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, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the transition period from to
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Commission File Number: 0-16052
QUADRAX CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 05-0420158
(State or other jurisdiction of (IRS Employer
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
618 MAIN STREET
WEST WARWICK, RHODE ISLAND 02893-0901
(Address of PrincipalExecutive Offices) (Zip Code)
(401) 821-1700
(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
(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|
Issuer's revenues for the most recent fiscal year: $14,535,819
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As of March 31, 2000, the aggregate market value of the voting common equity
held by non-affiliates was $2,341,541 computed by reference to the closing price
of March 31, 2000, of $0.1875 on the Nasdaq Electronic Bulletin Board.
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
As of March 31, 2000, there were outstanding 24,512,899 shares of Common Stock,
par value $.000009 per share.
Transitional Business Disclosure Format (check one): Yes No |X|
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Documents Incorporated by Reference: Yes |X| No
<PAGE>
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.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS-GENERAL
Quadrax Corporation (the "Company") was incorporated in Delaware on March
6, 1986. The Company's business is as a manufacturer and distributor of electric
power cordsets and interconnect cables primarily for original equipment
manufacturers ("OEMs") of small appliances.
The Company currently sells its products to approximately 150 customers.
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. The balance of sales are to a combination of electronic, medical
and interconnect device manufacturers.
The Company's current strategy is divided into two basic objectives. The
first is to obtain more sales from each customer and improve margins on the
Company's core products through internal cost improvements. The second is to
obtain business from customers that are in different industries from our core
customers, such as electrical connectors for products that are sold into the
medical industry along with higher value added products.
HISTORY
Prior to fiscal year 1995, the Company was a development stage company. The
Company's initial business was to design, develop, fabricate and sell
fiber-reinforced thermoplastic polymer composite materials ("Quadrax
Composites") and products manufactured from these materials.
On May 7 1997, the Company purchased all of the outstanding stock of
Victel, Inc. ("Victel") a Delaware Corporation whose sole asset was all of the
outstanding stock of Victor Electric Wire and Cable ("Victor"), a New York
corporation. Victor are a vertically integrated manufacturer of electric cables
drawn from raw copper rods into fine wire and stranded heavier cables. The
stranded cables are insulated with a PVC plastic and rubber compound and then
molded to plugs to create the finished cordset product.
Due to the Company's inability to obtain sufficient financing and the
subsequent filing of Chapter 11 bankruptcy, the Company reconfigured its
composite materials division during the latter part of 1997. The Victor Electric
Wire and Cable division continues to operate.
In February 2000 Victor merged with and into Victel under Section 907 of
the New York Business Corporation Law. Victel then merged with and into the
Company under Section 251 of the Delaware General Corporation Law.
MARKETS AND PRODUCT LINES
The Company produces a wide variety of power supply cords (cordsets),
insulated wire (bulk wire) and molded cable assemblies. The Company's products
are produced only after customer orders are received and then custom
manufactured 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
105(degree)C and plugs are available with designs for varied stress capacities.
During the year ended December 31, 1999, two customers each accounted for more
than 10% of total sales, with sales to both customers totaling approximately 50%
of total sales. The Company presently relies on corporate purchase agreements,
letters of intent and blanket orders for its one to three year production
schedules. The Company's plans for future growth depend on the continued
existence of these relationships with existing customers.
MARKETING, SALES AND DISTRIBUTION
The Company sells primarily through sales representative organizations.
Additionally, numerous "house" accounts are managed by an inside sales group.
The Company'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 the Company are typically strongest in the second and
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third quarters. As the Company's profitability significantly depends on sales
made in the second and third quarters, the Company'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 Company
will achieve consistent profitability on a quarterly or an annual basis. The
Company's management plans to target new market segments and develop new
products to reduce seasonality and increase total sales.
COMPETITION
The wire and cable industry is extremely competitive and the Company's
competition is both domestic and foreign. The Company's principal domestic
competitors are General Cable, Volex, Belden, and Komar. There are numerous
overseas competitors as well, principally in Mexico and China. Many of such
competitors are larger and better financed than the Company, and have
significantly greater manufacturing and marketing resources than do the Company.
The Company believes that its long established reputation for quality and
reliable delivery are key competitive assets.
The Company competes by means of aggressive pricing, new product
development, high quality products and exceptional service. To sustain its
competitive edge, the Company has implemented statistical process controls,
total quality management and continuous improvement programs. Included with
products purchased from the Company are access to its engineering resources and
assured immediate staff response to customers' needs. As an additional tool to
maximize service and performance, the Company has developed and uses Electronic
Data Interchange (EDI) capabilities.
To ensure competitiveness, the Company will continue to protect its
proprietary processes and other information by relying on trade secret laws and
non-disclosure and confidentiality agreements with certain of its employees and
other persons who have access to its proprietary processes and other
information.
MANUFACTURING
The Company has been ISO 9002 certified since December 1996. The Company's
electric cables are 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
the Company at its plant. The Company produces a wide variety of cordsets which
are all produced in response to a specific customer order.
PRODUCTION MATERIALS AND MACHINERY
The Company's key raw material ingredients are copper and insulating
compounds (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. The Company does not
presently have any long term supply agreements with its suppliers of copper or
plastic and does not anticipate the execution of any long term agreements with
these suppliers in the near future. The Company's management believes that the
policy of purchasing copper on the market is reasonable, but there can be no
assurance that this approach will be effective to adequately insulate the
Company against copper price fluctuations. In respect to 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 December 31, 1999, the Company employed 178 employees of which 141
are represented by the International Brotherhood of Electrical Workers ("IBEW").
The Company and the union executed a three-year
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collective bargaining agreement in April 1997 that matured on April 7, 2000. The
Company and the IBEW have orally agreed to extend the terms and conditions of
the contract to October 7, 2000. Although management considers its labor
relations to be excellent, there can be no assurance that the Company will be
able to renew such agreement after its expiration or, if it is renewed, will be
renewed on terms as favorable to the Company as those currently in existence. In
addition, the Company's operations could be materially adversely affected in the
event of an extended labor dispute.
PHYSICAL PLANT AND PROCEDURE
The Company's plant is designed 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. The Company's wire drawing operation is
capable of producing 60,000 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 or 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 the Company at its plant. The Company has a variety
of over 300 molds and the capability to process over 1,500,000 cordsets per
week. All the machinery used by the Company in its manufacturing process is made
of standard components for which replacement parts are readily available.
The Company distributes its finished products to its primarily OEM
customers by shipping directly from its plant. For very large customer orders,
these products can be temporarily warehoused at the Company's facilities and
shipped upon request.
INTELLECTUAL PROPERTY
The Company is the owner of United States service mark registration for the
name Victor, which is used in connection with its wire and cable business. The
Company has been awarded several patents in its fifty-year history, one of which
remains in effect. The Company intends to use and protect its patent and service
mark, as necessary. The Company believes its patent trademarks and service marks
have value and are an import factor in the marketing of its product. There can
be no assurance that the Company will be able to register other names or service
marks and obtain other patents it may consider important, that the Company's
current or future patents, trademarks or printed materials do not or will not
violate the proprietary rights of others, that the Company's patents or marks
would be upheld if challenged, or that the Company will not be prevented from
using its patents, marks or other printed materials and any of the foregoing
could have an adverse effect on the Company. Enforcement of one's own
proprietary rights or the defense against the proprietary claims of another can
be extremely costly and there can be no assurance that the Company will have the
financial resources necessary to enforce or defend its patents and its marks.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to waters
and the generation, handling, storage, transportation, treatment and disposal of
waste and other materials. The Company is not subject to any such laws and
regulations which are specific to the wire and cable industry. The Company
believes that its business, operations and facilities have been and are being
operated in compliance in all material respects with applicable environmental
and health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. Potentially significant
expenditures, however, could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains one facility and operates out of a building in West
Warwick, Rhode Island, leased by the Company, containing approximately 200,000
square feet of manufacturing and office space. The Company's
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plant has been located in this facility for approximately 50 years. The
Company's executive offices were relocated here during the Company's 1998 fiscal
year. The facility is leased from a third-party landlord on a "triple net" basis
at an annual base rental of approximately $240,000. This lease expires December
31, 2001.
