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
OF1934.
For the fiscal year ended December 31, 1998
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
(State or other jurisdiction of (IRS Employer
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
618 MAIN STREET
WEST WARWICK, RHODE ISLAND 02893-0901
(Address of Principal Executive 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: $17,308,846
-----------
As of December 31, 1998, the aggregate market value of the voting and non-voting
common equity held by non-affiliates was $694,427 computed by reference to the
closing price of December 31, 1998, of $0.015625 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 December 31, 1998, there were outstanding 44,453,334 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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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.
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ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS-GENERAL
Quadrax Corporation was incorporated in Delaware on March 6, 1986. The
Company's business, through its Victor Electric Wire and Cable subsidiary
("Victor") is as a manufacturer and distributor of electric power cordsets and
interconnect cables primarily for original equipment manufacturers ("OEMs") of
small appliances. The "Company" means Quadrax Corporation and, unless the
context otherwise requires, Victor.
Victor 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.
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. This Plan of Reorganization (the
"Plan"), as amended, was approved by the Bankruptcy Court on October 21, 1999,
with an effective date of November 5, 1999. This Plan provided for Victel and
Victor to be merged into the Company and the Company's thermoplastic business to
be continued as part of a licensing arrangement with an independent third party.
(See ITEM 3. LEGAL PROCEEDINGS)
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 105C
and plugs are available with designs for varied stress capacities.
The Company sells its products to approximately 150 customers. During the
year ended December 31, 1998, 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.
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MARKETING, SALES AND DISTRIBUTION
The Company sells primarily through nine 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 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.
Offshore suppliers still remain the largest threat to the Company's margins
and markets. The Company's established niche market in the tabletop appliance
and iron cord products is supported by just in time logistics and superior
customer service. In the iron cord product line, a proprietary design with
qualities that far surpass industry and customer standards has inhibited
competitive threats. These two factors enable the Company to grow its market
within its niche product line. Many of the domestic manufacturers of similar
type products have niche markets and capacity issues that preclude them from
making significant threats to the Company's business at this time. As the
Company expands its medical interconnect and electronic product line, domestic
competition will become a factor.
Also, the Company has been ISO 9002 certified since December 1996. 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'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.
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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 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. Regarding the supply of insulating compounds, the
Company 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, 1998, the Company employed 182 employees of which 138 are
represented by the International Brotherhood of Electrical Workers. The Company
and the union executed a three-year collective bargaining agreement in late
April 1997. Although considers its labor relations to be good, 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. (Also,
see ITEM 2. DESCRIPTION OF PROPERTY).
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.
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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 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. 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 the Petition Date, the Company filed a Voluntary Petition under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court, District of
Rhode Island, Case No. 11-98-10799.
During 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.
The implementation of the Plan calls 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. The
merger of Victel and Victor was completed in February 2000.
(2) The general unsecured creditors of the Company holding allowed claims
of $6,744,130 receiving 11,500,000 newly issued shares, 46% of the
outstanding new common stock, on a pro-rata basis, plus cash equal to
their pro-rata portion of $500,000 held in escrow. 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.
(3) The existing shareholders of the Company, approximately 11,000
beneficial owners, currently holding 44,453,334 shares of common stock,
receiving 1,250,000 shares of newly issued stock, 5%, of the common
stock of the Company on a pro-rata basis. All outstanding warrants have
been cancelled.
(4) For payment of $100,000, the Company is issuing 12,250,000 new shares,
49% of the outstanding new common stock shares of the Company ("the
Private Placement Securities"), to a third party private investor.
These Private Placement Securities are restricted securities within the
meaning of the Securities Act of 1933, as amended. The Private Investor
(the "Private Investor") after the effective date of the Plan may
resell these restricted securities without registration in accordance
with Rule 144 promulgated under the Securities Act of 1933, as amended.
The Private Investor 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 will also be issued additional shares of stock so that the
Private Investor continues to have a 49%
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interest in the total outstanding shares of Company. Additionally, the
Private Investor will have demand registration rights for the Private
Placement Securities on Form S-3 commencing when the Company becomes
eligible to use such form under the Securities Act of 1933, as amended.
The Private Investor will also be entitled to "piggy-back" registration
rights for the Private Placement Securities.
(5) The Company continuing 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 manufactured and
utilized by the outside third party lessee and $1.00 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.
(6) The Company issuing a Note Obligation ("Note") in the amount of
$2,450,000 to the Private Investor. This Note shall be repayable in two
years, from the Plan's effective date, bearing interest payments
equaling 8% per annum until maturity. These interest payments will be
paid monthly. The Note will be collateralized by all the assets of the
Company, but be subordinated to the security interest of the Company's
primary lender, Congress Financial Corporation. Through December 31,
1998, the Company has received $1,550,000 in cash pursuant to the Note
Obligation.
(7) The Company maintaining so-called Directors and Liability Insurance,
including company reimbursement, in the amount of at least $5,000,000
("D&O Insurance") for the protection of the former and current officers
and directors of the Company. The Company has purchased continued D&O
Insurance coverage for former and current officers and directors of the
Company.
(8) That 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 are dismissed and are no longer a liability of the
Company.
From time to time, the Company and Victor are involved in litigation
relating to claims arising out of its operations in the normal course of
business.
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 was not stayed or otherwise affected by the Company's Chapter 11
Petition and court proceedings.
As of December 31, 1998, neither the Company nor Victor are 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.
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
The Common Stock and the Company's Non-Callable Class C Common Stock
Purchase Warrants ("Class C Warrants") trade on the Nasdaq Electronic Bulletin
Board or the "Pink Sheets" under the symbols "QDRXQ" and "QDRZQ," 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 and the Pink Sheets for each
quarter within the last two fiscal years:
<TABLE>
<CAPTION>
Common Stock Class C Warrants
------------ ----------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 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
Fiscal 1997:
Quarter Ended March 31, 1997 $1.5000 $0.5000 $2.5000 $ 1.0000
Quarter Ended June 30, 1997 0.7813 0.3750 1.3750 0.5000
Quarter Ended September 30,1997 0.6875 0.4063 1.0000 0.5000
Quarter Ended December 31,1997 0.5000 0.0313 1.0000 0.0313
- ----------------------------------------------
</TABLE>
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, 1998, there were 44,453,334 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-Possession
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 delisting would follow unless it met the $1.00 minimum stock price
requirement. On April 15, 1998, 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 service operated by the National
Quotation Bureau.
DIVIDEND POLICY
The Company did not declare any dividends on common stock during its 1997
and 1998 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, the Company has 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. (See ITEM
3. LEGAL PROCEEDINGS)
The following financial tables set forth selected financial data at
December 31, 1998 and at December 31, 1997 and for the fiscal years then ended.
<TABLE>
<CAPTION>
( Dollars in thousands, except per share data)
Year Ended
--------------------------------------
Statement of operations data: December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Sales $ 17,309 $ 11,398
Cost of sales 16,051 9,973
-------- --------
Gross profit 1,258 1,424
Selling, general & administrative costs (2,407) 1,255
-------- --------
Income (loss) from operations (1,149) 169
Interest expense, net (431) (256)
-------- --------
Loss on continuing operations (1,580) (87)
Loss on discontinued operations (1,720) (10,376)
Loss on disposal of assets (1,710) -0-
-------- --------
Net loss $ (5,010) $(10,463)
======== ========
Net loss per common share $ (0.11) $ (0.26)
======== ========
Weighted average common shares outstanding 44,453 39,751
======== ========
December 31,
--------------------------------------
1998 1997
-------- --------
BALANCE SHEET DATA:
Working capital, (deficit) $ 872 $ (1,642)
Total assets 7,842 10,443
Long term liabilities 4,289 5,899
Total stockholders' equity (deficit) (7,790) (2,065)
</TABLE>
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FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenues recognized during fiscal 1998 were $17,309,000 as compared
to $11,398,000 in fiscal 1997. This increase over fiscal 1997 of $5,911,000
results from the Company having a complete year of Victor Electric Wire & Cable
Corp. ("Victor") sales in fiscal 1998, while in fiscal 1997, the Company's
Victor subsidiary sales commenced in May 1997.
Cost of goods sold for fiscal 1998 was $16,051,000, representing 92.7% of
sales for fiscal 1998. The Company's cost of goods sold for fiscal 1997 was
approximately $9,973,000 representing 87.5%, of sales for fiscal 1997 which
applied on a pro-rata basis for fiscal 1998, means that the cost of goods sold
increased approximately $1,150,000. There are two reasons for this pro-rata
increase; first, the Company changed its product mix in fiscal 1998. Second,
fiscal year 1997 reflected eight months where the Company saw a disproportionate
amount of sales on a ratable basis thereby allowing a high absorption of fixed
overhead, while fiscal year 1998 was a complete calendar year which included the
low volume sales months.
Selling, general and administrative costs ("SG&A") increased $1,152,000 in
fiscal 1998 to $2,407,000 compared to $1,255,000 in fiscal 1997. Of this
increase, $630,000 is attributable to fiscal 1998 results reflecting a full
calendar year, while 1997 results are for eight months. The balance of the
increase in fiscal 1998, approximately $525,000, is primarily attributable to an
increase in executive compensation previously paid by the Company's
thermoplastic operations.
Interest expense, in fiscal 1998, increased approximately $175,000. The
reasons for this increase are that fiscal 1998 was a full calendar year, while
fiscal 1997 was for eight months which accounts for $120,000 of the increase and
the balance of the increase, $55,000, is attributable to higher usage of the
credit line facility.
Other income decreased approximately $9,000 in fiscal year 1998 to zero, an
insignificant fluctuation.
Loss from discontinued operations decreased approximately $8,657,000 in
fiscal 1998 as compared to fiscal 1997. This decrease reflects the Company's
decision to discontinue its thermoplastic manufacturing operations and to
concentrate on its wire and cable business which is centered around its Victor
subsidiary.
Loss from disposal of assets increased $1,710,000 in fiscal 1998 as
compared to fiscal 1997. This increase reflects the Company's decision to
discontinue its thermoplastic manufacturing operations and to dispose of the
assets relating to this activity.
The Company's net loss in fiscal 1998 of $5,010,000 decreased by $5,453,000
as compared to the fiscal 1997 loss of $10,463,000 primarily for the reasons
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had total assets of $7,842,000 and
stockholders' equity (deficit) of ($7,790,000). Current assets were $5,210,000
and current liabilities were $4,338,000 resulting in working capital of
approximately $872,000 which is an increase of approximately $2,514,000 from
December 31, 1997, when the Company had a working capital deficit of
approximately $1,642,000. This increase in working capital is primarily due to
the Company filing for Chapter 11 Bankruptcy in fiscal 1998, which resulted in
the thermoplastic division's current liabilities to be classified as liabilities
subject to compromise.
Cash and cash equivalents decreased by approximately $8,000 from December
31, 1997 to $45,000 at December 31, 1998, an insignificant fluctuation.
