UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended June 30, 1997
[_] Transition Report Under to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File Number: 0-16052
---------------
QUADRAX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0420158
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 High Point Avenue Portsmouth, Rhode Island 02871
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(Address of principal executive offices) (Zip Code)
(401) 683-6600
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(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No__
--
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class Outstanding at August 1, 1997
----------------------- -----------------------------
Common Stock, par value 43,171,731 shares
$.000009 per share
1
QUADRAX CORPORATION
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION PAGE
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1997 and at December 31, 1996 3-4
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1997 and
June 30, 1996 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and
June 30, 1996 6-7
Notes to Condensed Consolidated Financial Statements 8-11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II - OTHER INFORMATION 17
Signatures 18
2
QUADRAX CORPORATION
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
-----------
ASSETS
June 30, December 31,
1997 1996
------------- ------------
Current assets:
Cash and cash equivalents $ 474,140 $ 1,200,063
Accounts receivable, net of allowances
for doubtful accounts of $399,000
and $219,000 respectively 3,217,015 883,005
Inventories 2,041,209 1,266,074
Other current assets 145,225 184,848
----------- ------------
TOTAL CURRENT ASSETS 5,877,589 3,533,990
----------- ------------
Property and equipment, at cost:
Machinery and equipment 7,999,370 4,618,313
Office equipment 919,722 910,895
Leasehold improvements 1,125,777 1,089,119
------------ ------------
10,044,869 6,618,327
Less accumulated depreciation and
amortization (3,889,927) (3,467,661)
------------ ------------
NET PROPERTY AND EQUIPMENT 6,154,942 3,150,666
------------ ------------
Goodwill, net of amortization of
$7,903 at December 31, 1996 0 110,651
Other assets 343,170 268,179
Deferred assets, net of amortization of
$48,275 and $70,600, respectively 310,947 236,238
------------ ------------
TOTAL ASSETS $12,686,648 $ 7,299,724
============ ============
See accompanying notes.
3
QUADRAX CORPORATION
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Current liabilities:
Accounts payable $ 3,083,665 $ 685,212
Accrued expenses 1,917,642 1,306,053
Current portion of long-term debt 946,511 856,904
------------- ------------
TOTAL CURRENT LIABILITIES 5,947,818 2,848,169
Bank and other debt, less current
portion 2,805,785 360,739
Convertible debentures payable 1,207,200 1,400,000
------------- ------------
TOTAL LIABILITIES 9,960,803 4,608,908
------------- ------------
Stockholders' equity:
Common stock 382 298
Additional paid-in capital 73,619,204 68,701,531
Retained earnings (deficit) (68,936,827) (63,757,759)
------------- ------------
4,682,759 4,944,070
Less:
Treasury stock, at cost (1,125,969) (1,125,969)
Unearned compensation and deferred (181,405) (504,193)
expenses
Notes receivable for options (649,540) (623,092)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 2,725,845 2,690,816
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 12,686,648 $ 7,299,724
============= ============
See accompanying notes.
4
QUADRAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
NET SALES $ 4,249,702 $ 840,327 $ 4,874,956 $ 1,927,344
COST OF GOODS SOLD 4,131,590 908,451 4,858,029 1,907,701
-------------- -------------- -------------- --------------
Gross Profit 118,112 (68,124) 16,927 19,643
OPERATING EXPENSES:
Research and development 255,373 99,044 513,429 393,611
Selling, general and administrative 1,546,158 1,269,438 2,720,220 2,757,823
Litigation and restructuring costs 1,270,000 0 1,270,000 0
-------------- -------------- -------------- --------------
Income from operations (2,953,419) (1,436,606) (4,486,722) (3,131,791)
OTHER INCOME (EXPENSE):
Interest expense (713,850) (775,986) (735,780) (839,832)
Interest income 19,187 15,389 43,434 30,961
Other, net 0 43,549 0 43,945
-------------- -------------- -------------- --------------
NET LOSS ($3,648,082) ($2,153,654) ($5,179,068) ($3,896,717)
============== ============== ============== ==============
NET LOSS PER COMMON SHARE ($0.10) ($0.10) ($0.15) ($0.19)
============== ============== ============== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 37,270,285 22,470,365 35,154,199 20,876,573
============== ============== ============== =============
See accompanying notes.
5
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
--------------- ---------------
Cash flows from operating activities:
Net loss ($5,179,068) ($3,896,717)
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation & amortization of fixed assets 364,171 302,158
Amortization of intangibles 118,576 67,881
Amortization of unearned compensation 322,788 52,788
Common stock issued for expenses 143,750 160,854
Common stock issued for interest 602,500 714,285
Write-down of machinery and equipment 405,479 0
Effect on cash flows of changes in assets and liabilities:
Accounts receivable and other (2,334,010) 181,263
Inventories (775,135) (423,862)
Prepaid expenses and other assets 39,623 (59,383)
Accounts payable 2,398,453 (122,112)
Accrued expenses 611,589 (507,129)
----------- ------------
Net cash used in operating activities (3,281,284) (3,529,974)
----------- ------------
Cash flows from investing activities:
Capital expenditures, net of Victor's fixed asset
appraisal write-up of $2,750,000 (165,563) (1,023,500)
Other intangible assets purchased (105,575) (33,350)
Payments for businesses acquired
net of cash acquired (710,175) 0
----------- ------------
Net cash provided by (used in) investing activities (981,313) (1,056,850)
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 9,826 4,187
Net proceeds from sale of preferred stock and warrants 246,250 3,150,000
Issuance of convertible debt, net of costs 2,859,752 1,536,666
Payment of note to related party 0 (300,000)
Issuance of debt 3,516,938 0
Repayment of debt (3,096,092) (84,854)
----------- -------------
Net cash provided by financing activities 3,536,674 4,305,999
----------- ------------
Net increase (decrease) in cash and cash equivalents (725,923) (280,825)
Cash and cash equivalents at beginning of period 1,200,063 2,613,555
----------- ------------
Cash and cash equivalents at end of period $ 474,140 $ 2,332,730
=========== ============
See accompanying notes.