In June 2000, the Company was served with an eviction notice from the
third-party landlord which alleges that the Company is in violation of its
lease. While the Company maintains that it has not violated the lease, it is
currently exploring all options with regards to exiting the building.
The Company believes that its existing leased facility is adequate to meet
its currently anticipated requirements for office and production needs for the
foreseeable future and that suitable additional or substitute facilities will be
available if required.
ITEM 3. LEGAL PROCEEDINGS
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 in the District of Rhode Island. The Company's wholly owned
subsidiaries Victor and Victel were not party to the bankruptcy filing on the
Petition Date. Pursuant to the filing of the voluntary petition, the Company
filed a plan for financial reorganization in December 1998.
At the time of the Chapter 11 Bankruptcy, the Company was prohibited from
paying and creditors were prohibited from attempting to collect claims or debts
arising prior to the Petition Date without approval of the Bankruptcy Court. The
primary objective of the Company during the Chapter 11 Bankruptcy was to develop
a Reorganization Plan, (the "Plan") which with the concurrence of its creditors
would allow the Company to operate without the supervision of the Bankruptcy
Court. Such a plan was developed and approved by the United States Bankruptcy
Court on October 21, 1999, with an effective date of November 5, 1999. On April
12, 2000, the Court issued its final decree discharging the Company from Chapter
11 bankruptcy proceedings.
The implementation of the Plan called for the following:
(1) The merging of Victel and Victor into the Company with the assets and
liabilities of Victel and Victor being assumed by the Company.
(2) Payment in full to certain creditors of approximately $260,512.
(3) The general unsecured creditors of the Company holding allowed claims
of $6,744,130 receiving 11,376,883 newly issued shares, representing
46% of the outstanding new common stock, on a pro-rata basis, valued at
$2,047,887, plus cash equal to their pro-rata portion of $500,000 held
in escrow. These shares are fully registered stock with no restrictions
on trading pursuant to the United States Securities and Exchange Act of
1933 and 1934, as amended, and were issued in February 2000. All
warrants to purchase the old common stock of the Company were
cancelled.
Pond Equities, Inc. ("Pond"), a licensed NASDAQ dealer, located in New
York, New York has offered to purchase from the unsecured creditors all
or part of the 11,500,000 shares issued for $0.05 per share with no
commissions payable by such creditors, provided such shares are
tendered within one year of the confirmation date of the Plan. Payments
for these shares tendered within one year are guaranteed by an
irrevocable letter of credit in the amount of $575,000 issued by Chase
Manhattan Bank.
(4) The existing shareholders of the Company, approximately 11,000
beneficial owners, holding 44,453,334 shares of the old common stock,
received 1,111,333 shares of newly issued stock, reflecting a
forty-for-one reverse stock split, which represents 5% of the new
common stock of the Company on a pro-rata basis.
(5) For payment of $100,000, the Company issued 12,024,683 new shares, 49%
of the outstanding new common stock shares of the Company ("the Private
Placement Securities"), to a third party private
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investor group, valued at $1,839,777. These shares were granted in
recognition of the investor group advancing funds to the Company.
As of December 31, 1999, the Private Investor Group had advanced
$4,064,369 to the Company, evidenced by Note Obligations. These Note
Obligations are repayable, contingent on the Company meeting various
financial covenants and bear interest at a rate of 8% per annum until
maturity. Of these Note Obligations, $2,400,000 are collateralized by
all the assets of the Company and are subordinated to the security
interest of the Company's primary lender, Congress Financial
Corporation (the "Primary Lender").
The Private Placement Securities are restricted securities within the
meaning of the Securities Act of 1933, as amended. The Private Investor
Group after the effective date of the Plan may use the provisions of
Rule 144 to resell these restricted securities without registration.
The Private Investor Group acquiring the Private Placement Securities
will be entitled to contractual transferable anti-dilution rights such
that in the event the Company issues additional shares of stock, the
Private Investor Group will also be issued additional shares of stock
so that they continue to have a 49% interest in the total outstanding
shares of Company. Additionally, the Private Investor Group will have
demand registration rights for the Private Placement Securities on Form
S-3 starting when the Company becomes eligible to use such form under
the Securities Act of 1933, as amended. The Private Investor Group will
also be entitled to "piggy-back" registration rights for the Private
Placement Securities.
(6) The Company expects to continue the Quadrax Composites business by
leasing equipment that is used to manufacture and produce its
thermoplastic tape to an outside third party manufacturer who will
utilize the tape produced to build their own unique product. The
Company will receive fees equal to $0.50 per pound for thermoplastic
tape produced by the lessee and sold to other users of the tape. It is
expected that this agreement will insure the continuation of the
Company's Quadrax Composites business and will add the support of a
substantial end user of its thermoplastic tape to further the marketing
strength of Quadrax Composites.
(7) The Company has purchased Directors and Liability Insurance, including
company reimbursement, in the amount of $5,000,000 ("D&O Insurance")
for the protection of the former and current officers and directors of
the Company.
(8) All claims and debts against the Company originating prior to the
Petition Date which were not accepted by the Company during the Chapter
11 Bankruptcy were dismissed and are no longer a liability of the
Company.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business.
The Company is subject to product liability litigation on a recurring basis
from persons suffering shocks from electrical appliances and other product
failures. The Company maintains insurance coverage against such liabilities in
amounts, which, in the opinion of management, are adequate against the risks
assumed. Victor's litigation was not stayed or otherwise affected by the
Company's Chapter 11 Petition and court proceedings.
As of December 31, 1999, the Company was not party to any legal
proceedings, which individually or in the aggregate could have a material
adverse effect on the Company's results of operations or financial position.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
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PART II
ITEM 5. MARKET FOR EQUITY AND RELATED STOCKHOLDER MATTERS
Effective February 23, 2000, the Company's newly issued common stock began
trading under the symbol "QDXC". (See ITEM 3. LEGAL PROCEEDINGS)
The table below sets forth the range of high and low bid prices for the
Common Stock and the Class C Warrants on Nasdaq and the Pink Sheets for each
quarter within the last two fiscal years and the fiscal quarter ending March 31,
2000.
<TABLE>
<CAPTION>
Common Stock Class C Warrants
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High Bid Low Bid High Bid Low Bid
Fiscal 2000:
<S> <C> <C> <C>
Quarter Ended March 31, 2000 $3.7500 0.0156 Not Available
Fiscal 1999:
Quarter Ended March 31, 1999 $0.0156 0.0156 Not Available
Quarter Ended June 30, 1999 0.0156 0.0156 Not Available
Quarter Ended September 30,1999 0.0156 0.0156 Not Available
Quarter Ended December 31,1999 0.0156 0.0156 Not Available
Fiscal 1998:
Quarter Ended March 31, 1998 $0.1250 $0.0300 $0.1875 $0.0313
Quarter Ended June 30, 1998 0.1250 0.0156 0.1563 0.0313
Quarter Ended September 30,1998 0.0313 0.0156 Not Available
Quarter Ended December 31,1998 0.0156 0.0156 Not Available
</TABLE>
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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, 1999, there were 24,512,899 shares of New Common Stock
outstanding and held of record by approximately 1,400 stockholders. The amount
of shares outstanding at December 31, 1999, reflects an adjustment for a
forty-for-one reverse stock split effective November 5, 1999.
