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 quarterly period ended June 30, 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 August 19, 1998, there were outstanding 45,544,176 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
June 30, 1998 and at December 31, 1997
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and June 30, 1997
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and
June 30, 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
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None since the Company's Form 10-QSB for the fiscal
period March 31, 1998 was filed with the Securities
and Exchange Commission on May 20, 1998.
Quadrax Corporation
Consolidated Balance Sheets
(Unaudited)
ASSETS
June 30, December 31,
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents $ 11,696 $ 53,042
Accounts receivable, less allowances
of $146,000 at June 30, 1998 and
$106,000 at December 31, 1997 2,477,719 2,346,881
Inventories 2,763,755 2,408,190
Other current assets 132,712 159,639
--------- ---------
TOTAL CURRENT ASSETS 5,385,882 4,967,752
Property and equipment, at cost:
Machinery and equipment 6,778,111 7,063,791
Office equipment 950,481 958,451
Leasehold improvements 1,182,163 1,179,563
--------- ---------
8,910,755 9,201,805
Less accumulated depreciation and
amortization 4,184,476 (4,119,284)
--------- ---------
NET PROPERTY AND EQUIPMENT 4,726,279 5,082,521
Other assets 110,532 88,414
Deferred assets, less amortization of
$80,250 and $66,000 at June 30, 1998
and December 31, 1997, respectively 291,690 304,639
---------- ----------
TOTAL ASSETS $10,514,383 $10,443,326
========== ==========
See accompanying notes to the consolidated financial statements
Quadrax Corporation
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
--------- ---------
Current liabilities not subject
to compromise:
Current portion of long-term debt $ 1,292,188 $ 1,109,515
Accounts payable 2,995,464 3,611,058
Accrued expenses 434,659 1,889,035
--------- ---------
TOTAL CURRENT LIABILITIES NOT SUBJECT
TO COMPROMISE 4,722,311 6,609,608
Liabilities subject to compromise (Note 1) 7,526,865 -0-
Long-term debt, less current portion (Note 3) 2,597,553 2,711,221
Convertible debentures payable (Note 3) -0- 3,187,500
--------- ---------
TOTAL LIABILITIES 14,846,729 12,508,329
Stockholders' equity:
Common stock 417 417
Additional paid-in capital 73,881,995 73,881,994
Retained earnings, deficit (76,488,209) (74,220,865)
--------- ----------
(2,605,797) (338,454)
Less:
Treasury stock, at cost; 656 shares of
Original convertible preferred stock
at June 30, 1998 and December 31, 1997
and 1,090,843 at June 30, 1998 and
December 31, 1997, shares of common stock (1,726,549) (1,726,549)
--------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (4,332,346) (2,065,003)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,514,383 $10,443,326
========== =========
See accompanying notes to the consolidated financial statements
Quadrax Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
NET SALES $4,670,245 $ 4,249,702 $8,906,174 $4,874,956
COST OF GOODS SOLD 3,933,369 4,163,840 8,159,723 4,890,279
--------- --------- --------- ---------
Gross Profit 736,876 85,862 746,451 (15,323)
OPERATING EXPENSES:
Research and development -0- 288,473 70,768 546,529
Selling, general and
administrative 614,922 1,561,458 1,487,245 2,735,522
Litigation and
restructuring costs -0- 1,270,000 -0- 1,270,000
Provision for bad debt 5,531 -0- 45,531 -0-
--------- --------- --------- ---------
Income from operations 116,423 (3,034,069) (857,093) (4,567,374)
OTHER INCOME (EXPENSE):
Interest expense (118,543) (713,850) (331,330) (735,780)
Interest income -0- 19,187 -0- 43,436
Other, net (13,196) -0- 18,386 -0-
-------- -------- --------- --------
LOSS BEFORE
REORGANIZATION ITEMS (15,316) (3,728,732) (1,170,037) (5,259,718)
Reorganization items
(Note 8) 133,307 -0- 1,097,307 -0-
