UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB/A - Number 2
[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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(401) 683-6600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x No__
--
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class Outstanding at August 1, 1997
----------------------- -----------------------------
Common Stock, par value 43,171,731 shares
$.000009 per share
1
QUADRAX CORPORATION
INDEX TO FORM 10-QSB/A
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 6,981,350 4,618,313
Office equipment 919,722 910,895
Leasehold improvements 1,125,777 1,089,119
------------ ------------
9,026,849 6,618,327
Less accumulated depreciation and
amortization (3,844,930) (3,467,661)
------------ ------------
NET PROPERTY AND EQUIPMENT 5,181,919 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 $11,713,625 $ 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 72,726,831 68,701,531
Retained earnings (deficit) (69,017,477) (63,757,759)
------------- ------------
3,709,736 4,944,070
Less:
Treasury stock, at cost (1,125,969) (1,125,969)
Unearned compensation and deferred
expenses (181,405) (504,193)
Notes receivable for options (649,540) (623,092)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,752,822 2,690,816
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 11,713,625 $ 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 4,163,840 908,451 4,890,279 1,907,701
-------------- -------------- -------------- --------------
Gross Profit 85,862 (68,124) (15,323) 19,643
OPERATING EXPENSES:
Research and development 288,473 99,044 546,529 393,611
Selling, general and administrative 1,561,458 1,269,438 2,735,520 2,757,823
Litigation and restructuring costs 1,270,000 0 1,270,000 0
-------------- -------------- -------------- --------------
Income from operations (3,034,069) (1,436,606) (4,567,372) (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 ($3,728,732) ($2,153,654) ($5,259,718) ($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 ($5,259,718) ($3,896,717)
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation & amortization of fixed assets 444,821 302,158
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 (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
Notes to Condensed Financial Statements (continued)
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. Pro-Forma Financial Statements
------------------------------
As discussed in Note 5 to these unaudited condensed consolidated financial
statements, the Company on May 7, 1997, acquired Victor Electric Wire and
Cable Co., Inc., "Victor". Subsequently, as of May 31, 1997, the Company
completed its disposition of Lion Golf of Oregon, Inc., "Lion Golf", which
transaction is discussed more fully in Note 6 to these unaudited condensed
consolidated financial statements.
The following unaudited pro forma financial information assumes the
acquisition and disposition of these entities occurred at the beginning of
each of the fiscal periods presented. This information is not necessarily
indicative either of results of operations that would have occurred had the
purchase and sale been made during the periods presented, or of future
results.
Pro Forma (unaudited)
---------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $4,790,530 $4,957,955 $8,319,229 $8,710,753
Income (Loss) From Operations ($3,229,428) ($1,000,838) ($4,799,547) ($2,699,337)
Net Loss ($3,957,866) ($2,185,396) ($5,626,380) ($3,934,634)
Net Loss per Common Share ($0.11) ($0.10) ($0.16) ($0.19)
8. 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.
The Company contracted for the fabrication of a new pultrusion machine which
it expects to be delivered at the end of the third quarter of 1997. At this
time, the Company anticipates financing the machine acquisition. Quadrax
plans to continue to fabricate pultrusion hockey sticks. We anticipate our
backlog will remain intact until we have the new machine in place and
operating.
9. Accounting Changes
------------------
Previously the Company accounted for the acquisition of Victor by valuing the
acquired assets at their independently appraised fair market value, which was
$1,018,020 in excess of their actual purchase price. This fair market
valuation would have had the effect of increasing depreciation charges over
the remaining book lives of such equipment (eight years), which would have
had the effect of lowering reported income for that same amount during the
eight year period. The fair market valuation also had the effect of
increasing the Company's reported additional paid-in capital by $1,018,020.
The Company is revising its accounting treatment of this transaction in order
to reflect the acquisition of Victor's assets at their actual purchase price.
This revision has the effect of increasing previously reported losses for the
quarter ended June 30, 1997 by $80,650. Net worth and fixed assets previously
reported at June 30, 1997 were reduced by approximately $1 million as a
result of the revision.
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.... 601,863 0
----------- ----------
$ (15,323) $ 19,643
=========== ==========
Total assets
Quadrax Corporation......................... $ 5,177,422 $9,511,921
Victor Electric Wire & Cable Corporation.... 6,536,203 0
----------- ----------
$11,713,625 $9,511,921
=========== ==========
Depreciation and amortization expense
Quadrax Corporation......................... $ 829,273 $ 370,039
Victor Electric Wire & Cable Corp...........
-Depreciation and amortization............. 56,912 0
----------- ----------
$ 886,185 $ 370,039
=========== ==========
- --------------------------------------------------------------------------------
* Information for Victor Electric Wire & Cable Corporation is from
the date of acquisition, May 7, 1997 to June 30, 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 $3,728,732 was approximately $1,575,000 greater than
its net loss from operations of $2,153,654 for the quarter ended June 30, 1996
("1996 second quarter"). The
12
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 $4,163,840 increased
$3,255,389 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 $288,473 in the 1997 second quarter,
which was $189,429 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 $292,020 to
$1,561,458 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 $5,259,718 was approximately $1,363,000 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 along with approximately $220,000
of increased sales for the quarter of Quadrax's Sports Products. Offsetting
these increases in sales in the 1997 first half was a decline in sales of the
Company's subsidiary, Lion Golf of Oregon of approximately $679,000. During the
second quarter of 1997, there was a shift in sporting goods sales from Lion Golf
products to Quadrax sporting goods products. The negative impact on the second
quarter sales as compared to the same quarter in 1996 resulted from the
disposition of Lion Golf which was offset in part by increased sales during the
quarter of hockey sticks, golf shafts and outside tape sales.
Cost of goods sold increased $2,982,578 in the 1997 first half to $4,890,279.
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 $546,529 in the 1997 first half, an
increase of $152,918 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 $22,303 in the 1997
first half to $2,735,520, an insignificant fluctuation.
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 half than in the 1996 first half.
Interest income in the 1997 first half was $42,434, 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 the entity in the 1996 first half.
14
Financial Position, Liquidity and Capital Resources
- ---------------------------------------------------
At June 30, 1997, the Company had total assets of $11,713,625 and
stockholders' equity of $1,752,822. 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.
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
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
* Previously Filed.
. 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)
December 22, 1997 /s/ James J. Palermo
- ----------------------------------- -----------------------------------
(Date) James J. Palermo, Chairman and
Chief Executive Officer
December 22, 1997 /s/ Brooks R. Herrick
- ----------------------------------- -----------------------------------
(Date) Brooks R. Herrick, Executive Vice
President, Chief Financial Officer
(Principal Accounting Officer)
18