DIVIDEND POLICY
The Company did not declare any dividends on common stock during its 1998
and 1999 fiscal years and does not expect to declare dividends in the
foreseeable future. Any cash generated by the Company will be retained to fund
the Company's on-going cash requirements.
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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, and other risks.
BANKRUPTCY FILING
Since the Petition Date in fiscal 1998, the Company operated as a
Debtor-in-Possession under Chapter 11 of the Bankruptcy Code. Accordingly,
claims which were the subject of pre-petition litigation were stayed and those
claims together with claims arising from pre-petition defaults and events of
default caused by the filing of the petition were resolved in the bankruptcy
proceedings. The bankruptcy case itself was resolved by a confirmation of a plan
of reorganization proposed by the Company and agreed to by its creditors and
confirmed by the United States Bankruptcy Court on October 21, 1999. The final
decree discharging the Company from Chapter 11 Bankruptcy proceedings was issued
on April 12, 2000 by the United States Bankruptcy Court. (See ITEM 3. LEGAL
PROCEEDINGS)
The following financial tables set forth selected financial data at
December 31, 1999 and at December 31, 1998 and for the fiscal years then ended.
<TABLE>
<CAPTION>
( Dollars in thousands, except per share data)
Year Ended
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STATEMENT OF OPERATIONS DATA: December 31, 1999 December 31, 1998
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<S> <C> <C>
Sales $ 14,536 $ 17,309
Cost of sales 13,959 16,051
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Gross profit 577 1,258
Selling, general & administrative costs (2,365) (2,407)
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Income (loss) from operations (1,788) (1,149)
Interest expense, net (511) (431)
Amortization of loan discount (497) -0-
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Loss on continuing operations (2,796) (1,580)
Loss on discontinued operations (307) (1,720)
Loss on disposal of assets -0- (1,710)
-
Gain on discharge of indebtedness 4,276 -0-
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Net income (loss) $ 1,173 $ (5,010)
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Net income (loss) per common share $ 0.25 $ (4.51)
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Weighted average common shares outstanding 4,702 1,111
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December 31,
---------------------------------------------
1999 1998
BALANCE SHEET DATA:
Working capital, (deficit) $ (490) $ 872
Total assets 8,480 7,842
Long term liabilities 4,673 4,289
Total stockholders' equity (deficit) (2,729) (7,790)
</TABLE>
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FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Total revenues recognized during fiscal 1999 were $14,536,000 as compared
to $17,309,000 in fiscal 1998. This decrease in fiscal 1999 sales of $2,773,000
is due primarily to one of the Company's larger customers deciding to purchase
its cordsets from a Mexican manufacturer who was able to provide comparable
products at a lower cost than the Company.
Cost of goods sold for fiscal 1999 was $13,959,000, representing 96.0% of
sales for fiscal 1999. The Company's cost of goods sold for fiscal 1998 was
approximately $16,051,000 representing 92.7% of sales for fiscal 1998. This
increase in cost of goods sold as a percent of sales is primarily attributable
to two reasons: one, the Company's loss of a large customer with gross margins
approximating 18% to a Mexican competitor, and; two, an increase in new customer
sales which had lower gross margins.
Selling, general and administrative costs ("SG&A") decreased $42,000 in
fiscal 1999 to $2,365,000, an insignificant fluctuation.
Interest expense, in fiscal 1999, increased approximately $80,000. The
reason for this increase reflects the increase in borrowings from the Private
Investor Group during fiscal 1999.
Amortization expense for loan premium increased $497,000 in fiscal 1999
from zero in fiscal 1998. This expense relates to the difference in valuation
that the Private Investor Group paid, $100,000, for 12,024,683 shares of new
common stock that the Private Investor Group received upon implementation of the
Company's Reorganization Plan. This premium is being amortized over the
remaining term of the Company's revolving loan with its primary lender.
Loss from discontinued operations decreased approximately $1,413,000 in
fiscal 1999 to $307,000 as compared to fiscal 1998. This decrease reflects the
Company's to discontinue its thermoplastic manufacturing operations and to
concentrate on its wire and cable business.
Loss from disposal of assets decreased $1,710,000 in fiscal 1999 to zero as
compared to fiscal 1998. This decrease reflects the Company's decision in fiscal
1998 to discontinue its thermoplastic manufacturing operations and to dispose of
the assets relating to this activity.
Gain on discharge of indebtedness increased approximately $4,276,000 in
fiscal 1999 from zero in fiscal 1998. The reason for this increase relates to
payments made to unsecured creditors on liabilities subject to compromise
pursuant to the finalization of the Chapter 11 Bankruptcy case. The Company, in
accordance with the Court approved reorganization plan, paid $500,000 in cash
and issued 11,376,683 shares of new common stock to the general unsecured
creditors of the Company in full satisfaction of all allowed claims against the
Company.
The Company's profit in fiscal 1999 of $1,173,000 increased by $6,183,000
as compared to the fiscal 1998 loss of $5,010,000 primarily for the reasons
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had total assets of $8,480,000 and
stockholders' equity (deficit) of ($2,729,000). Current assets were $6,046,000
and current liabilities were $6,536,000 resulting in a working capital deficit
of approximately $490,000, which is a decrease of approximately $1,362,000 from
December 31, 1998, when the Company had a working capital of approximately
$872,000. This decrease in working capital at December 31, 1999 is primarily due
to the reclassification of all of the monies due the Company's primary lender
under its revolving line of credit as a current liability in that this loan
becomes fully due and payable on May 7, 2000. At December 31, 1998,
approximately $2,245,000 of this revolving line of credit was classified as a
long-term liability.
Cash and cash equivalents increased by approximately $28,000 from December
31, 1998 to $73,000 at December 31, 1999, an insignificant fluctuation.
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Accounts receivable increased by approximately $150,000 from December 31,
1998 to $2,256,000 at December 31, 1999. The primary reason for this increase is
the delay in payments by the Company's customers on invoices due, particularly,
in respect to products sent to its Mexican customers.
Inventories increased by approximately $823,000 to $2,316,000 at December
31, 1999. The primary reason for this increase is that the Company closed its
Victor facility in December 1998, while in December 1999, the Company kept its
factory operating.
Attorney's escrow decreased approximately $960,000 in fiscal 1999 from
$1,000,000 at December 31, 1998. The reason for this decrease is due to the
Company's Reorganization Plan being approved by the United States Bankruptcy
Court and the monies being paid to the appropriate creditors in accordance with
the plan subsequent to its approval in October 1999.
Unamortized loan premiums, net of amortization, increased $1,243,000 at
December 31, 1999 from zero at December 31, 1998. The reason for this increase
reflects the difference in price paid, $100,000, for 12,024,683 shares of new
common stock that the Private Investor Group received upon implementation of the
Company's Reorganization Plan as confirmed by the United States Bankruptcy Court
in October 1999. This difference is being amortized over the remaining term of
the Company's revolving loan with its primary lender that matures on May 7,
2000.
