for
approximately $1,261,000 of the increase. The start up of the Quadrax Golf
division in fiscal 1997 accounted for $908,000 of the increase, while Quadrax's
Advanced Materials and Corporate segments were responsible for approximately
$383,000 of the fiscal 1997 increase. The Lion disposition favorably impacted
SG&A in fiscal 1997 by approximately $1,580,000.
Expenses related to litigation and restructuring costs decreased $55,000
to $1,270,000 in fiscal 1997 from $1,325,000 in fiscal 1996. The 1997
litigation and restructuring reserves relate to the following: (1) the cost of
the pultrusion machine and deferred compensation agreements relating to the
1996 Vega, U.S.A. acquisition, $645,000; (2) costs relating to the divestiture
of Lion Golf in May 1997, primarily goodwill, $200,000; and (3) costs relating
to the finalization of the termination of the Wimbledon tennis racquet
licensing relationship, $425,000. In fiscal 1996, the Company's restructuring
costs consisted of: one, the write-off of the unamortized portion of the
Wimbledon racquet license, $360,000; two, the write-off of the balance of the
McManis Sports molds and equipment, $250,000; and three, legal and professional
costs, $715,000, incurred to resolve issues that arose prior to fiscal 1996.
Interest expense increased $121,000 in fiscal 1997 to $2,002,000. The
primary reason for this 1997 increase is the interest expense of $229,000 on
the operating debt of the Victor subsidiary offset by the interest expense
reduction of approximately $85,000 resulting from the reduction of debt
associated with Lion Golf which was disposed of during fiscal 1997.
Interest income decreased $23,000 in fiscal 1997 to $47,000 from $70,000
in fiscal 1997, an insignificant change.
Other expense (income), net decreased $490,000 to an expense of $200,000
in the fiscal 1997 period from an income of $290,000 in fiscal 1996. The
primary reason for this decrease is that Lion Golf which was disposed of in
fiscal 1997 reported other income of approximately $273,000 in fiscal 1996
which was not repeated in fiscal 1997, and the write-off of the 2nd mortgage of
the Portsmouth, Rhode Island facility amounting to $250,000.
Financial Position, Liquidity and Capital Resources
At December 31, 1997, the Company had total assets of $10,443,000 and
stockholders' equity (deficit) of ($2,065,000). Current assets were $4,968,000
and current liabilities were $6,610,000 resulting in negative working capital
of approximately ($1,642,000) which is a decrease of approximately $2,328,000
from December 31, 1996, when working capital was approximately $686,000. This
decrease in working capital resulted principally from the Company's continued
losses from operations in the 1997 period.
Cash and cash equivalents decreased by approximately $1,147,000 from
December 31, 1996 to $53,000 at December 31, 1997. This decrease is due
primarily to the Company's use of approximately $5,559,000 to fund its
operations, capital expenditures of approximately $785,000 and the expenditures
of approximately $710,000 related to the purchase of Victor in May 1997. These
expenditures were offset by the Company's raising of additional capital of
approximately $5,232,000 along with net new bank debt incurred of $675,000.
Accounts receivable increased by approximately $1,464,000. The primary
reasons for this increase is due to the Company's acquisition of Victor in May
1997 increasing accounts receivable net by approximately $2,011,000, offset by
the disposition of Lion Golf and the write-off of Wimbledon receivables as part
of a settlement which combined decreased accounts receivable by $765,000.
Inventories increased by approximately $1,142,000. This increase is
primarily derived from the additional inventory the Company gained related to
the acquired subsidiary Victor of approximately $1,767,000, offset by the
disposition of Lion Golf which decreased inventories by $938,000. Additionally,
the inventories of the Quadrax Advanced Materials and Golf divisions increased
approximately $310,000 during fiscal year 1997.
Other current assets decreased by approximately $25,000 during fiscal
1997, of which, approximately $21,000 was due to the disposition of Lion Golf.
The other long term assets decreased in fiscal 1997 by $222,000 and
amounted to $393,000 at December 31, 1997. Principally, the decreases related
to the write-off of the 2nd mortgage on the Portsmouth, Rhode Island facility
amounting to $250,000 (Quadrax is in default on the Portsmouth, Rhode Island
lease and the first mortgage holder is commencing foreclosure on the facility)
and the decrease related to the disposition of Lion Golf amounting to
approximately $133,000, offset by increases amounting to approximately $153,000
related to the Victor subsidiary, which was acquired in fiscal 1997.
The current portion of long term debt increased by approximately $254,000.
This increase results principally from the Victor subsidiary's new working
capital line with Congress Financial Corporation, net of the assumption of the
Bank of Cascades line of credit by the new owners of Lion Golf.
Accounts payable and accrued expenses increased approximately $3,509,000
from $1,991,000 at the end of fiscal 1996, to $5,500,000 at the end of fiscal
1997. This increase primarily results from increases related to Victor of
approximately $2,589,000, to start up Golf operations of approximately
$378,000, to Advanced Materials division of approximately $771,000 and to
Quadrax corporate division of $290,000, offset by the disposition of Lion Golf
which caused decreases of approximately $383,000.
Long term debt increased approximately $2,350,000 to $2,711,000 at the end
of fiscal 1997. This increase principally results from the additional term
debt relating to the Victor amounting to approximately $2,663,000, net of the
long term debt assumed by the new owners of Lion Golf amounting to
approximately $291,000 when this entity was divested by the Company as of May
31, 1997.
Convertible debentures increased to $3,188,000 at the end of fiscal 1997
from $1,400,000 at the end of fiscal 1996. This increase related to the
issuance of an additional $3,210,000 of convertible debentures in February 1997
and an additional $1,500,000 and $750,000 of convertible debentures in August,
1997 and October, 1997, respectively, offset by the debenture holders'
conversion of $4,461,000 of their debentures to common stock during the fiscal
year 1997. Included in the increase of the debt payable is approximately
$788,000 of imputed interest that is due and payable upon conversion or
retirement of the debentures.
In fiscal 1997, capital expenditures were approximately $1,496,000. These
capital expenditures relate primarily to monies expended for the acquisition of
Victor in May 1997 totaling approximately $710,000, along with Victor capital
additions since the acquisition of approximately $275,000 and other capital
additions at Quadrax of approximately $511,000.
The Company generated revenues of approximately $13,969,000 in the fiscal
year 1997, and as a result, operations were not a total source of funds or
liquidity for the Company. The Company continues to depend on outside
financing for the cash required to fund its operations. Net funds provided by
financing activities during the fiscal year 1997, after giving effect to the
repayment of debt, totaled approximately $5,908,000, as compared to $6,188,000
during fiscal year 1996.
The Company received a going concern qualification from its outside
independent auditors on its fiscal 1996 audited financial statements and
expects to receive such a qualification in fiscal 1997 as well. The results to
date have not yet been sufficient to negate the auditor's qualifications.
There is no assurance that the Company's efforts to propose a plan of
reorganization that will be confirmed will be successful. Further there is no
assurance that a confirmed plan will enable the Company to achieve viability
and profitability or to raise money will be successful. It is difficult for
the Company to predict with accuracy the point at which the Company will be
viable and profitable or whether it can achieve viability or profitability at
all, 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. (See Note 1
to the Consolidated Financial Statements regarding Subsequent events.)
Year 2000 Issues
The Company initiated its efforts to obtain Year 2000 compliance in the
information systems area in September 1997 and plans to complete the project by
March 31, 1999. Incremental SG&A expense in 1998 and the first quarter of 1999
specific to the completion of the information systems phase is expected to be
minimal as the Company presently has identified the software and hardware
required to achieve Year 2000 compliance. Related investments in capital above
the normal cost of upgrades and replacements are not expected to exceed
$400,000. With respect to operational Year 2000 compliance issues, the Company
has very few products that are, by their nature, date dependent; however,
certain manufacturing, logistics, administrative and facility systems and
equipment use embedded computer technology. The Company has established an
internal steering committee that is currently working on identifying the
necessary actions and developing a plan for systematic assessment of suppliers
and customers. The incremental internal labor costs and external expenses for
the operational compliance phase cannot be determined at this time, but are not
expected to be significant. The Company does not anticipate any material
negative impacts related to Year 2000 issues as of December 31, 1997; however,
the Company is reliant in part on the effective execution by customers and
suppliers in dealing with these issues. Unforeseen Year 2000 compliance
issues, both within Quadrax, Victor and amongst their customers and suppliers
and in general within the business and governmental communities, could
negatively impact the Company's business results.
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements of the Company as of
December 31, 1997 and December 31, 1996 and for the fiscal
years ended December 31, 1997 and December 31, 1996 are set
forth following page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning each
director and executive officer of the Company as of the date of this
Report:
Name Age Position
James J. Palermo 61 Chairman, CEO, President and
Director
John A. McQuade 54 Vice President-Technical
Coordination
Michael Buck 36 Former Vice President -
Sales and Marketing
- Golf Division
David L. Park 48 Former Vice President and
General Manager - Advanced
Materials Division
Brooks Herrick 60 Executive Vice President
and Chief Financial Officer
John Palermo 55 President and Chief Executive
Officer- Victor Subsidiary
Sven Kraumanis 52 Vice President Administration
and Director
William G. Conway 55 Director
Alan Milton 44 Director
Eugene L. Scott 60 Director
John W. Jepson 64 Director
James J. Palermo has been a member of the Board of Directors
since July 1994. Mr. Palermo has been Chief Executive Officer of
the Company since September 1994, and Chairman of the Board
Directors since February 1995. He previously served as President
and Chief Operating Officer of the Company from May 1994 to
September 1994. From January 1990 to May 1994, Mr. Palermo was a
Principal of J.P. Associates, Inc., an investment banking firm.
John A. McQuade, the Company's Vice President of Technical
Coordination since March 2, 1998, served as Vice President and Chief
Administrative Officer of the Company from May 1994 to February 13,
1998. In October 1997, Mr. McQuade assumed the responsibility of
Vice-President - General Manager - Quadrax Golf Division, a position
held through February 13, 1998. From October 1990 to May 1994, Mr.
McQuade was an Executive Vice President of J.P. Associates, Inc., an
investment banking firm. From April 1984 to September 1990, he
served as Vice President, Manufacturing of New England Digital
Corporation, a manufacturer and distributor of computer equipment.
Michael Buck, in October 1997, assumed the role of Vice-
President Sales and Marketing - Quadrax Golf Division. He served in
this capacity until the Company ceased production in this division
and Mr. Buck departed the Company's employ on February 13, 1998.
Mr. Buck served as Vice President and General Manager of the
Company's Quadrax Golf Division from January 1997 to October 1997.
He previously served as Vice President-Sales and Marketing of the
Company's Advanced Materials Division from April 1996 to January
1997. From January 1994 to April 1996, Mr. Buck was Director of
Sports Technology at Textron Specialty Materials (a division of
Textron, Inc.). From June 1986 to January 1994, Mr. Buck was Product
Manager - Boron Composites at Textron. Mr. Buck has been involved
for the past twelve years in the business development, sales and
marketing of advanced composite materials, both domestically and
internationally, with particular emphasis on the sporting goods
industry. Mr. Buck received his B.S. and M.S. degrees in Mechanical
Engineering form the University of Massachusetts and an M.B.A. with
High Distinction from Babson College.
David L. Park became Vice President - General Manager - Quadrax
Advanced Materials Division in October 1997. Mr. Park departed the
Company's employ after the Company's decision to curtail production
in its plastics industry divisions on February 13, 1998. Previously,
he had served as Vice President-Product Development of
the Company from October 1994 until October 1997. From January 1989
to October 1994, Mr. Park was Vice President and Technical Director
of Bird Machine Company, a manufacturer of equipment for the
chemical, mining, oil, environmental, pulp and paper industries.
Brooks R. Herrick became the Company's Chief Financial Officer
and Executive Vice President on August 4, 1997. Mr. Herrick is a
Certified Public Accountant with a Master of Business Administration
from Boston College and a Master of Science in Taxation from Bentley
College. From 1993 - 1996, Mr. Herrick was the Vice President of
Finance/Corporate Controller of Amtrol, Inc., West Warwick, Rhode
Island, a manufacturer of water systems that was listed on The
Nasdaq National Market before its acquisition by another company.
From 1989 - 1993, Mr. Herrick was a Key Financial Executive at Damon
Corp., a clinical laboratory company listed on the New York Stock
Exchange. Prior to 1989, Mr. Herrick worked as Vice President,
Administration and Treasurer of Carlson Metalcraft Company, Inc.,
which he co-owned, and practiced public accounting in a firm bearing
his name, after early experience with Touche Ross & Company (now
Deloitte & Touche, L.L.P.)
John Palermo is President and Chief Executive Officer of the
Victor subsidiary. From 1989 until his employment by Victor, John
Palermo served as Chief Financial Officer (1989-1994) and President
(1994-1997) of Kenney Manufacturing Company, a manufacturer of
custom window coverings. From 1976 until 1989, John Palermo held
various senior accounting and finance positions with Riley
Consolidated, Inc., a subsidiary of Ashland Oil, Inc., and from 1965
until 1976, he held various finance positions with Westinghouse
Electric Corporation. John Palermo received a B.S. in Finance from
Northeastern University. John Palermo is the brother of James
Palermo, the Chairman and Chief Executive Officer of the Company.
John Palermo's selection as President and Chief Executive Officer of
Victor, and the terms of his employment agreement with Victor, were
unanimously approved by the independent directors of the Company.
Sven Kraumanis has been a member of the Board of Directors
since July 1994. Since March 2, 1998, Mr. Kraumanis has been
employed by the Company as its Vice President of Administration. Mr.
Kraumanis has served as General Counsel to Legacy Expediters Inc., a
privately-held real estate investor, developer and contractor in
Ontario, Canada since February 1997. Previously, Mr. Kraumanis was
employed by Brassie Golf Corporation as its General Counsel from May
1993 until June 1996 and as Vice President-Acquisitions from May
1994. Brassie Golf Corporation is engaged in the apparel, accessory
and entertainment aspects of the golf industry and its common stock
is listed on the Nasdaq SmallCap Market. For the four months ending
November 1994, Mr. Kraumanis was a director of Apogee Robotics,
Inc., a publicly held company engaged in the fabrication of
mechanical and robotic materials handling systems that subsequently
filed for bankruptcy protection on December 13, 1994. From 1979
until May 1993, Mr. Kraumanis served as President and General
Counsel of Harvest Consultants, Ltd., a land development and
consulting company that he founded.
William G. Conway has been a member of the Board of Directors
since October 1994. Since April 1991, Mr. Conway has served as the
President of The Conway Company, Inc. of Santa Fe, New Mexico, a
firm engaged in real estate development, financing and consulting.
From June 1986 to February 1991, Mr. Conway was Managing Director of
Jones Lang Wootton, USA, LP, an international real estate consulting
group. From September 1994 to November 1994, Mr. Conway was a
director of Apogee Robotics, Inc., a publicly held company engaged
in the fabrication of mechanical robotic materials handling systems
that subsequently filed for bankruptcy protection on December 13,
1994.
Alan Milton has been a member of the Board of Directors since
August 1995. Since 1991, Mr. Milton has been a Managing Director of
Mantis Holdings, Inc., a New York based private investment company
that focuses on high growth manufacturers and advanced materials
suppliers within the environmental industry. Mr. Milton has been a
director of Industrial Flexible Materials, Inc., a publicly-held
company since 1992, of Composite Particles, Inc., a privately-held
company since 1993 and of Discas, Inc., a publicly-held company
since 1996. Mr. Milton holds a Master of Science degree from Clark
University.
Eugene L. Scott has been a member of the Board of Directors of
the Company since September 1995. Mr. Scott is the founder and
publisher of Tennis Week. Mr. Scott served as counsel to the United
States Tennis Open from 1971 to 1972 and is currently a member of
the board of directors of the United States Tennis Association. Mr.
Scott has served as a past president of the United States
International Lawn Tennis Club (1976) and Vice President of the
International Tennis Hall of Fame (1981). Mr. Scott is a former
professional tennis player and a member of the New York State Bar
Association.
John W. Jepson has been a member of the Board of Directors
since February 26, 1997. Mr. Jepson is president of Noble Golf Co.,
a company he founded in 1993. From 1990-1992, Mr. Jepson was
executive vice president of the Ben Hogan Company, a manufacturer of
golf balls and clubs. From 1968-1992, Mr. Jepson held various
executive positions with The Acushnet Company, a manufacturer of
golf products. Mr. Jepson holds a Master of Science and a Ph.D.
from Yale University.
Compliance With Section 16(a) of the Securities Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity
security (collectively, "Section 16 Reporting Persons"), to file
initial reports of ownership and reports of changes in ownership
with the Securities Exchange Commission. Section 16 reporting
persons are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written
representations that no other reports are required, during the
fiscal year ended December 31, 1997, except as noted below, all
Section 16 (a) filing requirements applicable to Section 16
reporting persons were satisfied.
John Palermo failed to timely file an Initial Statement of
Beneficial Ownership of Securities on Form 3 upon his engagement as
Chief Executive Officer and President of Victor. David Park, James
Palermo and John Jepson each failed to timely file one Statement of
Changes of Beneficial Ownership on Form 4.
All such reports on Form 3 and Form 4 covered two transactions
and were filed concurrently with this Annual Report on Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid to the other current executive officers of the Company
whose salary and bonus for fiscal 1997 exceeded $100,000 on an annualized
basis (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Fiscal Other Annual All Other
Name Year Salary Bonus Compensation Compensation
(1) (2)
<S> <C> <C> <C> <C> <C>
James J. Palermo 1997 $267,112 - $ 17,870 $ 53,160
Chairman of the Board 1996 $254,052 $50,000 $ 79,892(4) $ 43,010
Chief Executive Officer 1995 $224,452 - $ 16,893 $ 43,010
And President
David Park
Vice President- 1997 $124,614 - $ 6,000 $ 732
Product Development 1996 $120,000 $ 6,000 -
1995 $120,000 $12,749 $15,420 $ 600
Edward Stoltenberg
Senior Vice President 1997 $ 98,123 - $ 5,400 $35,967 (3)
and Chief Financial 1996 $120,000 $41,475 $ 2,983 -
Officer 1995 $ 48,171 $ 3,000 - -
John McQuade 1997 $117,528 - $ 6,000 $ 1,140
Vice President and 1996 $109,492 - $ 6,000 $ 956
Chief Administrative 1995 $ 91,892 $12,748 $ 6,000 $ 876
Officer
John Palermo 1997 $125,629 $ - $ 4,900 $32,434 (6)
Chief Executive Officer
and President -
Victor Subsidiary (5)
Brooks Herrick 1997 $ 49,337 $ - $ 3,000 $ 750
Chief Financial
Officer and Executive
Vice President (7)
- ---------------------------------------
(1) Consists of automobile allowances and salary deferrals under the
Company's 401(k) Plan. No other perquisites or other benefits
to any Named Executive Officer for any specified year totaled
more than the lesser of $25,000 and 10% of the total annual
salary and bonus reported for the Named Executive Officer for
that year.
(2) Unless otherwise noted, consists of premiums paid by the
Company for life and long-term disability insurance.
(3) Mr. Stoltenberg was Senior Vice President and Chief Financial
Officer from August 1995 until July 1997 and was the Acting
Chief Financial Officer from April to August 1995. He served
as consultant to the Company from August 1994 to April 1995.
In 1996, the Company gave Mr. Stoltenberg 50,000 shares of
Common Stock for services previously performed. Mr. Stoltenberg
resigned in July, 1997 and received a severance settlement of
$34,477.
(4) Includes $65,000 which is the difference between market price
and exercise price for 100,000 shares of Common Stock on the
date of exercise.
(5) Paid by Victor, except footnote (6).
