U.S. 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, 1998
[ ] 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)
618 Main Street, West Warwick, Rhode Island 02893
- --------------------------------------------------------------
(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 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 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 X No
As of May 1 1998, there were outstanding 44,728,914 shares of
Common Stock, par value $.000009 per share.
QUADRAX CORPORATION
INDEX TO FORM 10-QSB
Part I - Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1998 and at December 31, 1997
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 1998 and March 31, 1997
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1998 and March 31, 1997
Notes to Condensed Consolidated Financial
Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
Item 6 Exhibits and Reports on Form 8-K
Quadrax Corporation
Consolidated Balance Sheets
(Unaudited)
ASSETS
March 31, December 31,
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents $ 49,427 $ 53,042
Accounts receivable, less allowances
of $146,000 at March 31, 1998 and
$106,000 at December 31, 1997 2,792,269 2,346,881
Inventories 2,371,239 2,408,190
Other current assets 164,482 159,639
--------- --------
TOTAL CURRENT ASSETS 5,377,417 4,967,752
Property and equipment, at cost:
Machinery and equipment 6,763,131 7,063,791
Office equipment 959,290 958,451
Leasehold improvements 1,182,163 1,179,563
--------- ---------
8,904,584 9,201,805
Less accumulated depreciation and
amortization (4,073,634) (4,119,284)
--------- ---------
NET PROPERTY AND EQUIPMENT 4,830,950 5,082,521
Other assets 152,356 88,414
License agreement, net of amortization
of $600,000 at March 31, 1998 and
December 31 1997 -0- -0-
Deferred assets, less amortization of
$73,125 and $66,000 at March 31, 1998
and December 31, 1997, respectively 297,513 304,639
---------- ----------
TOTAL ASSETS $10,658,236 $10,443,326
See accompanying notes to the consolidated financial statements
Quadrax Corporation
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
--------- ---------
Current liabilities not subject
to compromise:
Current portion of long-term debt $ 1,659,106 $ 1,109,515
Accounts payable 2,536,202 3,611,058
Accrued expenses 545,178 1,889,035
--------- ---------
TOTAL CURRENT LIABILITIES NOT SUBJECT
TO COMPROMISE 4,740,486 6,609,608
Liabilities subject to compromise (Note 1) 7,467,702 -0-
Long-term debt, less current portion (Note 3) 2,633,773 2,711,221
Convertible debentures payable (Note 3) -0- 3,187,500
--------- ---------
TOTAL LIABILITIES 14,841,961 12,508,329
Stockholders' equity:
Common stock 417 417
Additional paid-in capital 73,881,994 73,881,994
Retained earnings, deficit (76,339,587) (74,220,865)
--------- ----------
(2,457,176) (338,454)
Less:
Treasury stock, at cost; 656 shares of
Original convertible preferred stock
at March 31, 1998 and December 31, 1997
and 1,090,843 at March 31, 1998 and
December 31, 1997, shares of common stock (1,726,549) (1,726,549)
--------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (4,183,725) (2,065,003)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,658,236 $10,443,326
========= =========
See accompanying notes to the consolidated financial statements
Quadrax Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997*
----------- ----------
Net sales $ 4,235,929 $ 625,254
Cost of goods sold 4,226,354 726,439
---------- ---------
GROSS PROFIT 9,575 (101,185)
Operating Expenses
Research and development 70,768 258,056
Selling, general and
administrative 872,323 1,174,062
Provision for bad debt 40,000 -0-
---------- ---------
LOSS FROM OPERATIONS (973,516) (1,533,303)
Other Income (Expenses)
Interest expense (Note 1) (212,787) (21,930)
Interest income -0- 24,247
Other (expense) income, net 31,582 -0-
---------- ---------
LOSS BEFORE REORGANIZATION ITEMS (1,154,721) ($1,530,986)
Reorganization items (Note 8 ) (964,000) -0-
---------- ----------
NET LOSS ($2,118,721) ($1,530,986)
=========== ==========
NET LOSS PER COMMON SHARE ($0.05) ($0.05)
========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 44,728,914 33,066,400
========== ==========
* Reclassified to conform to current period presentation.