Other current assets decreased by approximately $449,000 during fiscal 1999
to approximately $118,000. The primary reason for this decrease is that the
monies due the Company at December 31, 1998 from the auction sales of its
thermoplastic division's assets, $394,000, were received during fiscal year
1999.
Accounts payable and accrued expenses decreased approximately $817,000 in
fiscal 1999 to $3,314,000. The reason for this decrease in fiscal 1999 is
twofold: one, the payment by the Company of the thermoplastic division's post
petition liabilities in fiscal 1999 of $487,000; and two, the decreased level of
the Company's revenues in fiscal 1999 which thereby decreased purchases from
outside third party vendors.
The current portion of long term debt increased in fiscal 1999
approximately $3,015,000 to $3,222,000 at December 31, 1999. The primary reason
for this increase is that the monies due the Company's primary lender, which are
due and payable on May 7, 2000, have been classified as a current liability. At
December 31, 1998, these loans were classified as a long-term liability.
Liabilities subject to compromise decreased approximately $7,005,000 to
zero at December 31, 1999. This decrease results from the Company's
Reorganization Plan being approved by the United States Bankruptcy Court on
October 21, 1999 and the liabilities subject to compromise paid in accordance
with this plan.
Long term debt increased approximately $384,000 in fiscal 1999 to
$4,673,000 at December 31, 1999. This increase is the result of the
reclassification of monies due the Company's primary lender at December 31,
1999, approximately $2,946,000, to current liabilities; less, the additional
monies advanced to the Company in fiscal 1999, approximately $2,514,000, by the
Private Investor Group.
In fiscal 1999, capital expenditures were approximately $299,000. These
capital expenditures relate to monies expended for Victor capital additions,
primarily, a new computer system.
The Company acquired its Victor Electric and Wire Cable division operating
entity in May 1997 and this division has incurred significant losses and expects
to continue to incur losses in the year 2000. The Company is dependent on
revenues from operations and borrowings from its private investor group for
working capital.
The Company's revolving line of credit with the Primary Lender matured May
7, 2000. On May 9, 2000, the Company's Primary Lender notified the Company that
it was in default on its loan agreement and elected to take the following
actions, without waiving its other rights and remedies: a) raising the interest
rate on the Company's loan to 4.5 % per annum in excess of the Prime Rate; b)
reducing the maximum credit to $4,000,000.00; and c) reducing the amount that
can be borrowed against inventory to a maximum of $1,000,000. The Primary Lender
has a first priority security interest in all the assets of the Company. The
Primary Lender has requested that the Company sign a
11
<PAGE>
forbearance agreement, although such agreement has not been executed. The terms
of the forbearance agreement are currently being negotiated. The Company is no
longer being funded by the Primary Lender. The Company's working capital needs
are being provided for by ColeVic Corporation whose principals have a
controlling interest in Victor Corporation. As a result of this arrangement, the
Company's new revenues are being generated by ColeVic. ColeVic will also
reimburse the Company for use of any pre-existing inventory used in the
manufacturing process. Currently, ColeVic is compensating the Company for
material and labor costs associated with the generation of new revenues.
A second factor which could affect the Company's operations in year 2000
is that the Company and its landlord are involved in a dispute regarding certain
rights, privileges and obligations which if not resolved could cause the Company
to be evicted from its principal manufacturing premises.
Notwithstanding the above, the Company during the first five months of 2000
has taken significant steps to increase its gross margins and reduce costs. The
Company has hired certain professionals to review all aspects of the Company's
operations and to implement procedures in order to achieve profitability. Gross
margins on product sales have been increased and costs have been reduced.
However, based on current sales commitments, the Company will still need
additional funding in order to meet its working capital needs through the year
2000. The Company will also need to renegotiate its current revolving loan
agreement or obtain new financing. In light of these uncertainties, the
Company's independent certified public accountants have questioned the Company's
ability to continue as a going concern in connection with their review of the
financial statements for the fiscal year ending December 31, 1999.
At this time, 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.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements of the Company as of December 31,
1999 and December 31, 1998 and for the fiscal years ended December 31, 1999 and
December 31, 1998 are set forth following page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
13
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
Thomas V. Desmond 44 Chief Executive Officer
James J. Palermo (1) 63 Chairman, CEO, President and
Director
Paul F. Jakoboski (2) 48 Vice President
Donald R. Wolfgang (1) 51 Secretary/Treasurer and Director
Abraham Backenroth 48 Director
David Bistricer 51 Director
Nachum Stein 52 Director
</TABLE>
-----------------------------------------------------------
(1) Resigned as director and officer in March 2000.
(2) Resigned as officer in March 2000.
Thomas V. Desmond has been a consultant to the Company since April 2000.
Mr. Desmond was appointed Chief Executive Officer of the Company in June 2000.
Prior to joining the Company, Mr. Desmond was a Principal of Trimingham
Advisors, Inc., an international management-consulting firm. Mr. Desmond had
been Senior Partner of Trimingham's New England practice responsible for a
variety of manufacturing engagements. Since 1996, Mr. Desmond served as Senior
Consolidations Accountant at ITT Sheraton. From 1990 to 1995, Mr. Desmond served
as Senior Accountant at Fidelity Investments where he was responsible for
financial reporting for several of Fidelity's capital operating companies. Mr.
Desmond received his B.A. degree from the University of Massachusetts at Boston,
a Certificate in Accountancy from Bentley College and a Masters of Science in
Taxation from Northeastern University. Mr. Desmond is a Certified Public
Accountant and a member of both the Massachusetts Society of CPA's and the
American Institute of Certified Public Accountants.
James J. Palermo served as a member of the Board of Directors of the
Company from July 1994 to March 2000. Mr. Palermo served as Chief Executive
Officer of the Company from September 1994 until March 2000 and Chairman of the
Board Directors from February 1995 until March 2000. 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. From 1984 to 1989, Mr. Palermo was
Chief Executive Officer of Bird, an international manufacturing company with
operations in six countries. Mr. Palermo resigned as an officer and director of
the Company in March 2000.
Paul F. Jakoboski served as Vice President of the Company from December
1999 until March 2000. Mr. Jakoboski has also been the President of the
Company's wholly-owned subsidiary Victor from May 1999 until March 2000. From
May 1997 to May 1999, Mr. Jakoboski was the Vice President of Sales and
Marketing for Victor. Mr. Jakoboski joined Victor in 1996 as its National Sales
Manager. Prior to joining Victor, Mr. Jakoboski served in various capacities in
the wire and cable industry in manufacturing operations and sales and marketing,
including IMS Incorporated from 1994 to 1996. Mr. Jakoboski holds a B.A. from
the University of Hartford. Mr. Jakoboski resigned as an officer of the Company
in March 2000.
14
<PAGE>
Donald R. Wolfgang served as a member of the Board of Directors and
Secretary/Treasurer of the Company from December 1999 until March 2000. Mr.
Wolfgang is an executive officer of Riblet Products Corporation, a privately
held company, a position he has held since 1995. Mr. Wolfgang resigned as an
officer and director of the Company in March 2000.
Abraham Backenroth has been a member of the Board of Directors of the
Company since December 1999. Mr. Backenroth is an attorney and has been a
partner in the firm of Backenroth, Frankel and Krinsky or its predecessor firm,
a New York professional legal partnership since 1990.
David Bistricer has been a member of the Board of Directors of the Company
since December 1999. Mr. Bistricer has been a private investor since 1990. Mr.