-------- -------- --------- ---------
NET LOSS ($ 148,623) ($3,728,732) (2,267,344) ($5,259,718)
========= ========= ========= =========
NET LOSS PER COMMON SHARE ($0.00) ($0.10) ($0.05) ($0.15)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 45,272,422 37,270,285 45,136,545 35,154,199
========= ========= ========= =========
See accompanying notes to the consolidated financial statements
Quadrax Corporation
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
-------------- --------------
Cash flows from operating activities:
Net loss ($2,267,344) ($5,259,718)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation & amortization of
fixed assets 360,910 444,821
Amortization of intangibles 14,250 118,576
Amortization of unearned compensation -0- 322,788
Common stock issued for expenses -0- 143,750
Common stock issued for interest -0- 602,500
Write-down of machinery and equipment -0- 405,479
Provision for bad debt 40,000 -0-
Increase (decrease) in cash resulting
from changes in:
Accounts receivable and other (170,838) (2,334,010)
Inventories (355,565) (775,135)
Prepaid expenses and other assets 26,927 39,623
Accounts payable 1,015,396 2,398,453
Accrued expenses 988,481 611,589
----------- -----------
Net cash used in operating activities (347,783) (3,281,284)
----------- -----------
Cash flows from investing activities:
Capital expenditures, net (4,668) (165,563)
Other intangible assets purchased (23,419) (105,575)
Payments for businesses acquired
net of cash acquired -0- (710,175)
----------- -----------
Net cash provided by (used in)
investing activities (28,087) (981,313)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of common
stock options -0- 9,826
Net proceeds from sale of
preferred stock and warrants -0- 246,250
Issuance of convertible debt,
net of costs -0- 2,859,752
Issuance of debt 872,580 3,516,938
Repayment of debt (538,056) (3,096,092)
----------- -----------
Net cash provided by financing activities 334,524 3,536,674
----------- ----------
Net increase (decrease) in cash
and cash equivalents (41,346) (725,923)
Cash and cash equivalents at
beginning of period 53,042 1,200,063
----------- -----------
Cash and cash equivalents
at end of period $ 11,696 $474,140
=========== ==========
See accompanying notes to the consolidated financial statements
<PAGE>
QUADRAX CORPORATION
Consolidated Statements of Cash Flows (continued)
for the Six Months Ended
June 30, 1998 and June 30, 1997
Supplemental schedule of significant noncash transactions:
1998:
None
1997:
The Company issued 9,089,928 shares of its common stock
in exchange for the cancellation of $3,402,800 of its
convertible debentures.
The Company issued 200,000 shares of its common stock
for payment of $143,750 of accrued liabilities and
expenses.
The Company disposed of its wholly-owned subsidiaries
Lion Golf of Oregon, Inc.,("Lion Golf"), and McManis
Sports Associates, ("McManis")by Lion Golf's former
principal shareholder assuming the responsibility for
all Lion Golf's indebtedness, including $725,376 in
notes payable.
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 June 30, 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 on June 30, 1998, 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.
Subsequently, the holders of the mortgage foreclosed.
The landlord has begun proceedings to evict the
Company. A hearing has been scheduled for September 15,
1998.
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. The Company has proposed a Plan of
Reorganization which is currently being considered by
the creditors of the Company and the Bankruptcy Court.
The Company's Plan of Reorganization is still subject
to approval by the creditors and the Bankruptcy Court.
There can be no assurance at this time that any plan of
reorganization will be approved by its creditors, or
confirmed by the Bankruptcy Court, or that such plan
will be consummated. 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.
