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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to.
COMMISSION FILE NUMBER 0-18583
POLYMER SOLUTIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada, U.S.A. 88-0360526
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1569 Dempsey Road
Vancouver, British Columbia
Canada V7K 1S8
(Address of principal executive offices)
(604) 683-3473
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2000.
TITLE OF CLASS NO. OF SHARES
Common Shares, par value $0.001 9,535,372
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POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three Months and Six Months Ended September 30, 2000
TABLE OF CONTENTS
Item Page
Number Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets
at September 30, 2000 and March 31, 2000............................. 3
Consolidated Statements of Operations
for the three and six months ended September 30, 2000 and 1999....... 4
Consolidated Statements of Cash Flows
for the six months ended September 30, 2000 and 1999................. 5
Notes to Consolidated Financial Statements................................ 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 9
PART II - OTHER INFORMATION
1. Legal Proceedings............................................................. 11
2. Changes in Securities and Use of Proceeds..................................... 11
3. Defaults Upon Senior Securities............................................... 11
4. Submission of matters to a vote of securities holders......................... 11
5. Other Information............................................................. 12
6. Exhibits Index and Reports on Form 8-K........................................ 13
SIGNATURES 13
The accompanying interim consolidated financial statements and notes are
unaudited: However, in the opinion of management, they reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the results for the interim periods presented. Results of operations for the
periods ended September 30, 2000 are not necessarily indicative of results
expected for an entire year.
Certain statements in this Quarterly Report on Form 10-Q are not based on
historical facts, but are instead based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. Actual events and
results may materially differ from anticipated results described in such
statements. The Company's ability to achieve such results is subject to certain
risks and uncertainties, including but not limited to, adverse business
conditions in the industries served by the Company and the general economy,
competition, new laws and regulations impacting the products that the Company
provides, and other risk factors affecting the Company's business which are
beyond the Company's control.
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POLYMER SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS)
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(Unaudited)
ASSETS
Current assets:
Cash $ 80,179 $ 65,097
Accounts receivable, net 2,203,076 2,374,065
Inventories, net 1,603,797 1,523,947
Prepaid expenses and other assets 160,256 120,360
Deferred income taxes, net 271,198 500,000
----------- -----------
4,318,506 4,583,469
Fixed assets, net 799,233 825,652
Goodwill, net 1,201,178 1,239,972
----------- -----------
$ 6,318,917 $ 6,649,093
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,220,876 $ 1,303,088
Payroll related and commissions payable 293,428 409,791
Current portion of capital lease obligations 181,163 159,498
----------- -----------
1,695,467 1,872,377
Long-term liabilities:
Bank loan facilities 958,064 1,752,667
Capital lease obligations 323,447 371,932
Severance plan liability 346,056 359,735
----------- -----------
3,323,034 4,356,711
----------- -----------
Minority interest 182,942 190,415
----------- -----------
Shareholders' equity:
Preferred stock, $0.001 par value;
Authorized - 4,000,000 shares; issued and outstanding - nil
Common stock, $0.001 par value;
Authorized - 20,000,000 shares; issued and outstanding,
September 30, 2000 - 9,535,372 and March 31, 2000 - 8,855,939 9,535 8,855
Additional paid-in capital 11,919,636 11,501,420
Accumulated deficit (9,116,230) (9,408,308)
----------- -----------
2,812,941 2,101,967
----------- -----------
$ 6,318,917 $ 6,649,093
=========== ===========
The accompanying notes are an integral part of these financial statements
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. DOLLARS)
THREE MONTHS ENDED SEPT. 30, SIX MONTHS ENDED SEPT. 30,
----------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Sales revenue $3,989,313 $2,906,894 $7,904,125 $5,702,517
Cost of goods sold 2,792,626 1,993,537 5,459,559 3,915,990
---------- ---------- ---------- ----------
1,196,687 913,357 2,444,566 1,786,527
---------- ---------- ---------- ----------
Corporate and administrative expenses:
Marketing and sales 309,243 266,498 648,992 569,615
General and administrative 436,713 285,499 845,615 516,556
Research and development 138,002 149,574 287,299 286,449