See accompanying notes to the consolidated financial statements<PAGE>
Quadrax Corporation
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
Cash flows from operating activities:
Net loss ($2,118,721) ($1,530,986)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation & amortization of
fixed assets 251,211 194,062
Amortization of intangibles 7,126 4,191
Amortization of unearned compensation -0- 41,394
Common stock issued for expenses -0- 106,250
Increase (decrease) in cash resulting
from changes in:
Accounts receivable and other (529,428) (30,792)
Inventories 36,951 (106,417)
Prepaid expenses and other assets (68,784) 57,757
Accounts payable 496,970 229,000
Accrued expenses 1,099,000 (414,148)
----------- -----------
Net cash used in operating activities (825,875) (1,449,689)
----------- -----------
Cash flows from investing activities:
Capital expenditures, net -0- (22,034)
Other intangible assets purchased -0- (11,771)
----------- -----------
Net cash provided by (used in)
investing activities -0- (33,805)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common
stock options -0- 9,826
Net proceeds from sale of
convertible debentures -0- 2,859,752
Payment of note to related party -0-
Issuance of debt 872,580 106,442
Repayment of debt (50,320) (168,892)
----------- -----------
Net cash provided by financing activities 822,260 2,807,128
----------- ----------
Net increase (decrease) in cash
and cash equivalents (3,615) 1,323,634
Cash and cash equivalents at
beginning of period 53,042 1,200,063
----------- -----------
Cash and cash equivalents
at end of period $ 49,427 $2,523,697
=========== ==========
Supplemental cash flow information:
Cash interest paid $ 105,787 $ 21,931
=========== ==========
See accompanying notes to the consolidated financial statements
QUADRAX CORPORATION
Consolidated Statements of Cash Flows (continued)
for the Three Months Ended
March 31, 1998 and March 31, 1997
Supplemental schedule of significant noncash transactions:
1998:
None
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.
Quadrax Corporation
Notes to Condensed Consolidated Financial Statements
1. Chapter 11 Bankruptcy Filing
On February 27, 1998, Quadrax Corporation, Debtor-in-
Possession (the "Company") filed Petition for relief under
Chapter 11 of the federal bankruptcy laws in the United
States Bankruptcy Court for the District of Rhode Island.
Under Chapter 11, certain claims against the Company in
existence prior to the filing of the petitions for relief
under the federal bankruptcy laws are stayed while the
Company continues business operations as Debtor-in-
Possession. These claims are reflected in the March 31, 1998
balance sheet as "liabilities subject to compromise".
Additional claims (liabilities subject to compromise) may
arise subsequent to the filing date resulting from rejection
of executory contracts, including leases, and from the
determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other
disputed amounts. Claims secured against the Company's
assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for
relief from the stay. Secured claims are secured primarily
by liens on the Company's property, plant and equipment.
The Company received approval from the Bankruptcy Court to
pay or otherwise honor certain of its pre-petition
obligations, including employee wages and related payroll
taxes and benefits. The Company has determined that there is
insufficient collateral to cover the interest portion of
scheduled payments on certain of its pre-petition secured
debt obligations. Contractual interest on those obligations
amounts to approximately $9,000, which is $3,000 in excess of
reported interest expense; therefore, the Company has
discontinued accruing interest on these obligations. Under
Chapter 11, interest is not being accrued on other pre-
petition debt of the Company (except for debt of its
subsidiary, Victor) from the filing date forward.
Quadrax Corporation, a Delaware corporation was incorporated
on March 6, 1986 and until 1994 was a development stage
company that developed defense industry products from its
advanced composite materials. Beginning in 1994, the Company
focused its attention on the sporting goods and industrial
products markets. Victor Corporation, a business acquired in
May, 1997, engages in the manufacture of electric wire and
cordsets.
Due to the Company's inability to obtain sufficient
financing, the Company significantly scaled down its
composite materials divisions during the latter part of 1997.
The Victor Electric Wire and Cable Corporation division
continues to operate as usual.
As of December 31, 1997, the Company was in default on its
lease payments to its landlord on the Portsmouth, Rhode
Island facility. Further, the Company was notified by the
holders of the mortgage of their intention to foreclose and
sell the building.
The Company had a working capital deficiency of approximately
$1.6 million at December 31, 1997. The Company has not
generated sufficient cash flow from recurring operations in
the composite materials divisions to sustain the composite
materials operations and as such the composite materials
operations were suspended on February 13, 1998.
A bankruptcy petition was filed in order for management to
obtain an opportunity to reorganize the Company. The Company
expects to reorganize its affairs under the protection of
Chapter 11 through a plan of reorganization. Although
management expects to file a plan of reorganization in 1998,
there can be no assurance at this time that a plan of
reorganization will be proposed by the Company, or approved
by its creditors, or confirmed by the Bankruptcy Court, or
that such plan will be consummated. After the expiration of
the Company's exclusivity period for filing such a plan,
creditors of the Company have the right to propose
alternative plans of reorganization. Any plan of
reorganization, among other things, is likely to result in
material dilution or elimination of the equity of existing
shareholders.
The consummation of a plan of reorganization is the principal
objective of the Company's Chapter 11 case. A plan of
reorganization sets forth the means for satisfying claims and
interests in the Company, including liabilities subject to
compromise.