Accounts receivable decreased by approximately $241,000 from December 31,
1997 to $2,106,000 at December 31, 1998. The primary reason for this decrease is
due to the Company's discontinuance of certain of its thermoplastic
manufacturing businesses in fiscal 1998. The Company's wire and cable accounts
receivable were not significantly different at December 31, 1998 compared to
December 31, 1997.
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Inventories decreased by approximately $915,000 during fiscal year 1998.
The primary reason for this decrease is the Company's discontinuance of certain
of its thermoplastic manufacturing businesses in fiscal 1998.
Attorney's escrow increased $1,000,000 in fiscal 1998 from zero at December
31, 1997. The reason for this increase is due to the Company's Chapter 11 filing
and reflects the monies that were advanced in December 1998 by the Private
Investor to fund the Company's Plan.
Other current assets increased by approximately $407,000 during fiscal 1998
to approximately $566,000. The reason for this increase is the monies, $394,000,
due the Company from the auction sales of its thermoplastic division's assets
which sale was held in December 1998, had not been received as of December 31,
1998.
Accounts payable and accrued expenses decreased approximately $1,369,000 in
fiscal 1998 to $4,131,000. The reason for this decrease is the reclassification
of the thermoplastic division's accounts payable and accrued expenses at
December 31, 1998 to the classification of liabilities subject to compromise.
The current portion of long term debt decreased in fiscal 1998
approximately $903,000 to $206,920 at December 31, 1998. The reason for this
decrease is a reclassification of the thermoplastic division's short term debt
liabilities to liabilities subject to compromise.
Liabilities subject to compromise increased to approximately $7,005,000 at
December 31, 1998 from zero at December 31, 1997. This increase results from the
Company's Chapter 11 Bankruptcy filing in fiscal 1998 and short term and long
term liabilities which will be restructured pursuant to the Company's Plan
which was confirmed on October 21, 1999 by the United States
Bankruptcy Court (See ITEM 3. LEGAL PROCEEDINGS).
Long term debt increased approximately $1,578,000 in fiscal 1998 to
$4,298,000 at December 31, 1998. The primary reason for this increase is the
$1,550,000 that the Private Investor advanced to the Company to be used to fund
the financial reorganization. Offsetting this increase was the reduction of the
Company's term debt with Congress Financial Corporation, $123,000, and the
reclassification of other long term liabilities, $95,000, of the thermoplastic
division to liabilities subject to compromise.
Convertible debentures decreased approximately $3,187,000 during fiscal
1998 to zero at December 31, 1998. The reason for the decrease is the
reclassification of the thermoplastic division's debenture liabilities at
December 31, 1998 to the category, liabilities subject to compromise.
In fiscal 1998, capital expenditures were approximately $27,000. These
capital expenditures relate primarily to monies expended for Victor capital
additions.
The Company generated revenues of approximately $17,309,000 in the fiscal
year 1998, 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 1998, after giving effect to the repayment of
debt, totaled approximately $875,000, as compared to $5,908,000 during fiscal
year 1997.
The Company's efforts to propose a plan of reorganization ultimately
resulted in a plan that was confirmed on October 21,1999. However, there is no
assurance that this confirmed plan will enable the Company to achieve viability
and profitability or to raise funds. 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.
11
<PAGE>
YEAR 2000 ISSUES
The Company initiated its efforts to obtain Year 2000 compliance in the
information systems area in September 1997. This project was successfully
completed on or about September 30, 1999. The internal and external expenses the
Company incurred for the operational compliance on this project were not
significant. Subsequent to September 30, 1999, the Company did not experience
any material negative impacts due to Year 2000 issues.
ITEM 7. FINANCIAL STATEMENTS.
The Consolidated Financial Statements of the Company as of December 31,
1998 and December 31, 1997 and for the fiscal years ended December 31, 1998 and
December 31, 1997 are set forth following page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company appointed the Certified Public Accounting firm of Mayer Rispler
& Company, P.C. to succeed the firm of Livingston & Hayn
s to perform an audit on
the Company's financial results of operations for the year ended December 31,
1998. There were no disagreements with Livingston & Haynes, P.C., the Company's
previous Certified Public Accountants, regarding matters of accounting and
financial disclosure for the fiscal year ended December 31, 1997.
12
<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:
James J. Palermo 62 Chairman, CEO, President and
Director
John V. Palermo 56 President and Chief Executive
Officer- Victor Subsidiary
Sven Kraumanis 53 Director
William G. Conway 56 Director
Alan Milton 45 Director
Eugene L. Scott 61 Director
John W. Jepson 65 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 of 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. From 1984 to
1989, Mr. Palermo was Chief Executive Officer of Bird, an international
manufacturing company with operations in six countries.
John V. 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.
Sven Kraumanis has been a member of the Board of Directors since July 1994.
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.
13
<PAGE>
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 to 1992, Mr. Jepson was executive vice president of the Ben
Hogan Company, a manufacturer of golf balls and clubs. From 1968 to 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, 1999, all
Section 16 (a) filing requirements applicable to Section 16 reporting persons
were satisfied.
14
<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 1998 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> <C>
James J. Palermo
Chief Executive Officer 1998 $210,978 - $ 9,600 $ -0-
and President 1997 $267,112 - $ 17,870 $ 53,160
John V. Palermo(4)
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 7, 1997 until March 16, 1999 and
received a severance settlement of $134,400.
- ------------------------------------------------------
The following table sets forth certain information regarding stock options
granted by the Company to the Named Executive Officers during fiscal 1998:
OPTION GRANTS IN LAST FISCAL YEAR
NONE
Employment and Termination Arrangements
The Company has entered into certain employment and termination agreements
with the following named Executive Officers:
John 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
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.
15
<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 December 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. (See ITEM 3.
LEGAL PROCEEDINGS)
Amount and Nature of % of
Name (2) Beneficial Ownership (1) Class
-------------------- ----------------------- -----
James J. Palermo 10,000 *
John Palermo 50,000 *
William G. Conway -0- *
Sven Kraumanis -0- *
Alan W. Milton -0- *
Eugene L. Scott -0- *
John W. Jepson -0- *
All officers and
directors as a group
(7 persons) 60,000 *
- ------------------------------------------
(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.
- --------------------------------------------------------------------------------
FISCAL YEAR-END STOCK OPTION VALUES
There were no stock options outstanding as of December 31, 1998.
16
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
17
<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. On February 18, 2000, the Company filed a Form 8-K
with respect to a change in its accountants from Livingston & Haynes, P.C.
to Mayer Rispler & Company, P.C. effective for the fiscal year ending
December 31, 1998.
(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.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Stockholders:
Quadrax Corporation
West Warwick, Rhode Island
We have audited the accompanying consolidated balance sheet of Quadrax
Corporation as of December 31, 1998, and the related consolidated statement of
operations, stockholders' equity and cash flows for the year 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, 1998,
and the results of its operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
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 do not
reflect the reduction of pre-petition liabilities and changes made in the
capitalization of the Company as a result of the bankruptcy settlement. These
matters are fully discussed in note 2.
/s/ Mayer Rispler & Company, P.C.
January 31, 2000
Brooklyn, New York
F-1
<PAGE>
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
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 the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 2, Quadrax Corporation, subsequent to December 31, 1997,
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The
accompanying consolidated financial statements as of December 31, 1997 and for
the year then ended 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
pre-petition 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 as of December 31, 1997 and
for the year then ended do not include adjustments that might result from the
ultimate outcome of these uncertainties.
The accompanying financial statements as of December 31, 1997 have been prepared
assuming that the Company will continue as a going concern. 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 discussed in Note 2. The consolidated financial
statements as of December 31, 1997 and for the year then ended 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.
Wellesley, Massachusetts
May 1, 1998
<PAGE>
Part I - Financial Information
Page
----
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders Equity for the
years ended December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
<TABLE>
<CAPTION>
QUADRAX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31,
1998 1997
---- ----
Current Assets
- --------------
<S> <C> <C>
Cash and equivalents $ 44,805 $ 53,042
Accounts receivable, less allowances of $113,805
and $106,000 in 1998 and 1997, respectively 2,105,556 2,346,881
Inventories 1,492,933 2,408,190
Attorneys escrow 1,000,184 - 0 -
Other current assets 566,386 159,639
---------- ------------
Total Current Assets $5,209,864 $ 4,967,752
Property, plant and equipment - net 2,497,098 5,082,521
Other assets 65,495 88,414
Deferred assets - net 69,462 304,639
----------- ------------
TOTAL ASSETS $7,841,919 $10,443,326
========= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------.