---------- ---------- ---------- ----------
883,958 701,571 1,781,906 1,372,620
---------- ---------- ---------- ----------
Income from operations 312,729 211,786 662,660 413,907
Other income 5,361 945 9,102 945
Interest (expense) (64,590) (57,900) (142,882) (119,351)
---------- ---------- ---------- ----------
Income before income tax expense 253,500 154,831 528,880 295,501
Income tax expense 118,802 -- 236,802 --
---------- ---------- ---------- ----------
Net income $ 134,698 $ 154,831 $ 292,078 $ 295,501
========== ========== ========== ==========
Basic and diluted earnings per share $ .01 $ .02 $ .03 $ .04
========== ========== ========== ==========
Weighted average basic and diluted number
of shares outstanding 9,259,356 8,160,857 8,983,621 7,206,484
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. DOLLARS)
SIX MONTHS ENDED
SEPT. 30,
-----------------------
2000 1999
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 292,078 $ 295,501
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 168,131 120,761
Gain on disposals of fixed assets (7,458) (945)
Benefit from deferred income tax 228,802 --
Changes in operating assets and liabilities:
Accounts receivable 170,989 (277,326)
Inventories (79,850) (238,504)
Prepaid expenses and other assets (39,896) (93,539)
Accounts payable (82,212) 60,994
Payroll related and commissions payable (116,363) 6,825
Severance plan liability (13,679) --
--------- ----------
Net cash provided by (used in) operating activities 520,542 (126,233)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (47,028) (49,122)
Proceeds from disposals of fixed assets 8,901 15,145
Other investing activities -- (158,252)
--------- ----------
Net cash used in investing activities (38,127) (192,229)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 411,423 1,122,027
(Payments) borrowings on operating line of credit, net (794,603) 323,224
Payments of capital lease obligations (84,153) (66,842)
Other financing activities -- (35,164)
--------- ----------
Net cash (used in) provided by financing activities (467,333) 1,343,245
--------- ----------
Increase in cash 15,082 1,024,783
Cash, beginning of year 65,097 39,303
--------- ----------
Cash, end of period $ 80,179 $1,064,086
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Minority interest shareholder exchange of shares $ 7,473 $ 34,246
========= ==========
Acquisition of equipment under capital leases $ 57,333 $ 61,800
========= ==========
The accompanying notes are an integral part of these financial statements.
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the United States
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have
been condensed or omitted pursuant to such rules and regulations. The
consolidated financial statements include the accounts of the company and
its wholly owned subsidiaries. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for this
period are not necessarily indicative of the results to be expected for the
whole year. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2000, as
filed with the Securities and Exchange Commission.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. INVENTORIES
SEPT. 30, MARCH 31,
2000 2000
---------- ----------
Raw materials and supplies $ 989,917 $ 951,843
Finished goods 943,996 872,504
Less allowance for slow-moving inventory (330,116) (300,400)
---------- ----------
$1,603,797 $1,523,947
========== ==========
3. INCOME TAXES
At September 30, 2000, the net deferred tax benefit was approximately
$271,000, net of a valuation allowance of approximately $2 million.
During the year ended March 31, 2000, the Company reduced its deferred tax
benefit valuation allowance by $500,000 based on an assessment of the
Company's ability to utilize deferred tax benefits in the future. This
assessment was based on management's analysis of the fiscal 2000 pre-tax
income, projected future income, improved gross margins generated from a
new plant, acquisition of U.S. Cellulose Co. and an augmented management
team. The amount of the deferred tax benefit valuation allowance could be
further reduced in the near term if fiscal 2001 pre-tax income and
estimates of future taxable income continue to improve.
At September 30, 2000, management believes that it is more likely than not
that the $271,000 tax benefit will be realized. The total amount of future
taxable income necessary
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to realize the benefit is approximately $677,500. The remaining valuation
allowance is considered necessary due to the uncertainty of future income
estimates.
4. EARNINGS PER SHARE ("EPS")
The Company's basic net income per share is computed by dividing net income
by the weighted average number of outstanding common shares. The diluted
EPS amounts are the same as the basic EPS for all periods presented. At
September 30, 2000, there were warrants and options for 2,543,166 shares
that were not included in the diluted EPS because they were antidilutive
for the period; however, these shares could potentially dilute basic EPS in
the future.