(6) Includes Quadrax consulting fee of $18,000 for due diligence
performed on behalf of the Company in connection with the
Victor acquisition.
(7) Mr. Herrick joined the Company August 4, 1997 and has an
annualized salary of $120,000.
- -------------------------------------------------------------------------
Directors' Compensation
Directors who are also employees of the Company do not receive
any additional remuneration for their services as directors. Effective
January 1, 1995, each director who was not an employee of the Company
is paid $1,200 per month.
At the 1996 Annual Meeting, the Shareholders properly approved an
amendment to the 1993 Stock Plan to increase the number of options to
purchase the Company's Common Stock automatically granted to non-
employee directors of the Company on the date of each annual meeting
of shareholders. Pursuant to such amendment, each non-employee
director of the Company received a grant of non-qualified, fully-
vested options to purchase 40,000 shares of the Company's Common Stock
at the market price of the Common Stock on the date of the meeting,
retroactive to the director's date of service on the Board. Further,
included in this amendment is the right of each non-employee director
to receive an automatic grant of non-qualified options to purchase
20,000 shares of Common Stock at the market value on the following
dates: (i) the date of the 1997 Annual Meeting of Shareholders, if the
price of the Company's Common Stock is at or above $2.00 per share on
the date of such meeting; (ii) the date of the 1998 Annual Meeting of
Shareholders, if the price of the Company's Common Stock is at or
above $4.00 per share on the date of such meeting; (iii) the date of
the 1999 Annual Meeting of Shareholders, if the price of the Company's
Common Stock is at or above $8.00 per share on the date of such
meeting. All of the above options are awarded through the end of a
director's term and will vest immediately upon any change of control
of the Company resulting in the removal of the director from the
Board.
The following table sets forth certain information regarding stock
options granted by the Company to the Named Executive Officers during
fiscal 1997:
OPTION GRANTS IN LAST FISCAL YEAR
Percent
Of Total
Number of Options
Shares Granted to Exercise
Underlying Employees Price
Options In Fiscal Per Expiration
Name Granted (1) Year(2) Share Date
- ------------ ----------- -------- ------ -------
James J. Palermo 100,000(3) 7.9% $0.47 5/19/07
Dave Park (4) 50,000 3.9% $0.43 5/14/98
Ed Stoltenberg 50,000 3.9% $0.47 5/14/98
John McQuade 50,000 3.9% $0.47 5/19/07
John Palermo 150,000 11.8% $0.47 (5) 5/19/07 (5)
Brooks Herrick 100,000 7.9% $0.50 (6) 8/04/07 (6)
(1) Represents shares of Common Stock issuable upon exercise of
stock options granted under the 1993 Stock Plan.
(2) In fiscal 1997, the Company granted options to acquire an
aggregate of 1,267,500 shares.
(3) Pursuant to Mr. James Palermo's employment contract, 100,000
1993 Stock Plan options are automatically granted to him at,
market price on each of January 1, 1996, January 1, 1997 and
January 1, 1998. The 1997 grant was delayed until the
Company's shareholders enlarged the 1993 Stock Plan at the May
19, 1997 Annual Meeting.
(4) Mr. Park's options will expire on May 14, 1998 as a result
of his February 13, 1998 departure from the employ of the Company.
(5) Mr. John Palermo's 1993 Stock Plan options granted in
connection with his employment contract vest in thirds at
market prices as follows: 50,000 at $0.47 on 5/19/97,
50,000 at $0.09 at 12/31/97 and 50,000 at market at 12/31/98.
(6) Mr. Brooks Herrick's 1993 Stock Plan options granted in
connection with his employment contract vested in halves
at market prices as follows: 50,000 at $0.50 on 8/04/97 and
50,000 at $0.09 on 12/31/97.
During 1997, the Company granted the following incentive stock
options with exercise prices at the market price of Common Stock on the
date of grant to the following independent directors of the Company:
Percent
Of Total
Number of Options
Shares Granted to Exercise
Underlying Employees Price
Options In Fiscal Per Expiration
Name Granted (1) Year(2) Share Date
- ------------ ----------- -------- ------ -------
William G. Conway 40,000 3.1% $0.47 5/19/07
Sven Kraumanis 40,000 3.1% $0.47 5/19/07
Alan Milton 40,000 3.1% $0.47 5/19/07
Eugene Scott (3) 40,000 3.1% $0.47 5/19/07
John Jepson 50,000 3.9% $0.47 (4) 5/19/07 (4)
(1) Represents shares of Common Stock issuable upon exercise of stock
options granted under the 1993 Stock Plan pursuant to automatic
grants approved by the Company's stockholders in 1996.
(2) Grants of 40,000 options to each director on May 19, 1997
are fully vested.
(3) In February 1997, 80,000 options previously granted to
Eugene Scott pursuant to the 1993 plan were re-priced to an
exercise price per share of $0.75. This adjustment was made
in consideration of Mr. Scott's forbearance regarding certain
of the Company's payables due to his controlled corporation.
(4) Mr. Jepson received a grant of 10,000 ten-year options
exercisable at $0.84 upon consenting to become a director on
February 24,1997.
None of the Named Executive Officers exercised options during the last
fiscal year. The following table shows fiscal year-end option values for
the Named Executive Officers:
FISCAL YEAR-END STOCK OPTION VALUES
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Options at Year-End Options at Year-End
------------------------ ----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- ------------
James J. 830,000 (1) -0- -0- -0-
Palermo
David. 122,000 (2) -0- -0- -0-
Park
Edward 80,000 (3) -0- -0- -0-
Stoltenberg
John 132,000 (4) -0- -0- -0-
McQuade
John 100,000 (5) -0- -0- -0-
Palermo.
Brooks 100,000 (6) -0- -0- -0-
Herrick
(1) Exercise prices per share: 530,000 at $0.68; 100,000 at $0.10;
100,000 at $0.84; 100,000 at $0.47.
(2) Exercise prices per share: 50,000 at $0.43; 72,000 at $0.68
(3) Exercise prices per share: 30,000 at $0.68; 50,000 at $0.47
(4) Exercise prices per share: 82,000 at $0.68; 50,000 at $0.47
(5) Exercise prices per share: 50,000 at $0.47; 50,000 at $0.09
(6) Exercise prices per share: 50,000 at $0.50; 50,000 at $0.09
(7) Value is based on the closing bid price per share of Common Stock
on December 31, 1997($0.09) as reported on the NASDAQ SmallCap
Market, less the applicable option exercise price. These values
have not been, and may never be, realized. Actual gains, if any,
on exercise will depend on the value of the Common Stock on the
date of the sale of the shares.
Also, see ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
regarding the December 31, 1997 re-instatement of certain executive
officers' stock options in exchange for a return to the Company of the
stock previously obtained by their conditional exercise.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of March 31, 1998, by (i) each
person known by the Company to own beneficially more than five percent of
the Common Stock, (ii) each director of the Company, (iii) each executive
officer and (iv) all directors and executive officers of the Company as a
group.
Amount and Nature of % of
Name(2) Beneficial Ownership(1) Class
James J. Palermo (10) 940,000 2.1
David Park (5) 129,000 *
John A. McQuade (3) 135,500 *
John Palermo (4) 150,000 *
Brooks R. Herrick (6) 100,000 *
William G. Conway (6) 173,333 *
Sven Kraumanis (6) 173,333 *
Alan W. Milton (6) 185,000 *
Eugene L. Scott (7) 192,000 *
John W. Jepson (8) 104,720 *
Michael Buck (9) 175,000 *
All officers and
directors as a group
(11 persons) 2,457,886 5.5
__________________________________________
(1) Each stockholder possesses sole voting and investment power
with respect to the shares listed, except as otherwise noted,
and subject to community property laws where applicable.
(2) The address of each named person is in care of: Quadrax
Corporation, 618 Main St., West Warwick, Rhode Island 02893-0901
(3) Includes 132,000 shares of Common Stock subject to outstanding
options, which are exercisable within sixty days after
March 31, 1998.
(4) Includes 100,000 shares of Common Stock subject to outstanding
options exercisable within sixty days after March 31, 1998.
(5) Includes 122,000 shares of Common Stock subject to outstanding
options exercisable until May 14, 1998.
(6) Consists solely of options to purchase shares of Common Stock
exercisable within sixty days after March 31, 1998.
(7) Includes 130,000 shares of Common Stock subject to outstanding
options exercisable within sixty days after March 31,1998
and 60,000 shares of indirectly owned Common Stock held by
Eugene Scott's controlled company.
(8) Includes 50,000 shares of Common Stock subject to outstanding
options exercisable within sixty days after March 31, 1998
and 4,720 shares of indirectly owned Common Stock held by
Mr. Jepson's spouse of which shares Mr. Jepson disclaims
beneficial ownership.
(9) Consists solely of 175,000 shares of Common Stock subject to
outstanding options exercisable until May 14, 1998.
(10) Includes 930,000 shares of Common Stock subject to options
exercisable within sixty days after March 31, 1998.
Changes in Control
The Company's Chapter 11 filing increases the probability of the
Company's reorganization entailing the sale of substantial Company
assets or some form of merger or business combination possibly
resulting in a change in control of the Company. Additionally, the
low per share price for shares of the Company's stock increases the
possibility that a buyer or buyers may acquire such quantity of
shares that may affect the existing control of the Company. Also,
conversion of the Company's convertible debentures into shares of the
Company's stock, under certain circumstances, may result in the
issuance of such quantity of new shares of the Common Stock so as to
influence control of the Company. Except for the above
circumstances, the Company has no knowledge of any arrangements that
may result in a change of control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Chairman, Chief Executive Officer and President,
James J. Palermo, and subsidiary Victor's President and Chief
Executive Officer, John Palermo, are brothers.
In exchange for the stock certificates issued to four officers
of the Company, and effective December 31,1997, the Company returned
to such officers their canceled notes aggregating approximately
$601,000 pursuant to the notes' provisions. The notes were given to
and held by the Company as payment for the conditional 1996 and 1997
exercise by the officers of certain of their stock options pursuant
to the 1996 agreement. Cancellation of the transaction returned
968,500 shares to treasury and re-instated the officers' 968,500
options.
Employment and Termination Arrangements
The Company has entered into certain employment and termination
agreements with the following Executive Officers:
James J. Palermo, the Chairman and Chief Executive Officer of
the Company, entered into an employment agreement with the Company on
January 1, 1996 that was approved by the Board in February 1996.
Under the terms of this agreement, for fiscal 1996, Mr. Palermo
received a base salary of $250,000 with certain increases in 1997 and
1998 and a yearly bonus to be dependent on the profitability of the
Company. The agreement provides for certain benefits, including
payment by the Company of premiums for life insurance on Mr. Palermo
and an automobile allowance and options exercisable for a total of
100,000 shares of Common Stock under the 1993 Stock Plan on January
1, 1996, 1997, and 1998, respectively for an exercise price of the
fair market value of the Common Stock on that date of each year.
Upon termination of his employment, Mr. Palermo is entitled to
receive severance benefits which include the payment of his base
salary for a period of one year plus any health and disability
benefits during this period. Mr. Palermo will receive a performance
bonus and up to an additional 100,000 options each year tied to the
Company's revenue and net income and the price of the Company's
Common Stock. Mr. Palermo will be granted certain options that vest
immediately upon termination of his employment due to any change of
control of the Company. Effective January 1, 1998, Mr. Palermo's
periodic salary payments were substitutionally made by Victor.
Concurrently, Mr. Palermo personally assumed the payment
responsibility for his life insurance premiums and auto allowance. In
further recognition of the Company's financial condition, on March
31, 1998, Mr. Palermo again reduced his compensation to a salary of
$194,000 per annum with provision for reimbursement of corporate
expenses. The Company's Board of Directors, acting unanimously and as
the Compensation Committee, accepted Mr. Palermo's compromise and
ratified the arrangements to date.
Brooks Herrick joined the Company on August 6, 1997 as its Chief
Financial Officer and Corporate Executive Vice President. Mr.
Herrick's letter of employment provided for an unspecified term with
a contract to be negotiated in January 1998. Mr. Herrick's
compensation includes a salary of $120,000 per annum paid bi-weekly,
50,000 options granted and priced at each of August 4,1997 and
December 31,1997, and benefits ordinarily provided to the Company's
senior officers. No contract was negotiated with Mr. Herrick and
presently the Company has an oral agreement with Mr. Herrick engaging
him to continue his employment on the terms as previously described.
Effective January 1, 1998 the periodic salary payments to Mr. Herrick
have been substitutionally made by Victor.
John A. McQuade, the Company's Vice President of Technical
Coordination was previously employed as its Vice President of
Administration and Vice President - General Manager of its Golf
Division. Pursuant to his January 1996 employment agreement, Mr.
McQuade received a base salary of $110,000 per year and certain
benefits common to all executive officers of the Company. Upon
termination or expiration of the employment agreement, Mr. McQuade is
subject to a non-competition agreement during any period during which
he is being paid by the Company and upon termination is entitled to
his base salary for one year as severance. The Agreement expires on
December 31, 1996, but provides that the term will be renewed
annually until either party provides notice of termination in
accordance with the terms thereof. The Agreement has renewed annually
in accordance with those terms. On February 13, 1998, Mr. McQuade's
employment was terminated along with the other managers employed by
the Company in connection with the Company's impending closure of the
plastics divisions. On March 2,1998, Mr. McQuade was hired as the
Company's Vice President of Technical Coordination, a position
related to the Company's plastics industry and underlying its plan of
reorganization. Mr. McQuade's oral employment agreement provides for
a similar base salary as described above.
John Palermo, Victor's Chief Executive Officer, is employed
under a three-year employment agreement which provides for a base
annual salary of $215,000 per year. Such annual salary is subject to
annual review by the Board of Directors with respect to increases.
In addition, John Palermo may receive a bonus based upon criteria to
be developed by the Board of Directors of the Company following
approval of Victor's strategic plan. John Palermo also received
options to purchase 150,000 shares of the Company's common stock,
vesting in three stages ending December 31, 1998, and received such
fringe benefits as are made available to other senior executives of
Victor. Victor also has agreed to pay the premium on an existing
life insurance policy for John Palermo. John Palermo's employment
agreement contains a non-competition provision which extends through
the end of Mr. Palermo's employment term. Upon termination of his
employment, Mr. Palermo is entitled to receive severance benefits
which include the payment of his base salary for a period of six
months plus any health and disability benefits during this period.
Sven Kraumanis joined the Company on March 2, 1998 as its Vice
President of Administration. The oral employment agreement with Mr.
Kraumanis provides for an annual salary of $130,000 and the
reimbursement of his expenses.
Severance Policy: Effective January 1, 1997, the Company
implemented a universal severance policy in an effort to stabilize
termination arrangements in connection with departing employees not
having written contracts. The policy applies to corporate officers,
general managers and all employees reporting to general managers. The
policy provides for up to six months of severance pay, at
management's discretion, in the event of employee terminations based
on workforce reductions or employee terminations occurring within the
year following a change of control of the company. A "change of
control" is defined as the sale, exchange or transfer of 20% or more
of the outstanding stock of the Company to one buyer or group of
affiliated buyers, or, the sale, exchange or transfer of
substantially all the Company's assets to any party not holding 5% or
more of the Company's Common stock on January 1, 1997. Employees
terminated for cause are not entitled to severance compensation.
Generally, "cause" includes documented under-performance, substance
abuse, dishonesty and conviction for crimes of moral turpitude.
<PAGE>
PART IV
ITEM 13.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements. Reference is made to page F-1 for all
financial statements 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
since November 15, 1997, the due date of the Company's Form
10-QSB/A-2 for its third quarter:
On December 12, 1997, the Company issued a press release
announcing suspended operations for a three week period ending
January 5,1998. The Company's action was to conserve cash through
this traditionally slow period and permit management to seek
financing and evaluate reorganization alternatives outside the
protection of proceedings under Chapter 11 of the United States
Bankruptcy Code.
On February 27, 1998 the Company filed a Report on Form 8-K
and issued a press release to announce the cessation of its plastics
industry operations, the Company's Chapter 11 filing, and the
continuance of Victor Corp's electric wire and cable business.
On April 15,1998 the Company filed a Report on Form 8-K
and issued a press release to announce its inability to timely
meet its Annual Report on Form 10-KSB filing deadline. The
filing delay to May 4,1998 was attributable to the additional
accounting burden caused by the Bankruptcy court filings.
The Company requested the delisting of its common stock which was
currently listed in the The Nasdaq SmallCap Market under the
trading symbol "QDRXQ", effective at the close of market, April 15,
1998.
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.
The following documents are filed as exhibits to this Annual Report
on Form 10-KSB:
Exhibit
No. Description
- ----- -----------------------------------
2.1 Stock Purchase Agreement between Quadrax
Corporation and Exeter Capital L.P.
dated May 7, 1997 (20)
3.1 Certificate of Incorporation, as amended (15)
3.1(a) Certificate of Designation of Class A
Preferred Stock - Series B (19)
3.2 By-laws of the Company, as amended (4)
4.1 Specimen Common Share Certificate (1)
4.2 Securities Purchase Agreement dated August 4,
1997 and Amendment No. 1 dated August 22, 1997
between the Company and Sovereign Partners, L.P.,
and Amendment No. 2 between the Company and
Dominion Capital Fund dated October 8,1997,
respectively
4.3 Registration Rights Agreement dated August 4,
1997 between the Company and Sovereign
Partners, L.P.
4.4 Form of $1,000,000 Convertible Debenture due
August 4, 1999
4.5 Form of $750,000 Additional Debenture due
August 1, 1999
4.6 Form of Warrant issued August 4, 1997
4.7 Specimen Certificate for Class C Warrants
(15)
4.8 Form of Warrant Agreement with American Stock
Transfer & Trust Company, as Warrant Agent
for Class C Warrants (5)
4.9(a) Form of $2,150,000 Convertible Debenture
bearing interest at the rate of 8% per
annum due October 8, 1998 (19)
4.9(b) Form of $3,600,000 Convertible Debenture
bearing interest at the rate of 8% per
annum due February 10, 1999 (19)
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 Stock Option Plan (15)
10.5 Business Loan Agreement between Bank of the
Cascades and Lion Golf of Oregon, Inc., dated
December 16, 1994. (19)
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)
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 issues 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 Warrants
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 Commercial Lease between the Dunes Motel and
Gift Shop of Bend, Ltd., as Landlord, and the
Lion Golf or Oregon, Inc., as Tenant, dated
July 7, 1994 (19)
10.16 Commercial Lease between Coral Tree Commerce
Center Associates as Landlord, and the
Company, as Tenant, dated April 10, 1996 (19)
10.17 Stock Purchase Agreement between the Company
and Conagher & Co. Inc., dated July 8, 1994,
and as amended November 15, 1994 (13)
10.18 Stock Purchase Agreement between the Company
and Conagher & Co. Inc., dated August 26,
1994 (13)
10.19 Amendment to Stock Purchase Agreement between
the Company and Conagher & Co. Inc., dated
September 16, 1994 (13)
10.20 Key Employee Agreement dated January 1, 1996
between the Company and James J. Palermo. (18)
10.21 Agreements 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., Pattison Hayton, Ill, Richard A.
Fisher and James J. Palermo (15)
10.22 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)
10.23 Letter Agreement dated March 17, 1995 among
the Company, Allied-Asian Consolidated
Limited, Conagher & Co., Inc., Pattison
Hayton, III, Richard A. Fisher and James J.