December 31,
1998 1997
---- ----
Current Liabilities Not Subject to Compromise
- ---------------------------------------------
Accounts payable $ 3,608,858 $ 3,611,058
Accrued expenses 522,017 1,889,035
Current portion of long term debt 206,920 1,109,515
------------ -----------
Total Current Liabilities $ 4,337,795 $ 6,609,608
Liabilities subject to compromise 7,004,642 - 0 -
Long-term debt, less current portion 4,289,027 2,711,221
Convertible debentures payable - 0 - 3,187,500
---------------- -----------
Total Liabilities $15,631,464 $12,508,329
---------- ----------
Stockholders' Equity
- --------------------
Common stock $ 414 $ 417
Additional paid-in capital 73,167,449 73,881,994
Accumulated deficit (79,230,859) (74,220,865)
---------- ----------
( 6,062,996) ( 338,454)
Less: treasury stock, at cost 656 shares of
original convertible preferred stock at December
31, 1998 and 1997 and 1,090,843 shares of
common stock at December 31, 1998 and 1997 ( 1,726,549) ( 1,726,549)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $ ( 7,789,545) $ ( 2,065,003)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,841,919 $ 10,443,326
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 17,308,846 $ 11,397,646
Cost of goods sold 16,050,607 9,973,257
---------------- --------------
Gross Profit 1,258,239 1,424,389
Operating Expenses
- ------------------
Selling, general and administrative 2,407,662 1,254,991
---------------- --------------
Income (Loss) From Operations ( 1,149,423) 169,398
Other Income (Expenses)
- -----------------------
Interest expense ( 430,947) ( 264,469)
Other income (expense) - 0 - 8,598
---------------- --------------
Loss From Continuing Operations ( 1,580,370) ( 86,473)
Loss from discontinued operations ( 1,719,664) (10,376,633)
Loss from disposal of assets ( 1,709,960) - 0 -
---------------- --------------
NET LOSS $( 5,009,994) $(10,463,106)
================ ==============
Basic Loss Per Common Share
- ---------------------------
Continuing operations $( 0.04) $ - 0 -
Discontinued operations ( 0.08) ( 0.26)
---------------- --------------
$( 0.12) $( 0.26)
================ ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 44,453,334 39,751,478
================ ==============
</TABLE>
- ----------------------------------
1 Reclassified to conform to current period presentation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997
---- ----
Cash Flows From Operating Activities
- ------------------------------------
<S> <C> <C>
Net loss $(5,009,994) $(10,463,106)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization of property and equipment 595,105 1,001,925
Amortization of intangibles 21,815 26,096
Amortization of deferred expense 504,193
Common stock issued for stock ( 64,264)
Common stock issued for expenses 99,500
Common stock issued for interest 848,201
Debt issued for interest 787,500
Non cash severance pay 48,960
Write down of restructured assets 405,479
Decrease in other assets 260,264
Net asset changes on disposition of assets 2,016,928 248,493
Reduction for common stock not issued ( 714,548)
Effect on cash flows of changes in assets and liabilities:
Accounts receivable 241,325 127,707
Inventories 915,257 ( 492,325)
Prepaid expenses and other (1,170,650) 16,809
Accounts payable and accrued expenses 2,447,924 1,085,190
--------- ---------
Net Cash Used in Operating Activities ( 656,838) ( 5,559,378)
---------- ---------
Cash Flows From Investing Activities
- ------------------------------------
Capital expenditures, net of acquisition ( 26,610) ( 741,630)
Other intangible assets purchased ( 43,953)
Payments for business acquired, net of cash acquired ( 710,165)
--------- ---------
Net Cash Used in Investing Activities ( 26,610) ( 1,495,748)
----------- -----------
Cash Flows From Financing Activities
- ------------------------------------
Proceeds from exercise of common stock options 74,086
Net proceeds from sale of stock and warrants 361,780
Issuance of debt instruments 1,550,000 923,297
Issuance of convertible debt, net of costs 4,796,896
Payment of note to related party
Repayment of debt ( 874,789) ( 247,954)
---------- ------------
Net Cash Provided by Financing Activities 675,211 5,908,105
---------- -----------
NET DECREASE IN CASH AND EQUIVALENTS ( 8,237) ( 1,147,021)
CASH AND EQUIVALENTS - BEGINNING OF PERIOD 53,042 1,200,063
----------- -----------
CASH AND EQUIVALENTS - END OF PERIOD $ 44,805 $ 53,042
=========== =============
</TABLE>
F-4
<PAGE>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTs OF CASH FLOWS
(CONTINUED)
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash Paid For:
1998 1997
---- ----
Interest $430,947 $292,472
Supplemental Schedule of Significant Noncash Transactions
- ---------------------------------------------------------
1998: None
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 of 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Shares
Common Additional Paid
Issued Outstanding Stock In Capital
------ ----------- ----- ----------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 32,712,852 32,680,817 $298 $68,701,531
Treasury stock acquired from cancellation of notes ( 90,308)
Receivable pursuant to the note's provisions ( 968,500)
Note cancelled 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 99,500
Exercise of common stock options 108,950 108,950 1 74,086
Conversion of convertible instruments
Issuance of stock for interest 119,323 119,323 1 64,748
Warrants exercised 862,500 862,500 8 361,780
Convertible debentures 11,841,132 11,841,132 107 5,244,253
Amortization of unearned compensation
and deferred expenses
Expenses incurred in raising of capital ( 663,904)
Net loss for the year
----------- ------------ --------- -----------
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 for the year
----------- ------------ --------- -----------
Balances, December 31, 1998 45,544,177 44,453,334 $414 $73,167,449
========== ========== === ==========
</TABLE>
<TABLE>
<CAPTION>
Retained
Treasury Deferred Unearned
(Deficit) Stock Expense Compensation
--------- ----- ------- ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 $(63,757,759) $(1,125,969) $(270,000) $(234,193)
Treasury stock acquired from cancellation of notes
Receivable pursuant to the note's provisions (600,580)
Note cancelled as part of severance package
Note of Lion which was distributed
as part of disposition
Common stock issued for services performed
Exercise of common stock options
Conversion of convertible instruments
Issuance of stock for interest
Warrants exercised
Convertible debentures
Amortization of unearned compensation
and deferred expenses 270,000 234,193
Expenses incurred in raising of capital
Net loss for the year (10,463,106)
----------- ------------ --------- -----------
Balances, December 31, 1997 $(74,220,865) $(1,726,549) $ - 0 - $ - 0 -
Adjustment for common stock never issued
Net loss for the year ( 5,009,994)
----------- ------------ --------- -----------
Balances, December 31, 1998 $(79,230,859) $(1,726,549) $ - 0- $ - 0 -
========== ========= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
From Related
Parties Total
------- -----
<S> <C> <C>
Balances, December 31, 1996 $(623,092) $ 2,690,816
Treasury stock acquired from cancellation of notes
Receivable pursuant to the note's provisions 600,580 - 0 -
Note cancelled 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)
Adjustment for common stock never issued ( 714,548)
Net loss for the year ( 5,009,994)
----------- ------------
Balances, December 31, 1998 $ - 0 - $( 7,789,545)
============ ===========
</TABLE>
F-6
<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 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
cost 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 divisions 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, 1998 and 1997 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.
CASH EQUIVALENTS - The Company considers all short-term investments, consisting
of money market funds and certificates of deposit, with original maturities of
three months or less, to be cash equivalents for purposes of the statement of
cash flows.
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 58% and 46% of total sales for the years ended 1998
and 1997, respectively.
F-7
<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.
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. As part of the discontinuance and disposal of
the Company's composite manufacturing division, all patents have been disposed
of.
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.
STOCK BASED COMPENSATION - The Company accounts for stock options as prescribed
by APB Opinion No. 25 and includes pro forma information in the stock options
footnote, as permitted by Statement of Financial Accounting Standards No. 123.
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. 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. 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.
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.
F-8
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
RECLASSIFICATIONS - The consolidated balance sheets, statements of operations,
statements of cash flows and notes to consolidated financial statements have
been restated to conform to current year presentation.
The consolidated statements of operations for each of the years in the two
year period ended December 31, 1998 have been restated to segregate the net
results of continued and discontinued operations.
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.
The implementation of the Plan calls 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.
F-9
<PAGE>
Quadrax corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) The general unsecured creditors of the Company holding allowed claims
of approximately $6,744,130 receiving 11,500,000 newly issued shares,
46% of the outstanding new common stock, on a pro-rata basis, plus
cash equal to their pro-rata portion of $500,000 held in escrow. 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.
The total pre-petition claims of approximately $7,004,642 has been
recorded as "liabilities subject to compromise" in the balance sheet.
(4) The existing shareholders of the Company, approximately 11,000
beneficial owners, currently holding 44,453,334 shares of common
stock, receiving 1,250,000 shares of newly issued stock, 5% of the
common stock of the Company on a pro-rata basis. All outstanding
warrants have been cancelled.
(5) For the payment of $100,000, the Company is issuing 12,250,000 new
shares, 49% of the outstanding new common stock shares of the Company
("the Private Placement Securities"), to a third party private
investor group. 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 resell these restricted securities without registration in
accordance with Rule 144 promulgated under the Securities Act of 1933
as amended. 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.
(6) The Company continuing 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.
F-10
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) The Company issuing Note Obligations ("Notes") for all advances from
the Private Investor Group. These Notes shall be repayable, contingent
on the Company meeting various financial covenants, and bear interest
at a rate of 8% per annum until maturity. The Notes will be
collateralized by all the assets of the Company, but will be
subordinated to the security interest of the Company's primary lender,
Congress Financial Corporation. Through December 31, 1998, the Company
has received $1,550,000 in cash pursuant to the Note Obligations.
(8) The Company maintaining so-called Directors and Liability Insurance,
including company reimbursement, in the amount of at least $5,000,000
("D&O Insurance") for the protection of the former and current
officers and directors of the Company. The Company has purchased
continued D&O Insurance coverage for former and current officers and
directors of the Company.
(9) That 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 are dismissed and are no longer a liability of
the Company.
NOTE 3 - INVENTORIES
Inventories consist of the following:
December 31,
1998 1997
---- ----
Raw materials $ 460,136 $1,091,747
Work in progress 442,185 - 0 -
Finished goods 590,612 1,316,443
---------- ---------
$1,492,933 $2,408,190
========= =========
NOTE 4 - ATTORNEYS ESCROW
Attorneys escrow represents amounts 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 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
1998 1997
---- ----
Machinery and equipment $3,272,001 $7,063,791
Furniture, fixtures and office equipment 547,073 958,451
Leasehold improvements 120,255 1,179,563
---------- ---------
$3,939,329 $9,201,805
Less: accumulated depreciation 1,442,231 4,119,284
--------- ---------
$2,497,098 $5,082,521
========= =========
Depreciation expense for the years ended December 31, 1998 and 1997,
amounted to $595,105 and $1,001,925, respectively.
F-11
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Note payable - bank revolver $2,244,611 $2,647,286
Note payable - bank term loans 701,336 823,334
Equipment notes payable, secured by the equipment - 0 - 135,116
Other non-interest bearing note - 0 - 215,000
Notes payable - private investor group 1,550,000 - 0 -
--------- -----------
$4,495,947 $3,820,736
Less: Current maturities ( 206,920) (1,109,515)
---------- ---------
$4,289,027 $2,711,221
========= =========
</TABLE>
The Company's wholly owned subsidiary, Victor Electric Wire and Cable, Inc.
("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, 1998 and 1997, the total amount due Congress, pursuant to
this loan agreement, was $ 2,945,947 and $3,470,620, respectively.
This Agreement is secured by substantially all of Victor's assets
including, but not limited to, inventories, receivables, and property and
equipment. The amount available under the revolving loan is limited by a formula
based on accounts receivable and inventories. 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, 1998 and 1997.
As a result, this amount under the revolving loan agreement has been classified
as long-term debt.
NOTE 7 - CONVERTIBLE DEBENTURES PAYABLE
In February 1997, the Company issued $3,211,000 of its Convertible
Debentures with interest payable at 8% per annum. 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 issued 1,500,000 of its convertible debentures
with interest payable at 8% per annum. At December 31, 1997, the holders of
these convertible debentures had converted none of the debentures into shares of
common stock.
In October 1997, the Company issued an additional $750,000 of 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 common stock of the Company.
F-12
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
For the year ended December 31, 1998, all convertible debentures payable
have been reclassified to liabilities subject to compromise, in accordance with
the bankruptcy settlement provisions.
NOTE 8 - 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, 1998 and 1997, - 0 and - 0 - shares issued and
outstanding at December 31, 1998 and 1997, respectively. 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, 1998 and 1997, and - 0 - shares issued and
outstanding at December 31, 1998 and 1997. Class A Convertible Preferred Stock,
Series B, $0.01 par value, 7,000 shares authorized at December 31, 1998 and
1997, and - 0 - shares issued at December 31, 1998 and 1997.
Common Stock, $.000009 par value, 90,000,000 shares authorized December 31,
1998 and 1997, 45,544,177 and 45,819,757 shares issued at December 31, 1998 and
1997, respectively, and 44,453,334 and 44,728,914 shares outstanding at December
31, 1998 and 1997, respectively.
As part of the bankruptcy settlement, all outstanding warrants and options
were cancelled.
NOTE 9 - STOCK OPTION PLANS
The Company had three stock option plans; a 1989 Plan, a 1993 Plan and a
1994 Plan. The 1989 Plan has been terminated.
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.