5. 401(k) RETIREMENT PLAN
On July 1, 2000, the Company implemented a 401(k) retirement plan. Eligible
employees may contribute from 1% to 15% of compensation through elective
deferrals. The Company may contribute a discretionary match at calendar
year end. The Board of Directors approved a $25,000 match for the current
year.
6. ACQUISITION AND MERGER
In October 1999, the Company purchased the outstanding capital stock of
U.S. Cellulose Co. ("USCC"), a paint coatings company based in California
with annual revenues of approximately $3,300,000. Pursuant to a Stock
Purchase Agreement dated October 15, 1999 the consideration paid was
$1,000,000 in cash. In connection with the purchase, the Company adopted
the USCC Employee Severance Plan, which entitles former USCC employees to
receive up to $384,400 in benefits, which will be paid over a six-year
period. The acquisition was accounted for using the purchase method of
accounting. USCC's assets and liabilities were recorded at their fair value
at the date of the acquisition. The excess of acquisition cost over the
fair value of tangible net assets acquired ("goodwill") is being amortized
on a straight-line basis over fifteen years.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to environmental related claims in the normal course
of business. Management believes these liabilities, if any, will not
materially affect the Company's financial position or results of
operations.
8. COMMON STOCK
During the second quarter of fiscal year 2001, the Company issued 231,500
shares on the exercise of warrants at an exercise price of $0.61 (Cdn$.90)
per share.
In August 2000, the Company obtained shareholder approval to amend the 1998
Director, Consultant and Employee Stock Option Plan to increase the total
number of Common Shares
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
available for future stock option grants under the Plan from 1,000,000
Common Shares to 1,650,000 Common Shares.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB 101B to defer the
effective date of implementation of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999 with
earlier application encouraged. The Company is currently assessing the
impact, if any, of the adoption of SAB 101 on the Company's financial
position or results of operations.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------------------------------------------------
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or future strategies that are signified by the
words "expects", "anticipates", "intends", "believes", or similar language. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from those projected in any such forward-looking statements.
In evaluating the Company's business, prospective investors should carefully
consider the information set forth below under the caption "Risk Factors" set
forth herein. The Company cautions investors that its business and financial
performance are subject to substantial risks and uncertainties.
OVERVIEW
Polymer Solutions, Inc. (the "Company"), develops, manufactures and distributes
paints, coatings and adhesives to various industries, primarily in California.
In 1998, PSI constructed a new production facility in Chico, California that
allows the Company significant growth opportunities both internally and by way
of acquisition. Presently, the new facility has excess production capacity and
with the addition of a minor amount of capital equipment and some additional
labor, capacity can be increased significantly.
On October 18, 1999 the Company acquired all the issued and outstanding shares
of U. S. Cellulose Co., Inc. ("USCC") a California based paint coatings company
for a total purchase price of $1,000,000 in cash. This purchase price has been
allocated to assets and liabilities based on their estimated fair market values.
To finance the transaction, the Company sold common shares as detailed on Form
8-K/A dated October 18, 1999, page F-9.
In connection with the purchase, the Company adopted a USCC Employee Severance
Plan, which entitles former USCC employees to receive up to $384,400 in
benefits, which will be paid over a six-year period. The acquisition was
accounted for using the purchase method of accounting. The excess of acquisition
cost over the fair value of net assets acquired ("goodwill") is being amortized
on a straight-line basis over fifteen years.
RESULTS OF OPERATIONS
Sales revenues increased 37% to $3,989,313 for the three months ended September
30, 2000, compared to the same prior year period, reflecting a 8% increase in
water-based products and a 66% increase in the Company's low volatile organic
compound ("VOC") solvent-based products. This contributed to the 39% increase in
sales revenues to $7,904,125 for the six months ended September 30, 2000,
compared to the same prior year period, reflecting a 15% increase in water-based
products and a 62% increase in the Company's VOC solvent-based products. This
increase is due both to the acquisition of USCC and the continued growth in the
number of customers and the volume of sales to existing customers covering all
of the Company's wood coating products lines.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------------------------------------------------
Gross profit for the second quarter increased to $1,196,687 from $913,357 for
the comparable period last year representing a 31% improvement. For the six
months ended September 30, 2000 gross profit increased to $2,444,566 from
$1,786,527 compared to the same prior year period. This 37% improvement in gross
profit was due to the aforementioned sales increase.