The consummation of a plan of reorganization for the Company
will require the requisite vote of impaired creditors and
interest holders in accordance with the provisions of the
Bankruptcy Code and confirmation of the plan by the
Bankruptcy Court.
The Bankruptcy Case itself should be resolved by either a
dismissal of the petition, a confirmation of a plan of
reorganization proposed by the Company, its creditors or a
third party, or a conversion of the case to a liquidation
under Chapter 7 of the Code.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue to operate as a
going concern which requires the realization of assets and
settlement of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filing and
circumstances relating to this event, including the Company's
losses from operations, such realization of assets and
liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and
liquidate or settle liabilities, for amounts other than those
reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts reported
in the financial statements, which do not give effect to all
adjustments or the carrying value of assets or liabilities
that might be necessary as a consequence of a plan of
reorganization.
The appropriateness of using the going concern basis is
dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations of the operating
subsidiary and the ability to generate sufficient cash from
collection of receivables and sales of non-strategic assets
to meet the obligations of the Company during its status as
Debtor-in-Possession.
Quadrax Corporation
Condensed Consolidated Financial Statements
March 31, 1998 (000's)
------------------------------------------------------
Parent
CONSOLIDATED Company
BALANCE (Debtor-in- Victor
SHEET Possession) Corporation Eliminations Consolidated
- --------------- ----------- ------------ ----------- ----------
ASSETS
Current assets $ 562 $4,816 $ $ 5,378
Property, plant &
equipment, net 2,254 2,576 4,830
Investment in
Subsidiary 720 -0- 720 -0-
Other assets 325 125 450
------ ------ ------ ------
TOTAL ASSETS $3,861 $7,517 $ 720 $10,658
====== ====== ====== ======= <PAGE>
March 31, 1998 (000's)
------------------------------------------------------
Parent
LIABILITIES AND Company
STOCKHOLDERS' (Debtor-in- Victor
EQUITY (DEFICIT) Possession) Corporation Elimination Consolidated
- --------------- ----------- ------------ ----------- ----------
LIABILITIES NOT
SUBJECT TO COMPROMISE
Current portion of
long-term debt $ -0- $1,659 $ -0- $ 1,659
Accounts payable 10 2,526 -0- 2,536
Accrued expenses 16 529 -0- 545
------ ------ ------ ------
Current liabilities
not subject to
compromise 26 4,714 -0- 4,740
LIABILITIES SUBJECT
TO COMPROMISE 7,468 -0- -0- 7,468
LONG TERM DEBT, LESS
CURRENT PORTION -0- 2,634 -0- 2,634
------ ------ ------ ------
Total liabilities 7,494 7,348 -0- 14,842
STOCKHOLDERS' EQUITY
(DEFICIT) (3,633) 169 720 (4,184)
------ ------ ------ ------
$3,861 $7,517 $ 720 $10,658
====== ====== ====== =======
<PAGE>
March 31, 1998 (000's)
------------------------------------------------------
Parent
CONSOLIDATED Company
STATEMENT (Debtor-in- Victor
OF CASH FLOWS Possession) Corporation Elimination Consolidated
- --------------- ----------- ------------ ----------- ----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES $ 15,202 $ (810,673) $ -0- $(825,875)
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES -0- -0- -0- -0-
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES -0- 822,260 -0- 822,260
------ ------ ------ ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (15,202) 11,587 -0- (3,615)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF
PERIOD 48,721 4,321 -0- 53,042
------ ------ ------ ------
CASH AND CASH
EQUIVALENTS AT
END OF PERIOD $ 33,519 $15,908 $ -0- $49,427
======= ======= ====== =======
<PAGE>
Liabilities subject to compromise consist of the following (000's):
Secured claims $ 162
Unsecured priority tax claims 103
Unsecured priority employee related claims 88
Unsecured non-priority employee related claims 1,076
Unsecured notes payable 131
Unsecured convertible debentures payable (Note 3) 3,188
Unsecured accrued interest 252
Unsecured other trade payables and accrued expenses 2,468
------
$7,468
======
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
March 31, 1998 (000's)
----------------------------------------------------
Parent
CONSOLIDATED Company
STATEMENT OF (Debtor-in- Victor
OPERATIONS Possession) Corporation Eliminations Consolidated
- --------------- ----------- ------------ ----------- ----------
Net sales $ 359 $ 3,877 $ -0- $ 4,236
Cost of sales 540 3,687 -0- 4,227
------ ------- ----- -------
Gross Profit (181) 190 -0- 9
Research &
development 71 -0- -0- 71
Selling, general &
administrative expenses 347 565 -0- 912
------ ------- ----- -------
Income (loss) from
operations (599) (375) -0- (974)
Interest(Expense)
income, net (115) (98) -0- (213)
Gain on sale of assets 32 -0- -0- 32
------ ------- ----- -------
Income (loss) before
Reorganization items (682) (473) -0- (1,155)
Reorganization items (964) -0- -0- (964)
------ ------- ----- -------
Net Income (loss) ($ 1,646) ($ 473) $ -0- ($ 2,119)
======== ======== ===== ==========
2. Significant Accounting Policies.
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, 1998 and the results of
operations for the three months ended March 31, 1998 and March 31, 1997.