F-13
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
1997
----
Pro forma net loss $11,130,442
Pro forma loss per share ( 0.28)
The weighted-average Black-Scholes value of options granted under the stock
option plans during 1997 was $0.41. Value was estimated using an expected life
of 18 months, no dividends, volatility of 110% and risk free weighted average
interest rates of 6.42% in 1997.
As part of the bankruptcy settlement, all outstanding stock options have
been cancelled. Therefore no pro forma information is being provided for the
year ended 1998.
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,
1999 $250,000
2000 250,000
2001 250,000
Rent expense charged to operations for the years ended December 31,
1998 and 1997 amounted to $249,268 and $149,832, respectively.
B) COPPER CONTRACTS - The Company's wholly owned subsidiary Victor
Electric Wire and Cable, Inc. 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 $100,863 and $104,694 for the years ended
December 31, 1998 and 1997, respectively.
F-14
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E) PRODUCT LIABILITY - 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.
F) LEGAL PROCEEDINGS - From time to time, the Company and Victor are
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 Quadrax
Corporation have been canceled.
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 $71,300,000 and $66,312,000
and research and development tax credit carryforwards in the amount of $325,000
at December 31, 1998 and 1997. These carryforwards expire at various times from
2002 to 2013. 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
$1,894,000 and $4,495,000 in 1998 and 1997, respectively, to recognize the
increases in deferred tax benefits that may not be fully realized prior to
expiration.
December 31,
1998 1997
---- ----
Deferred tax assets:
Net operating loss $28,377,000 $26,392,000
Other 1,700,000 1,700,000
----------- -----------
30,077,000 28,092,000
Less valuation allowance 29,776,000 27,882,000
---------- ----------
Total deferred tax assets 301,000 210,000
Deferred tax liabilities:
Other ( 301,000) ( 210,000)
------------ ------------
Net deferred taxes $ - 0 - $ - 0 -
================ ================
F-15
<PAGE>
QUADRAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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,
1998 1997
---- ----
<S> <C> <C>
Loss from discontinued operations:
Sales $ 95,802 $ 2,522,956
----------- -----------
Cost of goods sold 945,601 3,869,765
Selling, general and administrative 657,667 6,976,243
Restructuring costs (a) - 0 - 1,270,000
Depreciation and amortization 212,198 783,581
---------- ------------
Total costs 1,815,466 12,899,589
--------- ----------
Loss from discontinued operations $(1,719,664) $(10,376,633)
========= ==========
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>
(a) 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; (3)
costs relating to the termination of the Wimbledon tennis racquet licensing
relationship, $425,000.
F-16
<PAGE>
<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
President, and Chief Executive Officer
(Principal Executive Officer and
Principal Accounting and Financial
Officer)
Dated: February 18, 2000
By: /s/ Abraham Backenroth
---------------------------
Abraham Backenroth
Director
Dated: February 18, 2000
By: /s/ David Bistricer
---------------------------
David Bistricer
Director
Dated: February 18, 2000
By:
---------------------------
Nachum Stein
Director
Dated: February 18, 2000
<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 (20)
2.2 Second Amended Plan of Reorganization of E.B. Acquisition, L.L.C.,
filed jointly with the debtor Quadrax Corporation as confirmed by
Judge Arthur N. Votolato, United States Bankruptcy Court for the
District of Rhode Island, dated October 22, 1999
3.1 Certificate of Incorporation, as amended (11)
3.1(a) Certificate of Designation of Class A Preferred Stock - Series B (13)
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 (11)
4.8 Form of Warrant Agreement with American Stock Transfer & Trust
Company, as Warrant Agent for Class C Warrants (5)
4.9 Form of $3,600,000 Convertible Debenture bearing interest at the rate
of 8% per annum due February 10, 1999 (13)
10.1 Form of Proprietary Information and Invention Agreement executed by
certain employees of the Company (1)
10.2 1993 Stock Plan (7)
10.3 1994 Stock Option Plan (11)
10.4(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)
10.4(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) (8)
10.4(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. (8)
<PAGE>
EXHIBIT INDEX (CONT'D)
EXHIBIT
NO. DESCRIPTION
- --- ---------------------------------------------------------------------
10.5 Amendment to Partnership Agreement dated September 21, 1988 between
the Company and A.S.C. Development, Inc. (3)
10.6 Equipment Sales Agreement between the Company and Phillips Petroleum
Company dated September 9, 1992 (6)
10.7 License Agreement between the Company and Phillips Petroleum Company
dated September 8, 1992 (6)
10.8 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)
10.9 Commercial Lease between Coral Tree Commerce Center Associates as
Landlord, and the Company, as Tenant, dated April 10, 1996 (11)
10.10 Key Employee Agreement dated January 1, 1996 between the Company and
James J. Palermo. (12)
10.11 Key Employee Agreement dated January 1, 1996 between the Company and
John McQuade (12)
10.12 Loan and Security Agreement between Victor Corporation and Congress
Financial dated May 7, 1997 (14)
10.13 Lease between CRW Real Estate Partnership, as amended, and Victor
Corporation dated as of October 31, 1995 (14)
10.14 Employment Agreement between Victor Electric Wire & Cable Corp. and
John Palermo (15)
10.15 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.
21.1 List of Subsidiary Corporations
99.1 Press Release dated April 15, 1998 (16)
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.
21
<PAGE>
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. 3 to the Company's
Registration Statement on Form S-3, File No. 33-48998, filed September 23,
1992.
7. Incorporated by reference from the Company's Registration Statement on Form
S-3, File No. 33-66348 filed October 8, 1993.
8. Incorporated by reference from the Company's Form 10-K for the fiscal year
ended January 2, 1994.
9. Incorporated by reference from the Company's Form 10-Q for the fiscal
quarter ended July 3, 1994.
10. Incorporated by reference from the Company's Form 8-K dated as of November
14, 1994.
11. 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.
12. 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.
13. 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.
14. Incorporated by reference from the Company's Form 8-K/A Number 1 dated as
of May 7, 1997.
15. Incorporated by reference from the Company's Form 10-QSB for the fiscal
quarter ended June 30, 1997.
16. Incorporated by reference from the Company's Form 8-K dated April 15, 1998.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF RHODE ISLAND
- -----------------------------------------------------*
In re: :
QUADRAX CORPORATION : BK No. 98-10799
Debtor(s)
:
- -----------------------------------------------------*
The Second Amended Plan of Reorganization of E.B. Acquisition, LLC
Filed Jointly with the Debtor Quadrax Corporation (the "Plan") under Chapter 11
of. Title 11, United States Code, dated August 12, 1999, having been transmitted
to Debtor's creditors and equity security holders, and it having been determined
after notice and a hearing that:
1. The Plan, a copy of which is attached, has been accepted in writing by
the creditors and equity security holders whose acceptance is required by law;
2. The Plan complies with the applicable provisions of Title 11, United
States Code;
3. The proponent of the Plan has complied with the applicable provisions of
Title 11, United States Code;
4. The Plan has been proposed in good faith and not by any means forbidden
by law;
5. Any payment made or to be made by the proponent, by the debtor, or by a
person issuing securities or acquiring property under the Plan, for services or
for costs and expenses in, or in connection with the case, or in connection with
the Plan and incident to the case, have been fully disclosed to the Court and
are reasonable or, if to be fixed after confirmation of the Plan, will be
subject to the approval of the Court;
6. The identity and affiliations of the persons who are to be directors or
officers, or voting trustees, if any, of the reorganized debtor, after
confirmation of the Plan, have been fully disclosed, and the appointment of such
persons to such offices, or their continuance therein, is consistent with the
interest of the creditors and equity security holders and public policy:
<PAGE>
7. The identities of any insiders that will be employed or retained by the
reorganized debtor and the nature of their compensation have been fully
disclosed;
8. That each impaired class of claims or interest, if any, has accepted the
Plan, or will receive or retain under the Plan on account of such claim or
interest, property of a value, as of the affective date of the Plan, that is not
less than the amount that would be paid on such claim if the estate of the
debtor were liquidated under 11 U.S.C. Chapter 7 on such date;
9. Any allowed claim under 11 U. S. C. ss. 507(a)(8) will be paid in full
on the effective date of the Plan;
10. Any class of claims that is impaired under the Plan, at least one class
of claims that is impaired under the Plan has accepted the Plan, determined
without including any acceptances of the Plan by any insider;
11. Confirmation of the Plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of the debtor or
any successor to the debtor under the Plan, unless such liquidation, or
reorganization is proposed in the Plan;
12. The Debtor will be able to make all payments under the Plan and comply
with the Plan;
13. Any fee, charge, or amount required under 28 U. S. C. ss. 1930 or by
the Plan to be. paid before confirmation has been paid or will be paid on the
effective date of the Plan;
14. With respect to each class, pursuant to 11 U. S. C. ss.1126, such class
has accepted the Plan;
15. As of the commencement of this case and as of the date of this Order,
the Debtor had no retirement benefit plans for its employees or former employees
and no retiree benefits, as that term is defined in Section 1114 of Title 11,
due such employees and former employees.
NOW THEREFORE, It is ORDERED that:
a. The Plan, a copy of which is annexed hereto, is hereby is confirmed.
-2-
<PAGE>
b. All dividends shall be disbursed in accordance with the Claims deemed
allowed pursuant to 11 U. S. C. 81111 and as set forth in the Distribution Order
approved by this Court, and any deviation therefrom shall be made only after
application and approval of this court.
c. The Debtor is authorized and directed to issue common stock certificates
in the Reorganized Debtor to the general unsecured creditors in Class Four, to
Debtor's equity holders of record as of the effective date of the Plan in
accordance with the terms of the Plan and the Distribution Order approved by
this Court, and any deviation therefrom shall be made only after application and
approval of this Court. The Debtor is further authorized to issue common stock
in the Reorganized Debtor to E.B. Acquisition L.L.C., or its designee, in
accordance with the terms of the Plan.
d. The Reorganized Debtor is hereby authorized to enter into an arrangement
with Fuller Company or its designee ("Fuller") regarding the Reorganized
Debtor's thermoplastic tape lines and the operation thereof that is consistent
with the description of such arrangement contained in the Second Amended
Disclosure Statement of E.B. Acquisition, L.L.C. With Respect to its Second
Amended Plan of Reorganization, Filed Jointly with Debtor (the "Disclosure
Statement"), with such changes or modifications as (i) do not materially affect
the economic benefit of the arrangement to the Reorganized Debtor as described
in the Disclosure Statement or (ii) are approved by Order of this Court on
motion after notice (the "Thermoplastic Arrangement"), and for such purposes,
(a) the Reorganized Debtor, through one or more of its officers, may make,
execute, deliver, and perform under such agreements and other documents as shall
be necessary or desirable to evidence, implement, or consummate the
Thermoplastic Arrangement, and (b) the Reorganized Debtor is hereby authorized
to assume and to assign to Fuller that certain License Agreement between the
Debtor and Phillips Petroleum Company pertaining to the thermoplastic tape lines
and operations thereof and related proprietary technology, dated September 8,
1992, and all modifications or additions thereto, in accordance with the
provisions of the Plan. Entry of this Order shall be deemed compliance with any
undertaking by the Debtor or the Reorganized Debtor to obtain Court approval for
the Thermoplastic Arrangement prior to confirmation of the Plan.
