Here's the filing. I think the key sentence here is the last sentence of the third paragraph. It would seem that no matter how this works out, the shareholders will be left holding the bag.
May 20, 1998
QUADRAX CORP (QDRX)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain matters discussed in this section and elsewhere in this Form 10-QSB are forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competition, the outcome of Bankruptcy Court proceedings and other risks.
Bankruptcy Filing
Since the Petition Date, the Company has been operating as a Debtor-in- Possession under Chapter 11 of the Bankruptcy Code. Accordingly, several claims which were the subject of pre-petition litigation were stayed and those claims together with claims arising from several pre-petition defaults and events of default caused by the filing of the petition should be resolved in the bankruptcy proceedings. The bankruptcy case itself will be resolved by either a dismissal of the petition, a confirmation of a plan of reorganization proposed by the Company, its creditors or a third party, or a conversion of the case to a liquidation under Chapter 7 of the Code.
A bankruptcy petition was filed in order to obtain an opportunity to reorganize the Company. The Company expects to reorganize its affairs under the protection of Chapter 11 through a plan of reorganization. Although management expects to file a plan of reorganization in 1998, there can be no assurance at this time that a plan of reorganization will be proposed by the Company, or approved by the creditors, or confirmed by the Bankruptcy Court, or that such plan will be consummated. After the expiration of the Company's exclusivity period for such filings, creditors of the Company have the right to propose alternative plans of reorganization. Any plan of reorganization, among other things, is likely to result in material dilution or elimination of the equity of existing shareholders.
During the Chapter 11 filing, the Company is prohibited from paying, and creditors are prohibited from attempting to collect, claims or debts arising pre-petition without approval of the Bankruptcy Court. The consummation of a plan of reorganization is the principal objective of the Company's Chapter 11 case. A plan of reorganization sets forth the means for satisfying claims and interests in the Company, including liabilities subject to compromise.
The consummation of a plan of reorganization for the Company in accordance with the provisions of the bankruptcy code will require the requisite vote of impaired creditors and interest holders in accordance with the Provisions of the Bankruptcy Code and confirmation of the plan by the Bankruptcy Court. (Also, see Note 1 to the Consolidated Financial Statements - Chapter 11 Bankruptcy Filing)
Competition
As the Company enters the sporting goods and recreational equipment market, it faces competition from other materials used in the manufacture of such goods and equipment, and from other suppliers of thermoplastic composites. Quadrax's success in entering this market will largely depend upon its ability to displace other materials currently in use. If the Company is unsuccessful in creating a niche within the sporting goods and recreational equipment market by convincing the market of the strategic benefits of thermoplastic composites, the Company would be adversely affected. Many of the companies whose product offerings compete with Quadrax's product offerings have significantly greater financial, manufacturing, and marketing resources than Quadrax. The Company also faces competition from suppliers of similar products who do not use thermoplastic material.
Development of Distribution Channels
Success in the sporting goods and recreational equipment market will also hinge on the Company's ability to develop distribution channels, including both retailers and distributors, and there can be no assurance that the Company will be able to effectively develop such channels.
Continued Investment
Maintaining the Company's technological and strategic advantages over its competitors will require continued investment by the Company in design and development, sales and marketing, and customer service and support. There can be no assurance that the Company will have sufficient resources to make such investments.
Technological Advances
The Company's ability to maintain a competitive edge by making technological advances ahead of its competition will have a significant impact on the success of the Company.
Outside Financing
The Company believes that it will need significant outside financing over the next five years. There can be no assurance that it will be able to obtain such financing.
Results of Operations for Quarter Ended March 31, 1998 as compared to Quarter Ended March 31, 1997
The first quarter of 1998 includes the results of Victor Corporation, which was acquired by the Company on May 7, 1997, and the first quarter of 1997 includes the results of the Lion Golf subsidiary, which was disposed of by the Company on May 31, 1997.