6
QUADRAX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND JUNE 30, 1996
Supplemental schedule of significant noncash transactions:
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.
1996:
The Company issued 4,450,285 shares of its common stock in exchange for the
cancellation of $2,866,666 of its convertible debentures.
The Company issued 67,026 shares of its common stock for payment of $61,870
of accrued liabilities and expenses.
7
QUADRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited condensed consolidated financial statements presented herein
have been prepared in accordance with the instructions to Form 10-QSB and do
not include all of the information and note disclosures required by generally
accepted accounting principles. In the opinion of management, such condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 1997 and the results of operations for the
six months ended June 30, 1997 and June 30, 1996. The results of operations
for the six month period ended June 30, 1997 may not be indicative of the
results that may be expected for the year ending December 31, 1997. It is
suggested that these Condensed Consolidated Financial Statements be read in
conjunction with the Consolidated Financial Statements and the notes thereto
included in the Company's latest annual report to the Securities and Exchange
Commission on Form 10-KSB for the year ended December 31, 1996.
2. Debt
----
Long-term debt consists of the following:
June 30, December 31,
1997 1996
------------ -------------
Notes payable - bank $ 3,430,929 $ 654,464
Notes payable - to former Lion
shareholders and others 0 290,563
Equipment notes payable 116,367 97,616
Other non-interest bearing notes 205,000 175,000
----------- ---------
3,752,296 1,217,643
Less current maturities (946,511) (856,904)
----------- ---------
$ 2,805,785 $ 360,739
=========== =========
Note Payable - 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. As of June 30, 1997, the total
amount due Congress pursuant to this loan agreement was $3,430,929.
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, 1997. As a
result, this amount under the revolving loan agreement has been classified
as long-term debt.
8
QUADRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible Debentures
In February 1997, the Company issued $3,210,000 of its Convertible Debentures
for net proceeds to the Company of $2,889,000. Interest is payable at the
rate of 8% per annum commencing August, 1997 on the unconverted debentures as
of August, 1997. The debentures are convertible at various times ranging from
sixty days to one hundred and fifty 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 June 30, 1997,
the holders of these convertible debentures had converted $2,002,800 of the
debentures into 5,174,020 shares of common stock of the Company.
3. Shareholders Equity
-------------------
The Company's capital shares are as follows:
Class A Convertible Preferred Stock, $10.00 par value, 300,000 shares
authorized at June 30, 1997 and December 31, 1996, and -0- shares issued and
outstanding at June 30, 1997 and December 31, 1996.
Common Stock, $.000009 par value, 90,000,000 shares authorized at June 30,
1997 and December 31, 1996, and 42,692,195 and 32,680,817 shares outstanding
at June 30, 1997 and December 31, 1996, respectively.
4. Earnings Per Share
------------------
For the fiscal quarters ending June 30, 1997 and June 30, 1996, the net loss
per share was computed using the weighted number of average shares
outstanding during the respective periods. Common Stock equivalents did not
enter into the computation because the impact would have been anti-dilutive.
5. Acquisition of Victor Electric Wire & Cable Corp.
------------------------------------------------
On May 7, 1997, the Company acquired all of the outstanding stock of Victel,
Inc., a Delaware corporation ("Victel"), whose sole asset was all of the
outstanding stock of Victor Electric Wire & Cable Corp. ("Victor") , a
manufacturer of electric power cords and interconnect cables, for $720,000
cash and the assumption of approximately $2,840,000 of existing bank debt.
The existing bank debt was refinanced at the closing by means of Victor
entering into a new working capital and term credit agreement with Congress
Financial Corporation.
9
6. 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.
7. Litigation and Restructuring Costs
----------------------------------
During the six months ending June 30, 1997, the validity of the Company's
ownership of a pultrusion machine used to manufacture hockey sticks which had
been acquired from Vega, U.S.A., Inc. ("Vega") was challenged by Powerstick,
Ltd. ("Powerstick"), in the United States Federal District Court in
Providence, Rhode Island. After a jury trial in this court, it was determined
that the owner of the pultrusion machine was Powerstick and Quadrax was
ordered to return the subject machine to Powerstick, which occurred on July
7, 1997. In light of this court decision, the Company determined that all
costs relating to the pultrusion machine including the unamortized portion of
Vega, U.S.A.'s principal executive's deferred compensation should be expensed
in the six months ending June 30, 1997. Accordingly, the total amount
expensed for Vega in this period approximates $645,000.