The results of operations for the three month period ended March 31, 1998
may not be indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
3.Debt
Long-term debt consists of the following:
March 31, December 31,
1998 1997
---------- ------------
Note payable - revolver $3,452,186 $2,647,286
Note payable - bank 775,833 823,334
Equipment notes payable,
secured by the equipment 64,860 135,116
Other non-interest
bearing Note -0- 215,000
--------- ---------
4,292,879 3,820,736
Less current maturities (1,659,106) (1,109,515)
--------- ---------
$2,633,773 $2,711,221
========= =========
Note Payable - Revolver and Bank
The Company's wholly-owned subsidiary, Victor Electric Wire & Cable
Corporation ("Victor"), a New York corporation, has a $5,000,000 loan
agreement with Congress Financial Corporation, "Congress". The loan
arrangement with Congress provides for a three-year revolving credit
facility of up to $3,550,000, a $950,000 fully amortizing five year term
loan and an equipment financing facility of up to $500,000, also based upon
a five year fully amortizing repayment schedule. All of such loans bear
interest at a rate of prime plus 1.5%. The Company has guaranteed all of
the obligations of Victor to Congress. The total amount due Congress
pursuant to this loan agreement was $4,292,879 and $3,470,619 as of March
31, 1998 and December 31, 1997, respectively.
This Agreement is secured by substantially all of Victor's assets
including, but not limited to, inventory, receivables, and fixed assets.
The amount available under the revolving loan is limited by a formula based
on accounts receivable and inventory. The Company intends that
approximately $2,000,000 would remain outstanding under this agreement for
an uninterrupted period extending beyond one year from March 31, 1998 and
December 31, 1997. As a result, this amount under the revolving loan
agreement has been classified as long-term debt.
Victor Corporation was notified of an event of default on its Congress loan,
as a result of Quadrax Corporation's filing for protection under Chapter 11
of the Bankruptcy Code on February 27, 1998. The lender has not accelerated
the loan.
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.
In August 1997, the Company entered into a Securities Purchase Agreement for
$3,500,000 of its three year Convertible Debentures and issued $1,500,00 of
them for net proceeds to the Company of $1,359,475. Interest is payable at
the rate of 8% per annum commencing upon issuance date on the debentures.
The debentures are convertible at various times commencing October 3, 1997,
into a number of shares of common stock that can be purchased for a price
equal to seventy-five percent of the average closing bid price of the common
stock for the ten trading days immediately preceding the date of conversion
of the Debenture. At December 31, 1997, the holders of these convertible
debentures had converted none of the debentures into shares of common stock
of the Company.
In October 1997, the Company issued an additional $750,000 for net proceeds
to the Company of $668,000 from these convertible debentures which are
convertible into shares of common stock of the Company under similar terms
and conditions as outlined above. At December 31, 1997, the holder of these
convertible debentures had converted none of the debentures into shares of
common stock of the Company.
Both the August 1997 and the October 1997 issues have a provision for
penalty interest of which $150,000 has been accrued at March 31, 1998. Of
this amount, $75,000 was reflected in interest expense in the fiscal 1997
Statement of Operations and $75,000 was reflected in interest expense in the
first quarter of 1998. These accruals reflect a penalty of 2 1/2% on the
principal for the ninety-day period from the initial issuance date and for
each thirty-day period thereafter for the Company's failure to file with the
Securities and Exchange Commission, and have declared effective, a
registration statement covering the resale of the shares of common stock
issuable upon conversion of such debentures.
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 for both March 31, 1998 and December 31,
1997. Such interest is realized upon conversion of the debentures.
The convertible debenture liability is reflected as a "Liability Subject to
Compromise" at March 31, 1998 (see Note 1).
4. 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, 1998 and December 31, 1997, and -0- shares issued
and outstanding at March 31, 1998 and December 31, 1997.
Common Stock, $.000009 par value, 90,000,000 shares authorized March 31,
1998 and December 31, 1997, 45,819,757 shares were issued at March 31, 1998
and December 31, 1997, respectively, and 44,728,914, shares outstanding at
March 31, 1998 and December 31, 1997, respectively. The treasury shares of
1,090,843 account for the difference in the issued and outstanding shares.