Palermo (15)
10.24 Second Amendment to Agreement for the
Creation of a Voting Trust in settlement
of claims and liabilities (16)
10.25 Stock Purchase Agreement dated November 15,
1995 between the Selling Stockholders of Lion
Golf or Oregon, Inc. named therein and the
Company (17)
10.26 Unsecured Promissory Note dated December 29,
1995 between the Company and Robert K. Cole (17)
10.27 Debt Repayment Note dated December 29, 1995
between Lion Golf of Oregon, Inc. and Robert
K. Cole (17)
10.28 Employment Agreement dated December 29, 1995
between Lion Golf or Oregon, Inc. and James
Cole. (17)
10.30 Key Employee Agreement dated January 1, 1996
between the Company and John McQuade (18)
10.31 Key Employee Agreement dated January 1, 1996
between the Company and Edward A. Stoltenberg (18)
10.32 Loan and Security Agreement between Victor
Corporation and Congress Financial dated
May 7, 1997 (20)
10.32 Lease between CRW Real Estate Partnership, as
amended, and Victor Corporation dated as of
October 31, 1995 (20)
10.34 Employment Agreement between Victor Electric
Wire & Cable Corp. and John Palermo (21)
21.1 List of Subsidiary Corporations
99.1 Press Release dated April 15, 1998 (22)
99.2 Severance Policy of Quadrax Corporation dated
January 1, 1997
- ------------------------------------------------------
1. Incorporated by reference from the Company's
Registration Statement on Form S-1,
File No. 33-14275, filed May 19, 1987.
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, 1997.
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 20, 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.
17. Incorporated by reference from the Company's
Form 8-K, dated December 29, 1995, filed
January 15, 1996.
18. Incorporated by reference from the Company's
Amendment No. 3 to Form 10-K/A for the
fiscal year ended December 31, 1995, filed
February 18, 1997.
19. Incorporated by reference from the Company's
Amendment No. 1 to Form 10-K for the fiscal
year ended December 31, 1996, filed
October 24, 1997.
20. Incorporated by reference from the Company's
Form 8-K/A Number 1 dated as of May 7, 1997.
21. Incorporated by reference from the Company's
Form 10-QSB for the fiscal quarter ended
June 30, 1997.
22. Incorporated by reference from the Company's
Form 8-K dated April 15, 1998.
E-1
<PAGE>
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
James J. Palermo
Chairman of the Board of
Directors, and Chief
Executive Officer
Principal Executive Officer)
Dated: May 4, 1998
By:/s/ Brooks R. Herrick
Brooks R. Herrick
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Dated: May 4, 1998
By: /s/ William G. Conway
William G. Conway
Director
Dated: May 4, 1998
By: /s/ John W. Jepson
John W. Jepson
Director
Dated: May 4, 1998
By: /s/ Sven Kraumanis
Sven Kraumanis
Director
Dated: May 4, 1998
By: /s/ Alan Milton
Alan Milton
Director
Dated: May 4, 1998
By: /s/ Eugene L. Scott
Eugene L. Scott
Director
Dated: May 4, 1998
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Quadrax Corporation:
We have audited the accompanying consolidated balance sheets of Quadrax
Corporation (Debtor-in-Possession) and subsidiaries at December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. 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, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2, Quadrax Corporation, subsequent to the date of
the financial statements, filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code. The accompanying consolidated financial statements do
not purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such consolidated financial statements do not
purport to show (a) as to assets, their realizable value on a liquidation basis
or their availability to satisfy liabilities; (b) as to prepetition liabilities,
the amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to shareholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations, the
effect of any changes that may be made in its business. The outcome of these
matters is not presently determinable. Accordingly, the consolidated financial
statements do not include adjustments that might result from the ultimate
outcome of these uncertainties.
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1,2 and 13, the
Company's recurring losses from operations and future need for new financing
raise substantial doubt about its ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its ability
to (a) achieve profitability based on the successful development and
implementation of a plan for restructuring operations and (b) obtain new
financing when needed to pay for restructuring activities. Management's plans
concerning these matters are also discussed in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
/s/LIVINGSTON & HAYNES, P.C.
LIVINGSTON & HAYNES, P.C.
Wellesley, Massachusetts
May 1, 1998
F-1
<PAGE>
Quadrax Corporation
Consolidated Balance Sheets
ASSETS
December 31, December 31,
1997 1996
Current assets:
Cash and cash equivalents $ 53,042 $1,200,063
Accounts receivable, less allowances of
$106,000 and $219,000 in 1997 and 1996,
respectively 2,346,881 883,005
Inventories (Note 4) 2,408,190 1,266,074
Other current assets 159,639 184,848
--------- --------
TOTAL CURRENT ASSETS 4,967,752 3,533,990
Property and equipment, at cost:
Machinery and equipment 7,063,791 4,618,313
Office equipment 958,451 910,895
Leasehold improvements 1,179,563 1,089,119
--------- ---------
9,201,805 6,618,327
Less accumulated depreciation and amortization (4,119,284) (3,467,661)
--------- ---------
NET PROPERTY AND EQUIPMENT 5,082,521 3,150,666
Goodwill, net of amortization of $7,903
in 1996 (Note 16) -0- 110,651
Other assets, (Note 10) 88,414 268,179
License agreement, net of amortization of
$600,000 in 1997 and 1996 -0- -0-
Deferred assets, less amortization of $66,000 304,639 236,238
and $70,600 in 1997 and 1996, respectively
---------- ----------
TOTAL ASSETS $10,443,326 $7,299,724
See accompanying notes to the consolidated financial statements
F-2
<PAGE>
Quadrax Corporation
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1997 1996
Current liabilities:
Accounts payable $ 3,611,058 $ 685,212
Accrued expenses (Note 3) 1,889,035 1,306,053
Current portion of long-term debt (Note 7) 1,109,515 856,904
--------- ---------
TOTAL CURRENT LIABILITIES 6,609,608 2,848,169
Long-term debt, less current portion (Note 7) 2,711,221 360,739
Convertible debentures payable (Note 7) 3,187,500 1,400,000
--------- ---------
TOTAL LIABILITIES 12,508,329 4,608,908
Stockholders' equity (Note 5):
Common stock 417 298
Additional paid-in capital 73,881,994 68,701,531
Retained earnings, deficit (74,220,865) (63,757,759)
--------- ----------
(338,454) 4,944,070
Less:
Treasury stock, at cost; 656 shares of
Original convertible preferred stock
at December 31, 1997 and 1996 and 1,090,843
and 137,728 shares at December 31, 1997,
and 1996 respectively shares of
common stock (Note 14) (1,726,549) (1,125,969)
Unearned compensation and deferred
expenses (Note 8) -0- (504,193)
Notes receivable for options (Note 14) -0- (623,092)
--------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,065,003) 2,690,816
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,443,326 $ 7,299,724
========= =========
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
Quadrax Corporation
Consolidated Statements of Operations
December 31, December 31,
1997 1996*
Net Sales $13,968,736 $3,207,282
Cost of goods sold 13,922,669 4,115,034
----------- ---------
GROSS PROFIT 46,067 (907,752)
Operating Expenses:
Research and development 1,116,828 810,388
Selling, general and administrative 5,875,699 4,872,339
Provision for bad debt 92,000 123,600
Litigation and restructuring costs (Note 11) 1,270,000 1,325,000
--------- ----------
INCOME FROM OPERATIONS (8,308,460) (8,039,079)
Other Income (Expenses)
Interest expense (2,002,231) (1,880,774)
Interest income 47,545 69,637
Other (expense)income, net (199,960) 290,648
---------- ---------
NET LOSS ($10,463,106) ($ 9,559,568)
=========== ==========
NET LOSS PER COMMON SHARE ($0.26) ($0.40)
========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 39,751,478 23,922,373
========== ==========
* Reclassified to conform to current period presentation.
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Preferred Shares Outstanding Common
Shares Preferred Stock
Part I Class A
Class A Common
Original Convertible Issued
Outstanding Original Convertible Stock
<S> <C> <C> <C> <C>
<C> <C> <C>
Balances, December 31, 1995 318 0 17,804,847
17,772,812 $6 $0 $160
Issuance of Common Stock for
services to be performed 300,000 300,000 3
Common stock issued for
services performed 287,026 287,026 2
Issuance of stock in private placements
Class A, Series B Convertible Preferred 3,500 30
Exercise of common stock options 1,207,767 1,207,767 11
Conversion of convertible instruments
Original preferred (318) (6)
Class A, Series B convertible preferred (3,500) 4,436,926 4,436,926
Convertible debentures 7,877,548 7,877,548 84
Amortization of unearned
compensation and deferred expenses
Purchase of Treasury Stock (Note 9)
Issuance of stock to original preferred
shareholders 276,000 276,000 3
Issuance of stock to complete McManis
Sports acquisition 522,738 522,738 5
Expenses incurred in raising of capital
Net loss for the year
____ ________ ___________ ___________ ____ ________ ________
Balances, December 31, 1996 0 0 32,712,852 32,680,817 0 0 $298
Reinstated treasury stock shares (90,308)
Treasury stock acquired from cancellation of notes
Receivable pursuant to the note's provisions (968,500)
Note canceled as part of severance package
Note of Lion which was distributed as part of
disposition
Common stock issued for services performed 175,000 175,000 2
Exercise of common stock options 108,950 108,950 1
Conversion of convertible instruments
Issuance of stock for interest 119,323 119,323 1
Warrants exercised 862,500 862,500 8
Convertible debentures 11,841,132 11,841,132 107
Amortization of unearned
compensation and deferred expenses
Expenses incurred in raising of capital
Net loss for the year
________ _______ ___________ ___________ ___ _____ ____
Balances, December 31, 1997 0 0 45,819,757 44,728,914 0 0 $417
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Part II Paid In Earnings Treasury Deferred Unearned
Capital (Deficit) Stock Expense Compensation
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 $58,288,953 $(54,198,191) $(1,043,009) $0 $(339,769)
Issuance of Common Stock for
services to be performed 299,997 (300,000)
Common stock issued for
services performed 255,619
Issuance of stock in private placements
Class A, Series B Convertible Preferred 3,499,970
Exercise of common stock options 828,270 (34,000)
Conversion of convertible instruments
Original preferred
Class A, Series B convertible preferred
Convertible debentures 6,302,285
Amortization of unearned
compensation and deferred expenses 30,000 105,576
Purchase of Treasury Stock (Note 9)
Issuance of stock to original preferred
shareholders
Issuance of stock to complete McManis
Sports acquisition (48,960)
Expenses incurred in raising of capital 773,563
Net loss for the year (9,559,568)
________ ____________ ________ _________ _________
Balances, December 31, 1996 $68,701,531 $(63,757,759) (1,125,969) $(270,000) $(234,193
Reinstated treasury stock shares
Treasury stock acquired from cancellation of notes
Receivable pursuant to the note's provisions (600,580)
Note canceled as part of severance package
Note of Lion which was distributed as part of
disposition
Common stock issued for services performed 99,500
Exercise of common stock options 74,086
Conversion of convertible instruments
Issuance of stock for interest 64,748
Warrants exercised 361,780
Convertible debentures 5,244,253
Amortization of unearned
compensation and deferred expenses 270,000 234,193
Expenses incurred in raising of capital (663,904)
Net loss for the year (10,463,106)
___________ ____________ __________ _______ _________
Balances, December 31, 1997 $73,881,994 $(74,220,865) $(1,726,549) $0 $0
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
From Related
Part III Parties Total
<C> <C> <C>
Balances, December 31, 1995 $0 $2,708,150
Issuance of Common Stock for
services to be performed
Common stock issued for
services performed 255,621
Issuance of stock in private placements
Class A, Series B Convertible Preferred 3,500,000
Exercise of common stock options (623,092) 171,189
Conversion of convertible instruments
Original preferred (6)
Class A, Series B convertible preferred
Convertible debentures 6,302,369
Amortization of unearned
compensation and deferred expenses 135,576
Purchase of Treasury Stock (Note 9) 0
Issuance of stock to original preferred
shareholders 3
Issuance of stock to complete McManis
Sports acquisition (48,955)
Expenses incurred in raising of capital (773,563)
Net loss for the year (9,559,568)
________ __________
Balances, December 31, 1996 $(623,092) $2,690,816
Reinstated treasury stock shares
Treasury stock acquired from cancellation of n
Receivable pursuant to the note's provisions 600,580 0
Note canceled as part of severance package 48,960 48,960
Note of Lion which was distributed as part of
disposition 37,812 37,812
Common stock issued for services performed 99,502
Exercise of common stock options (64,260) 9,827
Conversion of convertible instruments
Issuance of stock for interest 64,749
Warrants exercised 361,788
Convertible debentures 5,244,360
Amortization of unearned
compensation and deferred expenses 504,193
Expenses incurred in raising of capital (663,904)
Net loss for the year (10,463,106)
________ ___________
Balances, December 31, 1997 $0 $(2,065,003)
/TABLE
<PAGE>
Quadrax Corporation
Consolidated Statements of Cash Flows
Year Ended
December 31, December 31,
1997 1996
Cash flows from operating activities:
Net loss ($ 10,463,106) ($ 9,559,568)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization
of fixed assets 1,001,925 633,068
Amortization of intangibles 26,096 136,591
Amortization of deferred expense 504,193 135,576
Common stock issued for stock options
exercised (64,264) -
Common stock issued for expenses 99,500 180,620
Common stock issued for interest 848,201 1,635,714
Debt issued for interest 787,500 -
Non cash severance pay 48,960 -
Write down of restructured assets 405,479 611,541
Decrease in other assets 260,264 -
Net asset changes on disposition of
Lion Golf 248,493 -
Effect on cash flows of changes
in assets and liabilities:
Accounts receivable and other 127,707 382,296
Inventories (492,325) 200,739
Prepaid expense and other assets 16,809 (50,651)
Accounts payable 1,557,004 (185,776)
Accrued expenses (471,814) 105,274
--------- ---------
Net cash used in operating activities ($5,559,378) ($5,774,576)
See accompanying notes to the consolidated financial statements.
<PAGE>
Quadrax Corporation
Consolidated Statements of Cash Flows (continued)
Year Ended
December 31, December 31,
1997 1996
Cash flows from investing activities:
Capital expenditures, net of acquisition (741,630) (1,792,793)
Other intangible assets purchased (43,953) (33,752)
Payments for business acquired
net of cash acquired (710,165) -
--------- --------
Net cash provided by(used in)
investing activities (1,495,748) (1,826,545)
Cash flows from financing activities
Proceeds from exercise of
common stock options 74,086 -
Net proceeds from sale of
stock and warrants 361,780 3,187,432
Issuance of debt instruments 923,297 95,579
Issuance of convertible debt,
net of costs 4,796,896 3,477,889
Payment of note to related party - (300,000)
Repayment of debt (247,954) (273,271)
--------- --------
Net cash provided by financing activities 5,908,105 6,187,629
Net increase (decrease) in cash
and cash equivalents (1,147,021) (1,413,492)
Cash and cash equivalents
at beginning of period 1,200,063 2,613,555
--------- ---------
Cash and cash equivalents at end of period $ 53,042 $1,200,063
========= =========
Supplemental cash flow information:
Cash interest paid $ 292,472 $ 239,550
See accompanying notes to the consolidated financial statements.<PAGE>
Quadrax Corporation
Consolidated Statements of Cash Flows (continued)
Supplemental Schedule of Significant Noncash Transactions:
1997:
The Company issued 11,841,132 shares of its common stock in exchange for the
cancellation of $4,460,800 of its convertible debentures and approximately
$783,000 of imputed interest expense.
The Company issued 175,000 shares of its common stock for payment of $99,500 of
accrued liabilities and expenses.
The Company disposed of its wholly-owned subsidiaries Lion Golf of Oregon, Inc.,
("Lion Golf"), and McManis Sports Associates, ("McManis") by Lion Golf's former
principal shareholder assuming the responsibility for all Lion Golf's
indebtedness including $752,376 in notes payable.
The Company issued 119,323 shares of the common stock in payment of $64,748 of
interest.
The Company canceled notes given to and held by officers for exercise of stock
options which were by their terms payable by return of the shares exercised or
by cash in the amount of $600,580. The returned 968,500 shares were added to
treasury stock and the 968,500 options were reinstated.
1996:
The Company issued 7,877,548 shares of its common stock in exchange for the
conversion of $4,666,666 of its convertible debentures and approximately
$1,635,000 of imputed interest expense.
The Company issued 287,026 shares of its common stock for payment in full for
$160,854 of accrued liabilities and expenses.
The Company acquired 114,084 shares of common stock for the Treasury via the
exercise of stock options.
The Company issued 300,000 shares of its common stock for consulting services.
The Company issued 4,436,926 shares of its common stock in exchange for the
conversion of $3,500,000 of its Series B Convertible Preferred Stock.
The Company issued 522,738 shares of its common stock to the former shareholders
of McManis Sports Associates, Inc. in settlement of a claim relating to the sale
to the Company of all of the issued and outstanding shares of Common Stock of
McManis Sports Associates, Inc. in 1994.
The Company canceled $68,000 of its subordinated debt due the former principal
shareholder of Lion Golf in consideration for his exercise of stock options.
See accompanying notes to the consolidated financial statements.
Quadrax Corporation
Notes to Consolidated Financial Statements
December 31, 1997
1. Subsequent Event
Quadrax Corporation, a Delaware corporation (the "Company") was incorporated on
March 6, 1986 and until 1994 was a development stage company that developed
defense industry products from its advanced composite materials. Beginning in
1994, the Company focused its attention on the sporting goods and industrial
products markets. Victor Corporation, a business acquired in May, 1997, engages
in the manufacture of electric wire and cordsets.
Due to the Company's inability to obtain sufficient financing, the Company
significantly scaled down its composite materials divisions during the latter
part of 1997. The Victor Electric Wire and Cable Corporation division continues
to operate as usual.
As of December 31, 1997, the Company was in default on its lease payments to its
landlord on the Portsmouth, Rhode Island facility. Further, the Company was
notified by the holders of the mortgage of their intention to foreclose and sell
the building.
The Company had a working capital deficiency of approximately $1.6 million at
December 31, 1997. As of that date, the Company has not generated sufficient
cash flow from recurring operations in the composite materials divisions to
sustain the composite materials operations.
At the close of business on February 27, 1998 (the "Petition Date"), Quadrax
Corporation filed a petition in the United States Bankruptcy Court for the
District of Rhode Island seeking protection from its creditors under Chapter 11
of the Bankruptcy Code.
A bankruptcy petition was filed in order for management to obtain an opportunity
to reorganize the Company. The Company expects to reorganize its affairs under
the protection of Chapter 11 through a plan of reorganization. Although
management expects to file a plan of reorganization in 1998, there can be no
assurance at this time that a plan of reorganization will be proposed by the
Company, or approved by its creditors, or confirmed by the Bankruptcy Court, or
that such plan will be consummated. After the expiration of the Company's
exclusivity period for filing such a plan, creditors of the Company have the
right to propose alternative plans of reorganization. Any plan of
reorganization, among other things, is likely to result in material dilution or
elimination of the equity of existing shareholders.
During the Chapter 11 filing, the Company is prohibited from paying, and
creditors are prohibited from attempting to collect, claims or debts arising
pre-petition without approval of the Bankruptcy Court. The consummation of a
plan of reorganization is the principal objective of the Company's Chapter 11
case. A plan of reorganization sets forth the means for satisfying claims and
interests in the Company, including liabilities subject to compromise.
The consummation of a plan of reorganization for the Company will require the
requisite vote of impaired creditors and interest holders in accordance with the
provisions of the Bankruptcy Code and confirmation of the plan by the Bankruptcy
Court.
The Bankruptcy Case itself should be resolved by either a dismissal of the
petition, a confirmation of a plan of reorganization proposed by the Company,
its creditors or a third party, or a conversion of the case to a liquidation
under Chapter 7 of the Code.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue to operate as a going concern which requires the
realization of assets and settlement of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filing and
circumstances relating to this event, including the Company's losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the financial statements
Further, a plan of reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all adjustments or the
carrying value of assets or liabilities that might be necessary as a consequence
of a plan of reorganization.