Additionally, the Company expensed in the six months ending June 30, 1997,
approximately $425,000 relating to terminating the Wimbledon license for
tennis racquets in North America.
The third component of restructuring costs incurred in the six months ending
June 30, 1997, relates to the disposition of Lion Golf of Oregon, Inc. as
described in Note 6 above. The costs relating to this divestiture were
approximately $200,000 in the six months ending June 30, 1997, and are
primarily comprised of the write-off of unamortized goodwill relating to the
acquisition of Lion Golf in 1995.
10
Quadrax Corporation
-------------------
Segment Information
-------------------
(Unaudited)
-----------
Six months ended June 30,
1997* 1996
----------------------------
Net sales
Quadrax Corporation......................... $ 1,468,369 $1,927,344
Victor Electric Wire & Cable Corporation.... 3,406,587 0
----------- ----------
$ 4,874,956 $1,927,344
=========== ==========
Gross profit
Quadrax Corporation......................... $ (617,186) $ 19,643
Victor Electric Wire & Cable Corporation.... 634,113 0
----------- ----------
$ 16,927 $ 19,643
=========== ==========
Total assets
Quadrax Corporation......................... $ 5,177,422 $9,511,921
Victor Electric Wire & Cable Corporation.... 7,509,226 0
----------- ----------
$12,686,648 $9,511,921
=========== ==========
Depreciation and amortization expense
Quadrax Corporation......................... $ 829,273 $ 370,039
Victor Electric Wire & Cable Corp...........
Depreciation and amortization............. 101,913 0
Restatement of prior period amortization.. (125,651) 0
----------- ----------
$ 805,535 $ 370,039
=========== ==========
______________________________________________________________________________
* Information for Victor Electric Wire & Cable Corporation is from
the date of acquisition, May 7, 1997.
11
ITEM II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain matters discussed in this section and
elsewhere in this Form 10-QSB are forward-looking statements. These forward-
looking statements involve risks and uncertainties including, but not limited
to, economic conditions, product demand and industry capacity, competition, and
other risks.
Competition. As the Company enters the sporting goods and recreational
equipment market, it faces competition from other materials used in the
manufacture of such goods and equipment, and from other suppliers of
thermoplastic composites. The Company's success in entering this market will
depend largely upon its ability to displace other materials currently in use.
If the Company is unsuccessful in creating a niche within the sporting goods and
recreational equipment market by convincing the market of the strategic benefits
of thermoplastic composites, the Company would be adversely affected. Many of
the companies whose product offerings compete with the Company's product
offerings have significantly greater financial, manufacturing and marketing
resources than the Company. The Company also faces competition from suppliers
of similar products who do not use thermoplastic materials with the acquisition
of Victor Electric Wire and Cable Corporation ("Victor"), the Company has also
entered the electric cordset industry, which also faces a strong competition
environment.
Development of Distribution Channels. Success in the sporting goods and
recreational equipment market will also hinge on the Company's ability to
develop distribution channels, including both retailers and distributors, and
there can be no assurance that the Company will be able to effectively develop
such channels.
Continued Investment. Maintaining the Company's technological and strategic
advantages over its competitors will require continued investment by the Company
in design and development, sales and marketing, and customer service and
support. There can be no assurance that the Company will have sufficient
resources to make such investments.
Technological Advances. The Company's ability to maintain a competitive edge
by making technological advances ahead of its competition will have a
significant impact on the success of the Company.
Outside Financing. The Company believes that it will need significant outside
financing over the next five years. There can be no assurance that it will be
able to obtain such financing.
RESULTS OF OPERATIONS FOR QUARTER ENDED JUNE 30, 1997 AS COMPARED TO QUARTER
- ----------------------------------------------------------------------------
ENDED JUNE 30, 1996
- -------------------
The Company's net loss from operations for the quarter ended June 30, 1997
("1997 second quarter") of $3,648,082 was approximately $1,494,000 greater than
its net loss from operations of $2,153,654 for the quarter ended June 30, 1996
("1996 second quarter").
12
The primary reason for this increase in the loss is that the Company expensed
$1,270,000 relating to litigation losses and divestiture of assets and trademark
licenses in the 1997 second quarter.
Total sales during the 1997 second quarter were $4,249,702 compared to
$840,327 in the 1996 second quarter, an increase of $3,409,375. This increase in
sales in the 1997 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.
Costs of goods sold for the second quarter of 1997 of $4,131,590 increased
$3,223,139 in the three months ended June 30, 1997 vis-a-vis the three months
ended June 30, 1996. The reason for the increase in costs during the 1997 second
quarter as compared to the 1996 second quarter is primarily due to the
acquisition of Victor.
Research and development expenses were $255,373 in the 1997 second quarter,
which was $156,329 higher than in the 1996 second quarter. The
reason for this increase in the 1997 second quarter is that the Company was
capitalizing product development costs in the 1996 second quarter relating to
the development of the golf shaft manufacturing facility in Vista, California.
Selling, general and administrative expenses increased by $276,720 to
$1,546,158 in the three months ended June 30, 1997 over the comparable period a
year ago. The primary reason for this increase is the additional selling,
general and administrative expenses, $283,000, incurred by the Company's new
Victor subsidiary since its acquisition in May 1997.
