UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1997
[ ] Transition Report Under to Section 13 or 15(d) of The
Securities Exchange Act of 1934
Commission File Number: 0-16052
Quadrax Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-0420158
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
300 High Point Avenue Portsmouth, Rhode Island 02871
(Address of principal executive offices) (Zip Code)
(401) 683-6600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Check mark 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__
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 14, 1997
Common Stock, par value 38,448,513 shares
$.000009 per share
QUADRAX CORPORATION
INDEX TO FORM 10-QSB
Part I - Financial Information Page
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1997 and at December 31, 1996 3-4
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1997 and
March 31, 1996 5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1997 and
March 31, 1996 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Part II - Other Information
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
Quadrax Corporation
Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, December 31,
1997 1996
----------- -------------
Current assets:
Cash and cash equivalents $ 2,523,697 $ 1,200,063
Accounts receivable, net of
allowances for doubtful accounts
of $219,000 913,797 883,005
Inventories 1,372,491 1,266,074
Other current assets 127,091 184,848
---------- ----------
TOTAL CURRENT ASSETS 4,937,076 3,533,990
---------- ----------
Property and equipment, at cost:
Machinery and equipment 4,631,029 4,618,313
Office equipment 919,245 910,895
Leasehold improvements 1,090,087 1,089,119
---------- ----------
6,640,361 6,618,327
Less accumulated depreciation and
amortization (3,661,723) (3,467,661)
----------- -----------
NET PROPERTY AND EQUIPMENT 2,978,638 3,150,666
----------- -----------
Goodwill, net of amortization
of $9,923 and $7,903, respectively 108,630 110,651
Other assets 284,545 268,179
Deferred assets, net of amortization
of $72,771 and $70,600, respectively 229,472 236,238
---------- -----------
TOTAL ASSETS $8,538,361 $7,299,724
========== ==========
See accompanying notes.
Quadrax Corporation
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
March 31, December 31,
1997 1996
----------- ------------
Current liabilities:
Accounts payable $ 914,212 $ 685,212
Accrued expenses 891,905 1,306,053
Current portion of long-term debt 836,863 856,904
---------- -----------
TOTAL CURRENT LIABILITIES' 2,642,980 2,848,169
Long-term debt, less current
portion 318,330 360,739
Convertible debentures payable 3,960,000 1,400,000
----------- -----------
TOTAL LIABILITIES 6,921,310 4,608,908
----------- -----------
Stockholders' equity:
Common stock 313 298
Additional paid-in capital 69,181,603 68,701,531
Retained earnings (deficit) (65,288,745) (63,757,759)
----------- -----------
3,893,171 4,944,070
Less:
Treasury stock, at cost (1,125,969) (1,125,969)
Unearned compensation and
deferred expenses (462,799) (504,193)
Notes receivable for options (687,352) (623,092)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,617,051 2,690,816
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $8,538,361 $7,299,724
========== ==========
See accompanying notes.
Quadrax Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenue:
Sales $ 625,254 $1,087,018
Interest income 24,247 15,968
---------- -----------
TOTAL REVENUE 649,501 1,102,986
---------- -----------
Expenses:
Cost of goods sold 663,185 936,438
Research and development 208,056 219,567
Selling, general and
administrative 1,089,062 1,438,385
Depreciation and amortization 198,254 187,811
Interest expense 21,930 63,846
----------- ----------
TOTAL EXPENSES 2,180,487 2,846,047
----------- ----------
NET LOSS ($1,530,986) ($1,743,061)
========== ==========
NET LOSS PER COMMON SHARE ($0.05) ($0.09)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 33,066,400 19,282,782
========== ==========
See accompanying notes.