-3-
<PAGE>
e. Pursuant to 11 U.S.C. ss.1106(7) and Fed. R. Bank. P. 3022, within one
year of the entry of the Order of Confirmation, or, if sooner, upon the
substantial consummation of the Plan of Reorganization and full administration
of the estate, the Debtor is required to file with the Clerk of Court, and to
serve upon all interested parties, a Final Report and Request for Final Decree.
The Final Report must: (1) identify all payments to creditors, interest holders,
expenses of administration and issuance of stock under the plan; (2) state that
the plan has been fully or, substantially consummated; and (3) request entry of
a final decree. If after the expiration of one year the Debtor does not believe
it has substantially consummated the Plan, a Status Report must be filed to
inform the Court and interest parties of: (1) the progress and status of the
Plan to date; (2) why the filing of the final report and request for final
decree cannot be made at this time; and (3) the date that the final report and
request for final decree will be filed. Failure to file either the Final Report
and Request for Final decree or the Status Report within the prescribed one year
period will automatically result in the issuance of an Order to Show Cause and
possible imposition of sanctions.
ENTER:
/s/
------------------------------
Arthur N. Votolato
United States Bankruptcy Judge
Dated: 10/22/99
-4-
<PAGE>
CERTIFICATION
-------------
The undersigned hereby certifies that on the 21st day of October, 1999, I
forwarded a true copy of the within Order via facsimile, to the following
parties:
Sheryl Serreze, Esq. James Palermo
United States Trustee's Office Quadrax Corporation
10 Dorrance Street, Room 910 c/o Victor Wire & Cable
Providence, RI 02903 618 Main Street
P.O. Box 1001
West Warwick, RI 02891
Andrew Richardson, Esq. Abraham Backenroth, Esq.
Boyajian, Harrington & Richardson Backenroth & Grossman
182 Waterman Street 885 Second Avenue
Providence, RI 02906 New York, NY 10017
Vincent J. Mariott, III, Esq.
Ballard, Spahr, Andrews & Ingersoll, LLP
1735 Market Street, 51st Fl.
Philadelphia, PA 19103-7599
Phone: 212-593-1100 ext. 336
Fax: 212-644-0544
<PAGE>
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF RHODE ISLAND
In Re:
QUADRAX CORPORATION Bk. No. 98-10799
Debtor Chapter 11
SECOND AMENDED
--------------
PLAN OF REORGANIZATION OF E.B. ACQUISITION, L.L.C.,
---------------------------------------------------
FILED JOINTLY WITH THE DEBTOR
-----------------------------
E.B. Acquisition, L.L.C. or its designee(s) or nominee(s) (hereinafter
referred to as "investor"), jointly with the Debtor Quadrax Corporation (the
"Debtor"), proposes the following Second Amended Plan of Reorganization (the
"Plan") to the creditors and equity holders of the Debtor pursuant to Section
1121 of Chapter 11 of the United States Bankruptcy Code. The provisions of this
Plan shall be binding upon the Debtor, all creditors of the Debtor, irrespective
of the nature of their claims, all equity security holders of the Debtor and
upon the Debtor, its successors and assigns.
ARTICLE II
----------
DEFINITIONS
-----------
1. ALLOWED CLAIMS shall mean all claims (as defined herein) that have been
allowed by an Order of the Bankruptcy Court entered in these cases or by express
provisions in this Plan.
2. CLAIMS shall mean all claims, as defined in Section 101(5) of the
Bankruptcy Code, against the Debtor of whatever nature whether or not scheduled,
liquidated or unliquidated, absolute or contingent, unsecured or secured by
assets of the Debtor, including all claims arising from the rejection of
executory contracts, license agreements and unexpired leases, any claims for
damages for personal injury or to personal property based upon strict liability,
negligence, worker's compensation statutes, or breach of warranty (express or
implied) relative to services rendered by the Debtor, or employment with the
Debtor, or any claims arising under or relative to any promissory notes,
debentures, and loans to the Debtor, and all claims based upon breach of
contract, tort, or any other theories of liability, provided all said claims or
interests have been duly scheduled or proven by a timely filed Proof of Claim.
<PAGE>
3. CODE shall mean the Bankruptcy Reform Act of 1978 as codified in Title
11 of the United States Code, and as amended by the Bankruptcy Amendments and
Federal Judgeship Act of 1984, P.L. 98-353, the Bankruptcy Judges, United States
Trustees, and Family Farmer Bankruptcy Act of 1986; P.L. 99-554, the Bankruptcy
Reform Act of 1994, P.L. 103-394 and any and all other amendments thereto as of
the Date of Confirmation of the Plan.
4. CONFIRMATION shall mean the approval of a proposed Plan of
Reorganization for Debtor by Order of the Court.
5. COURT shall mean the United States Bankruptcy Court for the District of
Rhode Island, including the United States Bankruptcy Judge presiding therein.
6. CREDITORS shall mean all creditors of the Debtor holding claims for
debts, liabilities, demands, or claims of any nature whatsoever, whether
unsecured or secured by assets of the Debtor, and whether liquidated,
unliquidated, absolute, contingent, or disputed.
7. DATE OF CONFIRMATION shall mean the date on which the Court shall
confirm by Order this proposed Plan of Reorganization.
8. DEBTOR shall mean Quadrax Corporation, a Rhode Island corporation.
9. EQUIPMENT AGREEMENT shall mean any agreement entered into by the Debtor
for the acquisition, use or lease of equipment to be utilized by the Debtor in
its business or manufacturing operations, regardless of the nature of the
agreement, e.g, a lease agreement, a financing agreement, or an installment
purchase contract, and irrespective of whether the creditor to any such
agreement holds a duly perfected and enforceable lien against any equipment that
is the subject of such agreements.
10. EQUITY HOLDERS shall mean all holders of certificated shares of stock
or common stock in the Debtor as of the Confirmation Date.
11. GENERAL UNSECURED CLAIMS shall mean all claims held by creditors of the
Debtor, other than secured claims as defined by Section 506 of the Code, that
are not entitled to priority under Section 507 of the Code, and shall include,
but not limited to, claims arising from the rejection of executory contracts,
license agreements and unexpired leases, all claims for damages for personal
injury or to
-2-
<PAGE>
personal property based upon strict liability, negligence, worker's compensation
statutes, or breach of warranty (express or implied) relative to services
rendered by the Debtor, all claims of former employees or current employees of
the Debtor relative to employment with the Debtor, irrespective of the theory of
liability, all claims arising under or relative to any promissory notes,
debentures (whether or not such debentures are convertible) or loans to the
Debtor, that portion of the claim of a secured creditor which is under-secured
as provided by Code Section 506(a) and all claims based upon breach of contract,
tort, or any other theories of liability, whether or not such claims are
scheduled or unscheduled, liquidated or unliquidated, contingent or absolute, or
disputed.
12. INVESTOR shall mean E.B. Acquisition L.L.C., a New York limited
liability company or its designee(s) or nominee(s) that will be funding the
plan.
13. LIEN shall mean a mortgage, pledge, enforceable final judgment lien,
enforceable statutory lien, security interest, or other encumbrance on Debtor's
assets that is effective and perfected under applicable laws as of the date of
the commencement of Debtor's case not avoidable or unenforceable under any
provisions of the Code or other applicable non-bankruptcy law.
14. SECURED CLAIM shall mean any claim secured by a lien on any assets of
the Debtor to the extent of the value of such assets, which lien is valid,
perfected, and enforceable under applicable law, and is not subject to avoidance
under the Code or other applicable non-bankruptcy law, and is duly established
and allowed as a claim in this case.
15. VICTEL shall mean Victel, Inc., the Debtor's wholly owned subsidiary
which owns all of the shares of stock in Victor Electric Wire & Cable
Corporation.
16. VICTOR shall mean Debtor's subsidiary Victor Electric Wire & Cable
Corporation, an operating company not in Chapter 11 which manufactures and
distributes electric wire and cable.
ARTICLE III
-----------
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS
----------------------------------------------
Holders of any and all Claims against the Debtor and the interests of
all equity securities holders, debenture holders, holders of warrants issued by
the Debtor for the purchase of common stock of the
-3-
<PAGE>
Debtor and all holders of other rights to acquire interests in the Debtor shall
be bound by the provisions of this Plan, and are hereby classified in the
following manner.
CLASS ONE consists of all administrative expenses entitled to priority
under Code Section 507(a)(1), including, without limitation:
(i) Counsel and Special Counsel engaged by the Debtor, any Accountants
engaged by the Debtor, Counsel to the Official Unsecured Creditors' Committee
(the "Committee") and any accountants or other professionals that may be engaged
by the Committee, for services that may be rendered in connection with this
case, and any other claims entitled to priority under Section 507(a)(1), to the
extent the same are allowed by Order of the Court.
(ii) all Claims of creditors, if any, arising after the commencement
of this case for services, goods or rents and charges that may be due and owing
by the Debtor after the commencement of the case, to the extent the same become
Allowed Claims including, but not limited to, moving and resetting up expenses
in the event the Debtor is evicted from the California and/or Portsmouth
facilities and the expenses of protecting and preserving the Debtor's machinery
and equipment relating to the thermoplastic tape line (the "tape line")
including, but not limited to moving expenses, storage charges, labor and salary
pertaining to the tape lines and the expense of satisfying back licensing fees
and charges relating to the tape lines which licenses are being assumed on
confirmation of the plan; and
(iii) all Claims of parties to any executory contracts and unexpired
leases, including but not limited to real estate leases, equipment leases and
license agreements, to the extent such contracts or leases are assumed by the
Debtor, as approved by the Court after notice or as assumed under the Plan (i.e.
executory contract relating to the licensing agreement with respect to the tape
lines) thereof, and relative to amounts required to be paid in order to cure
monetary defaults under such contracts or leases, in such amounts as may be
determined by the Court and all environmental clean-up expenses attributable to
any of the leased or owned premises of the Debtor or of Victor. With the
exception of the licensing agreements relating to the tape lines which are
deemed assumed on confirmation of the Plan, all Debtor's executory contracts
will be deemed rejected on confirmation unless expressly assumed in writing; and
-4-
<PAGE>
(iv) all claims of the Office of the United States Trustee for any
Chapter 11 quarterly fees and Court fees under 11 U.S.C. ss.1930 that have not
been paid and are due through the date of the entry of a final decree closing
this case.
(v) expenses of not more than $100,000 which may be incurred by
investor or Victor with respect to:
(a) the protection or preservation of the tape lines
including moving, storage, labor and salaries and
other expenses pertaining to the tape lines; and
(b) all expenses relating to the preparation of tax
returns and legal and accounting services
pertaining to the carry forward losses of the
Debtor.
CLASS TWO consists of all Claims entitled to priority under Section
507(a)(2), (3) and (4) to the extent the same become
Allowed Claims.