The appropriateness of using the going concern basis is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations of the operating subsidiary and the ability to generate sufficient
cash from collection of receivables and sales of non-strategic assets to meet
the obligations of the Company during its status as Debtor In Possession.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Quadrax
Corporation (the Company) and its wholly-owned subsidiaries. The Consolidated
Balance Sheets include Victor Electric Wire and Cable, Inc. All intercompany
transactions have been eliminated. The consolidated financial statements have
been prepared on a going-concern basis. The Company from its inception, through
December 31, 1997, 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. Such additional
financing must result from and is contingent upon a confirmed and consummated
plan of reorganization. The 1997 consolidated financial statements do not
include any adjustments related to the uncertainty of future financing. For the
fiscal year ended December 1997, the Company has raised approximately $4,460,800
from the sale of its convertible debentures in exempt transactions with private
parties.
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. All references to years in these notes to consolidated
financial statements represent fiscal years unless otherwise noted.
Revenue Recognition
Revenues are recorded as services are performed. Revenues derived from services
provided under fixed-price contracts are recognized on a
percentage-of-completion basis. If it is determined that a contract may result
in a loss, a provision for the loss is accrued at such time. For revenues
derived from product sales other than fixed price contracts, sales are
recognized based on shipment of products. Returned goods are recorded in
inventory at cost if they are saleable, or at scrap value if the goods cannot be
sold.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounts Receivable
The Company performs periodic credit evaluations and generally does not require
collateral.
Inventories
Inventories are valued at the lower of first-in, first-out cost or market (FIFO)
method, except for copper inventory which is valued by the last-in, first out
(LIFO) method and finished goods which are valued at standard cost which
approximates the lower of cost or market. Market for parts and materials is
determined based on replacement cost; market for finished goods is determined
based on net realizable value. The Company periodically reviews its inventories
to determine obsolete items in light of its marketing and business plans. At the
time obsolescence is ascertained, inventory items are written down to their net
realizable values.
Property and Equipment
Depreciation is provided on straight-line and accelerated method over the
estimated useful lives of the assets, ranging from three to eight 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 periodically reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable.
Convertible Securities Conversion Discount
The discount to market value rights on conversion of convertible debentures to
common stock is recorded as interest expense over the period from the sale of
the debentures to the first conversion date, while for convertible preferred
stock the conversion discount is recorded as a preferred stock dividend.
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.
Stock Options
The Company accounts for stock options granted based on APB Opinion #25 whereby
options granted are valued at market price on date of grant, less exercise
price.
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
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" which was
adopted prior to fiscal 1994. The implementation of SFAS No. 109 did not have a
material effect on the Company's consolidated financial position or its results
of operations.
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. Deferred tax
assets and liabilities are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities.
Net Loss Per Common Share
Net loss per share is based on the weighted-average number of shares outstanding
during each year. Exercise of stock options and warrants were not used in the
calculation of the net loss per share since the effect would be anti-dilutive.
3. Accrued Expenses
Accrued expenses consist of the following:
December 31, December 31,
1997 1996
----------- -----------
Payroll $609,837 $158,029
Professional fees 850,698 288,844
Insurance 78,800 82,370
Interest 145,195 70,731
Restructuring costs (Note 11) 133,285 650,846
Royalties 70,274 35,237
Other 946 19,996
--------- ---------
$1,889,035 $1,306,053
4. Inventories
Inventories consist of the following:
December 31, December 31,
1997 1996
----------- -----------
Raw materials $ 1,091,747 $ 316,918
Finished goods 1,316,443 949,156
--------- ---------
$2,408,190 $1,266,074
At December 31, 1997, Victor Corporation has inventory reserves for LIFO on raw
material amounting to $38,000 and obsolescence amounting to $136,000. As of
December 31, 1996, the Company's wholly owned subsidiary, Lion Golf, established
a reserve for inventory obsolescence of $260,000. This subsidiary was disposed
of in 1997. The Company believes that the write downs are adequate. However, no
assurances can be given as to the reserves adequacy should business levels be
significantly lower than anticipated.
5. Stockholders' Equity
The Company's capital structure is as follows:
Original Convertible Preferred Stock, $.01 par value, -0- and -0- shares
authorized at December 31, 1997 and December 31, 1996, -0- and -0- shares issued
and outstanding at December 31, 1997 and December 31, 1996, respectively. During
the twelve months ended December 31, 1997 and December 31, 1996, -0- and 198
shares of the Original Convertible Preferred Stock were converted to -0- and
75,268 shares of Common Stock, respectively. Subsequent to the end of fiscal
1995, all shares of Original Convertible Preferred Stock were converted into
common stock which was then redeemed by the Company for a nominal consideration.
Class A Convertible Preferred Stock, Series A, $10.00 par value, 300,000 shares
authorized at December 31, 1997 and December 31, 1996, and -0- shares issued and
outstanding at December 31, 1997 and December 31, 1996. Class A Convertible
Preferred Stock, Series B, $0.01 par value, 7,000 shares authorized at December
31, 1997 and December 31, 1996 and -0- shares issued at December 31, 1997 and
December 31, 1996. During the twelve month period ending December 31, 1996,
3,500 shares of Series B Convertible Preferred Stock were issued and then
converted into 4,436,926 shares of common stock.
Common Stock, $.000009 par value, 90,000,000 shares authorized December 31, 1997
and December 31, 1996, 45,819,757 and 32,712,852 shares issued at December 31,
1997 and December 31, 1996, respectively and 44,728,914 and 32,680,817, shares
outstanding at December 31, 1997 and December 31, 1996, respectively.
A summary of shares issuable upon exercise of warrants at December 31, 1997,
is as follows:
Number of Exercise Expiration
Class Shares Price Date
- --------------------- --------- ----- ------------
Class C (traded OTC as QDRXZ*) 1,346,376 $3.33 July 2001
Class D 322,500 5.50 October 1998
The Wall Street Group 13,913 7.19 May 1998
Manbey Partners 270,000 3.00 November 1999
J.W. Charles Co. 500,000 0.68 January 2000
J.W. Charles Co. 150,000 0.94 February 2000
J.W. Charles Co. 37,500 0.40 February 2000
The Levine Group 75,000 0.75 January 1999
Flurina Development, S.A. 500,000 1.10 April 1998
Flurina Development, S.A. 50,000 0.94 April 1998
Cygni, S.A. 500,000 1.25 October 1998
2/97 Convertible Debentures 56,000 0.94 February 2000
2/97 Convertible Debentures 265,000 0.65 February 2000
Sovereign Partners L.P. 700,000 0.50 July 2000
Dominion Capital Fund 300,000 0.50 July 2000
Jeffrey Taylor 10,000 0.75 July 2000
---------
Total 5,096,289
- ---------------------------------------------------
* There are a total of 311,199 warrants outstanding with each warrant entitling
the holder to purchase 4.3264 shares of common stock.
6. 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 500 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, 1997, the stockholders of the Company had authorized
the issuance of 4,043,912 options pursuant to the 1993 Plan.
During 1994, the Company adopted a Stock Option Plan that as of December 31,
1997, permits the issuance of up to 1,100,000 shares of the Company's common
stock to key executives. Under the terms of the plan, options granted are
incentive stock options and 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, 1997, the Board of Directors had authorized the
issuance of 1,100,000 options pursuant to the 1994 Plan.
Stock Option activity for the two prior years is summarized as follows:
Price Per Weighted Average
Options Share Price Per Share
Outstanding at
December 31, 1995 1,872,395 $0.10 to $8.40 $1.56
Granted at market 1,565,500 $0.68 to $1.81 $1.07
Exercised (1,207,767) $0.10 to $8.40 $1.22
Canceled and forfeited (174,712) $0.68 to $8.40 $4.29
---------
Outstanding at
December 31, 1996 2,055,416 $0.68 to $3.35 $0.92
Granted at market 1,367,000 $0.09 to $1.00 $0.45
Reinstated above
market 968,500 $0.10 to $0.84 $0.64
Exercised (108,950) $0.68 $0.68
Canceled and forfeited (607,750) $0.47 to $1.81 $1.27
---------
Outstanding at
December 31, 1997 3,674,216 $0.09 to $3.35 $0.77
Outstanding options at December 31, 1997 consist of:
Weighted Weighted Currently Weighted
Average Average Exercisable Average
Number Exercise Remaining Number Exercise
of Shares Exercise Price Price Life of Shares Price
200,000 $0.09 to $0.10 $0.09 106 mos. 200,000 $0.09
1,237,000 $0.43 to $0.50 $0.48 113 mos. 1,057,500 $0.48
1,598,883 $0.68 to $1.00 $0.73 97 mos. 1,583,883 $0.73
628,333 $1.28 to $1.81 $1.62 100 mos. 618,333 $1.62
10,000 $3.35 $3.35 79 mos. 10,000 $3.35
_________ _________
3,674,216 $0.77 3,469,716 $0.80
The Company follows APB Opinion 25, Accounting for Stock Issued to Employees,
to account for stock option and employee stock purchase plans. No compensation
cost is recognized because the option exercise price is equal to the market
price of the underlying stock on the date of grant. Had compensation cost for
these plans been determined based on the Black-Scholes value at the grant dates
for awards as prescribed by SFAS Statement 123, Accounting for Stock-Based
Compensation, pro forma net income and earnings per share would have been:
Year ended December 31, 1997 1996
- ------------------------- --------- ---------
Pro forma net loss $11,130,442 $10,467,550
Pro forma loss per share (0.28) (0.44)
The weighted average Black-Scholes value of options granted under the stock
option plans during 1997 and 1996 was $0.41 and $0.58. Value was estimated
using an expected life of 18 months, no dividends, volatility of 110% and 113%
and risk free weighted average interest rates of 6.42% and 5.35% in 1997 and
1996, respectively.
7.Debt
Long-term debt consists of the following:
December 31, December 31,
1997 1996
---------- ------------
Note payable - revolver $2,647,286 $ -
Note payable - bank 823,334 654,464
Notes payable - to former Lion shareholders
bearing interest at the rate of 8% - 290,563
Equipment notes payable, secured
by the equipment 135,116 97,616
Other non-interest bearing Note 215,000 175,000
--------- ---------
3,820,736 1,217,643
Less current maturities (1,109,515) (856,904)
--------- ---------
$2,711,221 $ 360,739
========= =========
Note Payable - Bank
The Company's wholly-owned subsidiary, Victor Electric Wire & Cable
Corporation ("Victor"), a New York corporation, has a $5,000,000 loan
agreement with Congress Financial Corporation, "Congress". The loan
arrangement with Congress provides for a three-year revolving credit
facility of up to $3,550,000, a $950,000 fully amortizing five year term
loan and an equipment financing facility of up to $500,000, also based upon
a five year fully amortizing repayment schedule. All of such loans bear
interest at a rate of prime plus 1.5%. The Company has guaranteed all of
the obligations of Victor to Congress. As of December 31, 1997, the total
amount due Congress pursuant to this loan agreement was $3,470,619.
This Agreement is secured by substantially all of Victor's assets
including, but not limited to, inventory, receivables, and fixed assets.
The amount available under the revolving loan is limited by a formula based
on accounts receivable and inventory. The Company intends that
approximately $2,000,000 would remain outstanding under this agreement for
an uninterrupted period extending beyond one year from December 31, 1997.
As a result, this amount under the revolving loan agreement has been
classified as long-term debt.
Subsequent to the balance sheet date, Victor Corporation was notified of an
event of default on its Congress loan, as a result of Quadrax Corporation's
filing for protection under Chapter 11 of the Bankruptcy Code on February
27, 1998. The lender has not accelerated the loan.
The Company's Lion Golf subsidiary has a $1,000,000 revolving line of
credit with its bank which is secured by substantially all of the
subsidiary's assets and which is guaranteed by the former principal
shareholder of Lion Golf and by the Company. The note matures March 31,
1997 and bears interest at prime plus 2% or 10.25% at December 31, 1996.
Loan advances are limited to 75% of eligible accounts receivable (as
defined) plus 45% of eligible inventories to a maximum of $500,000. The
bank has indicated that the loan will not be renewed after March 31, 1997.
At December 31, 1997, the Company has no obligations regarding this loan.
(see Note 16 - Disposition of Lion Golf of Oregon, Inc.). At December 31,
1996, Lion Golf was in violation of covenants related to annual income
and certain financial ratios as to which the bank has granted waivers to
March 31, 1997.
Notes Payable - Lion Shareholders
The Company's Lion Golf subsidiary has three unsecured notes bearing interest
at the rate of 8% per annum, payable to the former shareholders of this
subsidiary. These notes are subordinated to the bank credit line. The first
of the Notes, $258,863, has annual principal payments of $54,000 commencing
March 31, 1998. These annual payments can be limited to the extent of the
subsidiary's pre-tax profits as defined. The second note, $21,200, has
monthly principal payments of $2,400 until paid-in-full. The third note of
$10,500 is a demand note. At December 31, 1997, the Company has no obligation
regarding these three notes (see Note 16 - Disposition of Lion Golf of
Oregon, Inc.)
Maturities of long-term debt outstanding at December 31, 1997
are as follows:
For the year ending December 31,
1998 $ 1,109,515
1999 233,401
2000 2,215,375
2001 198,280
2002 64,165
---------
$3,820,736
=========
Convertible Debentures
In October 1995, the Company issued $3,000,000 of its Convertible Debentures
bearing interest at the rate of nine percent per annum for net proceeds to the
Company of $2,910,000. These debentures were convertible at the option of the
holders on or after the forty-first day after issuance into a number of shares
of common stock that can be purchased for a price equal to seventy-three
percent of the closing bid price of the common stock on the ten trading days
immediately prior to the conversion date. At December 31, 1995, the holders of
the convertible debentures had converted $750,000 of these debentures into
1,052,185 shares of common stock of the Company. Subsequent to December 31,
1995, the balance of the debentures outstanding, $2,250,000, were converted
into 3,815,029 shares of common stock of the Company.
In October 1996, the Company issued $2,150,000 of its Convertible Debentures
bearing interest at the rate of eight percent per annum for net proceeds to the
Company of $1,988,750. These debentures are convertible at the option of the
holders on or after the forty-first day of issuance into a number of shares of
common stock that can be purchased for a price equal to seventy percent of the
closing bid price of the common stock on the five trading days immediately
prior to the conversion date. At December 31, 1996, the holders of the
convertible debentures had converted $750,000 of these debentures into
1,521,572 shares of common stock of the Company. Subsequent to December 31,
1996, the balance of the debentures outstanding, $1,400,000, was converted into
3,915,908 shares of common stock of the Company.
In February 1997, the Company issued $3,211,000 of its Convertible Debentures
for net proceeds to the Company of $2,889,000. Interest is payable at the
rate of 8% per annum commencing August, 1997 on the unconverted debentures as
of August, 1997. The debentures are convertible at various times ranging
from sixty days to one hundred and fifty days after the date of issuance into
a number of shares of common stock that can be purchased for a price equal to
eighty percent of the average closing bid price of the common stock on the
five trading days immediately prior to the conversion date. At December 31,
1997, the holders of these convertible debentures had converted $3,061,000 of
the debentures into 7,925,224 shares of common stock of the Company.
In August 1997, the Company entered into a Securities Purchase Agreement for
$3,500,000 of its three year Convertible Debentures and issued $1,500,00 of
them for net proceeds to the Company of $1,359,475. Interest is payable at
the rate of 8% per annum commencing upon issuance date on the debentures.
The debentures are convertible at various times commencing October 3, 1997,
into a number of shares of common stock that can be purchased for a price
equal to seventy-five percent of the average closing bid price of the common
stock for the ten trading days immediately preceding the date of conversion
of the Debenture. At December 31, 1997, the holders of these convertible
debentures had converted none of the debentures into shares of common stock
of the Company.
In October 1997, the Company issued an additional $750,000 for net proceeds
to the Company of $668,000 from these convertible debentures which are
convertible into shares of common stock of the Company under similar terms
and conditions as outlined above. At December 31, 1997, the holder of these
convertible debentures had converted none of the debentures into shares of
common stock of the Company. Both the August 1997 and the October 1997
issues have provision for penalty interest of which $75,000 has been
reflected in interest expense in the fiscal year 1997 Statement of
Operations.
The imputed interest on the outstanding debentures as of December 31, 1997,
amounting to approximately $788,000, has been reflected as part of the
convertible debenture obligation. Such interest is due and payable, upon
conversion or retirement of the debentures.
As of March 31, 1998, attempts to file an effective registration statement
have not been successful, nor have any of the August 1997 or October 1997
debentures been converted to common stock of the Company. The Company has
failed to file an effective registration statement after 90 days from the
initial issuance date. A 2 1/2% of principal interest penalty is assessable
for that period and the Company faces further penalty interest of 2 1/2% of
principal for each thirty-day interval during the delayed filing or
effectiveness of the registration statement. The penalty interest provisions
prevail except to the extent shares issuable upon conversion of the
debentures can be sold pursuant to Rule 144 or other exemption available
under the provisions of the Securities Act of 1933 pertaining to all or a
portion of the transactions.
8. Commitments
At December 31, 1997, the Company has outstanding employment agreements with
three senior officers. The agreement for one senior officer expires on
December 31, 1998 and provides for a base salary of $250,000 adjusted for CPI
with severance pay in the amount of $250,000. One of the other two agreements
for senior officers expires December 31, 1998, and provides for base
compensation of $110,000 and severance pay equal to one year base compensation.
The other senior officer's oral employment agreement provides for an annual
base salary of $120,000 for an unspecified term with termination subject to the
Company's 1997 severance policy. The Victor subsidiary has an employment
agreement with one senior officer expiring on April 2000. The base salary is
$215,000 and severance is six months salary.
The Company recorded approximately $234,000 and $106,000 in fiscal years 1997
and 1996, respectively, for compensation expense for 200,000 shares of common
stock issued previously to Mr. Palermo pursuant to his employment contract.
At December 31, 1997, the future value of the unearned compensation provision
was uncertain and therefore the Company wrote off the total balance of the
provision at that date to expense. Previously, the Company was amortizing the
total compensation expense attributable to the 200,000 shares issued to Mr.
Palermo ($462,500) over five years. Similarly, the Company assessed the value
of the deferred expense provision as uncertain at December 31, 1997 and
therefore wrote off the total balance as at that date, $220,000 and $30,000 was
reflected in fiscal year 1997 and 1996, respectively.
Rent expense amounted to approximately $363,000, and $187,000 in fiscal 1997,
and 1996, respectively.
Regarding the Company's tenancy in Rhode Island, foreclosure and ejectment
proceedings commenced in February of 1998 are stayed pending developments in
Bankruptcy Court.
Minimum rental payments under operating leases in future years are as follows:
1998 $415,264
1999 $422,562
2000 $424,860
2001 $382,747
2002 $101,985
Thereafter $ 76,488
----------
$1,823,906
==========
Copper Contracts:
Victor maintains medium-term supply arrangements for all its copper needs in
the form of purchase orders issued to copper suppliers covering projected eight
month requirements.
9. 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 $66,312,000 and $54,863,000,
and research and development tax credit carryforwards in the amount of $325,000
at December 31, 1997 and December 31, 1996. These carryforwards expire at
various times from 2002 to 2012. 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 change of
control or a greater than 50% change in ownership. The amount, if any, of such
limitation has not been determined at this time. Net operating loss
carryforwards in 1996 include $480,000 acquired through the acquisition of
Lion Golf of Oregon, Inc. These loss carryforwards were removed in 1997 due to
the sale of Lion Golf of Oregon, Inc. During 1997, additional loss
carryforwards, in the amount of $1,469,000, were acquired in the purchase of
Victor Electric Wire and Cable, Inc.
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
$4,495,000 and $2,588,000 in 1997 and 1996, respectively, to recognize the
increases in deferred tax benefits that may not be fully realized prior to
expiration.