Quadrax Corporation
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
---------------- --------------
Cash flows from operating activities:
Net loss ($1,530,986) ($1,743,061)
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation & amortization of
fixed assets 194,062 153,663
Amortization of intangibles 4,191 34,148
Amortization of unearned
compensation 41,394 26,394
Common stock issued for expenses 106,250 98,984
Increase (decrease) in cash
resulting from changes in:
Accounts receivable and other (30,792) (83,463)
Inventories (106,417) (294,367)
Prepaid expenses and other assets 57,757 44,958
Accounts payable 229,000 334,642
Accrued expenses (414,148) (505,761)
---------- ----------
Net cash used in operating
activities (1,449,689) (1,933,863)
---------- -----------
Cash flows from investing activities:
Capital expenditures, net (22,034) (17,909)
Other intangible assets purchased (11,771) (7,662)
--------- -----------
Net cash provided by (used in)
investing activities (33,805) (25,571)
Cash flows from financing activities:
Proceeds from exercise of common
stock options 9,826 10,000
Net proceeds from sale of
convertible debentures 2,859,752 0
Payment of note to related party 0 (300,000)
Issuance of debt 106,442 78,454
Repayment of debt (168,892) 0
---------- ----------
Net cash provided by financing
activities 2,807,128 (211,546)
--------- ----------
Net increase (decrease) in cash
and cash equivalents 1,323,634 (2,170,980)
Cash and cash equivalents at
beginning of period 1,200,063 2,613,555
---------- ----------
Cash and cash equivalents at
end of period $2,523,697 $442,575
========== =========
See accompanying notes.
QUADRAX CORPORATION
Consolidated Statements of Cash Flows (continued)
for the Three Months Ended
March 31, 1997 and March 31, 1996
Supplemental schedule of significant noncash transactions:
1997:
The Company issued 1,447,247 shares of its common stock in exchange for the
cancellation of $650,000 of its convertible debentures.
The Company issued 150,000 shares of its common stock for payment-in-full
for $106,250 of accrued liabilities and expenses.
1996:
The Company issued 4,080,886 shares of its common stock in exchange for the
cancellation of $2,250,000 of its convertible debentures.
Quadrax Corporation
Notes to Condensed Consolidated Financial Statements
1. The unaudited condensed consolidated financial statements presented
herein have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and note
disclosures required by generally accepted accounting principles.
In the opinion of management, such condensed consolidated financial
statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's
financial position as of March 31, 1997 and the results of
operations for the three months ended March 31, 1997 and March 31,
1996. The results of operations for the three month period ended
March 31, 1997 may not be indicative of the results that may be
expected for the year ending December 31, 1997. It is suggested
that these Condensed Consolidated Financial Statements be read in
conjunction with the Consolidated Financial Statements and the
notes thereto included in the Company's latest annual report to the
Securities and Exchange Commission on Form 10-KSB for the year
ended December 31, 1996.
2. Debt
Long-term debt consists of the following:
March 31, 1997 December 31, 1996
Note payable - bank $ 499,296 $ 654,464
Notes payable - to former Lion
shareholders and others 384,105 290,563
Equipment notes payable 96,792 97,616
Other non-interest bearing note 175,000 175,000
-------- --------
1,155,193 1,217,643
Less current maturities 836,863 856,904
--------- ---------
$318,330 $360,739
======== ========
Note Payable - Bank
The Company's wholly-owned subsidiary, Lion Golf of Oregon, Inc.,
an Oregon corporation ("Lion Golf"), has a $1,000,000 revolving
line of credit with its bank which is secured by substantially all
of the subsidiary's assets and which is guaranteed by the Company
and the former principal shareholder of Lion Golf. The note
matured March 31, 1997 and bears interest at prime plus 2% or
10.75% at March 31, 1997. Loan advances are limited to 75% of
"eligible accounts receivable" plus 45% of "eligible inventories"
up to a maximum of $500,000, as such terms are defined under the
line of credit. The Company's current outstanding balance due on
the line of credit is approximately $499,000.
Notes Payable - Lion Shareholders and Others
Lion Golf has three unsecured notes bearing interest at the rate of
8% per annum, payable to its former shareholders. These notes are
subordinated to the bank credit line. The first of the notes, for
the principal amount of $254,804, has annual principal payments of
$54,000 commencing March 31, 1998. These annual payments can be
limited to the extent of Lion Golf's pretax profits as defined in
the Purchase Agreement among the Company, Lion Golf, and Lion
Golf's former shareholders dated December 29, 1995 (the "Purchase
Agreement"). The second note for the principal amount of $17,819,
has monthly principal payments of $2,156 until paid-in-full. The
third note is a demand note in the principal amount of $11,482.