Litigation and restructuring costs in the 1997 second quarter were $1,270,000
while in the 1996 second quarter such expenses were not present. These 1997
restructuring reserves relate to the following: one, the cost of the pultrusion
machine and deferred compensation agreements relating to the 1996 Vega, U. S. A.
acquisition, $645,000; two, costs relating to the divestiture of Lion Golf in
May 1997, primarily goodwill, $200,000; and three, costs relating to the
finalization of the termination of the Wimbledon tennis racquet licensing
relationship, $425,000.
Interest expense for the second quarter of 1997 decreased by $62,136 to
$713,850. This decrease reflects the Company's 1997 subordinated debt issuances
where the imputed interest expense discount was less in the 1997 second quarter
than in the 1996 second quarter.
Interest income increased by $3,798 to $19,187 in the three months ended June
30, 1997, as compared to the same period one year ago because of the greater
amount of money the Company had on deposit in interest bearing paper in 1997.
Other income decreased $43,549 to zero in the 1997 second quarter. The primary
reason for this decrease is that the Company's Lion Golf subsidiary settled a
product trademark dispute with a competitor and received a lump-sum settlement
of $40,000 from that entity in the 1996 second quarter.
13
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX
- ---------------------------------------------------------------------------
MONTHS ENDED JUNE 30, 1996
- --------------------------
The Company's net loss from operations for the six months ended June 30, 1997
("1997 first half") of $5,179,068 was approximately $1,280,000 more than its net
loss from operations of $3,896,717 for the six months ended June 30, 1996 ("1996
first half"). The primary reason for this increase in the loss is that the
Company expensed $1,270,000 relating to litigation losses and divestiture of
assets and trademark licenses in the 1997 first half.
Total sales during the 1997 first half were $4,874,956 compared to $1,927,344
in the 1996 first half. This increase of approximately $2,947,612 from the 1996
first half resulted from the Company's Victor subsidiary shipping approximately
$3,406,000 of products in the 1997 first half. Offsetting this increase in sales
in the 1997 first half was a decline in sales of the Company's subsidiary, Lion
Golf of Oregon of approximately $518,000.
Cost of goods sold increased $2,950,328 in the 1997 first half to $4,858,029.
The reason for the increase in costs during the 1997 first half as compared to
the 1996 first half is primarily due to the acquisition of Victor.
Research and development expenses were $513,429 in the 1997 first half, an
increase of $119,818 as compared to $393,611 in the 1996 first half. The reason
for this increase is that the Company was capitalizing product development costs
in the 1996 first half relating to the development of the golf shaft
manufacturing facility in Vista, California. In the 1997 first half, this
facility was being depreciated by the Company and product development costs were
being expensed as incurred.
Selling, general and administrative expenses decreased by $37,603 in the 1997
first half to $2,720,220, an insignificant fluctuation.
14
Litigation and restructuring costs in the 1997 first half were $1,270,000
while in the 1996 first half such expenses were not present. These 1997
restructuring reserves relate to the following: one, the cost of the pultrusion
machine and deferred compensation agreements relating to the 1996 Vega, U. S. A.
acquisition, $645,000; two, costs relating to the divestiture of Lion Golf in
May 1997, primarily goodwill, $200,000; and three, costs relating to the
finalization of the termination of the Wimbledon tennis racquet licensing
relationship, $425,000.
Interest expense for the first half of 1997 was $735,780, while in 1996, it
was $839,832, a decrease of $104,052. This decrease reflects the Company's 1997
subordinated debt issuances where the imputed interest discount was less in the
1997 first half than in the 1996 first half.
Interest income in the 1997 first half was $43,434, an increase of $12,473
from the 1996 first half. The reason for this increase was the Company had a
greater amount of money invested in interest bearing paper in 1997.
Other income decreased $43,945 to zero in the 1997 first half. The primary
reason for this decrease is that the Company's Lion Golf subsidiary settled a
product trademark dispute with a competitor and received a lump-sum settlement
of $40,000 from that entity in the 1996 first half.
Financial Position, Liquidity and Capital Resources
- ---------------------------------------------------
At June 30, 1997, the Company had total assets of $12,686,648 and
stockholders' equity of $2,725,845. Current assets were $5,877,589 and current
liabilities were $5,947,818 resulting in a working capital deficit of
approximately $70,000 which is a decrease of approximately $755,000 from
December 31, 1996, when working capital was approximately $685,000. This
decrease in working capital resulted from the Company's continued losses from
operations in the 1997 first half.
Cash and cash equivalents decreased by approximately $726,000 from December
31, 1996. This decrease is due primarily to the Company's use of approximately
$3,281,000 to fund its operations, capital expenditures of approximately
$166,000 and the expenditure of approximately $816,000 related to the purchase
of Victor in May 1997. These expenditures were offset by the Company's raising
of additional capital of approximately $3,116,000 along with net new debt
incurred of $420,000.
Accounts receivable increased by approximately $2,334,000. The primary reason
for this increase is due to the Company's acquisition of Victor in May 1997.
Inventories increased by approximately $775,000. This increase reflects the
additional inventory the Company gained when it purchased Victor.