<PAGE>
Quadrax Corporation
Condensed Consolidated Financial Statements
June 30, 1998 (000's)
------------------------------------------------------
Parent
CONSOLIDATED Company
BALANCE (Debtor-in- Victor
SHEET Possession) Corporation Eliminations Consolidated
- --------------- ----------- ------------ ----------- ----------
ASSETS
Current assets $ 460 $4,926 $ $ 5,386
Property, plant &
equipment, net 2,249 2,477 4,726
Investment in
Subsidiary 720 -0- (720) -0-
Other assets 317 85 -0- 403
------ ------ ------ ------
TOTAL ASSETS $3,746 $7,489 ($ 720) $10,515
====== ====== ====== =======
<PAGE>
June 30, 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- $1,292 $ -0- $ 1,292
Accounts payable 63 2,932 -0- 2,995
Accrued expenses -0- 435 -0- 435
------ ------ ------ ------
Current liabilities
not subject to
compromise 63 4,659 -0- 4,722
LIABILITIES SUBJECT
TO COMPROMISE 7,527 -0- -0- 7,527
LONG TERM DEBT, LESS
CURRENT PORTION -0- 2,597 -0- 2,597
------ ------ ------ ------
Total liabilities 7,590 7,256 -0- 14,846
STOCKHOLDERS' EQUITY
(DEFICIT) (3,844) 232 (720) (4,332)
------ ------ ------ ------
$3,746 $7,489 ($ 720) $10,514
====== ====== ====== =======
<PAGE>
June 30, 1998 (000's)
------------------------------------------------------
Parent
CONSOLIDATED Company
STATEMENT (Debtor-in- Victor
OF CASH FLOWS Possession) Corporation Elimination Consolidated
- --------------- ----------- ------------ ----------- ----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES ($ 46) ($ 302) $ -0- ($ 348)
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES -0- (28) -0- (28)
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES -0- 335 -0- 335
------ ------ ------ ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (46) 5 -0- (41)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF
PERIOD 49 4 -0- 53
------ ------ ------ ------
CASH AND CASH
EQUIVALENTS AT
END OF PERIOD $ 3 $ 9 $ -0- $ 12
======= ======= ====== =======
<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 2,527
------
$7,527
======
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
June 30, 1998 (000's)
----------------------------------------------------
Parent
CONSOLIDATED Company
STATEMENT OF (Debtor-in- Victor
OPERATIONS Possession) Corporation Eliminations Consolidated
- --------------- ----------- ------------ ----------- ----------
Net sales $ 387 $ 8,519 $ -0- $ 8,906
Cost of sales 559 7,601 -0- 8,160
------ ------- ----- -------
Gross Profit (172) 918 -0- 746
Research &
development 71 -0- -0- 71
Selling, general &
administrative expenses 382 1,104 -0- 1,486
Provision for bad debt 46 -0- -0- 46
------ ------- ----- -------
Income (loss) from
operations (671) (186) -0- (857)
Interest(expense)
income, net (114) (217) -0- (331)
Other income (expense) 23 (5) -0- (18)
------ ------- ----- -------
Income (loss) before
Reorganization items (762) (408) -0- (1,170)
Reorganization items 1,097 -0- -0- 1,097
------ ------- ----- -------
Net Income (loss) ($ 1,859) ($ 408) $ -0- ($ 2,267)
======== ======== ===== ==========
<PAGE>
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 June 30, 1998 and
the results of operations for the six months ended June
30, 1998 and June 30, 1997. The results of operations for
the six month period ended June 30, 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:
June 30, December 31,
1998 1997
---------- ------------
Note payable - revolver $3,102,188 $2,647,286
Note payable - bank 728,333 823,334
Equipment notes payable,
secured by the equipment 59,220 135,116
Other non-interest
bearing Note -0- 215,000
--------- ---------
3,889,741 3,820,736
Less current maturities 1,292,188 (1,109,515)
--------- ---------
$2,597,553 $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 $3,889,741 and
$3,470,619 as of June 30, 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 June 30, 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 events 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 and the net worth covenant of the loan
arrangement. 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
eight percent per annum for net proceeds to the Company of
$1,988,750. These debentures are convertible at the option
of the holders on or after the forty-first day of issuance
into a number of shares of common stock that can be
purchased for a price equal to seventy percent of the
closing bid price of the common stock on the five trading
days immediately prior to the conversion date. At December
31, 1996, the holders of the convertible debentures had
converted $750,000 of these debentures into 1,521,572
shares of common stock of the Company. Subsequent to
December 31, 1996, the balance of the debentures
outstanding, $1,400,000, was converted into 3,915,908
shares of common stock of the Company.
In February 1997, the Company issued $3,210,000 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 December 31, 1997, the holders of these convertible
debentures had converted $3,061,000 of the debentures into
7,925,224 shares of common stock of the Company.
In August 1997, the Company entered into a Securities
Purchase Agreement for $3,500,000 of its three year
Convertible Debentures and issued $1,500,00 of them for net
proceeds to the Company of $1,359,475. Interest is payable
at the rate of 8% per annum commencing upon issuance date
on the debentures. The debentures are convertible at
various times commencing October 3, 1997, into a number of
shares of common stock that can be purchased for a price
equal to seventy-five percent of the average closing bid
price of the common stock for the ten trading days
immediately preceding the date of conversion of the
Debenture. At June 30, 1998, 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 June 30, 1998, 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 June 30, 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 at 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 June 30, 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 June 30, 1998 and December
31, 1997, and -0- shares issued and outstanding at June
30, 1998 and December 31, 1997.