Lion Golf has a fourth unsecured outstanding note payable to an
outside third party in the amount of $100,000, bearing interest at
the rate of 10% per annum. This note is repayable from the
proceeds of sold inventory resulting from the goods purchased with
these funds.
Convertible Debentures
In October 1996, the Company issued $2,150,000 of its Convertible
Debentures bearing interest at the rate of 8% per annum for net
proceeds to the Company of $1,988,750. The debentures are
convertible at the option of the holders on or after the forty-first
day of issuance into a number of shares of common stock that can be
purchased for a price equal to sixty-five percent of the average
closing bid price of the common stock on the five trading days
immediately prior to the conversion date. At March 31, 1997, the
holders of these convertible debentures had converted $1,400,000 of
the debentures into 2,968,819 shares of common stock of the Company.
In February 1997, the Company issued $3,210,000 of its Convertible
Debentures bearing interest at the rate of 8% per annum commencing
August 1997 for net proceeds to the Company of $2,889,000. The
debentures are convertible, in tranches of $1,070,000, at the option
of the holders sixty days, ninety days, and one hundred twenty days
after the date of issuance into a number of shares of common stock
that can be purchased for a price equal to eighty percent of the
average closing bid price of the common stock on the five trading
days immediately prior to the conversion date. At March 31, 1997,
the holders of these convertible debentures had converted none of
the debentures into shares of common stock of the Company.
3. Shareholders Equity
The Company's capital shares are as follows:
Class A Convertible Preferred Stock, $10.00 par value, 300,000
shares authorized at March 31, 1997 and December 31, 1996, and -0-
shares issued and outstanding at March 31, 1997 and December 31,
1996.
Common Stock, $.000009 par value, 90,000,000 shares authorized at
March 31, 1997 and December 31, 1996, and 34,387,014 and 32,680,817
shares outstanding at March 31, 1997 and December 31, 1996,
respectively.
4. Earnings Per Share
For the fiscal quarters ending March 31, 1997 and March 31, 1996,
the net loss per share was computed using the weighted number of
average shares outstanding during the respective periods. Common
Stock equivalents did not enter into the computation because the
impact would have been anti-dilutive.
5. Subsequent Event
On May 7, 1997, the Company acquired all of the outstanding stock
of Victor Electric Wire & Cable Corporation ("Victor"), a
manufacturer of power cord sets and interconnect cables, for
$720,000 cash, plus the assumption of approximately $2,500,000 in
debt. The Company is accounting for this acquisition using the
purchase method. Accordingly, the purchase price will be allocated
to the assets acquired based on their estimated fair values.
Item II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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-QSB 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.
Competition. As the Company enters the sporting goods and
recreational equipment market, it faces competition from other
materials used in the manufacture of such goods and equipment, and
from other suppliers of thermoplastic composites. The Company's
success in entering this market will depend largely upon its ability
to displace other materials currently in use. If the Company is
unsuccessful in creating a niche within the sporting goods and
recreational equipment market by convincing the market of the
strategic benefits of thermoplastic composites, the Company would be
adversely affected. Many of the companies whose product offerings
compete with the Company's product offerings have significantly
greater financial, manufacturing and marketing resources than the
Company. The Company also faces competition from suppliers of similar
products who do not use thermoplastic materials.
Development of Distribution Channels. Success in the sporting
goods and recreational equipment market will also hinge on the
Company's ability to develop distribution channels, including both
retailers and distributors, and there can be no assurance that the
Company will be able to effectively develop such channels.
Continued Investment. Maintaining the Company's technological and
strategic advantages over its competitors will require continued
investment by the Company in design and development, sales and
marketing, and customer service and support. There can be no
assurance that the Company will have sufficient resources to make such
investments.
Technological Advances. The Company's ability to maintain a
competitive edge by making technological advances ahead of its
competition will have a significant impact on the success of the
Company.
Outside Financing. The Company believes that it will need
significant outside financing over the next five years. There can be
no assurance that it will be able to obtain such financing.