Bistricer is a principal in E.B. Acquisitions, LLC.
Nachum Stein has been a member of the Board of Directors of the Company
since December 1999. Mr. Stein has been a private investor since 1990. Mr. Stein
is a principal in E.B. Acquisitions, LLC
The Company's Chairman, Chief Executive Officer and President, James J.
Palermo, and former subsidiary Victor's President and Chief Executive Officer,
John Palermo, are brothers.
Related Party Transactions
As of December 31, 1999, the Private Investor Group, whose principals
are Board of Directors members Mr. Stein and Mr. Bistricer, had advanced
$4,064,369 to the Company, evidenced by the Note Obligations.
Employment and Termination Arrangements
The Company has entered into certain employment and termination agreements
with the following Executive Officers:
Effective November 5, 1999, the Company and James J. Palermo, the Chairman
and Chief Executive Officer entered into a two year employment agreement whereby
Mr. Palermo's compensation was a salary of $194,000 per annum, an automobile
allowance of $800.00 per month, and reimbursement of corporate expenses. James
J. Palermo resigned as an officer of the Company in March 2000 at which time
said employment agreement was terminated.
John V. Palermo, Victor's Chief Executive Officer, was employed under a
three-year employment agreement, which provided for a base annual salary of
$215,000 per year, commencing in May 1997. Such annual salary was subject to
annual review by the Board of Directors. In addition, John Palermo could receive
a bonus based upon criteria to be developed by the Board of Directors of the
Company. John Palermo resigned in March 1999 and was paid severance benefits
according to his employment contract which provided for payment of his base
salary for a period of six months plus any health and disability benefits during
this period
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
work-force 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.
15
<PAGE>
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, 1999, all
Section 16 (a) filing requirements applicable to Section 16 reporting persons
were satisfied.
16
<PAGE>
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 1999 exceeded $100,000 on an annualized basis
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Fiscal Other Annual All Other
------ ------------ ---------
Name Year Salary Bonus Compensation (1) Compensation (2)
---- ---- ------ ----- ---------------- ----------------
<S> <C> <C> <C> <C>
James J. Palermo (5) 1999 $192,995 -- $ 9,600 $ -0-
Chief Executive Officer 1998 $210,978 -- $ 9,600 $ -0-
and President 1997 $267,112 -- $ 17,870 $ 53,160
Paul Jakoboski (6) 1999 $ 99,416 -- $ -0- $ -0-
Vice President and 1998 $ 81,223 -- $ -0- $ -0-
President Victor 1997 $ 70,955 -- $ -0- $ -0-
Subsidiary
John V. Palermo(4) 1999 $164,189 -- $ 4,787 $ 6,186
Chief Executive Officer 1998 $244,270 -- $ 17,289 $ -0-
and President Victor 1997 $125,629 -- $ 4,900 $ 32,434(3)
Subsidiary
</TABLE>
(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) Includes Quadrax consulting fee of $18,000 for due diligence performed on
behalf of the Company in connection with the Victor acquisition.
(4) John V. Palermo was Chief Executive Officer and President of the Company's
Victory subsidiary from May 1997 until March 1999 and received a severance
settlement of $134,400.
(5) James J. Palermo resigned as President, Chief Executive Officer and
director of the Company in March 2000.
(6) Paul Jakoboski resigned as Vice President of the Company in March 2000.
------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted by the Company to the executive officers
during fiscal 1999 (See ITEM 3. LEGAL PROCEEDINGS).
17
<PAGE>
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 May 31, 2000, 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.
<TABLE>
<CAPTION>
Amount and Nature of % of
Name (2) Beneficial Ownership (1) Class
-------------------- ----------------------- -----
<S> <C> <C>
Thomas V. Desmond -0- *
Abraham Backenroth -0- *
David Bistricer (3) 12,024,683 49.05%
Nachum Stein (3) 12,024,683 49.05%
All officers and
directors as a group
(4 persons) 12,024,683 49.05%
------------------------------------------
</TABLE>
(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) Mr. Bistricer and Mr. Stein are principals in EB Acquisitions, LLC, a third
party private investor group which owns 12,024,683 shares of common stock
of the Company
--------------------------------------------------------------------------------
FISCAL YEAR-END STOCK OPTION VALUES
There were no stock options outstanding as of December 31, 1999. (See ITEM 3.
LEGAL PROCEEDINGS)
18
<PAGE>
PART IV
ITEM 12. 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.
(1) Form 8-K filed on February 18, 2000 reporting a change in accountants
from Livingston & Haynes, P.C., to Mayer Rispler & Company, P.C.
(2) Form 8-K/A filed on April 12, 2000 reporting a change in accountants
from Livingston & Haynes, P.C., to Mayer Rispler & Company, P.C.
(c) Exhibits. The Exhibits that are filed with this Form 10-KSB or have been
previously filed with the Securities and Exchange Commission are hereby
incorporated herein by reference pursuant to Item 601 of Regulation SK and
are set forth in the Exhibit Index beginning on page E-1.
19
<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/ Thomas V. Desmond
---------------------------
Thomas V. Desmond
Chief Executive Officer
(Principal Executive Officer
and Principal Financial Officer)
Dated: August 14, 2000
By: /s/ Abraham Backenroth
---------------------------
Abraham Backenroth
Director
Dated: August 14, 2000
By: /s/ David Bistricer
---------------------------
David Bistricer
Director
Dated: August 14, 2000
By: /s/ Nachum Stein
---------------------------
Nachum Stein
Director
Dated: August 14, 2000
20
<PAGE>
EXHIBIT INDEX
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 (4)
3.1 Certificate of Incorporation, as amended (5)
3.2 By-laws of the Company, as amended (3)
4.1 Specimen Common Share Certificate (2)
10.1 Form of Proprietary Information and Invention Agreement executed by
certain employees of the Company (1)
10.2 Equipment Sales Agreement between the Company and Phillips Petroleum
Company dated September 9, 1992 (4)
10.3 License Agreement between the Company and Phillips Petroleum Company
dated September 8, 1992 (4)
10.4 Loan and Security Agreement between Victor Corporation and Congress
Financial dated May 7, 1997 (7)
10.5 Lease between CRW Real Estate Partnership, as amended, and Victor
Corporation dated as of October 31, 1995 (7)
10.6 Chapter 11 Plan or Reorganization filed jointly by E.B. Acquisition
LLC and Quadrax Corporation confirmed by the United States
Bankruptcy Court of Rhode Island on October 21, 1999. (8)
21.1 List of Subsidiary Corporations (5)
--------------------------------------------------------------------------------
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,
1987.
3. Incorporated by reference from the Company's Form 10-K for the
fiscal year ended December 31, 1989.
4. 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.
5. 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.
6. Incorporated by reference from the Company's Amendment No. 1 to Form
10-KSB for the fiscal year ended December 31, 1996, filed October
24, 1997.
7. Incorporated by reference from the Company's Form 8-K/A Number 1
dated as of May 7, 1997.
8. Incorporated by reference from the Company's Form 10-KSB for the
fiscal year ended December 31, 1998, filed February 25, 2000.
E-1
<PAGE>
MAYER RISPLER & COMPANY, P.C.
MAYER RISPLER, C.P.A. 18 HEYWARD STREET
MICHAEL FRIEDMAN, C.P.A. BROOKLYN, NEW YORK 11211
JOSEPH SCHWARTZ, C.P.A. (718) 852-9200
FAX (718) 596-3968
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Stockholders:
Quadrax Corporation
West Warwick, Rhode Island
We have audited the accompanying consolidated balance sheets of Quadrax
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Quadrax Corporation at December 31, 1999 and
1998, and the results of its operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles.