December 31, December 31,
1997 1996
Deferred tax assets:
Net operating loss $26,392,000 $21,852,000
Other 1,700,000 1,700,000
---------- ----------
28,092,000 23,552,000
Less valuation allowance (27,882,000) (23,387,000)
---------- ----------
Total deferred tax assets 210,000 165,000
Deferred tax liabilities:
Other (210,000) (165,000)
---------- ----------
Total deferred tax liabilities (210,000) (165,000)
---------- ----------
Net deferred taxes $ -0- $ -0-
========== ==========
10. Related Party Transactions
The Company has a one-third interest in a limited partnership which is the
owner of the Company's corporate headquarters. The Company occupies these
facilities pursuant to a ten-year lease which expires in October 2003. The
Company's capital contribution of $250,000 to the limited partnership, which
owns the Portsmouth, Rhode Island facility, is recognized and secured by a
second deed of trust payable to the Company in the amount of $250,000. The
Company's investment in the limited partnership is reflected on its books at
December 31, 1996, at the cost of $250,000. At December 31, 1997, the Company
wrote off to expense the second deed of trust in the amount of $250,000 which
was carried on its balance sheet in other assets. At fiscal year end 1997, the
Company was several months in arrears on its rental payments. As a result, the
landlord commenced ejectment proceedings, such proceedings have been temporally
stayed as a result of the Company's Chapter 11 filing.
11. Restructuring Costs
Expenses related to litigation and restructuring costs amounted to $1,270,000
in fiscal 1997. The 1997 litigation and restructuring reserves relate to the
following: (1) the cost of the pultrusion machine and deferred compensation
agreements relating to the 1996 Vega, U.S.A. acquisition, $645,000; (2) costs
relating to the divestiture of Lion Golf in May 1997, primarily goodwill,
$200,000; and (3) costs relating to the finalization of the termination of the
Wimbledon tennis racquet licensing relationship, $425,000.
During fiscal year 1996, the Company expensed an additional $1,325,000 for
restructuring costs to cover the costs of terminating the Wimbledon racquet
license, $360,000, legal and professional costs relating to business
divestitures and personnel terminations, $715,000 and the write-off of McManis
Sports production molds and designs, $250,000.
12. Pro Forma Financial Information
On May 7, 1997, the Company acquired all of the outstanding stock of Victor
Electric Wire & Cable Corporation ("Victor"), a manufacturer of electrical wire
and cordsets, for $710,000 in cash and assumption of approximately $2,840,000
of existing bank debt. The Company accounted for this acquisition using the
purchase method. Accordingly, the purchase price was allocated to the assets
acquired based on their estimated fair values. This treatment resulted in all
cost being assigned to assets acquired.
The Company's Pro Forma Condensed Consolidated Statement of Operations for the
years ended December 31, 1997 and 1996 have been adjusted to reflect a
reduction in interest expense to Victor due to the contribution to capital of
the subordinated debt and other liabilities payable by Victor to its former
parent company. No other pro forma adjustments have been made to the condensed
consolidated statement of operations.
Condensed Consolidated Pro Forma Statement of Operations for the
Years ended December 31, 1997 and 1996:
December 31, December 31,
1997 1996
Total revenue $ 18,483,654 $ 20,176,513
Cost of sales 18,014,108 19,320,584
---------- -----------
GROSS PROFIT 469,546 855,929
Expenses:
Selling, general and administrative 6,465,254 6,213,212
Interest 2,085,782 2,220,201
Product development 1,116,829 810,388
Restructuring costs 1,270,000 1,325,000
---------- ----------
10,937,865 10,568,801
---------- ----------
PRO FORMA LOSS BEFORE INCOME TAXES (10,468,319) (9,712,872)
PRO FORMA INCOME TAX CREDIT - -
----------- ----------
PRO FORMA LOSS ($10,468,319) ($9,712,872)
=========== ===========
PRO FORMA LOSS PER COMMON SHARE ($0.26) ($0.41)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 39,751,478 23,922,373
=========== ===========
13. Contingencies
On the Petition Date, several claims which were the subject of
pre-petition litigation were stayed. Those claims, together with claims arising
from several pre-petition defaults and claims from events of default in loan
agreements, lease agreements and other financial obligations caused by the
filing of the petition should be resolved during the bankruptcy proceedings.
The bankruptcy case itself should be resolved by either a dismissal of the
petition, a confirmation of a plan of reorganization proposed by the Company,
its creditors or a third party, or a conversion of the case to a liquidation
under Chapter 7 of the Code.
During the bankruptcy process, the Company intends to object to claims
lacking merit and generally to pursue all its defenses, rights and remedies
regarding all the claims. Pre-petition claims against the Company include the
following:
The January 1997 conversion lawsuit of Power Stick Manufacturing, Inc.
("Power Stick") which was determined adversely by a jury in June, 1997. Under
the judgment, the Company was ordered to turn over possession of the hockey
stick pultrusion machine to Power Stick. In addition, the jury awarded Power
Stick damages of $150,000. The court has not entered this damage verdict,
pending completion of the second phase of the suit which is limited to Power
Stick's claims of patent infringement against the Company.
The January 1998 wrongful dismissal lawsuit of David Evans ("Evans"). The
Company dismissed Evans for cause and intends to vigorously defend the suit.
The February 1998 petition for the Appointment of Receiver by Michael
Dorf ("Dorf"), a former employee, in connection with an employment separation
agreement pursuant to which $15,211.54 was due to Dorf on December 12, 1997. A
hearing in respect of the issues did not occur prior to the Company's
Bankruptcy filing and the claim will be resolved in the Bankruptcy proceedings.
The February 1998 breach of settlement agreement lawsuit of Timothy P.
MacDonald and Sinapi Law Associates, Ltd. This claim will be resolved in the
Bankruptcy proceedings.
The February 1998 ejectment lawsuit of Lasalle National Bank. The
Company's landlord seeks repossession of the its Portsmouth, Rhode Island
premises for non-payment of rent. Temporary arrangements to enable the Company
to proceed with a plan of reorganization are being negotiated.
Victor is subject to product liability litigation on a recurring basis
from persons suffering shocks from electrical appliances and other product
failures. Victor maintains insurance coverage against such liabilities in
amounts which, in the opinion of management, are adequate against the risks
assumed. Victor's litigation is not stayed or otherwise affected by the
Company's Chapter 11 Petition and court proceedings.
14. Notes Receivable for Options
In exchange for the stock certificates issued to four officers of the Company,
and effective December 31,1997, the Company returned to such officers their
canceled notes in the amount of $601,000, pursuant to the notes' provisions.
The notes were given to and held by the Company as payment for the conditional
exercise by the officers of certain of their stock options pursuant to the 1996
agreements. Cancellation of the transaction returned 968,500 shares of the
issued stock to treasury and re-instated the officers' 968,500 options.
15. Acquisition of Victor Electric Wire & Cable Corporation
On May 7, 1997, the Company acquired all of the outstanding stock of Victel,
Inc., a Delaware corporation ("Victel"), whose sole asset was all of the
outstanding stock of Victor Electric Wire & Cable Corp. ("Victor"), a
manufacturer of electric power cords and interconnect cables, for $710,000 cash
and the assumption of approximately $2,840,000 of existing bank debt. The
existing bank debt was refinanced at the closing by means of Victor entering
into a new working capital and term credit agreement with Congress Financial
Corporation.
16. Disposition of Lion Golf of Oregon, Inc.
On June 4, 1997, the Company completed its disposition of Lion Golf of Oregon,
Inc., an Oregon corporation ("Lion Golf"), pursuant to the terms of an Agreement
for the sale of common stock dated as of May 31, 1997.
Pursuant to the Lion Golf Stock Disposition Agreement, the Company sold all of
the outstanding stock of Lion Golf of Oregon, Inc. and McManis Sports
Associates, Inc. to Lion Golf's former principal stockholder, Robert K. Cole.
In connection therewith, Mr. Robert Cole and Lion Golf assumed the
responsibility for approximately $1,200,000 of Lion Golf's indebtedness,
including the Bank of Cascades accounts receivable/inventory working capital
line with Lion Golf which had an outstanding balance due of $449,838 at May
31, 1997. As additional consideration, the Company's unrecorded unsecured
promissory note payable to Mr. Cole was canceled along with the Company's five
year employment agreements with Mr. Robert K. Cole as Chief Executive Officer
of Lion Golf and Mr. James Cole as President of Lion Golf. The Company also
wrote off the goodwill associated with Lion Golf in 1997 in the amount of
$110,000.
17. Reclassification of Expenses of Prior Period
Depreciation and amortization which were shown as separate line items, as well
as utilities and rent which were shown as selling, general and administration
expenses in the Statement of Operations in prior periods have been reclassified.
The Company currently is allocating these items to the functional categories
that produce the expenses and as such has reclassified the prior period
presentation of these items.
18. Segment Information
Fiscal year ended December 31,
1997* 1996
--------------------------
Net sales
Quadrax Corporation $ 2,522,956 $ 3,207,281
Victor Electric Wire & Cable Corporation 11,445,780 -0-
---------- -----------
$13,968,736 $ 3,207,281
=========== ===========
Gross profit
Quadrax Corporation $(1,346,809) $ (907,752)
Victor Electric Wire & Cable Corporation 1,392,876 -0-
----------- -----------
$ 46,067 $ (907,752)
=========== ===========
Total assets
Quadrax Corporation $ 3,750,305 $ 7,299,724
Victor Electric Wire & Cable Corporation 6,693,021 -0-
----------- -----------
$10,443,326 $ 7,299,724
=========== ===========
Depreciation and amortization expense
Quadrax Corporation $ 783,581 $ 769,659
Victor Electric Wire & Cable Corporation 244,440 -0-
----------- -----------
$ 1,028,021 $ 769,659
=========== ===========
* Information for Victor Electric Wire & Cable Corporation is from
the date of acquisition, May 7, 1997 to December 31, 1997.
19. Sales to Major Customers
Approximately 45.5% of the Company's Victor Electric Wire and Cable Corporation
("Victor") segments revenues in the year ended December 31, 1997, were from two
customers, accounting for approximately 21.6% and 15.6% of total revenues.
Export revenues accounted for approximately 11.5% of Victor's revenues in the
year ended December 31, 1997, and 9,4% of the total revenues. No one export
region accounted for more than 10%.
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between QUADRAX
CORPORATION, a Delaware corporation, with headquarters located at 300 High
Point Avenue, Portsmouth, Rhode Island 02871 ("Company") and the undersigned
(the "Buyer").
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration
afforded, inter alia, by Rule 506 under Regulation D ("Regulation D") as
promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, 8% Convertible Debentures (the "Debentures"),
of the Company which will be convertible into shares of Common Stock, $.000009
par value per share (the "Common Stock"), of the Company upon the terms and
subject to the conditions of such Debentures (the Common Stock and the
Debentures sometimes referred to herein as the "Securities"), and subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase. The undersigned hereby agrees to purchase from the Company,
the Debentures of the Company, in the principal amount of $3,500,000 in
Debentures, $1,000,000 principal amount at the First Closing, and the balance
as more specifically set forth in 84(j), and having the terms and conditions
and being in the forms attached hereto as Annex IA, as the initial Debenture
and Annex IB as to the Additional Debentures. The purchase price for each
Debenture shall be 100% of the principal amount of such Debenture (the
"Purchase Price") and shall be payable in United States Dollars.
b. Form of Payment. The Buyer shall pay the Purchase Price for each
Debenture by delivering immediately available good fUnds in United States
Dollars to the escrow agent (the "Escrow Agent") identified in the Joint
Escrow Instructions attached hereto as Annex H (the "Joint Escrow
Instructions") as set forth below. Promptly following payment by the Buyer
to the Escrow Agent of the Purchase Price of the Debenture, the Company shall
deliver the Debenture duly executed on behalf of the Company to the Escrow
Agent. By signing this Agreement, the Buyer and the Company, and subject to
acceptance by the Escrow Agent, each agrees to all of the terms and conditions
of, and becomes a party to, the Joint Escrow Instructions,
all of the provisions of which are incorporated herein by this reference as
if set forth in full.
c. Method of Payment. Payment into escrow of the Purchase Price for each
Debenture shall be made by wire transfer of funds to:
Bank of New York
350 Fifth Avenue
New York, New York 10001
ABA# 021000018
For credit to the account of Krieger & Prager, Esqs.
Account No. 105-0036843
Not later than l:00 p.m., New York time, on the date which is one (1) New York
Stock Exchange trading day after the Company shall have accepted this
Agreement and returned a signed counterpart of this Agreement to the Escrow
Agent by facsimile, the Buyer shall deposit with the Escrow Agent the Purchase
Price for the initial $1,000,000 Debenture, in currently available
funds. Time is of the essence with respect to such payment on the Closing
Date and each Additional Closing Date (as defined in 4j), and failure by the
Buyer to make such payment, shall allow the Company to cancel this Agreement.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Without limiting Buyer's right to sell the Common Stock pursuant to the
Registration Statement as defined in the Registration Rights Agreement, the
Buyer is purchasing the Debentures and will be acquiring the shares of Common
Stock issuable upon conversion of the Debentures for its own account for
investment only and not with a view towards the public sale or distribution
thereof and not with a view to or for sale in connection with any distribution
thereof;
b. The Buyer is (i) an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3), and (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason
of the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way
by the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its
investment in the Securities;
c. All subsequent offers and sales of the Debentures and the shares of
Common Stock issuable upon conversion of, or issued as interest on, the
Debentures (the "Shares" or "Common Stock" and, together with the Debentures,
the "Securities") by the Buyer shall be made pursuant to registration of the
Shares under the 1933 Act or pursuant to an exemption from registration;
d. The Buyer understands that the Debentures are being offered and sold,
and the Shares are being offered, to it in reliance on specific exemptions
from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy
of, and the Buyer's compliance with, the representations, warranties,
agreements, acknowledgements and understandings of the Buyer set forth herein
in order to determine the availability of such exemptions and the eligibility
of the Buyer to acquire the Debentures and to receive an offer of the Shares,
and Buyer shall indemnify and hold harmless the Company from and against any
liability incurred by the Company proximately caused by any
breach thereof by Buyer;
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Debentures and the offer of
the Shares which have been requested by the Buyer, including Annex V hereto.
The Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company and have received complete and satisfactory answers
to any such inquiries. Without limiting the generality of the foregoing, the
Buyer has also had the opportunity to obtain and to review the Company's (1)
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, (2) Quarterly Report on Form 1O-QSB for the fiscal
quarter ended March 31, 1997, (3) Proxy Statement for Annual Meeting of
Stockholders held May 19, 1997, and (4) Form 8-K dated May 31, 1997 and May
7, 1997, as amended (the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities involves
a high degree of risk;
g. The Buyer understands that no United States federal or state agency or
any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities;
h. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability
to general principles of equity and to bankruptcy, insolvency, moratorium and
other similar laws affecting the enforcement of creditors' rights generally.
i. Neither Buyer, nor any affiliate of Buyer, has any present intention
of entering into, any put option, short position, or other similar position
with respect to the Debentures or the Shares.
j. Notwithstanding the provisions hereof or of the Debentures, in no
event shall the holder be entitled to convert any Debenture to the extent
after such conversion, the sum of (1) the number of shares of Common Stock
beneficially owned by the Buyer and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of
the unconverted portion of the Debenture), and (2) the number of shares of
Common Stock issuable upon the conversion of the Debenture with respect to
which the determination of this proviso is being made, would result in
beneficial ownership by the Buyer and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (1) of such proviso.
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. There are no preemptive rights of any stockholder
of the Company, as such, to acquire the Common Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware. The Company has registered its Common Stock pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Common Stock is listed and traded on the
NASDAQ/Small Cap. The Company has received no notice, either oral or written,
with respect to the continued eligibility of the Common Stock for such
listing.
c. Authorized Shares. The Company has sufficient authorized and unissued
Shares as may be reasonably necessary to effect the conversion of the
Debentures. The Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Debentures, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights Agreement and Stock.
This Agreement and the Registration Rights Agreement, the form of which is
attached hereto as Annex N (the "Registration Rights Agreement"), and the
transactions contemplated thereby, have been duly and validly authorized by
the Company, this Agreement has been duly executed and delivered by the
Company and this Agreement is, and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium, and other similar laws
affecting the enforcement of creditors' rights generally; and the Debenture
will be duly and validly authorized and, when executed and delivered on behalf
of the Company in accordance with this Agreement, will be a valid and binding
obligation of the Company in accordance with its terms,
subject to general principles of equity and to bankruptcy, insolvency,
moratorium, or other similar laws affecting the enforcement of creditors'
rights generally.
e. Non-contravention. The execution and delivery of this Agreement and
the Registration Rights Agreement by the Company, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under
(i) the articles of incorporation or by-laws of the Company, (ii) any
indenture, mortgage, deed of trust, or other material agreement or instrument
to which the Company is a party or by which it or any of its properties or
assets are bound, including any listing agreement for the Common Stock except
as herein set forth, (iii) any existing applicable law, rule, or regulation
or any applicable decree, judgment, or (iv) order of any court, United States
federal or state regulatory body, administrative
agency, or other governmental body having jurisdiction over the Company or any
of its properties or assets, except such conflict, breach or default which
would not have a material adverse effect on the transactions contemplated
herein.
f. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the Stockholders of the Company is required to be
obtained by the Company for the issuance and sale of the Securities to the
Buyer as contemplated by this Agreement, except such authorizations, approvals
and consents that have been obtained.
g. SEC Filings. None of the SEC Filings with the Securities and Exchange
Commission since January 1, 1996 contained, at the time they were filed, any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements made therein
in light of the circumstances under which they were made, not misleading.