Other current assets decreased by approximately $40,000 between June 30, 1997
and December 31, 1996, an insignificant fluctuation.
Current portion of long-term debt increased by approximately $90,000. This
increase reflects the Company's Victor subsidiary's new working capital line
with Congress Financial Corporation, net of the assumption of the Bank of
Cascades line of credit by the new owners of Lion Golf.
Accounts payable and accrued expenses increased approximately $3,010,000 from
$1,991,265 at December 31, 1996. This increase relates to the acquisition of
Victor in May 1997.
Long term debt increased approximately $2,445,000 to $2,805,785 at June 30,
1997. This increase results from the additional term debt relating to the Victor
acquisition net of the long term debt assumed by the new owners of Lion Golf
when this entity was divested by the Company as of May 31, 1997.
Convertible debentures decreased to $1,207,200 at June 30, 1997 from
$1,400,000 at December 31, 1996. This reflects the debenture holder's
conversion of its debentures to common stock during the six months ended June
30, 1997, along with the issuance of an additional $3,210,000 of convertible
debentures in February 1997.
15
In the first six months of fiscal 1997, capital expenditures were
approximately $840,000. These capital expenditures relate primarily to monies
expended for the acquisition of Victor in May 1997.
The Company generated revenues of approximately $4,900,000 in the first six
months of fiscal 1997, 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 1997, after giving effect to
the repayment of debt, totaled approximately $3,537,000 during the period ended
June 30, 1997.
The Company believes that funds provided by operations, cash on hand
(approximately $475,000 at June 30, 1997), and monies, $1,000,000, raised from
the sale of convertible debentures in August 1997 will be sufficient to meet the
Company's near-term cash requirements. In addition, the Company has a binding
commitment from the purchasers of the convertible debentures sold in August 1997
to purchase up to an additional $2,500,000 of convertible debentures prior to
the end of the first quarter of fiscal 1998. (See Part II - Item 2(c).
The Company received a going concern qualification from its outside
independent auditors on its fiscal 1996 audited financial statements. While the
Company believes it has made and will continue to make substantial progress
towards achieving profitability, the results to date have not yet been
sufficient to negate the auditors' qualifications. During this transition,
management continues to redirect the Company's focus from the defense related
products to consumer oriented products. Management believes that the Company
will be able to continue to raise money from outside third parties in sufficient
amounts to support its operations until the time in which the Company's consumer
product programs generate sufficient revenues.
There is no assurance that the Company's efforts to achieve viability and
profitability or to raise money will be successful or that the forecasts will be
achieved. It is difficult for the Company to predict with accuracy the point at
which the Company will be viable and profitable or whether it can achieve
viability or profitability at all, due to the difficulty of predicting
accurately the amount of revenues that the Company will generate, the amount of
expenses that will be required by its operations, and the Company's ability to
raise additional capital.
16
QUADRAX CORPORATION
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Item 2(c) Sale of Unregistered Securities
Item 5 Other Information
Description of Business - Victor Electric Wire & Cable Corp.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement between Victor Electric Wire &
Cable Corp. and John Palermo
27 Financial Data Schedule
(b) Reports on Form 8-K
. On June 12, 1997, the Company filed a Form 8-K with respect to the
its disposition of Lion Golf of Oregon, Inc., an Oregon corporation,
pursuant to the terms of an Agreement for the sale of common stock
dated as of May 31, 1997.
. On July 18, 1997, the Company filed an amended Form 8-K with respect
to the acquisition of Victor Electric Wire & Cable Corp. with the
filing of the audited financials for Victor for the fiscal years
ended June 30, 1996 and June 30, 1995. Also filed was the Company's
unaudited pro-forma combing condensed consolidated balance sheets as
of December 31, 1996 and March 31, 1997 and the related unaudited
pro-forma combing condensed statements of operations for the year
and three months then ended.
17
QUADRAX CORPORATION
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUADRAX CORPORATION
-------------------
(Registrant)
August 14, 1997 /s/ James J. Palermo
- ----------------------------------- -----------------------------------
(Date) James J. Palermo, Chairman and
Chief Executive Officer
August 14, 1997 /s/ Brooks R. Herrick
- ----------------------------------- -----------------------------------
(Date) Brooks R. Herrick, Executive Vice
President, Chief Financial Officer
(Principal Accounting Officer)
18
PART II
Item 1. Legal Proceedings
The lawsuit of Power Stick Manufacturing, Inc. v. Quadrax Corporation, No.
CA 97-CV-020-T, United States District Court of Rhode Island, was determined
adversely by a jury in June, 1997. Under the judgment, the Company was ordered
to turn over possession of the hockey stick pultrusion machine purchased by
Quadrax in June, 1996, to Power Stick Manufacturing, Inc. This was done on July
7, 1997. In addition, the jury awarded Power Stick damages of $150,000. The
court has not entered this damage verdict, pending completion of the second
phase of the suit which is limited to Power Stick's claims of patent
infringement against the Company. The Company believes that it has meritorious
defenses to such claims. The plaintiff has not taken any further action with
respect to pursuing its claims. See Note 7 of Notes to the unaudited financial
statements included in this report concerning charges to the Company's assets
and earnings incurred in the second quarter as a result of this verdict.