5. Earnings Per Share
For the fiscal quarters ending March 31, 1998 and March 31, 1997, 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.
6. Victor Acquisition
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.
7. Disposition of Lion Golf of Oregon, Inc.
On June 4, 1997, the Company completed its disposition of Lion Golf of Oregon,
Inc., an Oregon corporation ("Lion Golf"), pursuant to the terms of an
Agreement for the sale of common stock dated as of May 31, 1997.
Pursuant to the Lion Golf Stock Disposition Agreement, the Company sold all
of the outstanding stock of Lion Golf of Oregon, Inc. and McManis Sports
Associates, Inc. to Lion Golf's former principal stockholder, Robert K.
Cole. In connection therewith Mr. Robert Cole and Lion Golf assumed the
responsibility for approximately $1,200,000 of Lion Golf's indebtedness,
including the Bank of Cascades accounts receivable/inventory working
capital line with Lion Golf which had an outstanding balance due of
$449,838 at May 31, 1997. As additional consideration, the Company's
unrecorded unsecured promissory note payable to Mr. Cole was canceled along
with the Company's five year employment agreements with Mr. Robert K. Cole
as Chief Executive Officer of Lion Golf and Mr. James Cole as President of
Lion Golf. The Company also wrote off the goodwill associated with Lion
Golf in 1997 in the amount of $110.000.
8. Reorganization Items
Reorganization costs are those costs associated with the reorganization and
restructuring of the Company as part of the Chapter 11 Bankruptcy filing
process. Reorganization items reflected in the 1998 quarter of approximately
$964,000 is made up of $671,000 of accrued severance pay related to the
suspension of operations, and $293,000 of 1998 quarter corporate
administrative expenses including professional fees incurred for the
restructuring, reorganization and disposal of assets related to a plan of
reorganization.
9. Reclassification of Expenses of Prior Period
Depreciation and amortization which were shown as separate line items, as
well as utilities and rent which were shown as selling, general and
administration expenses in the Statement of Operations in prior periods have
been reclassified. The Company currently is allocating these items to the
functional categories that produce the expenses and as such has reclassified
the prior period presentation of these items.
10. Segment Information
Three months ended March 31,
1998* 1997
--------------------------
Net sales
Quadrax Corporation $ 359,367 $ 625,254
Victor Electric Wire & Cable Corporation 3,876,562 -0-
---------- -----------
$ 4,235,929 $ 625,254
=========== ===========
Gross profit (loss)
Quadrax Corporation $ (200,560) $ (101,175)
Victor Electric Wire & Cable Corporation 190,985 -0-
----------- -----------
$ 9,575 $ (101,175)
=========== ===========
Total assets
Quadrax Corporation $ 3,140,914 $ 8,538,361
Victor Electric Wire & Cable Corporation 7,517,322 -0-
----------- -----------
$10,658,236 $ 8,538,361
=========== ===========
Depreciation and amortization expense
Quadrax Corporation $ 132,759 $ 198,254
Victor Electric Wire & Cable Corporation 125,378 -0-
----------- -----------
$ 258,137 $ 198,254
=========== ===========
* Victor Electric Wire & Cable Corporation was acquired on May 7, 1997
<PAGE>
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, the outcome of Bankruptcy Court proceedings and
other risks.
Bankruptcy Filing
Since the Petition Date, the Company has been operating as a Debtor-in-
Possession under Chapter 11 of the Bankruptcy Code. Accordingly, several
claims which were the subject of pre-petition litigation were stayed and
those claims together with claims arising from several pre-petition
defaults and events of default caused by the filing of the petition should
be resolved in the bankruptcy proceedings. The bankruptcy case itself will
be resolved by either a dismissal of the petition, a confirmation of a plan
of reorganization proposed by the Company, its creditors or a third party,
or a conversion of the case to a liquidation under Chapter 7 of the Code.
A bankruptcy petition was filed in order to obtain an opportunity to
reorganize the Company. The Company expects to reorganize its affairs
under the protection of Chapter 11 through a plan of reorganization.
Although management expects to file a plan of reorganization in 1998, there
can be no assurance at this time that a plan of reorganization will be
proposed by the Company, or approved by the creditors, or confirmed by the
Bankruptcy Court, or that such plan will be consummated. After the
expiration of the Company's exclusivity period for such filings, creditors
of the Company have the right to propose alternative plans of
reorganization. Any plan of reorganization, among other things, is likely
to result in material dilution or elimination of the equity of existing
shareholders.