As discussed in Note 2, on February 27, 1998, Quadrax Corporation filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. This plan of
reorganization was approved by the bankruptcy court on October 21, 1999, with an
effective date of November 5, 1999. The accompanying consolidated financial
statements reflect the reduction of pre-petition liabilities and changes made in
the capitalization of the Company as a result of the bankruptcy reorganization.
These matters are fully discussed in note 2.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3, the Company's recurring losses from operations, negative working capital and
stockholders' capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also discussed in Note 3. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.
Brooklyn, New York
May 8, 2000 (except as to notes 3 and 10
which are dated as of June 16, 2000)
F-1
<PAGE>
QUADRAX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Current Assets
--------------
<S> <C> <C>
Cash $ 72,567 $ 44,805
Accounts receivable, less allowances of $129,518
and $113,805 in 1999 and 1998, respectively 2,256,486 2,105,556
Inventories 2,315,918 1,492,933
Attorneys escrow 40,460 1,000,184
Unamortized loan premium 1,242,698 - 0 -
Other current assets 117,818 566,386
------------ ------------
Total Current Assets $ 6,045,947 $ 5,209,864
Property, plant and equipment - net 2,319,941 2,497,098
Other assets 114,317 134,957
---------- ------------
TOTAL ASSETS $ 8,480,205 $ 7,841,919
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
December 31,
1999 1998
---- ----
Current Liabilities Not Subject to Compromise
---------------------------------------------
Accounts payable $ 2,705,493 $ 3,608,858
Accrued expenses 608,835 522,017
Current portion of long term debt 3,222,052 206,920
----------- ------------
Total Current Liabilities $ 6,536,380 $ 4,337,795
Liabilities subject to compromise - 0 - 7,004,642
Long-term debt, less current portion 4,672,967 4,289,027
----------- -----------
TOTAL LIABILITIES $11,209,347 $15,631,464
---------- ----------
Stockholders' Equity
--------------------
Common stock $ 221 $ 414
Additional paid-in capital 77,055,257 73,167,449
Accumulated deficit (78,058,071) (79,230,859)
---------- ----------
( 1,002,593) ( 6,062,996)
Less: treasury stock, at cost 16 shares of
original convertible preferred stock at December
31, 1999 and 1998 and 27,271 shares of
common stock at December 31, 1999 and 1998 ( 1,726,549) ( 1,726,549)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $( 2,729,142) $( 7,789,545)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 8,480,205 $ 7,841,919
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $14,535,819 $ 17,308,846
Cost of goods sold 13,958,803 16,050,607
---------- ----------
Gross Profit 577,016 1,258,239
Operating Expenses
------------------
Selling, general and administrative 2,364,663 2,407,662
----------- -----------
Loss From Operations ( 1,787,647) ( 1,149,423)
Other Expenses
--------------
Interest expense ( 510,811) ( 430,947)
Amortization - loan premium ( 497,079) - 0 -
------------ ----------------
Loss From Continuing Operations ( 2,795,537) ( 1,580,370)
Loss from discontinued operations ( 306,782) ( 1,719,664)
Loss from disposal of assets - 0 - ( 1,709,960)
Gain on debt discharge pursuant
to bankruptcy reorganization 4,275,107 - 0 -
----------- ----------------
Net INCOME (LOSS) $ 1,172,788 $( 5,009,994)
=========== ===========
Basic Gain (Loss) Per Common Share
----------------------------------
Continuing operations $( 0.59) $( 1.42)(a)
Discontinued operations ( 0.07) ( 3.09)(a)
Debt discharge 0.91 - 0 -
-------------- -----------------
$ 0.25 $( 4.51)(a)
============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,701,710 1,111,333 (a)
============== ===============
</TABLE>
--------
(a) Restated to reflect 40 for 1 reverse stock split.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares Common Additional Paid
Issued Outstanding Stock In Capital
------ ----------- ----- ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1997 45,819,757 44,728,914 $417 $73,881,994
Adjustment for common stock never issued ( 275,580) ( 275,580) ( 3) ( 714,545)
------------- ------------- ------ --------------
Net loss
Balances, December 31, 1998 45,544,177 44,453,334 $414 $73,167,449
Reduction of outstanding shares effected
by forty for one reverse stock split (44,405,573) (43,342,001) (404)
Common shares issued pursuant to
bankruptcy reorganization 23,401,566 23,401,566 211 3,887,808
Net income
------------- ------------- ------ --------------
Balance, December 31, 1999 24,540,170 24,512,899 $221 $77,055,257
============= ============= ------ ==============
</TABLE>
<TABLE>
<CAPTION>
Retained
Treasury
(Deficit) Stock Total
--------- ----- -----
<S> <C> <C> <C>
Balances, December 31, 1997 $(74,220,865) $(1,726,549) $(2,065,003)
Adjustment for common stock never issued ( 714,548)
Net loss ( 5,009,994) (5,009,994)
----------- ----------- -----------
Balances, December 31, 1998 $(79,230,859) $(1,726,549) $(7,789,545)
Reduction of outstanding shares effected
by forty for one reverse stock split ( 404)
Common shares issued pursuant to
bankruptcy reorganization 3,888,019
Net income 1,172,788 1,172,788
----------- ----------- ---------
Balance, December 31, 1999 $(78,058,071) $(1,726,549) $(2,729,142)
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash Flows From Operating Activities
------------------------------------
<S> <C> <C>
Net gain (loss) $1,172,788 $(5,009,994)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 476,337 595,105
Amortization of intangibles 20,640 21,815
Amortization of loan premium 497,079 - 0 -
Common stock issued for pre petition payables 2,047,941 - 0 -
Common stock issued for loan premium 1,739,674 - 0 -
Net asset changes on disposition of assets - 0 - 2,016,928
Reduction for common stock not issued - 0 - ( 714,548)
Effect on cash flows of changes in assets and liabilities:
Accounts receivable ( 150,930) 241,325
Inventories ( 822,985) 915,257
Prepaid expenses and other ( 331,485) (1,170,650)
Accounts payable and accrued expenses (7,821,189) 2,447,924
--------- ---------
Net Cash Used in Operating Activities (3,172,130) ( 656,838)
--------- ----------
Cash Flows From Investing Activities
------------------------------------
Capital expenditures ( 299,180) ( 26,610)
---------- -----------
Cash Flows From Financing Activities
------------------------------------
Issuance of debt instruments 2,654,369 1,550,000
Borrowings 789,101 - 0 -
Contributed capital 100,000 - 0 -
Repayment of debt ( 44,398) ( 874,789)
----------- ----------
Net Cash Provided by Financing Activities 3,499,072 675,211
--------- ----------
NET INCREASE (DECREASE) IN CASH 27,762 ( 8,237)
CASH - BEGINNING OF PERIOD 44,805 53,042
----------- -----------
CASH - END OF PERIOD $ 72,567 $ 44,805
=========== ===========
Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
Cash Paid For:
Interest $ 382,589 $ 430,947
Supplemental Schedule of Significant Noncash Transactions
---------------------------------------------------------
</TABLE>
1999: a) The Company issued 23,401,566 shares of stock as part of its
bankruptcy reorganization (see Note 2).
b) The Company issued equipment notes totaling $140,000.