The Company's net loss from operations for the quarter ended March 31, 1998 ("1998 quarter") of approximately $2,119,000 was approximately $589,000 more than its net loss from operations of approximately $1,531,000 for the quarter ended March 31, 1997 ("1997 quarter"). The primary reasons for the increase in the net loss in the 1998 quarter compared to the 1997 quarter were as follows: (1) as to increases in the net loss, Quadrax Corporation's reorganization costs amounted to approximately $964,000 in 1998, Victor Corporation's net loss of $374,000 is included in 1998 and the interest expense for 1998 is $191,000 higher than in 1997; (2) as to decreases in the net loss, Quadrax's composite materials divisions reported reductions in product development costs in 1998 compared to 1997 amounting to approximately $187,000, reductions in selling, general and administrative costs in 1998 compared to 1997 were reported for the Quadrax corporate division of $331,000 and for the Quadrax composite material operating units of $329,000; and (3) a further reduction of the losses in 1998 resulted from the disposition of Lion Golf in May, 1997, which reported a net loss of approximately $90,000 for the 1997 quarter. This net loss was not repeated in the 1998 quarter, resulting in an improvement in the 1998 quarter loss over the 1997 quarter.
Total revenue recognized during the 1998 quarter increased over the 1997 quarter by approximately $3,611,000 to $4,236,000. Revenues increased in the 1998 quarter due to the inclusion of Victor Corporation's revenues amounting to approximately $3,877,000 and from increases in revenues reported in the 1998 quarter amounting to approximately $158,000 from the Quadrax composite materials golf shaft products, bicycle component products and hockey sticks products. Offsetting these increases was a decrease in revenues as a result of disposing of Lion Golf, which reported approximately $423,000 of revenues in the 1997 quarter that were not repeated in the 1998 quarter. The composite materials divisions operations were suspended in February, 1998 due to a lack of adequate funding.
Costs of goods sold for the 1998 quarter amounted to $4,226,000, an increase of approximately $3,479,000 over the 1997 quarter. The principal reasons for the this increase are the added sales of Victor Corporation in 1998 accounting for approximately $3,686,000 of the cost increase, combined with an increase in the Quadrax Composite divisions' inventory reserve during the 1998 quarter of approximately $100,000. Offsetting these increases is the reduction in cost of goods sold in the 1998 quarter of approximately $329,000 due to the disposition of Lion Golf.
Research and development expenses were $71,000 in the 1998 quarter, a decrease of approximately $187,000, as compared to $258,000 reported in the 1997 quarter. The decrease in the 1998 quarter is due to the lack of available funding and the suspension of operations of Quadrax's composite material divisions.
During the 1998 quarter, the Company's selling, general and administrative expenses were $872,000, a decrease of approximately $302,000 from $1,174,000 in the 1997 quarter. The primary reasons for this decline are decreased expenditures for selling, general and administrative expenses for Quadrax's composite divisions of approximately $331,000, and for its corporate division of approximately $231,000 ($293,000 of corporate division expenses are categorized as reorganization costs in the 1998 quarter) primarily related to the suspension of operations of the composite divisions and the disposition of Lion Golf, which reported $187,000 of selling, general and administrative costs in 1997 that were not repeated in 1998. The inclusion of Victor Corporation's selling, general and administrative expenses in the 1998 quarter increased expenses for 1998 versus 1997 by approximately $465,000.
Additional reserves for bad debts for the Quadrax composites divisions in the amount of $40,000 were provided during the 1998 quarter.
Interest expense for the 1998 quarter increased by approximately $191,000 to $213,000. This increase is primarily the result of additional interest in the 1998 period related to penalty interest of $75,000 on the convertible debentures, interest on the unconverted debentures at March 31, 1998 and the inclusion of interest on the debt of Victor Corporation. Interest on the Quadrax Debtor-in-Possession debt and debentures is not being accrued after the petition date of February 27, 1998.
Other income in the 1998 quarter is principally due to the gain on the sale of a piece of Quadrax composite materials division machinery and equipment of approximately $23,000.
The interest income decreased by approximately $24,000 in the 1998 quarter, as compared to the same period one year ago. Cash was not available for investing in the 1998 period.
Reorganization items reflected in the 1998 quarter of approximately $964,000 is made up of $671,000 of accrued severance pay related to the suspension of operations, and $293,000 of 1998 quarter corporate administrative expenses, including professional fees incurred for the restructuring, reorganization or disposal of assets related to a plan of reorganization.
Financial Position, Liquidity and Capital Resources
At March 31, 1998, the Company had total assets of $10,658,000 and a stockholders' deficit of ($4,184,000). Current assets were $5,377,000, current liabilities were $4,740,000 and liabilities subject to compromise were $7,468,000. The current liabilities reflect the outstanding liabilities of the Victor subsidiary and Quadrax Debtor-in-Possession post-partition liabilities. The liabilities subject to compromise represent the pre-petition liabilities of Quadrax Debtor-in-Possession that are eligible for compromise because they are either unsecured, disputed, contingent or undersecured and subject to compromise in the Chapter 11 reorganization.