Results of Operations for Quarter Ended March 31, 1997 as compared to
Quarter Ended March 31, 1996
The Company's net loss from operations for the quarter ended March
31, 1997 ("1997 first quarter") of approximately $1,530,000 was
approximately $210,000 less than its net loss from operations of
approximately $1,740,000 for the quarter ended March 31, 1996 ("1996
first quarter"). The primary reason for this loss decrease was the
reduction in selling, general, and administrative costs, the Company
incurred during the 1997 first quarter.
Total revenue recognized during the 1997 first quarter decreased
approximately $460,000 to $625,254 in the 1997 first quarter. The
reasons for this decrease are: one, the decline in sales at the
Company's Lion Golf of Oregon, "Lion", subsidiary of $343,000; two,
a decrease in sales of lacrosse products, $146,000; and three, a
decrease in sales of tape and defense laminates of $91,000.
Offsetting these declines were increases in sales of golf shaft
products, bicycle component products and hockey sticks of $129,000.
Interest income increased by approximately $8,000 in the three
months ended March 31, 1997, as compared to the same period one year
ago. The reason for this is the higher amount of money the Company
had on deposit in interest bearing paper in 1997.
Costs of goods sold for the first quarter of 1997 of $663,185
decreased approximately $273,000 in the three months ended March 31,
1997 compared to the three months ended March 31, 1996. The reason
for this decrease is the decline in sales in 1997, particularly, at
Lion.
Research and development expenses were $208,056 in the 1997 first
quarter, a negligible decrease of approximately $11,000 as compared
to $219,567 in the 1996 first quarter.
Selling, general and administrative expenses decreased by
approximately $349,000 to $1,089,062 in the three months ended March
31, 1997 over the comparable period a year ago. The primary reasons
for this decline are: one, a compensation expense decrease of
$103,000; two, the decreased expenditures for professional
consultants of $108,000; and three, the absence of costs relating to
maintaining the Wimbledon brand name, such as advertising, trade
shows and royalty expenditures, $112,000.
Depreciation and amortization expense increased by $10,000 to
$198,254 in the first quarter of 1997. This increase is due
primarily to the Company's placement in service of its Vista,
California facility for the manufacturing of golf shafts.
Interest expense for the first quarter of 1997 decreased by
approximately $42,000 to $21,930. This reflects the Company's 1996
subordinated debt financings which were accruing interest from
initial funding, while the 1997 subordinated debt financing does not
accrue interest until the instrument has been held by the investor
for six months.
Financial Position, Liquidity and Capital Resources
At March 31, 1997, the Company had total assets of $8,538,361 and
stockholders' equity of $1,617,051. Current assets were $4,937,076
and current liabilities were $2,642,980 resulting in working capital
of approximately $2.3 million which is an increase of approximately
$1.6 million from December 31, 1996, when working capital was
approximately $0.7 million. This increase in working capital was a
result of the Company's issuance of convertible debentures in
February 1997, which resulted in net proceeds to the Company of
approximately $2,900,000.
Cash and cash equivalents increased by approximately $1,324,000
from December 31, 1996. This increase is due to the Company's
issuance of convertible debentures in February 1997, net of operating
expenses incurred and paid in the 1997 first quarter.
Accounts receivable increased by approximately $31,000 to $914,000,
a negligible fluctuation.
Inventories increased by approximately $106,000. This increase is
due to the build-up of product required for Lion Golf's anticipated
shipments during the Spring season.
Other current assets decreased by approximately $58,000 between
March 31, 1997 and December 31, 1996. This decrease was caused by the
amortization of insurance premiums that were prepaid.
The current portion of long-term debt decreased by approximately
$20,000. This reflects decreased usage of the Company's line of
credit with the Bank of the Cascades.
Accounts payable and accrued expenses decreased approximately
$185,000 from $1,991,000 at December 31, 1996. This decrease was
caused primarily by payments made against the accrued liability for
restructuring costs established in prior periods and payments to
employees for payroll related costs.
Long term debt decreased approximately $42,000 to about $318,000 at
March 31, 1997. The reasons for this decrease are the payments the
Company made on its Advanced Materials Systems division financing
leases, along with several payments made on the subordinated debt of
Lion Golf.
Convertible debentures increased $2,560,000 to $3,960,000 during
the three months ended March 31, 1997. This increase is the result of
the issuance of $3,200,000 of debentures in February 1997, less the
conversion of $650,000 worth of debentures issued in 1996 into common
stock.