During the Chapter 11 filing, the Company is prohibited from paying, and
creditors are prohibited from attempting to collect, claims or debts
arising pre-petition without approval of the Bankruptcy Court. The
consummation of a plan of reorganization is the principal objective of the
Company's Chapter 11 case. A plan of reorganization sets forth the means
for satisfying claims and interests in the Company, including liabilities
subject to compromise.
The consummation of a plan of reorganization for the Company in accordance
with the provisions of the bankruptcy code will require the requisite vote
of impaired creditors and interest holders in accordance with the
Provisions of the Bankruptcy Code and confirmation of the plan by the
Bankruptcy Court. (Also, see Note 1 to the Consolidated Financial
Statements - Chapter 11 Bankruptcy Filing)
Competition
As the Company enters the sporting goods and recreational equipment market,
it faces competition from other materials used in the manufacture of such
goods and equipment, and from other suppliers of thermoplastic composites.
Quadrax's success in entering this market will largely depend upon its
ability to displace other materials currently in use. If the Company is
unsuccessful in creating a niche within the sporting goods and recreational
equipment market by convincing the market of the strategic benefits of
thermoplastic composites, the Company would be adversely affected. Many of
the companies whose product offerings compete with Quadrax's product
offerings have significantly greater financial, manufacturing, and
marketing resources than Quadrax. The Company also faces competition from
suppliers of similar products who do not use thermoplastic material.
Development of Distribution Channels
Success in the sporting goods and recreational equipment market will also
hinge on the Company's ability to develop distribution channels, including
both retailers and distributors, and there can be no assurance that the
Company will be able to effectively develop such channels.
Continued Investment
Maintaining the Company's technological and strategic advantages over its
competitors will require continued investment by the Company in design and
development, sales and marketing, and customer service and support. There
can be no assurance that the Company will have sufficient resources to make
such investments.
Technological Advances
The Company's ability to maintain a competitive edge by making
technological advances ahead of its competition will have a significant
impact on the success of the Company.
Outside Financing
The Company believes that it will need significant outside financing over
the next five years. There can be no assurance that it will be able to
obtain such financing.
<PAGE>
Results of Operations for Quarter Ended March 31, 1998 as compared to
Quarter Ended March 31, 1997
The first quarter of 1998 includes the results of Victor
Corporation, which was acquired by the Company on May 7, 1997, and the
first quarter of 1997 includes the results of the Lion Golf subsidiary,
which was disposed of by the Company on May 31, 1997.
The Company's net loss from operations for the quarter ended
March 31, 1998 ("1998 quarter") of approximately $2,119,000 was
approximately $589,000 more than its net loss from operations of
approximately $1,531,000 for the quarter ended March 31, 1997 ("1997
quarter"). The primary reasons for the increase in the net loss in
the 1998 quarter compared to the 1997 quarter were as follows: (1) as
to increases in the net loss, Quadrax Corporation's reorganization
costs amounted to approximately $964,000 in 1998, Victor Corporation's
net loss of $374,000 is included in 1998 and the interest expense for
1998 is $191,000 higher than in 1997; (2) as to decreases in the net
loss, Quadrax's composite materials divisions reported reductions in
product development costs in 1998 compared to 1997 amounting to
approximately $187,000, reductions in selling, general and
administrative costs in 1998 compared to 1997 were reported for the
Quadrax corporate division of $331,000 and for the Quadrax composite
material operating units of $329,000; and (3) a further reduction of
the losses in 1998 resulted from the disposition of Lion Golf in May,
1997, which reported a net loss of approximately $90,000 for the 1997
quarter. This net loss was not repeated in the 1998 quarter, resulting
in an improvement in the 1998 quarter loss over the 1997 quarter.
Total revenue recognized during the 1998 quarter increased over the
1997 quarter by approximately $3,611,000 to $4,236,000. Revenues
increased in the 1998 quarter due to the inclusion of Victor
Corporation's revenues amounting to approximately $3,877,000 and from
increases in revenues reported in the 1998 quarter amounting to
approximately $158,000 from the Quadrax composite materials golf shaft
products, bicycle component products and hockey sticks products.
Offsetting these increases was a decrease in revenues as a result of
disposing of Lion Golf, which reported approximately $423,000 of
revenues in the 1997 quarter that were not repeated in the 1998
quarter. The composite materials divisions operations were suspended
in February, 1998 due to a lack of adequate funding.
Costs of goods sold for the 1998 quarter amounted to $4,226,000, an
increase of approximately $3,479,000 over the 1997 quarter. The
principal reasons for the this increase are the added sales of Victor
Corporation in 1998 accounting for approximately $3,686,000 of the
cost increase, combined with an increase in the Quadrax Composite
divisions' inventory reserve during the 1998 quarter of approximately
$100,000. Offsetting these increases is the reduction in cost of
goods sold in the 1998 quarter of approximately $329,000 due to the
disposition of Lion Golf.