Common Stock, $.000009 par value, 90,000,000 shares
authorized June 30, 1998 and December 31, 1997, 46,635,019
shares were issued at June 30, 1998 and December 31, 1997,
respectively, and 45,544,176, shares outstanding at June
30, 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 June 30, 1998 and June 30,
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.
<PAGE>
10. Segment Information
Six months ended June 30,
1998 1997*
--------------------------
Net sales
Quadrax Corporation $ 387,277 $ 1,468,369
Victor Electric Wire & Cable Corporation 8,518,897 3,406,587
---------- -----------
$8,906,174 $ 4,874,956
=========== ===========
Gross profit (loss)
Quadrax Corporation $ (171,610) $ (617,186)
Victor Electric Wire & Cable Corporation 918,061 601,863
---------- -----------
$ 746,451 $ (15,323)
========== ============
Total assets
Quadrax Corporation $3,025,686 $ 5,177,422
Victor Electric Wire & Cable Corporation 7,488,697 6,536,203
----------- -----------
$10,514,383 $11,713,625
=========== ===========
Depreciation and amortization expense
Quadrax Corporation $ 139,404 $ 829,273
Victor Electric Wire & Cable Corporation 235,756 56,912
----------- -----------
$ 375,160 $ 886,185
========== ==========
* 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 recognizes its need for outside financing and
that it can only begin to reestablish itself as an
operating entity over a significant time period following
a successful emergence from bankruptcy with a Court
approved reorganization plan. There can be no assurance
that a plan of reorganization will be approved or that the
Company will be able to obtain such financing.
Results of Operations for Quarter Ended June 30, 1998 as
compared to Quarter Ended June 30, 1997
The Company's net loss from operations for the
quarter ended June 30, 1998 ("1998 second quarter") was
$148,623 compared to its net loss from operations of
$3,728,732 for the quarter ended June 30, 1997 ("1997
second quarter"). This reduction is primarily due to the
expense of any losses incurred from the suspended
operations of the company's thermoplastic operations in
Rhode Island and California due to the Chapter 11
bankruptcy filing.
Total sales during the 1998 second quarter were
$4,670,245 compared to $4,249,702 in the 1997 second
quarter. This increase in sales in the 1998 second quarter
is attributable to Victor Electric Wire and Cable Corp.,
("Victor"), which was acquired by the Company on May 7,
1997. Victor's sales from May 7, 1997 to June 30, 1997
were approximately $3,400,000 as compared to a full
quarter for Victor in 1998 of $4,642,344.
Costs of goods sold for the second quarter of 1998 of
$3,933,369 decreased in the three months ended June 30,
1998 compared to the three months ended June 30, 1997 of
$4,163,840. Most of this decrease is a result of the 1998
second quarter being comprised of the Victor operation and
its gross profit.
Research and development expenses were $0.00 in the
1998 second quarter, as compared to $288,473 in the 1997
second quarter. The reason for this decrease is due to
the suspension of Quadrax's composite material divisions
operations while in Chapter 11 bankruptcy.
Selling, general and administrative expenses incurred
in the three months ended June 30, 1998 were $614,922
compared to $1,561,458 in the three months ended June 30,
1997. This decrease is due to the suspension of Quadrax's
composite material divisions operations while in Chapter
11 bankruptcy.
There were no litigation and restructuring costs in
the 1998 second quarter as compared to the 1997 second
quarter expenses of$1,270,000.
Interest expense for the second quarter of 1998 of
$118,543 essentially represents the expense for the Victor
outstanding debt. The 1997 interest expense of $713,750
reflects the Company's 1997 subordinated debt issuances.
Results of Operations for Six Months Ended June 30, 1998
as compared to Six Months Ended June 30, 1997
The Company's had a loss from operations for the six
months ended June 30, 1998 ("1998 first half") of
$2,267,344. Nearly all of this loss was incurred in the
first quarter. This loss compares to a net loss from
operations of $5,259,718 for the six months ended June 30,
1997 ("1997 first half").
Total sales during the 1998 first half were $8,906,174
compared to $4,874,956 in the 1997 first half. This
increase of $4,031,218 resulted from the Company's Victor
subsidiary shipping approximately $3,406,000 of products
in the 1997 first half compared to $8,497,783 for the first
half of 1998.