Item 2(c) - Sales of Unregistered Securities
On August 4, 1997 the Company contracted to sell to one accredited
investor, in a private offering pursuant to Rule 506 of Regulation D under the
Securities Act of 1933, up to $3,500,000 principal amount of Convertible
Debentures, together with attached warrants to purchase up to 700,000 shares of
the Company's common stock at an exercise price of $0.59 per share at any time
prior to August 4, 2000.
The Company sold one debenture with a principal amount of $1,000,000 at its
principal face amount for cash. Such debenture is due August 4, 1999, and bears
interest at an annual rate of 8% (the "Initial Debenture"). The number of
shares issuable upon conversion of the Initial Debenture is determined by
dividing the principal amount of the Initial Debenture being converted by 80% of
the average closing bid price for the Company's Common Stock for the ten (10)
trading days immediately preceding the date of conversion of the Debenture (the
"Market Price"). The holder may, at its option, convert the Initial Debenture
into shares of Common Stock beginning on the earlier of 60th day following the
date of issuance of the Initial Debenture and the effective date of a
registration statement registering such Common Stock for resale by such holder.
The purchaser is obligated to purchase the remaining Debentures (the "Additional
Debentures") in a series of tranches (as directed by the Company by ten (10)
days prior written notice) commencing thirty (30) days after the effective date
of such registration statement. The Additional Debentures will bear
interest at a rate of 4% rather than 8%, and shall each be due two years from
their respective dates of issuance. The Additional Debentures issued in each
such tranche will be not less than $50,000 nor in excess of $200,000 principal
amount, and must be purchased by the purchaser subject only to certain external
market conditions. Management of the Company believes all of the Additional
Debentures will be purchased by the purchaser within twelve (12) months from the
date of the initial closing. The Company is obligated to require the purchaser
to purchase at least an additional $1,250,000 principal amount of Additional
Debentures by August 4, 1998, or else the Company must issue the purchaser an
additional warrant to purchase an additional 300,000 shares of the Company's
Common Stock on terms identical to the 700,000 share warrant issued at the
initial closing. The number of shares issuable upon conversion of the Additional
Debentures will be determined by dividing the principal amount of the Additional
Debentures being converted by the lesser of (i) 84% of the Market Price on the
date(s) of issuance of such Additional Debentures, or (ii) 100% of the Market
Price on the date of issuance of the Initial Debenture, or $0.472 per share. The
Additional Debentures will be convertible immediately upon issuance. In no event
may the Initial Debenture and the Additional Debentures, taken together, convert
into a number of shares of Common Stock which exceeds 20% of the number of
shares of Common Stock outstanding on the date of the first closing (43,171,731
shares). The purchaser was granted demand registration rights for the shares of
Common Stock issuable upon conversion of the Debentures and exercise of the
Warrants.
A selling commission of 7% of the principal amount sold was paid to Jesup &
Lamont Securities Corporation, together with a 1% non-accountable expense
allowance. Jesup & Lamont also received 100,000 shares of the Company's common
stock, with the same registration rights as given to the purchaser of the
debentures.
ITEM 5. OTHER INFORMATION - Acquisition of Victor Electric Wire & Cable Corp.
On May 7, 1997, the Company acquired sole ownership of Victor Electric Wire
& Cable Corp. ("Victor") by means of the purchase of all of the issued and
outstanding stock of Victor's holding-company parent from the former owner. The
purchase price for Victor consisted of $720,000 cash and the assumption of
approximately $2,800,000 in existing bank debt. Terms of the purchase were
determined by arm's-length negotiations between the Company and the seller,
which had no prior business or personal relationships.
The source of the funds for the cash portion of the purchase price was a
portion of the net proceeds from the Company's February 1997 private placement
of convertible debentures.
The existing bank debt was refinanced at closing by means of Victor
entering into a new revolving and term credit agreement with Congress Financial
Corp. (New England) ("Congress"). The loan agreement with Congress provides for
a three-year revolving credit facility of up to $3,550,000 drawable against a
percentage of accounts receivable and inventory, 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.
BUSINESS OF VICTOR
Victor, located in Coventry, Rhode Island, is a vertically-integrated
manufacturer of electric power cordsets and interconnect cables, primarily for
original equipment manufacturers of small appliances.
Manufacturing Process.
----------------------
Victor manufactures its cordsets by drawing raw copper rods into fine wire,
and then stranding such fine wire into heavier cables of varying thicknesses
depending upon customer specifications. The stranding cables are insulated with
a PVC plastic and rubber compound, and then molded to plugs to create the
finished product. Every component except blades (prongs) and insulating
compound, consisting of PVC plastic and rubber, is manufactured by Victor at its
plant.
Product Lines.
--------------
Victor produces a wide variety of cordsets and all cordsets are produced in
response to a specific customer order.
Customers.
----------
Victor sells its products to approximately 150 customers. Currently,
approximately 60% of sales are to nationally recognized manufacturers of small
consumer appliances. The remainder of sales are made to a combination of
electronic, medical and interconnect device manufacturers. During the year
ended December 31, 1996, two customers each accounted for more than 10% of total
sales, with sales to both customers totalling 35% of total sales.
Competition.