Except as set forth on Annex V hereto, the Company has since January 1, 1996
timely filed all requisite forms, reports and exhibits thereto with the
Securities and Exchange Commission.
h. Absence of Certain Changes. Since January 1, 1997, there has been no
material adverse change and no material adverse development in the business,
properties, operations, financial condition, or results of operations of the
Company, except as disclosed in Annex V or in the documents referred to in
Section 2(e) hereof.
i. Full Disclosure. There is no fact known to the Company (other than
general economic conditions known to the public generally) or as disclosed in
the documents referred to in Section 2(e), that has not been disclosed in
writing to the Buyer that (i) could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise) or in the earnings,
business affairs, properties or assets of the Company or (ii) could reasonably
be expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement.
j. Absence of Litigation. Except as set forth in Annex V hereto, and in
the documents referred to in Section 2(e), which the Buyer has reviewed, there
is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have
a material adverse effect on the properties, business, condition (financial
or other), results of operations or prospects of the Company and its
subsidiaries taken as a whole or the transactions contemplated by this
Agreement or any of the documents contemplated hereby or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, this Agreement or any of such other
documents.
k. Absence of Events of Default. Except as set forth in Annex V hereto and
Section 3(e), no Event of Default, as defined in the respective agreement to
which the Company is a party, and no event which with the giving of notice or
the passage of time or both would become an Event of Default (as so defined),
has occurred and is continuing, which would have a
material adverse effect on the Company's financial condition or results of
operations.
l. No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property
is bound, and neither the execution, nor the delivery by the
Company, nor the performance by the Company of its obligations under this
Agreement or the Debentures, other than the conversion provision thereof, will
conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under, any
material indenture, mortgage, deed of trust or other material agreement
applicable to the Company or instrument to which the Company is a party or by
which it is bound or any statute or the Certificate of Incorporation or
By-Laws of the Company, or any decree, judgment, order, rule or regulation of
any court or governmental agency or body having jurisdiction over the Company
or its properties, or the Company's listing agreement for its Common Stock.
m. Prior Issues. During the twelve (12) months preceding the date hereof, the
Company has not issued any securities except as set forth in the documents
listed in Section 2e. The presently outstanding unconverted principal amount
of each such issuance of July 25, 1997 is $941,200. No person holds any
unfulfilled registration rights.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Debentures
have not been and are not being registered under the provisions of the 1933
Act and, except as provided in the Registration Rights Agreement, the Shares
have not been and are not being registered under the 1933 Act, and may not be
transferred unless (A) subsequently registered
thereunder or (B) the Buyer shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company
and its transfer agent, to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms
of said Rule and further, if said Rule is not applicable, any resale of such
Securities under circumstances in which the seller, or the
person through whom the sale is made, may be deemed to be an underwriter, as
that term is used in the 1933 Act, may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and
conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that the
Debentures, and, until such time as the Common Stock has been registered under
the 1933 Act as contemplated by the Registration Rights Agreement and sold in
accordance with such Registration Statement, the shares of Common Stock issued
to the Holder upon conversion of the Debentures shall bear a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of the Debenture and such shares of Common Stock):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL
OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to enter into
the Registration Rights Agreement, in substantially the form attached hereto
as Annex IV, on or before the Initial Closing Date.
d. Filings. The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Debentures to the Buyer under any
United States laws and regulations, or by any domestic securities exchange or
trading market, and to provide a copy thereof to the Buyer promptly after such
filing.
e. Reporting Status. So long as the Buyer beneficially owns any of the
Debentures, the Company shall file all reports required to be filed with the
SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even
if the 1934 Act or the rules and regulations thereunder would permit such
termination.
f. Use of Proceeds. The Company will use the proceeds from the sale
of the Debentures (excluding amounts paid by the Company for legal fees and
finder's fees in connection with the sale of the Debentures) for internal
working capital purposes , and shall not, directly or indirectly, use such
proceeds for any loan to or investment in any other corporation, partnership
enterprise or other person, except for wholly owned subsidiaries or for the
purpose of making acquisitions of businesses.
g. Certain Agreements. The Company covenants and agrees that it will not,
without the prior written consent of the Buyer, (i) enter into any subsequent
or further offer or sale of common stock or securities convertible into common
stock with any third party until the expiration of one hundred twenty (120)
days from the Additional Closing Date of the final tranche of Additional
Debentures. However, clauses 4(g)(i) will not apply to (x) the issuance of
securities (other than for cash) in connection with a merger, consolidation,
sale of assets, disposition of a business, product or license by the Company,
strategic alliance, bank loan or agreement, or the exercise of outstanding
options, or OI) the exchange of the capital stock for assets, stock or other
joint venture interests.
h. Available Shares. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to yield the number of Common Stock issuable at conversion as may
be required to satisfy the conversion rights of the Buyer pursuant to the
terms and conditions of the Debentures.
i. Warrants. The Company agrees to issue to Buyer at the Closing,
transferable divisible warrants (the "Warrants") for 700,000 shares of Common
Stock. Such Warrants shall bear an exercise price per share of Common Stock
as follows: 125% of the Market Price, as defined in the Debenture, on the
Closing Date, and shall be exercisable immediately upon issuance, and for a
period of three (3) years thereafter, in the form annexed hereto as Exhibit
VI, together with piggy-back registration rights, and demand registration
rights.
j. The Buyer irrevocably agrees to purchase up to an additional
$2,500,000 of Debentures (the "Additional Debentures") in a series of
tranches, commencing thirty (30) days after the effective date of the
registration statement contemplated by the Registration Rights Agreement
attached hereto as Annex IV (the "Effective Date"), upon the same terms and
conditions and substantially in the form as those applicable to the initial
Debentures issued pursuant to the Agreement except as set forth in 4(j)(d) and
the maturity date of such Additional Debenture shall be two years from the
Additional Closing Date on which such Additional Debenture was issued (each
an "Additional Closing Date"). Buyer's obligation to purchase the
Additional Debentures, on each Additional Closing Date (which shall occur not
less than ten (10) business days apart), shall be contingent upon the
satisfaction of the following conditions:
(a) The Company shall give the Buyer ten (10) days prior written notice;
(b) The Debentures issued in each tranche shall be not less than $50,000
nor in excess of $200,000 principal amount;
(c) On each Additional Closing Date:
(i) The Registration Statement required to be filed under the
Registration Rights Agreement, is effective;
(ii) The representations and warranties contained in Section 3
shall be true and correct in all material respects;
(iii)The average daily trading volume for the previous three months must
exceed 150,000 shares;
(iv) The average daily share price of the common stock for the ten trading
days prior thereto, must exceed $.25 per share;
(v) The number of shares issuable upon conversion of the
Debentures, together with the Shares of Common Stock issued prior thereto
pursuant to this Agreement, will not exceed 20% of the outstanding Common
Shares of the Company.
(d) The conversion price for shares to be issued upon conversion of the
Additional Debentures shall be the lesser of (a) 84% of the Market Price on
the Additional Closing Date, or (b) 100% of the Market Price on the date of
the issuance of the original Debenture and the coupon rate of interest on all
such additional Debentures shall be 4% rather than 8%.
(e) In the event that the Company does not exercise its option to require
the Buyer to purchase at least $1,250,000 of Debentures, the Company will, not
later than fifteen (15) months after the date hereof, issue to the Buyer an
additional 300,000 Warrants upon the terms and conditions of 1[4i hereof. In
any event, the Company's obligations under the Registration Rights Agreement,
shall be to register the necessary common stock underlying $3,500,000 in
Debentures, and the shares underlying 1,000,000 Warrants to purchase common
stock.
5. TRANSFER AGENT INSTRUCTIONS.
a. Promptly following the delivery by the Buyer of the Purchase Price for
each Debenture in accordance with Section l(c) hereof, the Company will
irrevocably instruct its transfer agent to issue Common Stock from time to
time upon conversion of the Debenture in such amounts as specified from time
to time by the Company to the transfer agent, bearing the restrictive legend
specified in Section 4(b) of this Agreement prior to registration of the
Shares under the 1933 Act, registered in the name of the Buyer or its nominee
and in such denominations to be specified by the Buyer in connection with each
conversion of the Debenture. The Company warrants that no instruction other
than such instructions referred to in this Section 5 and stop transfer
instructions to give effect to Section 4(a) hereof prior to registration and
sale of the Shares under the 1933 Act will be given by the Company to the
transfer agent and that the Shares shall
otherwise be freely transferable on the books and records of the Company as
and to the extent provided in this Agreement, the Registration Rights
Agreement, and applicable law. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Securities. If the Buyer provides the Company with an
opinion of counsel reasonably satisfactory to the Company and its transfer
agent that registration of a resale by the Buyer of any of the Securities in
accordance with clause (1)(B) of Section 4(a) of this Agreement is not
required under the 1933 Act, the Company shall (except as
provided in clause (2) of Section 4(a) of this Agreement) permit the transfer
of the Securities and, in the case of the Shares, promptly instruct the
Company's transfer agent to issue one or more certificates for Common Stock
without legend in such name and in such denominations as specified by the
Buyer.
b. The Company will permit the Buyer to exercise its right to convert the
Debenture by telecopying an executed and completed Notice of Conversion, in
the form attached to the Form of Debenture attached hereto as Annex I, to the
Company and delivering within three business days thereafter, the original
Notice of Conversion and the Debenture representing the Shares to the Company
by express courier to the Transfer Agent. Each date on which a Notice of
Conversion is telecopied to and received by the Company in accordance with the
provisions hereof shall be deemed a Conversion Date. The Company will
transmit the certificates
representing the Shares of Common Stock issuable upon conversion of any
Debenture (together with a replacement Debenture representing the any
principal amount not so converted) to the Buyer via express courier, by
electronic transfer or otherwise, within three business days after receipt
by the transfer agent of the original Notice of Conversion and the Debenture
representing the Shares to be converted (the "Delivery Date").
d. The Company understands that a delay in the issuance of the Shares of
Common Stock beyond the Delivery Date could result in economic loss to the
Buyer. As compensation to the Buyer for such loss, the Company agrees to pay
late payments to the Buyer for late issuance of Shares upon Conversion in
accordance with the following schedule (where "No. Business Days Late" is
defined as the number of business days beyond five (5) business days from
Delivery Date:
Late Payment For Each
$10,000 of Debenture
No. Business Days Late Principal Amount Being Converted
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
> 10 $1,000 + $200 for
each Business
Day Late beyond 10
days
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Nothing herein shall limit Buyer's right to
pursue actual damages for the Company's failure to issue and deliver Common
Stock to the Buyer. Furthermore, in addition to
any other remedies which may be available to the Buyer, in the event that the
Company fails for any reason to effect delivery of such shares of Common Stock
within five business days after the Delivery Date, the Buyer will be entitled
to revoke the relevant Notice of Conversion by delivering a notice to such
effect to the Company whereupon the Company and the Buyer shall each be
restored to their respective positions immediately prior to delivery of such
Notice of Conversion.
6. DELIVERY INSTRUCTIONS.
Each Debenture shall be delivered by the Company to the Escrow
Agent pursuant to Section l(b) hereof, or a delivery against payment basis at
each closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the initial $1,000,000 Debenture
(the "Closing Date" ) shall occur no later than 12:00 Noon, New York time on
the second NYSE trading day after the fulfillment or waiver of all Closing
conditions pursuant to Sections 8 and 9, or such other mutually agreed to
time. The Closing shall occur on such date at the offices of the
Escrow Agent. Notwithstanding anything to the contrary contained herein, the
Escrow Agent will be authorized to release the funds representing the Purchase
Price for the Debenture, and the Debenture only upon satisfaction of the
conditions set forth in Section 8 hereof. The Additional Debentures shall be
issued and sold on the Additional Closing Dates in accordance with this
section and the Joint Escrow Instructions.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Debentures on
the Closing Date and Additional Closing Dates to the Buyer pursuant to this
Agreement is conditioned upon:
a. The receipt and acceptance by the Buyer of this Agreement as evidenced
by execution of this Agreement by the buyer for at least One Million
($1,000,000.00) Dollars in Debenture (or such lesser amount as the Company,
in its sole discretion, shall determine);
b. Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the Purchase Price for the Debenture in accordance
with Section l(c) hereof;
c. The accuracy on the Closing Date and each Additional Closing Date of
the representations and warranties of the Buyer contained in this Agreement
as if made on the Closing Date and the performance by the Buyer on or before
the Closing Date and each Additional Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date
and each Additional Closing Date;
d. There shall not be in effect any law, rule or regulation prohibiting
or restricting the transactions contemplated hereby, or requiring any consent
or approval which shall not have been obtained.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Debentures
on the Closing Date and each Additional Closing Date is conditioned upon:
a. Acceptance by the Company of this Agreement for the sale of
Debentures, as indicated by execution of this Agreement;
b. Delivery by the Company to the Escrow Agent of the appropriate
Debenture in accordance with this Agreement;
c. The accuracy in all material respects on the Closing Date and each
Additional Closing Date of the representations and warranties of the Company
contained in this Agreement as if made on the Closing Date and such Additional
Closing Date and the performance by the Company on or before the Closing Date
and each Additional Closing Date of all covenants and agreements of the
Company required to be performed on or before the Closing Date and such
Additional Closing Date, and as to Additional Debentures, the conditions set
forth in Section 4j ; and
d. On the Closing Date and each Additional Closing Date, the Buyer having
received an opinion of counsel for the Company, dated the Closing Date and
each Additional Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in Annex III attached
hereto, and on the first Closing Date only, the Registration Rights Agreement
annexed hereto as Annex IV and the 700,000 share Warrants.
10. GOVERNING LAW; COST OF COLLECTION; MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non conveniens, to the bringing of any
such proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all
parties hereto. This Agreement may be signed in one or more counterparts, each
of which shall be deemed an original. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this
Agreement in any other jurisdiction. This Agreement may be amended only
by an instrument in writing signed by the party to be charged with
enforcement. This Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof. Any costs
(including attorneys fees and disbursements) incurred by Buyer with respect
to any default by the Company under this Agreement, the Registration Rights
Agreement, or the Debenture, shall be the obligation of the Company.
11. NOTICES. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon, (a) by personal delivery or fax, or (ii) one business day after
deposit with a nationally recognized overnight delivery service such as
Federal Express, with postage and fees prepaid, addressed to each of the other
parties thereunto entitled at the following addresses, or at such other
addresses as a party may designate by ten days advance written notice to each
of the other parties hereto.
COMPANY:
QUADRAX CORPORATION
300 High Point Avenue
Portsmouth, Rhode Island 02871
Telecopier No. (401) 683-5630
with a copy to:
Joseph Smith, Esq.
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Telecopier No. (212) 661-0989
PURCHASER:
At the address set forth on the signature page of this Agreement.
ESCROW AGENT:
Krieger & Prager, Esqs.
319 Fifth Avenue
New York, New York 10016
Telecopier No. (212) 213-2077
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
Company's representations and warranties shall survive the execution and
delivery hereof of this Agreement and the delivery of the Debenture.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth
below.
AGGREGATE INITIAL PURCHASE PRICE OF SUCH DEBENTURE: $ 1,000,000
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing statements
are true and correct and chat it has caused this Securities Purchase Agreement
to be duly executed on its behalf this 4th day of August 1997.
Telecopier No.
(Signature of Authorized Person)
Print Name and Title
SOVEREIGN PARTNERS. L.P.
By Southridge Capital Management, LLC
By:/s/Stephen Hicks
Jurisdiction of Incorporation
or Organization
Delaware
This Agreement has been accepted as of the date set forth below.
QUADRAX CO
by: /S/ James Palermo
Title: CEO
Date: 8/4/97
Jurisdiction of Incorporation
or Organization
Delaware
AMENDMENT NO. 1 TO
SECURITIES PURCHASE AGREEMENT
BETWEEN
QUADRAX CORPORATION AND SOVEREIGN PARTNERS, L.P.
This Amendment No. 1 dated August 22, 1997 to Securities
Purchase Agreement dated as of August 4, 1997 is entered into
between Quadrax Corporation (the "Company") and Sovereign
Partners, L.P. ("Buyer") with respect to the following facts. All
terms used herein which are not defined herein shall have the
meanings set forth in the Securities Purchase Agreement.
1. The Company and the Buyer are the parties to the Securities
Purchase Agreement.
2. The Buyer has agreed to purchase and the Company has agreed to
sell a further $500,000 principal amount Initial Debenture as of
the date hereof, notwithstanding that the Company has not yet
filed its registration statement on Form S-3.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company will issue and sell to Buyer, and Buyer will
purchase from the Company, a $500,000 principal amount Initial
Debenture, in the form attached to the Securities Purchase
Agreement as Annex I, for a price of $500,000.
2. The Buyer's commitment to purchase Additional Debentures
pursuant to Section 4(j) of the Securities Purchase Agreement
shall be reduced from $2,500,000 to $2,000,000.
3. The Warrant issued to Buyer on August 4, 1997 shall be
initially exercisable at a price of $0.50 per share, rather than
at $0.59 per share.
4. All other terms and conditions of the Securities Purchase
Agreement are hereby ratified and confirmed, except as expressly
modified herein.
In witness whereof, the parties have executed this Amendment
No. 1 as of the date set forth above, being duly authorized to do
so.
QUADRAX CORPORATION SOVEREIGN PARTNERS, L.P.
By:__________________ By: Southridge Capital Management LLC,
its general partner
James J. Palermo,
C.E.O.
By: _____________________________
Stephen Hicks, President
AMENDMENT NO. 2 TO
SECURITIES PURCHASE AGREEMENT
BETWEEN
QUADRAX CORPORATION AND SOVEREIGN PARTNERS, L.P.
This Amendment No. 2 dated October 8th, 1997 to Securities Purchase Agreement
dated as of August 4, 1997, as amended on August 22, 1997, is entered into
between Quadrax Corporation (the "Company") and Dominion Capital Fund, as
assignee of Sovereign Partners, L.P.("Buyer") with respect to the following
facts. All terms used herein which are not defined herein shall have the
meanings set forth in the Securities Purchase Agreement.
1. The Company and the Buyer are the parties to the Securities Purchase
Agreement.
2. The Buyer has agreed to purchase and the Company has agreed to sell a further
$750,000 principal amount Initial Debenture as of the date hereof,
notwithstanding that the Company's registration statement on Form S-3 (File No.
333-34905) has not yet been declared effective.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company will issue and sell to Buyer, and Buyer will purchase from the
Company, a $750,000 principal amount Initial Debenture, in the form attached to
the Securities Purchase Agreement as Annex I, for a price of $750,000.
2. The Buyer's commitment to purchase Additional Debentures pursuant to Section
4(j) of the Securities Purchase Agreement shall be reduced from $2,000,000 to
$1,250,000.
3. The Conversion Rate for all of the Initial Debentures including those sold to
Sovereign Partners, L.P., (which shall have an aggregate principal amount of
$2,250,000 upon closing of the sale refereed to in Section 1 hereof) shall be
Seventy-Five Percent (75%) of the Market Price on the Conversion Date, and the
Conversion Rate for all of the Additional Debentures shall be the lesser of (a)
75% of the Market Price on the Additional Closing Date of (b) 100% of the Market
Price on the date of the issuance of the first Initial Debenture.
4. All other terms and conditions of the Securities Purchase Agreement are
hereby ratified and confirmed, except as expressly modified herein.
In witness whereof, the parties have executed this Amendment No. 2 as of the
date set forth above, being duly authorized to do so.
QUADRAX CORPORATION DOMINION CAPITAL FUND
By:__________________ By: _________________________
James J. Palermo, CEO Mark Valentine, Agent
Annex IV
to Stock Purchase
Agreement
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of August 4, 1997
(this "Agreement"), is made by and between QUADRAX CORPORATION, a
Delaware corporation (the "Company"), and the person named on the
signature page hereto (the "Initial Investor").
WITNESSETH:
WHEREAS, upon the terms and subject to the conditions of the Securities
Purchase Agreement, dated as August 4, 1997, between the Initial
Investor and the Company (the "Securities Purchase Agreement''), the
Company has agreed to issue and sell to the Initial Investor one or
more 8% Convertible Debentures of the Company (collectively the
"Debentures"), and warrants to purchase up to 700,000 shares of Common
Stock (which may be increased by an additional 300,000 shares upon certain
circumstances) which Debentures will be convertible into shares of the common
stock, $.000009 par value (the "Common Stock"), of the Company (the "Conversion
Shares") upon the terms and subject to the conditions of such Debentures, and
the Warrants will be exercisable for shares of Common Stock (the "Warrant
Shares"); and
WHEREAS, to induce the Initial Investor to execute and deliver the
Securities Purchase Agreement, the Company has agreed to provide
certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder, or any similar
successor statute (collectively, the "Securities Act"), with respect
to the Conversion Shares and Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
Company and the Initial Investor hereby agrees as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings :
(i) "investor" means the Initial Investor and any permitted
transferee or assignee who agrees to become bound by the provisions of
this Agreement in accordance with Section 9 hereof.
(ii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement
or Statements in compliance with the Securities
Act and pursuant to Rule 415 under the Securities Act or any successor
rule providing for offering securities on a continuous basis ("Rule
415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares and the
Warrant Shares .
(iv) "Registration Statement" means a registration statement of the
Company.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted
transferee or assignee of the Registrable Securities pursuant to
Section 9 of this Agreement.