Costs of goods sold increased $3,269,444 in the 1998
first half to $8,159,723. The reason for the increase costs
during the 1998 first half is due to the additional sales
of Victor.
Selling, general and administrative expenses
decreased by $1,248,277 in the 1998 first half to
$1,487,245 as compared to $2,735,522 in the 1997 first
half. Most of the difference is due to cessation of
operations in Quadrax's thermoplastic facilities due to
the Chapter 11 bankruptcy.
Interest expense for the first half of 1998 was
$331,330, while in 1997, it was $735,780, a decrease of
$404,450.
Financial Position, Liquidity and Capital Resources
At June 30, 1998, the Company had total assets of
$10,514,383 and a stockholders' deficit of $4,332,346.
Current assets were $5,385,882, current liabilities were
$4,722,311 and liabilities subject to compromise were
$7,526,865. 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
$41,346 from December 31, 1997 to $11,696 at June 30,
1998. This decrease is due primarily to the use of
approximately $348,000 to fund its operations, offset by
the Company's net new bank debt raised during the period
of approximately $334,524.
Accounts receivable increased by approximately
$170,838. Victor's receivables increased during the
periodby approximately $385,000, 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 $214,000. 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 increased by approximately $356,000.
This is due primarily to the suspension of Quadrax's
composite material divisions operations in February, 1998
amounting to approximately $290,000, which was offset by
an increase in Victor's inventories of approximately
$646,000 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
$22,000 from December 31, 1997 to June 30, 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 $183,000 to approximately $1,292,000 at June
30 1998. Primarily this increase results from the
increase in Victor's revolving debt during the quarter of
approximately $300,000, offset by the reduction in the
current portion related to the debt reflected as
liabilities subject to compromise at June 30, 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 period's loss from operations.
Accounts payable and accrued expenses decreased by
approximately $2,000,000 from $5,500,000 at December 31,
1997 to $3,430,000 at June 30, 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 June 30, 1998.
During this same quarter, Victor's payables increased by
approximately $800,000 due to its ramp up of production.
Liabilities subject to compromise amounted to
approximately $7,527,000 at June 30, 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 $114,000 to
approximately $2,598,000 at June 30, 1998. The major
reason for the decrease at June 30, 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 six months ended June 30, 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 six months of fiscal 1998, capital
expenditures were a negligible amount.
The Company generated revenues of approximately
$8,906,000 in the first six 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 half of fiscal 1998, after giving
effect to the repayment of debt, totaled approximately
$335,000, as compared to $3,537,000 during the first half
ended June 30, 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 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)
<PAGE>
QUADRAX CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
A claim has been brought against the Company and its
Chief Executive Officer, James J. Palermo, by Sovereign
Partners L.P. and Dominion Capital Fund, LTD. holders of
the convertible debt alleging certain securities
violations. Claims have been filed in the Bankruptcy
Court and action has commenced in New York. Mr. Palermo
has filed for indemnification from the Company under the
company by-laws and applicable laws. In addition, the
Company has notified the D&O insurer which has indicated
its willingness to cover defense costs and liabilities and
indemnities to the extent required under the policy.
Both the Company and Mr. Palermo deny all charges and
intend to defend vigorously.
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 June 30,
31, 1998 is approximately $3,890,000. 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
None since the Company's Form 10-QSB for the
fiscal period March 31, 1998 was filed with
the Securities and Exchange Commission on
May 20, 1998.
<PAGE>
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: August 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,696
<SECURITIES> 0
<RECEIVABLES> 2,623,719
<ALLOWANCES> 146,000
<INVENTORY> 2,763,755
<CURRENT-ASSETS> 5,385,882
<PP&E> 8,910,755
<DEPRECIATION> 4,184,476
<TOTAL-ASSETS> 10,514,383
<CURRENT-LIABILITIES> 4,722,311
<BONDS> 2,597,553
0
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<COMMON> 417
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<TOTAL-LIABILITY-AND-EQUITY> 10,514,383
<SALES> 8,906,174
<TOTAL-REVENUES> 8,906,174
<CGS> 8,159,723
<TOTAL-COSTS> 8,159,723
<OTHER-EXPENSES> 1,558,013
<LOSS-PROVISION> 45,531
<INTEREST-EXPENSE> 331,330
<INCOME-PRETAX> (2,267,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,267,344)
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