1998: None
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS - Quadrax Corporation, (the Company), was incorporated
in Delaware on March 6, 1986 and prior to fiscal year 1995 was a development
stage company. The Company's business was to design, develop, fabricate and sell
fiber-reinforced thermoplastic polymer composite materials ("Quadrax
Composites") and products manufactured from these materials.
On May 7, 1997, the Company acquired all of the outstanding stock of
Victel, Inc., a Delaware corporation, whose sole asset was all of the
outstanding stock of Victor Electric Wire and Cable, Inc. (Victor), a New York
corporation, for $720,000 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
costs being assigned to the assets acquired.
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.
Due to the Company's inability to obtain sufficient financing and
subsequent filing of Chapter 11 bankruptcy (see note 2), the Company
discontinued its composite materials division during the latter part of 1997,
and disposed of substantially all of its assets during 1998. The Victor Electric
Wire and Cable, Inc. division continues to operate as usual.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Quadrax Corporation (the Company) and its wholly owned subsidiaries.
All intercompany transactions have been eliminated.
REVENUE RECOGNITION - Revenue from product sales are recognized upon shipment to
customers. Provisions for discounts and rebates to customers, and returns and
other adjustments are provided for in the same period the related sales are
recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts of financial assets
and liabilities at December 31, 1999 and 1998 approximate fair value due to the
relatively short period of time between origination of the instruments and their
expected realization, or, in the case of debt, because the debt is at interest
rates competitive with those that would be available to the Company in the
current market environment.
CONCENTRATION OF CREDIT RISK - The Company extends credit based on an evaluation
of the customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent on each customer's
financial condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. Sales to two major customers
accounted for approximately 28% and 58% of total sales for the years ended 1999
and 1998, respectively.
F-6
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
PROPERTY AND EQUIPMENT - Deprecation is provided on straight-line and
accelerated methods over the estimated useful lives of the assets, ranging from
three to ten years. Amortization of leasehold improvements is provided on the
straight-line method over the remaining term of the lease.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". 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.
NET LOSS PER COMMON SHARE - Basic net loss per share is based on the
weighted-average number of shares outstanding each year.
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 the revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 2000. Because the Company does not employ
derivatives, management believes that the adoption of the new statement will
have no effect on earnings or the financial position of the Company.
NOTE 2 - BANKRUPTCY PROCEEDINGS
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 in the District of Rhode Island. The Company's wholly owned subsidiaries
Victor and Victel were not party to the bankruptcy filing on the Petition Date.
Pursuant to the filing of the voluntary petition, the Company filed a plan for
financial reorganization in December, 1998.
At the time of the Chapter 11 Bankruptcy, Quadrax was prohibited from
paying and creditors were prohibited from attempting to collect claims or debts
arising prior the Petition Date without approval of the Bankruptcy Court. The
primary objective of the Company during the Chapter 11 Bankruptcy was to develop
a Reorganization Plan, (the Plan) which with the concurrence of its creditors
would allow the Company to operate without the supervision of the Bankruptcy
Court. Such a plan was developed and approved by the United States Bankruptcy
Court on October 21, 1999, with an effective date of November 5, 1999.
F-7
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The implementation of the Plan called for the following:
a) The merging of Victel and Victor into the Company with the assets and
liabilities of Victel and Victor being assumed by the Company.
b) Payment in full to certain creditors of approximately $260,512.
c) The general unsecured creditors of the Company holding allowed claims
of approximately $6,744,130 receiving 11,376,883 newly issued shares,
representing 46% of the outstanding new common stock, on a pro-rata
basis, which have been valued at $2,047,887 plus cash equal to their
pro-rata portion of approximately $500,000 held in escrow. These
shares are to be fully registered stock with no restrictions on
trading pursuant to the United States Security and Exchange Acts of
1933 and 1934, as amended, and were issued in February, 2000. All
warrants to purchase common stock of the Company have been cancelled.
Pond Equities, Inc. (Pond), a licensed NASDAQ dealer, located in New
York, New York has offered to purchase from the unsecured creditors
all or part of the 11,500,000 shares issued for $0.05 per share with
no commissions payable by such creditors, provided such shares are
tendered within one year of the confirmation date of the Plan.
Payments for these shares tendered within one year are guaranteed by
an irrevocable letter of credit in the amount of $575,000 issued by
Chase Manhattan Bank.
d) The existing shareholders of the Company, approximately 11,000
beneficial owners, currently holding 44,453,334 shares of common
stock, received 1,111,333 shares of newly issued stock, reflecting a
forty for one reverse stock split and representing 5% of the common
stock of the Company on a pro-rata basis.
e) For the payment of $100,000, the Company is issuing 12,024,683 new
shares, 49% of the outstanding new common stock shares of the Company
("the Private Placement Securities"), to a third party private
investor group, which are being valued at $1,839,777. These shares
were granted in recognition of the Investor Group advancing funds to
the Company (see note 8b). These Private Placement Securities are
restricted securities within the meaning of the Securities Act of
1933, as amended. The Private Investor Group after the effective date
of the Plan may use the provisions of Rule 144 to resell these
restricted securities without registration. The Private Investor Group
acquiring the Private Placement Securities will be entitled to
contractual transferable anti-dilution rights such that in the event
the Company issues additional shares of stock, the Private Investor
Group will also be issued additional shares of stock so that they
continue to have a 49% interest in the total outstanding shares of the
Company. Additionally, the Private Investor Group will have demand
registration rights for the Private Placement Securities on Form S-3
starting when the Company becomes eligible to use such form under the
Securities Act of 1933, as amended. The Private Investor Group will
also be entitled to "piggy-back" registration rights for the Private
Placement Securities.
F-8
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - BANKRUPTCY PROCEEDINGS (CONTINUED)
f) The Company expects to continue the Quadrax Composites business by
leasing equipment that is used to manufacture and produce its
thermoplastic tape to an outside third party manufacturer who will
utilize the tape produced to build their own unique product. The
Company expects to receive fees equal to $0.50 per pound for
thermoplastic tape produced by the lessee and sold to other users of
the tape. It is expected that this agreement will insure the
continuation of the Company's Quadrax Composites business and will add
the support of a substantial end user of its thermoplastic tape to
further the marketing strength of Quadrax Composites.
g) The Company has purchased Directors and Liability Insurance, including
company reimbursement, in the amount of $5,000,000 ("D&O Insurance")
for the protection of the former and current officers and directors of
the Company.
h) All claims and debts against the Company originating prior to the
Petition Date which were not accepted by the Company during the
Chapter 11 Bankruptcy were dismissed and are no longer a liability of
the Company.
NOTE 3 - LIQUIDITY
The Company acquired Victor Electric Wire and Cable, Inc. its operating
entity, in May, 1997 and it has incurred significant losses since the
acquisition and expects to continue to incur losses in year 2000. The Company is
dependent on revenues from operations and borrowings from its private investor
group for working capital. The Company's revolving line of credit with its
primary lender Congress Financial Corp. (Congress) expired May 7, 2000. On May
9, 2000, Congress notified the Company that it is in default of its loan
agreement and adjusted the Company's ability to borrow by reducing its borrowing
base.
During the first five months of 2000, the Company has taken significant
steps to increase its gross margins and reduce costs. The Company has hired
certain professionals including a new chief executive officer to review all
aspects of the Company's operations and to implement procedures in order to
achieve profitability. Gross margins on product sales have been increased and
costs have been reduced. However, based on current sales commitments, the
Company will still need additional funding in order to meet its working capital
needs through the year 2000. The Company will also need to renegotiate its
current revolving loan agreement or obtain new financing.