CLASS THREE consists of the Claims of any taxing authorities that
constitute priority claims under Section 507(a)(8) of the Code to the extent any
such claims become Allowed Claims.
CLASS FOUR consists of the Claims of all general unsecured,
non-priority creditors of the Debtor, to the extent of any such claims become
Allowed Claims. This class consists of Claims of whatever kind or nature that
are not included in any other class specified herein, as scheduled or as filed
and as allowed by Order of the Court after final resolution of any objections or
disputes with regard to any such Claims.
Expressly included within this Class, without limitation, any Claims
that become allowed based upon the rejection of any executory contracts or
unexpired leases of the Debtor including any claims arising under Equipment
Agreements that were terminated by the Debtor prior to the commencement of the
case or are terminated after the Commencement of the case, any claims for
damages for personal injury or for personal property based upon strict
liability, negligence, worker's compensation statutes, or breach of warranty
(expressed or implied) relative to services rendered by the Debtor or employment
with the Debtor, any Claims arising under any consulting agreement or employment
agreements with the Debtor relative to employment with the Debtor or the
provision of consulting services to the Debtor, any Claims arising under or
relative to any promissory notes, debentures or loans to the Debtor, or
guarantee
-5-
issued by the Debtor, (including the contractual claims of Sovereign Partners,
L.P. and Dominion Capital Fund under debentures issued by the Debtor, but not
any fraud claims of said creditors), all claims relative to the unsecured
portion of a secured creditor's claim and all Claims that become allowed based
upon breach of contract, tort or any other theories of liability, whether or not
such Claims are scheduled or unscheduled, liquidated, or unliquidated,
contingent or absolute or disrupted.
CLASS FIVE consists of the claims, if any, (a) any holders of any fraud
Claims arising from or in connection with the purchase or sale of an equity
security, convertible debenture or warrant of the Debtor, including, but not
limited to, preferred stock, common stock, any stock options and any and all
other rights to acquire interests in the Debtor, for damages arising from the
circumstances surrounding the purchase or sale of such securities or other
interests but not the contractual rights or interest created thereby
(collectively the "Stock Securities Claims"), and (b) any Claims of current or
former employees, officers or directors of the Debtor for indemnification,
pursuant to the provisions of Debtor's corporate By-Laws, by reason of any
claims asserted or that may be asserted against such employees, officers or
directors relating to or arising out of their serving as such employee, officer
or director (collectively the "Indemnification Claims"). Such claims do not
include claims of such officers, directors or employees relating to compensation
owned by the Debtor for their services to the Debtor.
CLASS SIX consists of the interests of all equity security holders of
the Debtor and the interests of all holders of warrants issued by the Debtor for
the option to purchase shares of the common stock of the Debtor.
ARTICLE IV
----------
UNIMPAIRED CLAIMS
-----------------
A. CLASSES AND INTERESTS UNIMPAIRED UNDER THE PLAN.
-----------------------------------------------
All Claims in Classes One, Two and Three are not impaired under the
Plan.
-6-
<PAGE>
B. TREATMENT OF UNIMPAIRED CLAIMS.
------------------------------
CLASS ONE
---------
Allowed claims in this Class shall be paid in cash in full on the
Effective Date of the Plan, or upon the entry of an Order of the Court allowing
such administrative expense claims, whichever shall be in the later date, or
upon such other items as may be agreed to by each such claimant, the Debtor and
the Investor.
CLASS TWO
---------
The Allowed Claims of creditors entitled to priority under Section
507(a)(2), (3) and (4) shall be paid in full on the Effective Date of the Plan.
Payments to creditors holding claims for wages, vacation pay and severance pay,
to the extent such claims become Allowed Claims, shall receive the net amount of
their Allowed Claims after deduction of all payroll withholding taxes required
to be withheld by applicable non-bankruptcy law.
CLASS THREE
-----------
The Allowed Claims of governmental taxing authorities, inclusive of
pre-petition accrued interest and all taxes that may become due and payable as a
result of the payment under the Plan of wage, vacation and severance pay claims
of current and former employees of the Debtor, shall be paid in full on the
Effective Date of the Plan.
Total claims for Class One, Class Two and Class Three shall not exceed
$1 million dollars.
ARTICLE V
---------
IMPAIRED CLAIMS
---------------
A. CLASSES AND INTERESTS IMPAIRED UNDER THE PLAN.
----------------------------------------------
All claims in Classes Four and Five and the interests of equity holders
and holders of warrants in Class Six are impaired under the Plan.
-7-
<PAGE>
B. TREATMENT OF IMPAIRED CLAIMS AND INTERESTS.
-------------------------------------------
CLASS FOUR
----------
Creditors in this Class holding Allowed Claims shall receive on the
Effective Date of the Plan in exchange for their claims:
(a) their pro-rata share of a $500,000 distribution
pertaining to funds already held in escrow
pursuant to Court order dated December 16, 1999;
(b) their pro-rata share of 11,500,000 newly issued
shares of the Debtor constituting 46% of the 25
million shares in the reorganized Debtor to be
issued under the Plan; and
(c) their pro-rata distribution on avoidance
recoveries.
The Debtor shall make a distribution to each creditor holding an
Allowed Claim in this Class, within sixty (60) days of the Effective Date of the
Plan to the extent feasible depending on the nature and status of disputed
claims (the "Distribution Date"), or the allowance of any such claim, whichever
shall be the later date. To the extent any objections to claims in this Class
are not resolved on the Distribution Date, and pending resolution of such
objections, the Debtor shall retain in escrow, in an interest-bearing account,
the pro rata share of the $500,000 distribution to members of this class and the
pro-rata portion of the Debtor shares due each such creditor under the Plan
based upon the amount of each such creditor's claim as filed.
Any dividends payable to creditors within this Class that remain
unclaimed by any such creditor ninety (90) days following the issuance of such
dividend, shall be redistributed by the Debtor to all other members of the Class
holding Allowed Claims who have claimed their dividends or for whom dividends
are being held in escrow pending resolution of disputed claims.
Pond Equities, Inc. ("Pond"), a licensed NASDAQ trader, located in New
York City, has made an offer (the "Offer") to purchase all or part of the
11,500,000 Shares issued to Creditors in Class Four under the Plan for $0.05 per
Share, with no commissions payable by such creditors, provided such Shares are
-8-
<PAGE>
tendered within one year of the Effective Date of the Plan. The payment of the
obligations under this Offer will be guaranteed by an irrevocable letter of
credit to be issued upon confirmation by Chase Manhattan Bank (the "Letter of
Credit"). Creditors in Class Four will be able to draw upon the Letter of Credit
through Creditors' Committee Counsel in the event Pond fails to purchase
properly tendered Stock Certificates in the Reorganized Debtor in accordance
with the procedures set forth in the Offer. Pond's Offer will be exercisable by
a Class Four Creditor upon the Effective date of the Plan. Pond has also
consented to the jurisdiction of the Bankruptcy Court for the District of Rhode
Island for purposes of the enforcement of the Offer by a creditor seeking to
enforce its rights under the Offer.
No creditor is obligated to offer to Pond the Shares in the Reorganized
Debtor received under the Plan, and no recommendation relative to such Offer is
made by the Investor, the Debtor or the Creditors' Committee.
CLASS FIVE
----------
The holders of Claims in this class, to the extent any such Claims
become Allowed Claims, shall receive payment of their Allowed Claims against the
Debtor solely from insurance or the proceeds of insurance covering such claims,
up to the amount of their respective claims and to the extent such proceeds are
sufficient to pay such claims against the Debtor. Such payment shall be in full
satisfaction, settlement, release and discharge of such Stock Securities Claims
and Indemnification Claims against the Debtor.
All holders of Stock Securities Claims against the Debtor shall file a
Proof of Claim with the Court pertaining to such claims within thirty (30) days
of the Effective Date of the Plan. Additionally, within thirty (30) days of the
Effective Date of the Plan, all holders of any Stock Securities Claims against
any former or current employees, officers or directors of the Debtor, shall file
a Proof of Claim with the Court pertaining to such Claims, identifying such
persons against whom such claims are asserted. Copies of all such Proofs of
Claims shall be served upon Counsel for the Debtor, the Investor, and the
Committee, any such employees, officers or directors identified in the Proofs of
Claim and any known
-9-
<PAGE>
Counsel of such persons and the United States Trustee. Any
such holders of Stock Securities Claims who fail to timely file such Proofs of
Claims against the Debtor or against any former or current employees, officers
or directors of the Debtor within said thirty (30) day period, shall be forever
barred from asserting any such Stock Securities Claims against the Debtor or
against any such employees, officers or directors, and all such claims shall
have no force or effect.
All holders of Indemnification claims shall file Proofs of Claims with
the Court within thirty (30) days of service upon such holder of a Stock
Securities Claim or other claim against such holder giving rise to such
Indemnification Claim. Copies of such Proofs of Claims must be served upon
Counsel for the Debtor and the Committee and the United States Trustee. Any
holders of Indemnification Claims who fail to timely file such claims against
the Debtor within such thirty (30) day period shall be forever barred from
asserting any such Indemnification Claims against the Debtor, and all such
claims shall be of no force and effect.
The Reorganized Debtor shall maintain so-called Directors and Liability
Insurance, including company reimbursement, in the amount of at least $5,000,000
("D&O Insurance") for the protection of the former and current employees,
officers and directors of the Debtor and the Reorganized Debtor. The Reorganized
Debtor shall also purchase continued D&O Insurance coverage for fomer and
current employees, officers and directors of the Debtor. the Debtor believes
that this continued coverage, while in effect, may protect the Debtor and such
employees, officers and directors from loss from claims first made during the
coverage period for actions alleged to have been committed before the end of the
original D&O Insurance policy period, including, but not limited to Stock
Securities Claims.
CLASS SIX
---------
Equity Security Holders and Holders of Warrants. On the Effective Date,
all outstanding shares of the Debtor will be exchanged for 1,250,000 new shares
in the Reorganized Debtor such that 1,250,000 shares will constitute 5% of the
newly issued shares which will be distributed, on a pro rata basis, to the
Debtor's shareholders holding shares or warrants as hereafter included on the
Effective Date. All holders
-10-
<PAGE>
of warrants issued by the Debtor for the purchase of Quadrex Common Stock (the
"Old Warrants") shall be entitled to exercise the Old Warrants on or before the
Effective Date of the Plan at the price provided in the Old Warrants. Any shares
thus issued willthen be subject to the reverse stock split applicable to the
other shareholders.
The aggregate new shares to be issued to the Equity Security Holders
and holders of Old Warrants, provided that the holders of Old Warrants exercise
their option as provided herein by the Plan prior to the Effective Date, shall
cumulatively equal five (5%) percent of the total new outstanding shares as of
the Effective Date of the Plan. The balance of the newly issued shares shall be
distributed as follows:
(a) 11,500,000 shares to general unsecured creditors
as hereinbefore provided; and
(b) 12,250,000 shares constituting 49% of the
outstanding newly issued shares in the Debtor to
E.B. Acquisition LLC and/or its designees for
nominee(s) in exchange for funding the Plan.