------------
Victor is ISO 9002 certified. Victor competes by means of aggressive
pricing, new product development, high quality and exceptional service.
Victor's principal domestic competitors are
Belden, Leviton and Komar. There are numerous overseas competitors as well,
principally in Mexico and China. Many of such competitors are larger and better
financed than Victor, and have significantly greater manufacturing and marketing
resources than does Victor. Victor believes that its long-established reputation
for quality and reliable delivery are key competitive assets.
Raw Materials
-------------
Victor's key raw material ingredients are copper and insulating compound
(consisting of PVC and rubber). All such materials are commodities available
from several sources. However, as commodities, the prices for both raw copper
and plastic resins are volatile and respond to both general economic conditions,
and supply and demand conditions for commodities specifically. Victor's
management uses a variety of approaches to manage copper prices which they
believe minimize Victor's commodity pricing risks, however, there can be no
assurance that the approaches used will be effective to adequately insulate
Victor against such pricing risks.
Sales and Marketing
-------------------
Victor sells primarily through four sales representative organizations.
However, numerous "house" accounts are managed by an inside sales group.
Victor's business is historically seasonal, with sales strongest in the
months of May through September as its customers place orders for goods to be
sold by them during the year-end holiday buying season. Victor's management
plans to target new market segments and develop new products to reduce
seasonality and increase total sales.
Intellectual Property
---------------------
Victor has been awarded several patents in its fifty-year history, one of
which remains in effect. Victor also holds several trademarks. While Victor's
trademarks are widely recognized in the industry, management does not consider
its intellectual property assets to be material to the business. Victor does not
require any licensed technology from any third party.
Employees.
----------
At June 30, 1997, Victor employed 275 full-time employees, of which 225 are
represented by the International Brotherhood of Electrical Workers. Victor and
the union executed a new three-year collective bargaining agreement in late
April, 1997. Management considers its labor relations to be excellent.
Legal Matters.
--------------
Victor is subject to product liability litigation on a recurring basis from
persons suffering shocks from electrical appliances and other product failures.
Victor maintains insurance coverage against such liabilities in amounts which,
in the opinion of management, are adequate against the risks assumed.
Victor is currently a co-defendant in Mickle v. Cooper Industries, Inc. et
al. (USDC, PA No. 97-3572) a lawsuit brought by an employee of a company who was
allegedly injured while using a soldering iron in the course of her employment
when it shorted and she received an electical shock. The soldering iron which
allegedly caused the injury was manufactured by Weller Wire, and the electric
power cordset attached to the soldering iron was manufactured by Victor.
Claimed damages have not been quantified.
Facility.
--------
Victor operates out of a four-story, single location, leased facility in
Coventry, Rhode Island, containing approximately 200,000 square feet of
manufacturing and office space. Victor has been located in such facility for
approximately 50 years. The Company believes that this facility will be adequate
to meet Victor's office and production needs for the foreseeable future. The
facility is leased from a third-party landlord on a "triple net" basis at an
annual base rental of approximately $240,000. Such lease expires December 31,
2001.
MANAGEMENT
John Palermo, President and Chief Executive Officer. From 1989 until his
employment by Victor, John Palermo served as Chief Executive Officer (1989-1994)
and President (1994-1997) of Kenney Manufacturing Company, a manufacturer of
custom window coverings. From 1976 until 1989, John Palermo held various senior
accounting and finance positions with Riley Consolidated, Inc., a subsidiary of
Ashland Oil, Inc., and from 1965 until 1976, he held various finance positions
with Westinghouse Electric Corporation. John Palermo received a B.S. in Finance
from Northeastern University. John Palermo is the brother of James Palermo, the
Chairman and Chief Executive Officer of the Company. John Palermo's selection as
President and Chief Executive Officer of Victor, and the terms of his employment
agreement with Victor, was unanimously approved by the independent directors of
the Company.
James Newton, Chief Financial Officer. Mr. Newton has been Victor's Chief
Financial Officer since 1991. From 1989 through 1990, Mr. Newton was Controller
of Astra Corporation, a manufacturer of electrical transformers. From 1977
until 1989, Mr.
Newton was Controller of Collyer Insulated Wire, a manufacturer of wire and
cable products. From 1969 through 1977, Mr. Newton was Assistant Controller of
Metalized Ceramics Corporation, a small electronics manufacturer. Mr. Newton
has a B.S. in Business Administration from Bryant College.
Paul Jakoboski, Vice President, Sales and Marketing. Mr. Jakoboski has been
Victor's Vice President, Sales and Marketing since 1997. Mr. Jakoboski joined
Victor in 1996 as National Sales Manager. Form 1994 to 1996, he was Account
Manager for IMS, Inc. a distributor of wire and cable. From 1992 to 1994, he
served as General Manager in SL&R, a company specializing in the sale of
contract goods to designers and architects. Mr. Jakoboski previously worked in
marketing and operations management for Excelsior Wire Corporation and Storm
Products Company at various times from 1979 through 1990.