In the first three months of fiscal 1997, capital expenditures were
approximately $34,000, a negligible amount. The Company anticipates
capital expenditures in 1997 will be approximately $1,000,000 for the
purchase of a hockey stick pultrusion machine, an additional
thermoplastic tape manufacturing line and other miscellaneous
manufacturing equipment. These equipment acquisitions are expected to
be paid for through equipment leasing programs and from funds raised
through the placement of the Company's securities.
The Company generated revenues of approximately $650,000 in the
first three months of fiscal 1996, and as a result, operations were
not a 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 in the
first quarter of fiscal 1997, after giving effect to the repayment of
debt, totaled approximately $2,800,000 during the period ended March
31, 1997.
The Company believes that proceeds of approximately $2,900,000 from
additional sales of convertible debentures in February 1997, together
with funds provided by operations will be sufficient to meet the
Company's near-term cash requirements. In addition, if needed, the
Company believes that it will be able to raise additional monies from
the sale of convertible debentures.
The Company received a going concern qualification from its outside
independent auditors on its fiscal 1996 audited financial statements.
While the Company believes it has made and will continue to make
substantial progress towards achieving profitability, the results to
date have not yet been sufficient to negate the auditors'
qualifications. During this transition, management continues to
redirect the Company's focus from the defense related products to
consumer oriented products. Management believes that the Company will
be able to continue to raise money from outside third parties in
sufficient amounts to support its operations until the time in which
the Company's consumer product programs generate sufficient revenues.
The Company believes that it can achieve viability and profitability
by continuing to expand sales of sporting goods products, as well as
other products that employ its thermoplastic materials.
There is no assurance that the Company's efforts to achieve
viability and profitability or to raise money will be successful or
that the forecasts will be achieved. It is difficult for the Company
to predict with accuracy the point at which the Company will 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.
QUADRAX CORPORATION
Part II - Other Information
Item 2(c) - Sales of Unregistered Securities
On February 10, 1997, the Company sold $3,210,000
principal amount of 8% Convertible Debentures due February 10,
1999, with attached warrants to purchase 321,000 shares of the
Company's common stock at an exercise price of $0.9375 per share
at any time prior to February 10, 2000, to a total of 16
accredited investors in a private offering pursuant to Rule 506
of Regulation D under the Securities Act of 1933. None of the
investors is a resident of or domiciled in the United States.
The debentures were sold at their principal face amounts for
cash. A selling commission of 10% of the principal amount sold
was paid to J. W. Charles Securities, Inc.
Up to one-third of the principal amount of each
debenture may be converted into shares of the Company's common
stock by the holder from and after April 11, 1997, a further
one-third from and after May 11, 1997 and the remaining one-
third from and after June 10, 1997. The conversion price is the
lesser of $.9375 or 80% of the average closing bid price of the
Company's common stock on the Nasdaq SmallCap Market on the five
trading days immediately preceding the date of actual
conversion, subject to a floor conversion price of $.40 per
share. Should the conversion price be below the floor price,
the Company is obligated to convert up to 125,000 shares per
$50,000 face amount per debenture, with any remaining principal
amount to be repaid in cash within 60 days of the conversion
date, together with interest at 7% per annum.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None since Form 10-KSB for fiscal year ended
December 31, 1996 was filed on March 28, 1997.
(b) Reports on Form 8-K
On May 16, 1997, the Company filed a Form 8-K with
respect to the acquisition of Victor Electric Wire
& Cable Corporation for $720,000, plus the
assumption of approximately $2.5 million in debt.
Victor, which is headquartered in West Warwick,
Rhode Island, manufactures power cordsets and
interconnect cables, primarily for original
equipment manufacturers (OEM) of small appliances.
QUADRAX CORPORATION
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
QUADRAX CORPORATION
(Registrant)
May 19, 1997 /s/ James J. Palermo
(Date) James J. Palermo, Chairman and
Chief Executive Officer
May 19, 1997 /s/ Edward A. Stoltenberg
(Date) Edward A. Stoltenberg,
Senior Vice President,
Chief Financial Officer
(Principal Accounting Officer)
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<PERIOD-END> MAR-31-1997
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