Cash and cash equivalents decreased by approximately $4,000 from December 31, 1997 to $49,000 at March 31, 1998. This decrease is due primarily to the use of approximately $826,000 to fund its operations, offset by the Company's net new bank debt raised during the quarter of approximately $822,000.
Accounts receivable increased by approximately $445,000 to $2,792,000. Victor's receivables increased during the period by approximately $676,000, principally due to the operations gearing up for higher cyclical sales experienced during the mid and later quarters of the calendar year. Quadrax's composite materials divisions experienced a decline in receivables during the period of approximately $230,000. Quadrax's receivables declined due to the suspension of its composite materials divisions operations in February, 1998 and receivables offset against notes payable accounting for approximately $190,000, together with an increase in the allowance for bad debts of $40,000 during the quarter.
Inventories decreased by approximately $37,000. This decrease is due primarily to the suspension of Quadrax's composite material divisions operations in February, 1998 amounting to approximately $277,000, which was offset by an increase in Victor's inventories of approximately $240,000 due to build-up of product required for Victor's anticipated higher cyclical shipments during the mid and later quarters of the calendar year.
Other current assets increased by approximately $64,000 from December 31, 1997 to March 31, 1998. Principally, the increase relates to monies put in escrow related to the Chapter 11 filing.
The current portion of long-term debt increased by approximately $549,000 to approximately $1,659,000 at March 31, 1998. Primarily this increase results from the increase in Victor's revolving debt during the quarter of approximately $805,000, offset by the reduction in the current portion related to the debt reflected as liabilities subject to compromise at March 31, 1998, which were categorized as current portion of long-term debt at December 31, 1997. The increase in Victor's revolver relates to the receivable and inventory build up as well as funding of the 1998 quarter's loss from operations.
Accounts payable and accrued expenses decreased by approximately $2,419,000 from $5,500,000 at December 31, 1997 to $3,081,000 at March 31, 1998. The major reason for the decrease in payables during the quarter was the re-categorization of approximately $2,900,000 of liabilities that were reflected as accounts payables at December, 1997 to liabilities subject to compromise at March 31, 1998. During this same quarter, Victor's payables increased by approximately $467,000 due to its ramp up of production.
Liabilities subject to compromise amounted to approximately $7,468,000 at March 31, 1998. The liabilities subject to compromise represent the pre-petition liabilities of Quadrax Debtor-in-Possession that are eligible for compromise because they are either unsecured, disputed, contingent or undersecured and subject to compromise in the Chapter 11 reorganization. (See note 1 - Chapter 11 Bankruptcy Filing)
Long term debt decreased approximately $78,000 to approximately $2,634,000 at March 31, 1998. The major reason for the decrease at March 31, 1998 was the reclassification of the long-term portion of the capital leases of approximately $68,000 at March 31, 1998 to a liability subject to compromise.
Convertible debentures decreased $3,188,000 during the three months ended March 31, 1998. This decrease is the result of the liability being reclassified at March 31, 1998 and shown as a liability subject to compromise.
In the first three months of fiscal 1998, capital expenditures were a negligible amount.
The Company generated revenues of approximately $4,236,000 in the first three months of fiscal 1998, and, as a result, operations were not a total source of funds or liquidity for the Company. The Company continues to depend on outside financing for the cash required to fund its operations. Net funds provided by financing activities in the first quarter of fiscal 1998, after giving effect to the repayment of debt, totaled approximately $822,000, as compared to $2,807,000 during the period ended March 31, 1997.
The Company received a going concern qualification from its outside independent auditors on its fiscal 1997 audited financial statements.
There is no assurance that the Company's efforts to propose a plan of reorganization that will be confirmed will be successful. Further there is no assurance that a confirmed plan will enable the Company to achieve viability and profitability or to raise money successfully. There are also no assurances that the Company can generate the cash flow required to pay the expenses of Quadrax Corporation, Debtor-in-Possession, as due during the Debtor-in-Possession period. It is difficult for the Company to predict with accuracy the point at which the Company will be viable and profitable or whether it can achieve viability or profitability at all, due to the difficulty of predicting accurately the amount of revenues that the Company will generate, the amount of expenses that will be required by its operations, and the Company's ability to raise additional capital. (See Note 1 to the Consolidated Financial Statements regarding Chapter 11 Bankruptcy Filing)
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