After the Effective Date, the shares held by the current equity security
holders, the warrant holders who exercise their options in accordance herewith
ad the general creditors will be freely tradeable. The shares to be issues to
the Investor and/or the designee(s) or nominee(s) shall be restricted from
trading for a period of 1 year following their issuance. The Investor's 49%
shareholder interest shall not be diluted by any subsequent issuance of stock
whether issued to retire debt or for the purpose of obtaining new assets or
equity in the Reorganized Debtor. The Investor's shares of stock will be subject
to the registration rights.
Subject to confirmation of the Plan, Quadrax entered into an
understanding with Investor pursuant to which the investor agreed to purchase
from Quadrax, for an aggregate purchase price of $100,000, 49% of the
outstanding new shares of the Reorganized Debtor (the "Private Placement
Securities"). The commitment is subject to the Plan being confirmed by a
non-appealable order and becoming effective in accordance with its terms, and
the delivery to the Investor of an executed Registration Rights Agreement as
hereinafter described, the executed Note and Security Agreement referred to
herein and the Common Stock
-11-
<PAGE>
Certificate representing the Investor's 49% Interest in the Reorganized Debtor.
The offer and sale of the Private Placement Securities will be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) and Regulation D of the Securities
Act. The Investor is an "accredited Investor" within the meaning of rule 501(a)
of Regulation D under the Securities Act.
No funds to be paid by the Investor under the Plan will be paid or
deposited into the Disbursing Account (as hereinafter defined) unless and until
there is a non-appealable order confirming the Plan, the executed Registration
Rights Agreement, the executed Note and Security Agreement adn the Common Stock
Certificate representing the Investor's 49% Interest in the Reorganized Debtor
are delivered to the Investor.
The following is a summary of principal proposed terms and covenants
of the Private Placement Securities: Restricted Securities:
The Private Placement Securities are characterized as "restricted
Securities." "Restricted securities" are securities that are acquired directly
or indirectly from the Issuer, or from an affiliate of the Issuer, in a
transaction or chain of transactions not involving a public offering, including
securities acquired pursuant to Section 4(2) and Regulation D
The Investor, after the Effective Date of the Plan, as an affiliate of
Quadrax may use the provisions of Rule 144 for resale of these restricted
securities without registration. Rule 144 provides a safe harbor from the
registration requirements of the Securities Act of 1933. Restricted securities
which are sold in compliance with Rule 144 are no longer considered restricted
securities and may generally be resold by non-affiliates without restriction
except for the one year restriction imposed herein under the Plan.
-12-
<PAGE>
Registration Rights:
--------------------
Quadrax and the Investor will enter a Registration Rights Agreement
providing for demand registration rights on the Private Placement Securities on
Form S-3 commencing when Quadrax becomes eligible to use such form under the
Securities Act of 1933, as amended. The Investor will also have piggy-back
registration rights.
Contraactual Anti-dilution:
---------------------------
The Private Placement Securities will be entitled to contractual
transferable anti-dilution rights. In the event the Debtor issues additional
shares of stock, then additional shares of stock will also be issued to the
Investor, such that the 49% interest granted the Investor under the Plan
continues, without dilution, to be a 49% interest in the total outstanding
shares of the Reorganized Debtor. The issuance of such additional shares to
retain such 49% interest would be without additional payment by the Investor.
Taxes.
------
If required by virtue of the jurisdiction of the Investor, the parties
willnegotiate mutually satisfactory provisions with respect to withholding
taxes.
Exchange of Shares:
-------------------
Promptly after the Effective Date, a letter of transmittal with
instructions will be mail to each Quadrax stockholder for use in the exchange of
Quadrax Common Stock Certificates and for the use in facilitating the issuance
of shares to general creditors. In the reverse stock split, each holder of
Quadrax Common Stock will be entitled to receive his pro rata portion fo the
1,250,000 new shares issued under the Plan. Upon surrender of a Quadrax Common
Stock Certificate cancellation to American Stock Transfer & Trust Company, or to
such other agent or agents as may be appointed by Quadrax, duly completed and
validly executed in accordance with the Instructions thereto, the holder of such
certificate shall be entitled to receive in exchange therefor certificates
evidencing the number of shares of
-13-
<PAGE>
Reorganized Quadrax Common Stock each holder has the right to receive in
exchange for his or her shares of Quadrax Common Stock.
The same procedure will be followed with respect to any shares of
Reorganized Quadrax Common stock to be issued to those holders of Old Warrants
who execute their options on or before the Effective Date of the Plan to
purchase the Debtor Common stock in accordance with the provisions of this Plan
and with respect to shares to be issued to great creditors.
Pond has made an offer to purchase all or part of the Shares issued to
shareholders of the Debtor in Class Six under the Plan for $0.05 per Share, with
no commissions payable by such shareholders, provided such Shares are tendered
within one year of the Effective Date of the Plan. Pond's offer will be
exercisable by a Class Six shareholder upon the Effective Date of the Plan. Pond
has also consented to the jurisdiction of the Bankruptcy Court for the District
of Rhode Island for purposes of the enforcement of this offer by a shareholder
seeking to enforce its rights under the Offer.
No shareholder is obligated to offer to Pond the Shares in the
Reorganized Debtor received under the Plan, and no recommendation relative to
such offer is made by te Investor, the Debtor or the Creditors' Committee.
ARTICLE VI
----------
ASSIGNMENT OF AVOIDANCE ACTIONS
-------------------------------
On the Effective Date of the Plan, the Debtor will assign to the
Committee, all avoidance actions, if any, arising under Sections 544, 545.
546,547, 548 and 553 of the Bankruptcy Code (the "Avoidance Actions"). The
Committee may in its discretion pursue any such avoidance actions for the
benefit of the general unsecured creditors in Class Four.
The Committee shall remain in effect post-Confirmation for purposes of
(a) pursuing any Avoidance Actions, (b) pursuing any Objections to disputed
claims filed by the Committee or the Debtor, and (c) distributing to the
unsecured creditors in Class Four any funds resulting from the Avoidance Actions
or the resolution of disputed claims. Any such additional funds will be
distributed pro rata to general unsecured creditors holding allowed claims in
Class Four as and when such distribution may be
-14-
<PAGE>
practicable, and after application by the Committee to the Court and approval
thereof by the Court. Counsel to the Committee shall serve as the Disbursing
Agent with respect to the distribution of any such funds.
The Committee's Counsel shall continue to represent the Committee
post-Confirmation in such matters and with respect to enforcement of the Pond
Offer, and the Committee may engage such other or additional Counsel as it deems
appropriate subject to the Court's approval. such counsel shall be compensated
for their services from the funds in the Debtor's Estate as maybe approved by
the Court upon Application of Counsel but limited to the $1 million cap for
hotel administration and priority expenses. Notice of any such Applications
filed with the Court shall be provided to all unsecured creditors of the Debtor
and all other parties in Interest.
ARTICLE VII
-----------
EFFECTIVE DATE
--------------
The Effective Date shall be the 15th day after the entry of the Order
of Confirmation so long as no stay or appeal from each Order has been met.
In the event of a stay of the Order of Confirmation, Investor shall
have the right to withdraw funding of the Plan, and in such event, the Plan
shall be null and void.
ARTICLE VIII
------------
EXECUTORY CONTRACTS
-------------------
Any and all executory contracts or unexpired leases of the Debtor
including license agreements: (i) not previously rejected by the Debtor as
approved by Order of the Court, (ii) not previously assumed by the Debtor as
approved by Order of the Court or (iii) for which no Motion to assume any such
contract or lease has been filed and is pending with the Court ont he Effective
Date of the Plan, shall be and are hereby deemed rejected as of the Effective
Date of the Plan, except as follows:
Licensing agreements pertaining to the Debtor's pre-preg tape lines and
associated equipment, as heretofore stated, with Phillips Petroleum Company is
deemed accepted as of the confirmation of the Plan.
-15-
<PAGE>
Any persons or entities injured by the rejection of any such executory
contracts or unexpired leases shall file a Proof of Claim with the Court for
damages arising therefrom within thirty (30) days of the Plan Effective Date,
unless an earlier filing requirement has been imposed by Order of this Court.
Copies of such claims shall be served upon Counsel for the Debtor, the Investor,
the Committee and the United States Trustee. Any claims for rejection of an
executory contract or unexpired lease that are not timely filed are forever
barred and shall have no force and effect. Any such claims that are timely
filed, to the extent allowed by the Court, shall be treated and paid in
accordance with the provisions of the Plan relating to the claims of general
unsecured non-priority creditors in Class Four.
ARTICLE IX
-----------
IMPLEMENTATION OF THE PLAN
--------------------------
At least twenty-four (24) hours prior to the Hearing on the
Confirmation of the Plan, the Investor shall deposit with Investor's Counsel $1
million to cover all administration and priority expenses, less those funds
already expended to pay administration expenses out of the proceeds of the
auction sale and such funds advanced by Investor under (v) relating to Class One
Claims. The Investor may also direct that the remaining portion of the proceeds
of the auction may be used to reduce the payment of Investor provided for in
this paragraph. Upon the entry of a final non-appealable order confirming the
Plan and compliance with the provisions of the Plan by the Debtor's delivery to
the Investor of the executed Registration Rights Agreement, the Note and
Security Agreement and the Certificate of Common Stock representing the 49%
interest of the Investor in the Reorganized Debtor, such funds shall be
transferred to Debtor's Counsel and deposited in an interest-bearing account,
entitled "Disbursing Account." Such funds as provided for in this paragraph
shall be distributed to administrative creditors in accordance with the
provisions of the Plan.
The Debtor will distribute the monies to be paid by the investor to
creditors in accordance with the provisions of the Plan from the Disbursing
Account.
-16-
<PAGE>
Disputes regarding claims shall be resolved either by agreement of each
such claimant and the Debtor, or as determined by the Court after notice to any
such affected claimants, the Committee and the United States Trustee.
In conjunction with the hearing on the confirmation of the Plan, the
Debtor shall file a proposed Distribution Order which shall include a schedule
of the funds to be held in escrow with respect to each disputed claim and set
forth the amounts to be distributed to all other creditor holding Allowed
Claims.
The Investor shall receive 48% of the outstanding new shares of the
Reorganized Debtor in consideration of the payment of $100,000 for the purpose
of funding the Plan, and the existing equity security holders and these holders
of Old Warrants who exercise their options by the Effective Date in accordance
with the provisions of the Plan, shall receive in a reverse stock split
cumulatively 5% of the outstanding new shares of the Reorganized Debtor. The
balance of the new outstanding shares constituting 48% of the total new
outstanding shares will be distributed to general creditors.
The 49% Interest of investor shall not be diluted by any subsequent
Issuance of stock whether issued to retire debt for the purpose of obtaining new
assets or equity in the Reorganized Debtor.