Management Compensation
-----------------------
John Palermo, Victor's Chief Executive Officer, is employed under a three-
year employment agreement which provides for a base annual salary of $215,000
per year. Such annual salary is subject to annual review by the Board of
Directors with respect to increases. In addition, John Palermo may receive a
bonus based upon criteria to be developed by the Board of Directors of the
Company following approval of Victor's strategic plan. John Palermo also
received options to purchase 150,000 shares of the Company's common stock,
vesting in three stages ending December 31, 1998, and receives such fringe
benefits as are made available to other senior executives of Victor. Victor also
has agreed to pay the premium on an existing life insurance policy for John
Palermo. John Palermo's employment agreement contains a non-competition
provision which extends through the end of Mr. Palermo's employment term.
RISK FACTORS ASSOCIATED WITH THE BUSINESS OF VICTOR
Raw Materials Availability and Commodity Pricing.
-------------------------------------------------
The copper and plastic and rubber used to create the insulating compound
used by Victor as raw materials are subject to substantial price fluctations.
The copper industry and the plastics industry are both cyclical in nature and
prices for Victor's raw materials are influenced by numerous factors beyond the
control of Victor, including general economic conditions and competition. While
Victor expects that there will continue to be an abundance of copper and
insulating compound for use in the production of its electric power cordsets,
there can be no assurance that adequate quantities will be available or that
prices Victor may be required to pay for raw materials will allow Victor to
operate at a profit.
No Long-term Agreements with Suppliers or Customers and Dependence on
---------------------------------------------------------------------
Significant Suppliers and Customers.
------------------------------------
Victor is dependent on third party relationships with several suppliers of
copper and plastic resins, the raw materials necessary to the business of
Victor. While Victor has long-term supply arrangements for a portion of its
copper requirements, Victor does not presently have any long term agreements
with its suppliers of plastic and does not anticipate the execution of any long-
term agreements with these suppliers in the future. Victor believes that it has
alternative sources of supply available to it in the event that its requirements
change or its current suppliers are unable or unwilling to fulfill Victor's
needs. Nevertheless, there can be no assurance that alternative suppliers will
be available upon terms comparable to Victor's existing arrangements.
Victor also does not presently have any long-term agreements with its
customers and does not anticipate the execution of any long-term agreements in
the future. During the year ended December 31, 1996, Victor's two largest
customers each accounted for more than 10% of total sales, with sales to both
customers totalling 35% of total sales. Victor's existing operations and plans
for future growth anticipate the continued existence of relationships with its
current customers.
Seasonality; Fluctuations in Quarterly Results.
-----------------------------------------------
Victor's business is seasonal as its customers place the majority of their
orders with Victor in May through September so that the customers receive the
electric power cordsets in time to utilize them in the manufacture of goods to
be sold by such customers during the year-end holiday buying season.
Accordingly, net revenues for Victor are typically strongest in the second and
third quarters. As Victor's profitability significantly depends on sales made
in the second and third quarters, Victor's operations could be materially
adversely affected by an economic downturn in any second or third quarter. Net
revenues in other quarters are generally lower and vary significantly as a
result of customers requirements for new types of electric power cordsets and
other factors. There can be no assurance that Victor will achieve consistent
profitability on a quarterly or an annual basis.
Competition.
------------
The industry in which Victor competes is highly competitive. Victor is ISO
9002 certified, and competes with other companies that are also ISO 9002
certified, many of which are larger and better financed than Victor, and have
significantly greater manufacturing and marketing resources than does Victor.
Victor's domestic competitors include Belden, Leviton and Komar. There are also
numerous overseas competitors. While Victor believes that its long-established
reputation for quality and reliable delivery are attractive features to
potential customers, there can be no assurance that Victor can capture an
adequate competitive customer base to sustain profitibility, or that other
companies will not provide superior products in both price and quality.
Environmental Regulation.
-------------------------
Federal, state and local environmental laws apply to the activities of
Victor and to the products its produces. Violations of statutes, regulations or
environmental permit requirements, even
if unintentional, can result in significant fines, costs, revocation of required
licences or permits or requirements for remedial work. Victor's present and
planned activities are, or may become, subject to regulation under various
federal, state and local environmental laws and regulations, including laws and
regulations that may be adopted in the future. Such regulations may materially
adversely affect Victor's existing or planned operations. Any failure of Victor
to comply with the requirements of these environmental laws and regulations,
even if unintentional, could give rise to liabilities, penalties or fines which
could have a material adverse effect on the business or financial condition of
Victor.
Product Liability and Other Claims.
-----------------------------------
Victor may be subject to substantial products liability costs if uninsured
claims arise of out of problems associated with the products of Victor. Victor
is subject to product liability litigation on a recurring basis from persons
suffering shocks from electrical appliances. Victor maintains insurance
coverage against such liabilities in amounts which, in the opinion of
management, are adequate against the risks assumed. There can be no assurance
that Victor's insurance arrangements can be maintained over time, or if
maintained, will be effective to insulate the assets of Victor from such claims.
Unionized Employees
-------------------
At June 30, 1997, Victor employed 225 full time employees who are
represented by the International Brotherhood of Electrical Workers. Victor and
the union executed a new three-year collective bargaining agreement in late
April 1997. There can be no assurance that Victor will be able to renew such
collective bargaining agreement after its expiration, or that such renewal will
be on terms as favorable as those currently in existence. In addition, Victor's
operations could be materially adversely affected in the event a strike is
called by the union for an extended period of time.