(c) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file with
the SEC, no later than thirty (30) days following the initial Closing
Date under the Securities Purchase Agreement, either a Registration
Statement on Form S-3 registering for resale by the Investor a
sufficient number of shares of Common Stock for the Initial Investors
(or such lesser number as may be required by the SEC, but in no event
less than the number of shares into which the
Debentures would be convertible and the Warrants exercisable at the
time of filing of the Form S-3, or an amendment to any pending Company
Registration Statement on Form S-3, and such Registration Statement or
amended Registration Statement shall state that, in accordance with
Rule 416 and 457 under the Securities Act, it also covers such
indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Debentures and the exercise of the
Warrants resulting from adjustment in the Conversion Price, or to
prevent dilution resulting from stock splits, or stock dividends). If
at any time the number of shares of Common Stock into which the
Debentures may be converted exceeds the aggregate number of shares of
Common Stock then registered, the Company shall, within ten (10)
business days after receipt of a written notice from any Investor,
either (i) amend the Registration Statement filed by the Company
pursuant to the preceding sentence, if such Registration Statement has
not been declared effective by the SEC at that time, to register all
shares of Common Stock into which the Debenture may be converted, or
(ii) if such Registration Statement has been declared effective by the
SEC at that time, file with the SEC an additional Registration
Statement on Form S-3 to register the shares of Common Stock into
which the Debenture may be converted that exceed the aggregate number
of shares of Common Stock already registered. If the staff of the SEC
determines that all of the Conversion Shares cannot be registered by
the Company for resale by the Investor because, in the view of the
staff, such registration would constitute a primary offering by the
Company, then the Company shall have an additional one hundred twenty
(120) days in which to amend such registration statement to another
available form.
Payments by the Company.
(i) If the Registration Statement covering the Registrable
Securities is not filed in proper form with the Securities and Exchange
Commission within thirty (30) days after the Closing, the Company will
make payment to the Initial Investor in the amount of $500 per day for
each $10,000 in principal amount of Debentures for each day thereafter
until such Registration Statement, in proper form, is filed with the
Securities and Exchange Commission.
(ii) If the Registration Statement covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a)
hereof is not effective by ninety (90) days following the initial
Closing Date (except as provided by the last sentence of section 2a),
then the Company will make payments to the Initial Investor in such
amounts and at such times as shall be determined pursuant to this
Section 2(b). The amount to be paid by the Company to the Initial
Investor shall be determined as of each Computation Date, and such
amount shall be equal to two and one-half (2 1/2) percent of the
purchase price paid by the Initial Investor for all Debentures then
purchased and outstanding pursuant to the Securities Purchase Agreement
for any period from the Initial Date to the first Computation Date, and
to each Computation Date thereafter, to the date the Registration
Statement is declared effective by the SEC (the "Periodic Amount"). The
full Periodic Amount shall be paid by the Company in immediately
available funds within three business days after each Computation Date.
Notwithstanding the foregoing, the amounts payable by the Company
pursuant to this provision shall not be payable to the extent any delay
in the effectiveness of the Registration Statement occurs because of
an act of, or a failure to act or to act timely by the Initial Investor
or its counsel, or in the event all of the Registrable Securities may
be sold pursuant to Rule 144 or another available exemption under the
Act.
As used in this Section 2(b), the following terms shall have the
following meanings:
"Computation Date" means the date which is ninety (90) days after the
initial Closing Date (except as provided by the last sentence of
section 2(a)), and, if the Registration Statement required to be filed
by the Company pursuant to Section 2(a) has not theretofore been
declared effective by the SEC, each date which is thirty (30) days
after the previous Computation Date pro rated for partial periods)
until such Registration Statement is so declared effective.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC by thirty (30) days
after the initial Closing Date, a Registration Statement with respect
to not less than the number of Registrable Securities provided in
Section 2(a), above, and thereafter use its best efforts to cause each
Registration Statement relating to Registrable Securities to become
effective on the earlier of (i)five days after notice from the
Securities and Exchange Commission that the Registration Statement may
be declared effective, or (b) ninety (90) days after the Closing Date,
and keep the Registration Statement effective at all times until the
earliest (the "Registration Period") of (i) the date that is two years
after the Closing Date (ii) the date when the Investors may sell all
Registrable Securities under Rule 144 or (iii) the date the Investors
no longer own any of the Registrable Securities, which Registration
Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement
of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration
Statement as may be necessary to keep the Registration effective at all
times during the Registration Period, and, during the Registration
Period, comply with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities of the Company covered
by the Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as
setforth in the Registration Statement;
(c) The Company shall permit a single firm of counsel designated by
the Initial Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior
to their filing with the SEC, and not file any document in a form
to which such counsel reasonably objects.
(d) Furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel identified to the
Company, (i) promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company, one (1)
copy of the Registration Statement, each preliminary prospectus and
prospectus, and each amendment or supplement thereto, and (ii) such
number of copies of a prospectus, and all amendments and supplements
thereto and such other documents, as such Investor may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by such Investor;
(e) As promptly as practicable after becomirig aware of such event,
notify each Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading,
and use its best efforts promptly to prepare a supplement or amendment
to the Registration Statement or other appropriate filing with the SEC
to correct such untrue statement or omission, and deliver a number of
copies of such supplement or amendment to each Investor as such
Investor may reasonably request;
(f) As promptly as practicable after becoming aware of such event, notify
each Investor who holds Registrable Securities being sold
(or, in the event of an underwritten offering, the managing
underwriters) of the issuance by the SEC of a Notice of Effectiveness
or any notice of effectiveness or any stop order or other suspension
of the effectiveness of the Registration Statement at the earliest possible
time;
(g) Use its commercially reasonable efforts to secure designation of
all the Registrable Securities covered by the Registration Statement
as a National Association of Securities Dealers Automated Quotations
System ("NASDAQ") "Small Capitalization" within the
meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the quotation of the
Registrable Securities on the NASDAQ Small Cap Market; or if, despite
the Company's commercially reasonable efforts to satisfy the preceding
clause, the Company is unsuccessful in doing so, to secure NASDAQ/OTC
Bulletin Board authorization and quotation for such Registrable
Securities and, without limiting the generality of
the foregoing, to arrange for at least two market makers to register
with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities;
(h) Provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective
date of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to
the Registration Statement and enable such certificates for the
Registrable Securities to be in such denominations or amounts as the
case may be, as the Investors may reasonably request, and, within three
(3) business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company
shall deliver, and shall cause legal counsel selected by the Company
to deliver, to the transfer agent for the Registrable Securities (with
copies to the Investors whose Registrable Securities are included in
such Registration Statement) an appropriate instruction and opinion of
such counsel; and
(j) Take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investors, In connection with the
registration of the Registrable Securities, the Investors shall have
the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with
respect to the Registrable Securities of a particular Investor that
such Investor shall furnish to the Company such information regarding
itself, the Registrable Securities held by it, and the intended method
of disposition of the Registrable Securities held by it, as shall be
reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5)
days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information
the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such Investor's
Registrable Securities included in the Registration Statement. If at
least two (2) business days prior to the filing date the Company has
not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration
Statement without including Registrable Securities of such
Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested
by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section
3(e) or 3(f), above, such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration
Statement covering such Registrable Securities until such investor's
receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(e) or 3(1) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of
the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the
prospectus covering such Registrable Securities current at the time of
receipt of such notice.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but
including, without limitation, all registration, listing, and
qualifications fees, printers and accounting fees, the fees and
disbursements of counsel for the Company, shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such
Investor, each person, if any, who controls any Investor within the
meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities
or expenses (joint or several) incurred (collectively, "Claims") to
which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or
proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of
the following statements, omissions or violations in the Registration
Statement, or any post-effective amendment thereof,
or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the final prospectus
(as amended or supplemented, if the Company files any amendment thereof
or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements
made therein, in light of the circumstances under which the statements
therein were made, not
misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or
any rule or regulation under the Securities Act, the Exchange Act or
any state securities law (the matters in the foregoing clauses (i)
through (iii) being, collectively, "Violations"). The Company shall
reimburse the Investors, promptly as such expenses are incurred and are
due and payable, for any legal fees or other reasonable expenses
incurred by them in connection with investigating or defending any such
Claim. Notwithstanding
anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a) shall not (I) apply to a Claim
arising out of or based upon a Violation which occurs in reliance upon
and in conformity with information furnished in writing to the Company
by or on behalf of any Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any
such amendment thereof or supplement thereto, if such prospectus was
timely made available by the Company pursuant to Section 30>) hereof;
(II) be available to the extent such Claim is based on a failure of the
Investor to deliver or cause to be delivered the prospectus made
available by the Company; or (III) apply to amounts paid in settlement
of any Claim if such
settlement is effected without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Each
Investor will indemnify the Company and its officers, directors
and agents against any claims arising out of or based upon a Violation
which occurs in reliance upon and in conformity with information
furnished in writing to the Company, by or on behalf of
such Investor, expressly for use in connection with the preparation of
the Registration Statement, subject to such limitations and conditions
as are applicable to the Indemnification provided by the
Company to this Section 6. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
(b) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made
against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party
similarly noticed, to assume control of the defense thereof with
counsel mutually satisfactory to the indemnifying party and the
Indemnified Person or the Indemnified Party, as the case may be;
provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the reasonable fees
and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party,
the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due
to actual or potential differing interests between such Indemnified
Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for
only one separate legal counsel for the Investors; such legal counsel
shall be selected by the Investors holding a majority in interest of
the Registrable Securities included in the Registration Statement to
which the Claim relates. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability
to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the Indemnifying party is prejudiced in its
ability to defend such action. The indemnification required by this
Section 6 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying
party agrees to make the maximum contribution with respect to any
amounts for which it would otherwise be liable under Section 6 to the
fullest extent permitted by law; provided, however, that (a) no
contribution shall be made under circumstances where the maker would
not have been liable for indemnification under the fault standards set
forth in Section 6; (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section Il(f) of
the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities
.
8. Reports under Exchange Act. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities
Act or any other similar rule or regulation of the SEC that may at any
time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company
agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement
by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the
most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company and (iii) such other
information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement
shall be automatically assigned by the Investors to any transferee of
the Registrable Securities (or all or any portion of any Debenture of
the Company which is convertible into such securities) only if: (a) the
Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (b) the Company is,
within a reasonable time after such transfer or assignment, furnished
with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately
following such transfer or
assignment the further disposition of such securities by the transferee
or assignee is restricted under the Securities Act and applicable state
securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this
sentence the transferee or assignee agrees in writing with the Company
to be bound by all of the provisions contained herein.
In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company
shall not be liable for any damages arising from such delay, or the
payments set forth in Section 2(c) hereof.
10. Amendment of Registration Rights. Any provision of this Agreement
may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectiveiy), only with the written consent of the Company and
Investors who hold an eighty (80%) percent interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two or more persons or entities
with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be
in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile
transmission, receipt confirmed, or other means) or sent by certified
mail, return receipt requested, properly addressed and with proper
postage pre-paid (i) if to the Company, QUADRAX CORPORATION, 300 High
Point Avenue, Portsmouth, Rhode Island
02871 ATT: James J. Palermo, with a copy to Joseph Smith, Esq., Epstein
Broker & Green, P.C., 250 Park Avenue, New York, New York 10177; (ii)
if to the Initial Investor, at the address set forth under its name in
the Securities Purchase Agreement, with a copy to Samuel Krieger, Esq.,
Krieger & Prager, 319 Fifth Avenue, Third Floor, New York, NY 10016 and
(iii) if to any other Investor, at such address as such Investor shall
have provided in writing to the Company, or at such other address as
each such party furnishes by notice given in accordance with this
Section Il(b), and shall be effective, when personally delivered, upon
receipt and, when so sent
by certified mail, four (4) calendar days after deposit with the United
states Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York. Each of the parties
consents to the jurisdiction of the federal courts whose districts
encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with
any dispute arising under this Agreement and hereby waives, to the
maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding
in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This
Agreement may be signed in one or more counterparts, each of which
shall be deemed an original. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect. the validity or enforceability
of the remainder of this Agreement or the validity or enforceability
of this Agreement in any other jurisdiction. This Agreement may be
amended only by an instrument in writing signed by the party to be
charged with enforcement. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to
the subject matter hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are
no restrictions, promises, warranties or undertakings, other than those
set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings among the parties hereto with respect to
the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may
require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning
thereof.
(i) This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed
by a party, may be delivered to the other party hereto by telephone
line facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.
(j) The Company acknowledges that any failure by the Company to
perform its obligations under Section 3(a), or any delay in such
performance could result in to the Investors and the Company agrees
that, in addition to any other liability of the company may have by
reason of any such failure or delay, the Company shall be liable for
all direct damages caused by any such failure or delay, unless same is
the result of force majeure. Neither party shall be liable for
consequential damages.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS THEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of
the day and year first above written.
QUADRAX CORPORATION
By: /S/ James J. Palermo
Name: James J. Palermo
Title: CEO
SOVERIGN PARTNERS. L.P.
By: Southridge Capital Management, LLC
BY: /s/ Stephen Hicks
Name: Stephen Hicks
Title Pres. SCM, LLC
DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION
OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD,
PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT
PURSUANT TO REGISTRATION OR EXEMPTION OR SAFE HARBOR
THEREFROM .
No. A-1 us $ 1.000,000
QUADRAX CORPORATION
8% CONVERTIBLE DEBENTURE DUE AUGUST 1, 1999
THIS DEBENTURE is one of a duly authorized issue of $3,500,000 in Debentures
of QUADRAX CORPORATION, a corporation organized and existing under the laws of
the State of Delaware (the "Company") designated as its 8% Convertible
Debenture Due August 1, 1999.
FOR VALUE RECEIVED, the Company promises to pay to SOVEREIGN PARTNERS LP, the
registered holder hereof (the "Holder"), the principal sum of One Million and
00/100 (US $1,000,000) Dollars on August 1, 1999 (the "Maturity Date") and to
pay interest on the principal sum outstanding from
time to time in arrears upon conversion as provided herein on August 1, 1999
at the rate of 8% per annum accruing from the date of initial issuance. Accrual
of interest shall commence on the first such business day to occur after the
date hereof until payment in full of the principal sum has been made or duly
provided or. Subject to the provisions of Section 4 below, the principal of,
and interest on, this Debenture are payable at the option of the Holder, in
shares of Common Stock of the Company, $.000009 par value ("Common Stock"), or
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts, at the address
last appearing on the Debenture Register of
the Company as designated in writing by the Holder from time to time. The
Company will pay the principal of and interest upon this Debenture on the
Maturity Date, less any amounts required by law to be deducted, to the
registered holder of this Debenture as of the tenth day prior to the Maturity
Date and addressed to such holder at the last address appearing on the
Debenture Register. The forwarding of such check shall constitute a payment of
principal and interest hereunder and shall satisfy and discharge the liability
for principal and interest on this Debenture to the extent of the sum
represented by such check plus any amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
!US$10,000) and
integral multiples thereof. The Debentures are exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws
or other applicable laws at the time of such payments, and Holder shall execute
and deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any
proposed transfer of this Debenture, the Company may require, prior to issuance
of a new Debenture in the name of such other person, that it receive reasonable
transfer documentation including legal opinions
that the issuance of the Debenture in such other name does not and will not
cause a violation of the Act or any applicable state or foreign securities
laws. Prior to due presentment for transfer of this Debenture,
the Company and any agent of the Company may treat the person in whose name
this Debenture is duly registered on the Company's Debenture Register as the
owner hereof for the purpose of receiving payment as herein provided and for
all other purposes, whether or not this Debenture be overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
4. The Holder of this Debenture is entitled, at its option, to convert
at any time commencing the earlier of (a) sixty (60) days after the date
hereof, or (b) the Effective Date of the Registration Statement fried pursuant
to the Registration Rights Agreement between the Company and the Holder, or the
Holder's predecessor in interest, the principal amount of this Debenture,
provided that the principal amount is at least US $10,000 (unless if at the
time of such election to convert the aggregate principal
amount of all Debentures registered to the Holder is less that Ten Thousand
Dollars (US S10,000). then the whole amount thereof) into shares of Common
Stock of the Company at a conversion price for each share of Common Stock
("Conversion Rate") equal to 75% of the Market Price on the Conversion Date.
For purposes of this Section 4, the Market Price shall be the average closing
bid price of the Common Stock on the ten (10) trading days immediately
preceding the Conversion Date, as reported by the National
Association of Securities Dealers, or the closing bid price on the
over-the-counter market on such date or, in the event the Common Stock is
listed on a stock exchange, the Market Price shall be the closing price
on the exchange on such date, as reported in the Wall Street Journal.
Conversion shall be effectuated by surrendering the Debentures to be converted
to the Company's transfer agent, American Stock Transfer
& Trust Company, with the form of conversion notice attached hereto as Exhibit
A, executed by the Holder of the Debenture evidencing such Holder's intention
to convert this Debenture or a specified portion (as
above provided) hereof, and accompanied, if required by the Company, by prope'
assignment hereof in blank. Interest accrued or accruing from the date
ofissuance to the date of conversion shall, at the option
of the Holder, be paid in cash or Common Stock upon conversion at the
Conversion Rate. No fraction of Shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares
issuable shall be rounded to the nearest whole share. The date on which notice
of conversion is given (the "Conversion Date") shall be deemed to be the date
onwhich the Holder fares the conversion notice duly
executed, to the Company. Facsimile delivery of the conversion notice shall be
accepted by the Company at facsimile number (401) 683-5630; ATT: James J.
Palermo). Certificates representing Common Stock upon conversion will be
delivered within three (3) business days from the date the notice of conversion
with the original Debenture is delivered to the Company's transfer agent.
5. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rare, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
7. If the Company merges or consolidates with another corporation or sells
or transfers all or substantially all of its assets to another person and the
holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer,
subject to adjustments which shall be as nearly equivalent as may be
practicable. In the event of any proposed merger, consolidation or sale or
transfer of all or substantially all of the assets of the Connpany
(a "Sale"), the Holder hereof shall have the right to convert by delivering a
Notice of Conversion to the Company within fifteen (15) days of receipt of
notice of such Sale from the Company. In the event the Holder hereof shall
elect not to convert. the Company may prepay all outstanding principal and
accrued interest on this Debenture plus aI~edemption Premium of 2596, less all
amounts required by law to be deducted, upon which tender of payment following
such notice, the right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
10. This Debenture shall be governed by and construed in accordance with
the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any abjection,
including any objection based on forum non coveniens, to the bringing of any
such proceeding in such jurisdictions.
11. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest on
this Debenture and same shall continue for a period of three (3) days; or
b. Any of the representations or warranties made by the
Company herein. in the Securities Purchase Agreement, or in any
certificate or financial or other written statements heretofore or hereafter
furnished by the Company in connection with the execution and delivery of this
Debenture or the Securities Purchase Agreement shall be false or misleading in
any material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the Holder
or to cause its Transfer Agent to issue shares of Common Stock upon exercise
by the Holder of the conversion rights of the Holder in accordance with the
terms of this Debenture, fails to transfer or to cause its Transfer Agent to
transfer any certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture or the
Registration Rights Agreement, and such transfer is otherwise lawful, or fails
to remove any restrictive legend or to cause its Transfer Agent to transfer on
any certificate or any shares of Common Stock issued to the Holder upon
conversion of this Debenture as and when required by this Debenture, the
Agreement or the Registration Rights Agreement and such legend removal is
otherwise lawful, and any such failure shall continue uncured for five (5)
business days.
d. The Company shall fail to perform or observe,
in any material respect, any other covenant, term, provision, condition,
agreement or obligation of the Company under this Debenture and such failure
shall continue uncured for a period of thirty (30) days after written notice
from the Holder of such failure;
or
e. The Company shall(l) admit in writing its inability to pay its debts
generally as they mature; (2) make an assignment for the benefit of creditors or
commence proceedings for its dissolution; or 13) apply for or consent to the
appointment of a trustee, liquidator or receiver for its or for a substantial
part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the Company or
for a substantial part of its property or business without its consent and
shall not be discharged within sixty (60) days after such appointment; or
g. Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of the whole
or any substantial portion of the properties or assets of the Company and shall
not be dismissed within sixty (60) days thereafter; or
h. Any money judgment, writ or warrant of attachment, or similar process
in excess of Two Hundred Thousand ($200,000) Dollars in the aggregate shall be
entered or filed against the Company or any of its properties or other assets
and shall remain unpaid, unvacated, unbonded or unstayed for a period of
sixty(60) days or in any event later than five (5) days prior to the date of
any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within sixty (60) days after such
institution or the Company shall by any action or answer approve of, consent to,
or acquiesce in any such proceedings or admit the material allegations of, or
default in answering a petition filed in any such proceeding; or
j. The Company shall have its Common Stock suspended or delisted from an
exchange or over-the-counter market from trading for in excess of Two trading
days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by Law.