Research and development expenses were $71,000 in the 1998 quarter, a
decrease of approximately $187,000, as compared to $258,000 reported
in the 1997 quarter. The decrease in the 1998 quarter is due to the
lack of available funding and the suspension of operations of
Quadrax's composite material divisions.
During the 1998 quarter, the Company's selling, general and
administrative expenses were $872,000, a decrease of approximately
$302,000 from $1,174,000 in the 1997 quarter. The primary reasons for
this decline are decreased expenditures for selling, general and
administrative expenses for Quadrax's composite divisions of
approximately $331,000, and for its corporate division of
approximately $231,000 ($293,000 of corporate division expenses are
categorized as reorganization costs in the 1998 quarter) primarily
related to the suspension of operations of the composite divisions and
the disposition of Lion Golf, which reported $187,000 of selling,
general and administrative costs in 1997 that were not repeated in
1998. The inclusion of Victor Corporation's selling, general and
administrative expenses in the 1998 quarter increased expenses for
1998 versus 1997 by approximately $465,000.
Additional reserves for bad debts for the Quadrax composites divisions
in the amount of $40,000 were provided during the 1998 quarter.
Interest expense for the 1998 quarter increased by approximately
$191,000 to $213,000. This increase is primarily the result of
additional interest in the 1998 period related to penalty interest of
$75,000 on the convertible debentures, interest on the unconverted
debentures at March 31, 1998 and the inclusion of interest on the debt
of Victor Corporation. Interest on the Quadrax Debtor-in-Possession
debt and debentures is not being accrued after the petition date of
February 27, 1998.
Other income in the 1998 quarter is principally due to the gain on the
sale of a piece of Quadrax composite materials division machinery and
equipment of approximately $23,000.
The interest income decreased by approximately $24,000 in the 1998
quarter, as compared to the same period one year ago. Cash was not
available for investing in the 1998 period.
Reorganization items reflected in the 1998 quarter of approximately
$964,000 is made up of $671,000 of accrued severance pay related to
the suspension of operations, and $293,000 of 1998 quarter corporate
administrative expenses, including professional fees incurred for the
restructuring, reorganization or disposal of assets related to a plan
of reorganization.
Financial Position, Liquidity and Capital Resources
At March 31, 1998, the Company had total assets of $10,658,000 and a
stockholders' deficit of ($4,184,000). Current assets were
$5,377,000, current liabilities were $4,740,000 and liabilities
subject to compromise were $7,468,000. The current liabilities
reflect the outstanding liabilities of the Victor subsidiary and
Quadrax Debtor-in-Possession post-partition liabilities. The
liabilities subject to compromise represent the pre-petition
liabilities of Quadrax Debtor-in-Possession that are eligible for
compromise because they are either unsecured, disputed, contingent or
undersecured and subject to compromise in the Chapter 11
reorganization.
Cash and cash equivalents decreased by approximately $4,000 from
December 31, 1997 to $49,000 at March 31, 1998. This decrease is due
primarily to the use of approximately $826,000 to fund its operations,
offset by the Company's net new bank debt raised during the quarter of
approximately $822,000.
Accounts receivable increased by approximately $445,000 to $2,792,000.
Victor's receivables increased during the period by approximately
$676,000, principally due to the operations gearing up for higher
cyclical sales experienced during the mid and later quarters of the
calendar year. Quadrax's composite materials divisions experienced a
decline in receivables during the period of approximately $230,000.
Quadrax's receivables declined due to the suspension of its composite
materials divisions operations in February, 1998 and receivables
offset against notes payable accounting for approximately $190,000,
together with an increase in the allowance for bad debts of $40,000
during the quarter.
Inventories decreased by approximately $37,000. This decrease is due
primarily to the suspension of Quadrax's composite material divisions
operations in February, 1998 amounting to approximately $277,000,
which was offset by an increase in Victor's inventories of
approximately $240,000 due to build-up of product required for
Victor's anticipated higher cyclical shipments during the mid and
later quarters of the calendar year.
Other current assets increased by approximately $64,000 from December
31, 1997 to March 31, 1998. Principally, the increase relates to
monies put in escrow related to the Chapter 11 filing.
The current portion of long-term debt increased by approximately
$549,000 to approximately $1,659,000 at March 31, 1998. Primarily
this increase results from the increase in Victor's revolving debt
during the quarter of approximately $805,000, offset by the reduction
in the current portion related to the debt reflected as liabilities
subject to compromise at March 31, 1998, which were categorized as
current portion of long-term debt at December 31, 1997. The increase
in Victor's revolver relates to the receivable and inventory build up
as well as funding of the 1998 quarter's loss from operations.