As of June 16, 2000, the Company is negotiating a forbearance agreement
with Congress as well as attempting to obtain new financing from other sources.
NOTE 4 - INVENTORIES
Inventories consist of the following:
December 31,
1999 1998
---- ----
Raw materials $ 424,534 $ 460,136
Work in progress 910,776 442,185
Finished goods 980,608 590,612
---------- ----------
$ 2,315,918 $ 1,492,933
========== ==========
F-9
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - ATTORNEYS ESCROW
Attorneys escrow represents the balance still held by the Company's
bankruptcy attorneys to be used to pay all pre-petition liabilities as per the
bankruptcy settlement and certain post petition liabilities.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
1999 1998
---- ----
Machinery and equipment $3,251,191 $3,272,001
Furniture, fixtures and office equipment 858,625 547,073
Leasehold improvements 128,693 120,255
---------- ----------
$4,238,509 $3,939,329
Less: Accumulated depreciation 1,918,568 1,442,231
--------- ---------
$2,319,941 $2,497,098
========= =========
Depreciation expense for the years ended December 31, 1999 and 1998,
amounted to $476,337 and $595,105, respectively.
NOTE 7 - UNAMORTIZED LOAN PREMIUM
As discussed in note 2e, the excess of the value of the shares received by
the Private Investor Group over the cost is being recorded as a loan premium.
The premium is being amortized over the remaining term of the Company's
revolving loan with its primary lender (see note 8b).
NOTE 8 - DEBT
Long-term debt consists of the following:
December 31,
1999 1998
---- ----
Note payable - bank revolver (a) $3,033,712 $2,244,611
Note payable - bank term loans (a) 696,090 701,336
Notes payable - private investor group (b) 4,064,369 1,550,000
Equipment notes payable, secured by the equipment 100,848 -0-
---------- ----------
$7,895,019 $4,495,947
Less: Current maturities (3,222,052) ( 206,920)
---------- ----------
$4,672,967 $4,289,027
========== ==========
F-10
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
a) The Company 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, expiring May 7,
2000, 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 loans are
secured by all of the assets of the Company. As of December 31, 1999
and 1998, the total amount due Congress, pursuant to this loan
agreement, was $3,729,802 and $2,945,947, respectively.
b) The Company issued Note Obligations ("Notes") for all advances from
the Private Investor Group. The notes are repayable, contingent on
the Company meeting various financial covenants, and bear interest at
a rate of 8% per annum until maturity. Of these notes $2,400,000 are
collateralized by all the assets of the Company, and are subordinated
to the security interest of the Company's primary lender, Congress
Financial Corporation. Through December 31, 1999, the Company has
received $4,064,369 in cash pursuant to the Note Obligations.
NOTE 9 - STOCKHOLDERS' EQUITY
The Company's capital structure is as follows:
Original Convertible Preferred Stock, $.01 par value, - 0 - shares
authorized, issued and outstanding at December 31, 1999 and 1998. All shares of
Original Convertible Preferred Stock were converted into common stock, which was
then redeemed by the Company for a normal consideration.
Class A Convertible Preferred Stock, Series A, $10.00 par value, 300,000
shares authorized at December 31, 1999 and 1998, and - 0 - shares issued and
outstanding at December 31, 1999 and 1998. Class A Convertible Preferred Stock,
Series B, $0.01 par value, 7,000 shares authorized at December 31, 1999 and
1998, and - 0 - shares issued at December 31, 1999 and 1998.
Common Stock, $.000009 par value, 90,000,000 shares authorized December 31,
1999 and 1998, 24,540,170 and 1,138,604 shares issued at December 31, 1999 and
1998, respectively, and 24,512,899 and 1,111,333 shares outstanding at December
31, 1999 and 1998, respectively. These amounts reflect an adjustment for a forty
for one reverse stock split effective November 5, 1999.
Additionally, all common shares granted pursuant to the bankruptcy
reorganization are reflected as issued and outstanding at December 31, 1999,
since all rights to receive these shares were granted as of November 5, 1999,
the effective date that the Company emerged from Chapter 11 bankruptcy.
As part of the bankruptcy reorganization, all outstanding warrants and
options were cancelled.
F-11
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
A) RENT - The Company is obligated under a real property operating lease,
expiring on December 31, 2001, for the premises it occupies in West
Warwick, Rhode Island.
Minimum future annual rental payments excluding payments, for real
estate tax and other costs, are as follows:
December 31,
2000 $250,000
2001 250,000
Rent expense charged to operations for the years ended December
31, 1999 and 1998 amounted to $250,000 and $249,268, respectively.
As of June 16, 2000, the Company has been engaged in a dispute
with its landlord regarding certain rights, privileges and obligations
which if not resolved could cause the Company to be evicted from its
premises.
B) COPPER CONTRACTS - The Company 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.
C) UNION CONTRACT - The Company has an agreement with the International
Brotherhood of Electrical Workers Trade Union, which terminates on
April 7, 2000. The agreement covers all non office personnel.
D) DEFINED CONTRIBUTION PLAN - The Company has a defined contribution
plan (401K) for substantially all employees over the age of 21 not
covered under collective bargaining agreements. All employees with at
least three months of service to the Company can contribute a
percentage of their gross salaries limited to Internal Revenue Service
regulations. The Company contributes to this plan as a match of the
employees' contributions limited to 2 1/2%. Expenses recorded under
this plan amounted to $73,378 and $100,863 for the years ended
December 31, 1999 and 1998, respectively.
E) PRODUCT LIABILITY - The Company is subject to product liability
litigation on a recurring basis from persons suffering shocks from
electrical appliances and other product failures. The Company
maintains insurance coverage against such liabilities in amounts,
which in the opinion of management, are adequate against the risks
assumed.
F) LEGAL PROCEEDINGS - From time to time, the Company is involved in
litigation relating to claims arising out of its operations in the
normal course of business.
G) EMPLOYMENT CONTRACTS - As part of the bankruptcy proceedings at
December 31, 1998, all employment contracts entered into by the
Company have been canceled.
F-12
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11 - 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 $70,127,000 and $71,300,000
and research and development tax credit carryforwards in the amount of $325,000
at December 31, 1999 and 1998. These carryforwards expire at various times from
2002 to 2014.
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 adjusted to adjust
for the deferred tax benefits that may not be fully realized prior to
expiration.
December 31,
1999 1998
---- ----
Deferred tax assets:
Net loss $29,663,000 $30,077,000
Less valuation allowance 29,362,000 29,776,000
---------- ----------
Total deferred tax assets 301,000 301,000
Deferred tax liabilities:
Other ( 301,000) ( 301,000)
---------- ----------
Net deferred taxes $ - 0 - $ - 0 -
========== =========
NOTE 12 - DISCONTINUED OPERATIONS
The Company ceased certain operations of its Quadrax (Composite) division
during 1998 and disposed of certain of its assets. Information attributable to
loss from these discontinued operations is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Loss from discontinued operations:
<S> <C> <C>
Sales $ 95,802
---------
Cost of goods sold 945,601
Selling, general and administrative $306,782 657,667
Depreciation and amortization 212,198
------- ---------
Total costs 306,782 1,815,466
------- ---------
Loss from discontinued operations $(306,782) $(1,719,664)
======= =========
The loss from disposal of assets is summarized as follows:
Carrying value of assets disposed $2,103,826
Less: Net proceeds 393,866
----------
Loss from disposal of assets $(1,709,960)
=========
</TABLE>
F-13