12. Nothing contained in this Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or
any rights whatsoever as a shareholder of the Company, unless and to
the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer thereunto duly authorized.
Dated: 8/4/97.
QUADRAX CORPORATION
By:
/S/JAMES J. PALERMO
CEO
DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES ARE
RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR
EXEMPTION OR SAFE HARBOR THEREFROM.
No. A-3US $ $750,000
QUADRAX CORPORATION
8% CONVERTIBLE DEBENTURE DUE AUGUST 1, 1999
THIS DEBENTURE is one of a duly authorized issue of $3,500,000 in
Debentures of QUADRAX CORPORATION, a corporation organized and existing under
the laws of the State of Delaware (the "Company") designated as its 8%
Convertible Debenture Due August 1, 1999.
FOR VALUE RECEIVED, the Company promises to pay to DOMINION CAPITAL FUND,
the registered holder hereof (the "Holder"), the principal sum of Seven Hundred
Fifty Thousand and 00/100 (US $750,000) Dollars on August 1, 1999 (the
"Maturity Date") and to pay interest on the principal sum outstanding from time
to time in arrears upon conversion as provided herein on August 1, 1999 at the
rate of 8% per annum accruing from the date of initial issuance. Accrual of
interest shall commence on the first such business day to occur after the date
hereof until payment in full of the principal sum has been made or duly
provided for. Subject to the provisions of Section4 below, the principal of,
and interest on, this Debenture are payable at the option of the Holder, in
shares of Common Stock of the Company, $.000009 par value ("Common Stock"), or
in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts, at the address
last appearing on the Debenture Register of the Company as designated in writing
by the Holder from time to time. The Company will pay the principal of and
interest upon this Debenture on the Maturity Date, less any amounts required
by law to be deducted, to the registered holder of this Debenture as of the
tenth day prior to the Maturity Date and addressed to such holder at the last
address appearing on the Debenture Register. The forwarding of such check
shall constitute a payment of principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this
Debenture to the extent of the sum represented by such check plus any amounts
so deducted.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Ten Thousand Dollars
(US$10,000) and integral multiples thereof. The Debentures are exchangeable
for an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same. No service
charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax
laws or other applicable laws at the time of such payments, and Holder shall
execute and deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including legal opinions that the issuance of the Debenture in
such other name does not and will not cause a violation of the Act or any
applicable state or foreign securities laws. Prior to due presentment for
transfer of this Debenture, the Company and any agent of the Company may treat
the person in whose name this Debenture is duly registered on the Company's
Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. The Holder of this Debenture is entitled, at its option, to convert
at any time commencing the earlier of (a) sixty (60) days after the date
hereof, or (b) the Effective Date of the Registration Statement filed pursuant
to the Registration Rights Agreement between the Company and the Holder, or the
Holder's predecessor in interest, the principal amount of this Debenture,
provided that the principal amount is at least US $10,000 (unless if at the
time of such election to convert the aggregate principal amount of all
Debentures registered to the Holder is less that Ten Thousand Dollars (US
$10,000), then the whole amount thereof) into shares of Common Stock of the
Company at a conversion price for each share of Common Stock ("Conversion Rate")
equal to 75% of the Market Price on the Conversion Date. For purposes of this
Section 4, the Market Price shall be the average closing bid price of the
Common Stock on the ten (10) trading days immediately preceding the Conversion
Date, as reported by the National Association of Securities Dealers, or the
closing bid price on the over-the-counter market on such date or, in the event
the Common Stock is listed on a stock exchange, the Market Price shall be the
closing price on the exchange on such date, as reported in the Wall Street
Journal. Conversion shall be effectuated by surrendering the Debentures to be
converted to the Company's transfer agent, American Stock Transfer & Trust
Company, with the form of conversion notice attached hereto as Exhibit A,
executed by the Holder of the Debenture evidencing such Holder's intention to
convert this Debenture or a specified portion (as above provided) hereof, and
accompanied, if required by the Company, by proper assignment hereof in blank.
Interest accrued or accruing from the date of issuance to the date of
conversion shall, at the option of the Holder, be paid in cash or Common Stock
upon conversion at the Conversion Rate. No fraction of Shares or scrip
representing fractions of shares will be issued on conversion, but the number
of shares issuable shall be rounded to the nearest whole share. The date on
which notice of conversion is given (the "Conversion Date") shall be deemed to
be the date on which the Holder faxes the conversion notice duly executed, to
the Company. Facsimile delivery of the conversion notice shall be accepted by
the Company at facsimile number (401) 683-5630; ATT:James J. Palermo).
Certificates representing Common Stock upon conversion will be delivered within
three (3) business days from the date the notice of conversion with the
original Debenture is delivered to the Company's transfer agent.
5. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin
or currency, herein prescribed. This Debenture and all other Debentures now
or hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which
shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right
to convert by delivering a Notice of Conversion to the Company within fifteen
(15) days of receipt of notice of such Sale from the Company. In the event the
Holder hereof shall elect not to convert, the Company may prepay all
outstanding principal and accrued interest on this Debenture plus a Redemption
Premium of 25%, less all amounts required by law to be deducted, upon which
tender of payment following such notice, the right of conversion shall
terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
10. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York. Each of the parties
consents to the jurisdiction of the federal courts whose districts encompass
any part of the City of New York or the state courts of the State of New
York sitting in the City of New York in connection with any dispute arising
under this Agreement and hereby waives, to the maximum extent permitted by
law, any objection, including any objection based on forum non coveniens, to
the bringing of any such proceeding in such jurisdictions.
11. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest on
this Debenture and same shall continue for a period of three (3) days;
or
b. Any of the representations or warranties made by the Company herein, in
the Securities Purchase Agreement, or in any certificate or financial
or other written statements heretofore or hereafter furnished by the
Company in connection with the execution and delivery of this Debenture
or the Securities Purchase Agreement shall be false or misleading in
any material respect at the time made; or
c: The Company fails to issue shares of Common Stock to the Holder or to
cause its Transfer Agent to issue shares of Common Stock upon exercise
by the Holder of the conversion rights of the Holder in accordance with
the terms of this Debenture, fails to transfer or to cause its Transfer
Agent to transfer any certificate for shares of Common Stock issued to
the Holder upon conversion of this Debenture and when required by this
Debenture or the Registration Rights Agreement, and such transfer is
otherwise lawful, or fails to remove any restrictive legend or to cause
its Transfer Agent to transfer on any certificate or any shares of
Common Stock issued to the Holder upon conversion of this Debenture as
and when required by this Debenture, the Agreement or the Registration
Rights Agreement and such legend removal is otherwise lawful, and any
such failure shall continue uncured for five (5) business days.
d. The Company shall fail to perform or observe, in any material respect,
any other covenant, term, provision, condition, agreement or obligation
of the Company under this Debenture and such failure shall continue
uncured for a period of thirty (30) days after written notice from the
Holder of such failure; or
e. The Company shall (1) admit in writing its inability to pay its debts
generally as they mature; (2) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (3) apply for
or consent to the appointment of a trustee, liquidator or receiver for
its or for a substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the Company or
for a substantial part of its property or business without its consent
and shall not be discharged within sixty (60) days after such
appointment; or
g. Any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60) days thereafter;
or
h. Any money judgment, writ or warrant of attachment, or similar process
in excess of Two Hundred Thousand ($200,000) Dollars in the aggregate
shall be entered or filed against the Company or any of its properties
or other assets and shall remain unpaid, unvacated, unbonded or
unstayed for a period of sixty(60) days or in any event later than five
(5) days prior to the date of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against the Company
and, if instituted against the Company, shall not be dismissed within
sixty (60) days after such institution or the Company shall by any
action or answer approve of, consent to, or acquiesce in any such
proceedings or admit the material allegations of, or default in
answering a petition filed in any such proceeding; or
j. The Company shall have its Common Stock suspended or delisted from an
exchange or over-the-counter market from trading for in excess of two
trading days.
Then, or at any time thereafter, and in each and every such case, unless
such Event of Default shall have been waived in writing by the Holder (which
waiver shall not be deemed to be a waiver of any subsequent default) at the
option of the Holder and in the Holder's sole discretion, the Holder may
consider this Debenture immediately due and payable, without presentment,
demand, protest or notice of any kinds, all of which are hereby expressly
waived, anything herein or in any note or other instruments contained to the
contrary notwithstanding, and the Holder may immediately enforce any and all
of the Holder's rights and remedies provided herein or any other rights or
remedies afforded by law.
12. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company,
unless and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: October __, 1997
QUADRAX CORPORATION
By: ______________________
James J. Palermo
Chief Executive Officer<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
Debenture)
The undersigned hereby irrevocably elects to convert $
________________ of the principal amount of the above Debenture No. ___
into Shares of Common Stock of QUADRAX CORPORATION (the "Company")
according to the conditions hereof, as of the date written below.
Date of Conversion*______________________________________________
Applicable Conversion Price ____________________________________
Signature ________________________________________________________
[Name]
Address: ___________________________________________________________
____________________________________________________________________
* This original Debenture and Notice of Conversion must be received by the
Company's transfer agent by the third business date following the Date of
Conversion.
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR
EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN
EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO
ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE
REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE
COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM
SUCH REGISTRATION.
QUADRAX CORPORATION
COMMON STOCK PURCHASE WARRANT
1. Issuance. In consideration of good and
valuable consideration, the receipt of which is hereby
acknowledged by Quadrax Corporation, a Delaware corporation
(the "Company"), Jeffrey Taylor or registered assigns (the
"Holder") is hereby granted the right to purchase at any
time until 5:00 P.M., New York City time, on July 31, 2000
(the "Expiration Date"), Ten Thousand (10,000) fully paid
and nonassessable shares of the Company's Common Stock, par
value $.000009 per share (the "Common Stock") at an initial
exercise price of $0.75 per share (the "Exercise Price"),
subject to further adjustment as set forth in Section 6
hereof.
2. Exercise of Warrants. This Warrant is
exercisable at the Exercise Price per share of Common Stock
payable hereunder, payable in cash or by certified or
official bank check, or by "cashless exercise", by means of
tendering this Warrant Certificate to the Company to receive
a number of shares of Common Stock equal in Market Value to
the difference between the Market Value of the shares of
Common Stock issuable upon exercise of this Warrant and the
total cash exercise price thereof. Upon surrender of this
Warrant Certificate with the annexed Notice of Exercise Form
duly executed, together with payment of the Exercise Price
for the shares of Common Stock purchased, the Holder shall
be entitled to receive a certificate or certificates for the
shares of Common Stock so purchased. For the purposes of
this Section 2, "Market Value" shall be an amount equal to
the average closing bid price of a share of Common Stock for
the ten (10) days preceding the Company's receipt of the
Notice of Exercise Form duly executed multiplied by the
number of shares of Common Stock to be issued upon surrender
of this Warrant Certificate.
3. Reservation of Shares. The Company hereby
agrees that at all times during the term of this Warrant
there shall be reserved for issuance upon exercise of this
Warrant such number of shares of its Common Stock as shall
be required for issuance upon exercise of this Warrant (the
"Warrant Shares").
4. Mutilation or Loss of Warrant. Upon
receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and
(in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of
mutilation) upon surrender and cancellation of this Warrant,
the Company will execute and deliver a new Warrant of like
tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. Rights of the Holder. The Holder shall
not, by virtue hereof, be entitled to any rights of a
stockholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except
to the extent set forth herein.
6. Protection Against Dilution.
6.1 Adjustment Mechanism. If an
adjustment of the Exercise Price is required pursuant to
this Section 6, the Holder shall be entitled to purchase
such number of additional shares of Common Stock as will
cause (i) the total number of shares of Common Stock Holder
is entitled to purchase pursuant to this Warrant, multiplied
by (ii) the adjusted purchase price per share, to equal
(iii) the dollar amount of the total number of shares of
Common Stock Holder is entitled to purchase before
adjustment multiplied by the total purchase price before
adjustment.
6.2 Capital Adjustments. In case of any
stock split or reverse stock split, stock dividend,
reclassification of the Common Stock, recapitalization,
merger or consolidation, or like capital adjustment
affecting the Common Stock of the Company, the provisions of
this Section 6 shall be applied as if such capital
adjustment event had occurred immediately prior to the date
of this Warrant and the original purchase price had been
fairly allocated to the stock resulting from such capital
adjustment; and in other respects the provisions of this
Section shall be applied in a fair, equitable and reasonable
manner so as to give effect, as nearly as may be, to the
purposes hereof. A rights offering to stockholders shall be
deemed a stock dividend to the extent of the bargain
purchase element of the rights.
7. Transfer to Comply with the Securities
Act; Registration Rights.
(a) This Warrant has not been registered under
the Securities Act of 1933, as amended, (the "Act") and has
been issued to the Holder for investment and not with a view
to the distribution of either the Warrant or the Warrant
Shares. Neither this Warrant nor any of the Warrant Shares
or any other security issued or issuable upon exercise of
this Warrant may be sold, transferred, pledged or
hypothecated in the absence of an effective registration
statement under the Act relating to such security or an
opinion of counsel satisfactory to the Company that
registration is not required under the Act. Each
certificate for the Warrant, the Warrant Shares and any
other security issued or issuable upon exercise of this
Warrant shall contain a legend on the face thereof, in form
and substance satisfactory to counsel for the Company,
setting forth the restrictions on transfer contained in this
Section.
(b) The Company agrees to file a registration
statement, which shall include the Warrant Shares, on Form
S-3 or another available form (the "Registration
Statement"), pursuant to the Act, by the 30th calendar day
after the date this Warrant was issued (the "Original
Issuance Date") and to have the registration of the Warrant
Shares completed and effective by the 90th calendar day
after the Original Issuance Date (the "Effective Date").
8. Notices. Any notice or other
communication required or permitted hereunder shall be in
writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by
certified, registered or express mail, postage pre-paid.
Any such notice shall be deemed given when so delivered
personally, telegraphed, telexed or sent by facsimile
transmission, or, if mailed, two days after the date of
deposit in the United States mails, as follows:
(i) if the to Company, to:
Quadrax Corporation
300 High Point Avenue
Portsmouth, RI 02871
Attn: Chief Financial Officer
(ii) if to the Holder, to:
Any party may be notice given in accordance with this
Section to the other parties designate another address or
person for receipt of notices hereunder.
9. Supplements and Amendments; Whole
Agreement. This Warrant may be amended or supplemented only
by an instrument in writing signed by the parties hereto.
This Warrant of even date herewith contain the full
understanding of the parties hereto with respect to the
subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings
other than expressly contained herein and therein.
10. Governing Law. This Warrant shall be
deemed to be a contract made under the laws of the State of
Rhode Island and for all purposes shall be governed by and
construed in accordance with the laws of such State
applicable to contracts to be made and performed entirely
within such State.
11. Counterparts. This Warrant may be
executed in any number of counterparts and each of such
counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together
constitute but one and the same instrument.
12. Descriptive Headings. Descriptive
headings of the several Sections of this Warrant are
inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have executed
this Warrant as of the __th day of _____________ 1997.
QUADRAX CORPORATION
By:_________________________________
James J. Palermo,
President
Attest:
________________________
John McQuade,
Chief Administrative Officer
Exhibit 21.1 List of Subsidiary Corporations
List of Subsidiaries
Percentage of
Name of State of Stock Owned
Subsidiary Incorporation by Quadrax Corporation
Quadrax Advanced Rhode Island 100%
Materials
Systems, Inc.
Quadrax Sports, Inc. Rhode Island 100%
Victel, Inc. Delaware 100%
Victor Electric New York 100%
Wire & Cable
Corporation
Severance Police of Quadrax Corporation
Effective as of January 1, 1997, the
following shall apply to all executive officers
who are not a party to a valid and existing
employment agreement with Quadrax
Corporation (each an "Employee").
The Employee shall be entitled to receive
the following upon a termination of employment
with Quadrax Corporation (the "Corporation") in
the event of 1) a "change of control", as
hereinafter defined; 2) a reduction or
rationalization of the work force; or 3) a
discharge for cause. Upon receipt by the Employee
of the severance benefits hereunder, the rights of
the Employee and obligations of the Corporation
shall become void and be of no further force and
effect.
If the Employee is terminated by the
Corporation within 12 months following a change in
control without cause, then the Employee shall be
entitled to receive his base salary, on a pro-
rated basis, for a period of six months from the
date of termination and any bonus that has accrued
and is due and owed to the Employee by the
Corporation. If the Employee is terminated by the
Corporation for any reason after 12 months
following a change of control, then the Employee
shall not be entitled to receive any severance
benefits.
If the Employee is terminated by the
Corporation by reason of a reduction or a
rationalization of the work force without cause,
then the Employee shall be entitled to received
his base salary on a pro-rated basis, for a period
of up to six months from the date of termination
and any bonus that has accrued and is due and owed
to the Employee by the Corporation.
If the Employee is terminated by the
Corporation for cause, then the Employee shall not
be entitled to receive any severance benefits
under this policy and any benefits that are paid
to the Employee by the Corporation shall be in the
sole discretion of the Corporation.
As used herein, an executive officer shall
include, and be limited to, all corporate
officers, general managers and all employees who
report directly to a general manager.
As used herein, for "cause" shall include,
and be limited to, inadequate job performance that
is documented by the Company, intentional failure
or refusal to perform employment obligations,
dishonesty, insobriety, abuse of alcohol, use of
illegal drugs or a conviction or the entering of a
plea of nolo contendere to a crime involving moral
turpitude or any other crime materially impairing
or material hindering the Employee's ability to
perform his duties for the Corporation.
As used herein, "change of control" is
defined as the sale, exchange or transfer of: (i)
20% or more of the outstanding common stock of the
Corporation to any buyer or group of affiliated
buyers; or (ii) substantially all of the assets of
the Corporation to any party who does not hold at
least 5% of the outstanding common stock of the
Corporation as of the effective date of this
policy.
Quadrax Corporation
By: /s/ James J. Palermo
James J. Palermo
President and Chief
Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF QUADRAX CORPORATION AND ITS SUBSIDIARIES
AS OF DECEMBER 31, 1997 AND THE INCOME STATEMENT FOR THE YEAR THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 53,042
<SECURITIES> 0
<RECEIVABLES> 2,452,881
<ALLOWANCES> 106,000
<INVENTORY> 2,408,190
<CURRENT-ASSETS> 4,967,752
<PP&E> 9,201,805
<DEPRECIATION> 4,119,284
<TOTAL-ASSETS> 10,443,326
<CURRENT-LIABILITIES> 6,609,608
<BONDS> 5,898,721
0
0
<COMMON> 417
<OTHER-SE> (2,065,420)
<TOTAL-LIABILITY-AND-EQUITY> 10,443,326
<SALES> 13,968,736
<TOTAL-REVENUES> 13,968,736
<CGS> 13,922,669
<TOTAL-COSTS> 13,922,669
<OTHER-EXPENSES> 1,270,000
<LOSS-PROVISION> 92,000
<INTEREST-EXPENSE> 2,002,231
<INCOME-PRETAX> (10,463,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,463,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,463,106)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