Accounts payable and accrued expenses decreased by approximately
$2,419,000 from $5,500,000 at December 31, 1997 to $3,081,000 at March
31, 1998. The major reason for the decrease in payables during the
quarter was the re-categorization of approximately $2,900,000 of
liabilities that were reflected as accounts payables at December, 1997
to liabilities subject to compromise at March 31, 1998. During this
same quarter, Victor's payables increased by approximately $467,000
due to its ramp up of production.
Liabilities subject to compromise amounted to approximately $7,468,000
at March 31, 1998. The liabilities subject to compromise represent the
pre-petition liabilities of Quadrax Debtor-in-Possession that are
eligible for compromise because they are either unsecured, disputed,
contingent or undersecured and subject to compromise in the Chapter 11
reorganization. (See note 1 - Chapter 11 Bankruptcy Filing)
Long term debt decreased approximately $78,000 to approximately
$2,634,000 at March 31, 1998. The major reason for the decrease at
March 31, 1998 was the reclassification of the long-term portion of
the capital leases of approximately $68,000 at March 31, 1998 to a
liability subject to compromise.
Convertible debentures decreased $3,188,000 during the three months
ended March 31, 1998. This decrease is the result of the liability
being reclassified at March 31, 1998 and shown as a liability subject
to compromise.
In the first three months of fiscal 1998, capital expenditures were a
negligible amount.
The Company generated revenues of approximately $4,236,000 in the
first three months of fiscal 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 in the
first quarter of fiscal 1998, after giving effect to the repayment of
debt, totaled approximately $822,000, as compared to $2,807,000 during
the period ended March 31, 1997.
The Company received a going concern qualification from its outside
independent auditors on its fiscal 1997 audited financial statements.
There is no assurance that the Company's efforts to propose a plan of
reorganization that will be confirmed will be successful. Further
there is no assurance that a confirmed plan will enable the Company to
achieve viability and profitability or to raise money successfully.
There are also no assurances that the Company can generate the cash
flow required to pay the expenses of Quadrax Corporation,
Debtor-in-Possession, as due during the Debtor-in-Possession period.
It is difficult for the Company to predict with accuracy
the point at which the Company will be viable and profitable or
whether it can achieve viability or profitability at all, due to the
difficulty of predicting accurately the amount of revenues that the
Company will generate, the amount of expenses that will be required by
its operations, and the Company's ability to raise additional capital.
(See Note 1 to the Consolidated Financial Statements regarding Chapter
11 Bankruptcy Filing)
QUADRAX CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
Incorporated by reference to the Company's Form 10-KSB for the
fiscal period December 31, 1997 on file with the Securities and
Exchange Commission on May 5, 1998.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
As of March 30, 1998, Quadrax has been notified that the Bankruptcy
filing by Quadrax Corporation, on February 27, 1998, caused an event
of default on its Congress debt. The amount of the Congress debt
outstanding at March 31, 1998 is approximately $4,293,000. The debt
has not been accelerated.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
On January 29, 1998, the Company filed an amended
Form 8-K with respect to the acquisition of Victor Electric
Wire and Cable Corporation.
On March 16, 1998, the Company filed a Form 8-K with
respect to the Company's Bankruptcy Filing on February 27, 1998.
On April 16, 1998, the Company filed a Form 8-K regarding
the delisting of Quadrax Corporation's common stock from Nasdaq.
QUADRAX CORPORATION
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUADRAX CORPORATION
By: /s/ James J. Palermo
James J. Palermo
Chairman of the Board of
Directors, and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 20, 1998
By:/s/ Brooks R. Herrick
Brooks R. Herrick
Executive Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
Dated: May 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 49,427
<SECURITIES> 0
<RECEIVABLES> 2,938,269
<ALLOWANCES> 146,000
<INVENTORY> 2,371,239
<CURRENT-ASSETS> 5,377,417
<PP&E> 6,763,131
<DEPRECIATION> 4,073,634
<TOTAL-ASSETS> 10,658,236
<CURRENT-LIABILITIES> 4,740,486
<BONDS> 2,633,773
0
0
<COMMON> 417
<OTHER-SE> (4,184,142)
<TOTAL-LIABILITY-AND-EQUITY> 10,658,236
<SALES> 4,235,929
<TOTAL-REVENUES> 4,235,929
<CGS> 4,226,354
<TOTAL-COSTS> 4,226,354
<OTHER-EXPENSES> 70,768
<LOSS-PROVISION> 40,000
<INTEREST-EXPENSE> 212,787
<INCOME-PRETAX> (2,118,721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,118,721)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,118,721)
<CHANGES> 0
<NET-INCOME> (2,118,721)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