The Reorganized Debtor shall issue a note to the Investor in the amount
of the $2,450,000 (collectively referred to as the "Note Obligation"), which
Note Obligation shall be repayable in two years, bearing monthly interest
payments equaling 8% per annum until maturity. To the extent the Reorganized
Debtor has insufficient cash flow to pay any interest payment under the Note
Obligation, such interest shall accrue and be payable upon the maturity of the
Note Obligation. On the Effective Date, Victel and Victor shall be merged into
the Debtor and appropriate Articles of Merger or other corporate documents as
required shall be prepared, executed and filed as necessary to effectuate such
merger. Under the terms of the merger, the Reorganized Debtor will assume all
obligations of Victel and Victor including the secured obligation of Congress
Financial Corp. In addition, the Note Obligation will be secured by a second
position lien, subordinate to the lien of Congress, against all assets of the
Debtor. The Note Obligation shall be accelearated to the extent of the proceeds
of liquidation, if any, or other disposition proceeds of the collateral securing
the same.
-17-
<PAGE>
Any Debt incurred by the Reorganized Debtor under the Plan, other than
debt in favor of the investor, shall be unsecured and subordinated in payment to
the obligation of Victor/Victel to Congress (the "Obligations"). The Investor's
debt may be secured by the assets of the Reorganized Debtor, and shall be
subordinate in payment and priority to the Obligations and the lien and security
interest of Congress.
The Debtor shall seek to refinance the Note Obligation to the investor
in order to pay such obligation at its maturity. However, in the event the
Reorganized Debtor is unable to pay in full or refinance the same, the investor
will extend the term of the Note Obligation upon such terms as may be necessary
for the Reorganized Debtor to meet all of its Obligations based upon its
financial obligations at the time of the Initial Maturity of the Note Obligation
and its projections of future revenuee.
The Reorganized Debtor intends to continue its themoplastic tape
business through an anticipated arrangement with the Fuller Company ("Fuller")
pursuant to terms and conditions of a formal agreement to be negotiated by the
Investor and Fuller, and subject to the approval of the Bankruptcy Court prior
to confirmation of the Plan. The Fuller arrangement would insure the
continuation of the Debtor's business and the continuation of employment for
Debtor's personnel. The Fuller arrangement would also add the support of a
substantial end user of the product and add to the marketing strength of the
product.
The Reorganized Debtor will obtain all assets and assume all
obligations of Victor/Victel and will specifically assume all obligations to
Congress pursuant to the terms of an assumption agreement as provided for in the
amended and restated Term Sheet Incorporated under a certain order of the
Bankruptcy Court dated December 16, 1998.
The Board of Directors of the Reorganized Debtor shall consiste of one
(1) member of the present board, Jim Palermo, and four (4) members appointed by
the investor, Brent Dowd of Mid-America Cable Company, Divid Bistricer, Nachum
Stein and Abraham Backenroth, Esq., who shall serve until such next regularly
held annual meeting of the shareholders in accordance with the Debtors By-Laws.
The Debtor's Certificate of Incorporation will be amended to provide that the
Board of Directors will have the discretion to issue such additional shares of
stock as the Board deems appropriate and in the best interest
-18-
<PAGE>
of the Reorganized Debtor without restriction as to the amount of shares that
can be issued; provided, however, that in such event, additional shares will
also be issued to the investor to ensure that the 49% interest granted the
Investor under the Plan is not diluted and remains a 49% interest in the
outstanding shares of the Reorganized Debtor; and provided further that for a
period of one year from the Effective Date there shall be no dilution of any
shares issued under the Plan absent the consent of 75% of all outstanding
shareholders. The Debtor's Certificate of incorporation will also be amended and
restated in its entirety consistent with the provisions of the Plan and the
entity that will emerge as the Reorganized Debtor.
The general terms of the plan were agreed to by the Debtor, the
Creditors' Committee and the Investor and previously incorporated in a certain
consent order of the Court dated December 16, 1998.
The key terms of the understanding between the parties are contained in
paragraphs 10a through 10f of the December 16, 1998 Order which is incorporated
in the Plan herein by reference.
Moreover, in accordance with the understanding of the parties:
"Anything to the contrary notwithstanding, this plan
incorporates by reference the business terms and conditions
stated in paragraph 10a through 10f of the Order and to the
extent of inconsistency with any other terms of this plan,
paragraph 10a through 10f of the Order shall be controlling"
(the "Plan").
ARTICLE X
---------
POST-CONFIRMATION FEES, REPORTS AND FINAL DECREE
------------------------------------------------
A. POST CONFIRMATION UNITED STATES TRUSTEE QUARTERLY FEES.
-------------------------------------------------------
A quarterly fee shall be paid by the Reorganized Debtor to the United
States Trustee, for deposit into the Treasury, for each quarter (including any
fraction thereof) until this case is converted, dismissed, or closed pursuant to
a Final Decree, as required by 28 U.S.C. ss. 1930(a)(6).
-19-
<PAGE>
B. CHAPTER 11 POST-CONFIRMATION REPORTS AND FINAL DECREE
------------------------------------------------------
(a) POST-CONFIRMATION REPORTS.
At the end of the first quarter after entry of the Confirmation ORder,
the Reorganized Debtor shall file a post-confirmation status report, the purpose
of which is to explain the progress made toward substantial consummation of the
confirmed Plan of Reorganization. The report shall include a statement of
receipts and disbursements, with the ending cash balance, for the entire
quarter. The report shall also include information sufficiently comprehensive to
enable the Court to determine: (1) whether the Order confirming the Plan has
become final; (2) whether depositions, if any, required by the Plan have been
distriubuted; (3) whether any property proposed by the Plan to be transferred
has been transferred; (4) whether the Reorganized Debtor under the Plan has
assumed the business or the management of the property dealt with by the Plan;
(5) whether payments under the Plan have commenced; (6) whether accrued fees due
to the United States Trustee under 28 U.S.C. ss. 1930(a)(6) have been paid; and
(7) whether all motions, contested matters and adversary proceedings have been
finally resolved. Further reports must be filed at the end of every quarter
thereafter until entry of a Final Decree, unless otherwise ordered by the Court.
(b) SERVICE OF REPORTS.
A copy of each report shall be served, no later than the day upon which
it is filed with the Court, upon the United States Trustee, the Debtor, the
Creditors' Committee and such other persons or entities as may request such
reports in writing by special notice filed with the Court.
(c) FINAL DECREE.
After the estate is fully administered, the Reorganized Debtor shall
file an application for a Final Decree, and shall serve the application on the
United States Trustee, together with a proposed Final Decree. The United States
Trustee shall have twenty (20) days within which to object or otherwise comment
upon the Court's entry of the Final Decree.
-20-
<PAGE>
ARTICLE XI
----------
DISCHARGE
Pursuant to Section 1141(d)(1) of the Code, the Confirmation Order
shall act as a discharge against the Debtor, its Estate, its assets, and its
successors and assigns as of the Effective Date of the Plan, and through the
Effective Date of the Plan including principal interest, costs and attorneys'
fees, and expressly including, but not limited to, all claims of the holders of
any promissory notes or debentures, all claims relating to loans to the Debtor,
and all claims arising under any Equipment Agreements contracts, license
agreements, or lease agreements with the Debtor and all post-petition
administration claims. All such Claims shall be paid in accordance with the
provisions of this Plan to the extent they became Allowed Claims.
Except as otherwise stated in the Plan, the Debtor will retain, free
and clear of all claims, all of the Debtor's assets as of the Effective Date.
ARTICLE XII
-----------
RETENTION OF JURISDICTION
-------------------------
The Bankruptcy Court shall retain jurisdiction of these cases pursuant
to the provisions of Chapter 11 of the Code until final allowance or
disallowance of all claims, and also with respect to the following matters:
To enable the Debtor to commence, prosecute, settle, compromise,
abandon, or consummate any and all proceedings to set aside liens and
encumbrances, and to recover any preferences, transfers, assets, claims and/or
damages to which the Debtor may be entitled under applicable provisions of the
Code or other federal, state, or local law;
To adjudicate all controversies regarding the validity, extent and
enforceability of any liens, encumbrances or interests in and to the assets;
To adjudicate all controversies concerning the classification or
allowance of any claims or interests;
-21-
<PAGE>
To review and determine all claims or to adjudicate all controversies
arising from the assumption, assignment, or the rejection of any executory
contracts or unexpired leases, (including License Agreements) and to assist in
consummation of the assumption, assignment, or the rejection of any such
executory contracts or unexpired leases (including License Agreements);
To assist the Debtor in all aspects of effectuating the within Plan,
including enforcement of any provisions of this Plan or the code with respect to
the payment of any claims;
To determine damages in connection with any disputed, contingent, or
unliquidated claims, whether secured, priority, or unsecured;
To adjudicate all claims with respect to a security or ownership
interest in any property of the Debtor or any proceeds thereof; To adjudicate
all claims or controversies arising out of any purchases, sales, contracts,
leases, or obligations undertaken by the Debtor prior to confirmation of the
Plan;
To recover all assets and properties of the Debtor and its estate,
wherever located;
To hear and determine all applications, adversary proceedings and
contested matters properly pending on the Date of Confirmation or property
brought thereafter by the Debtor in accordance with the provisions of the Plan;
To correct any defect, cure any omission or reconcile any
inconcsitency in the Plan or Confirmation Order as may be necessary to
effectuate the purposes and intent of the Plan;
To assist the Debtor and adjudicate any and all other matters with
respect to the Chapter 11 proceeding of the Debtor as this Court may deem just
and necessary; and
-22-
<PAGE>
To enter a final decree closing this Chapter 11 case as and when may be
appropriate.
E.B. ACQUISITION LLC
By its Attorneys,
Abraham Backenroth, Esq. (AB-1989)
Backenroth & Grossman, LLP
885 Second Avenue
New York, NY 10017
Telephone: (212) 593-1100
Facsimile: (212) 644-0544
Dated:
QUADRAX CORPORATION
By its Attorney,
Diane Finkle, Esq.
State Bar No. 2644
WINOGRAD, SHINE & ZACKS, P.C.
123 Dyer Street
Providence, RI 02903
Telephone: (401) 273-8300
Facsimile: (401) 272-5728
Dated:
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 44,805
<SECURITIES> 0
<RECEIVABLES> 2,105,556
<ALLOWANCES> 113,805
<INVENTORY> 1,492,933
<CURRENT-ASSETS> 5,209,864
<PP&E> 3,939,329
<DEPRECIATION> 1,442,231
<TOTAL-ASSETS> 7,841,919
<CURRENT-LIABILITIES> 4,337,795
<BONDS> 4,289,027
0
0
<COMMON> 414
<OTHER-SE> 7,789,959
<TOTAL-LIABILITY-AND-EQUITY> 7,841,919
<SALES> 17,308,846
<TOTAL-REVENUES> 17,308,846
<CGS> 16,050,607
<TOTAL-COSTS> 16,050,607
<OTHER-EXPENSES> 2,407,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 430,947
<INCOME-PRETAX> (1,580,370)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,580,370)
<DISCONTINUED> (1,719,664)
<EXTRAORDINARY> (1,709,960)
<CHANGES> 0
<NET-INCOME> (5,009,994)
<EPS-BASIC> (0.12)
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