Marketing and sales expense for the three months ended September 30, 2000
totaled $309,243, an increase of 16% from $266,498 in the comparable prior year
period. For the six months ended September 30, 2000 marketing and sales expense
totaled $648,992, an increase of 14% from $569,615 in the comparable prior year
period. This is due to higher expenses of the marketing and sales staff required
to maintain the expansion of the customer base.
General and administrative expenses for the second quarter were $436,713 versus
$285,499 for the same prior year period, an increase of 53%. For the six months
ended September 30, 2000 general and administrative expenses were $845,615,
versus $516,556 for the same prior year period, representing a 64% increase.
These increases are associated with the acquisition of USCC and the related
general and administrative expenses.
Research and development expenses were $138,002 during the second quarter,
versus $149,574 for the same prior year period, reflecting an 8% decrease. For
the six months ended September 30, 2000 research and development expenses were
$287,299, versus $286,449 for the same prior year period, reflecting a .3%
increase.
Interest expense totaled $64,590 for the three months ended September 30, 2000
compared to $57,900 in the same prior year period reflecting a 12% increase. For
the six months ended September 30, 2000 interest expense totaled $142,882
compared to $119,351 in the same prior year period reflecting a 20% increase.
These increases are due to higher interest rates on the operating line of
credit.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had $80,179 in cash compared to $65,097 at the
end of fiscal 2000. Cash flow provided by operating activities totaled $520,542
for the first half of fiscal year 2001, versus cash used in operations of
$126,233 in the comparable prior year period. This is primarily due to improved
profitability resulting from increased sales revenues from both internal growth
and the acquisition of USCC. Capital additions were $47,028 in the six months
ended September 30, 2000, compared to $49,122 for the same period a year ago.
Proceeds from issuance of common stock at the end of the second quarter were
$411,423 versus $1,122,027 in the comparable prior period.
The Company has a positive working capital of $2,623,039 at September 30, 2000,
versus $2,711,092 at March 31, 2000. The current ratio at September 30, 2000 was
2.5:1 compared with 2.4:1 for the fiscal 2000 year end ratio.
The operating line of credit at September 30, 2000 is $958,064 down from the
fiscal year end balance of $1,752,667 on a credit limit of $3 million.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------------------------------------------------
VOTE TO SECURITIES HOLDERS
In the Proxy relating to the August 2, 2000 Annual General Meeting, Management
of the Company obtained shareholder approval to amend the 1998 Director,
Consultant and Employee Stock Option Plan to increase the total number of Common
Shares available for future stock option grants under the Plan from 1,000,000
Common Shares to 1,650,000 Common Shares.
OUTLOOK
In fiscal year 2001 the Company is pursuing additional internal sales growth,
and will continue to aggressively seek opportunities to create a meaningful
increase in shareholder value for our investors through future acquisitions,
joint ventures, and other strategic alliances that will utilize capacity of our
state of the art manufacturing plant by adding new customers and improved
products.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Stockholders was held on August 2, 2000 in
Vancouver, British Columbia, Canada. At such meeting, 9,257,539 shares
were entitled to vote of which 4,720,913 shares were voted. The table
below discloses the vote with respect to each proposal:
1) To ratify the selection of PricewaterhouseCoopers, LLP, Sacramento,
California as the Company's independent auditors for the fiscal year
ended March 31, 2001.
For 4,720,580
Against 0
Abstain 333
2) To elect the following Directors to serve for a term ending upon the
2001 Annual Meeting of Stockholders or until their successors are
duly elected and qualified:
Ellis, Gordon L. Silbernagel, Stephen H.
Habib, Gerald A. Sutherland, John J.
Jones, Darryl F. Flanagan, E. Laughlin
Maligie, William A.
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As proposed by management in the proxy statement to the stockholders,
each of the above nominees were re-elected to the Board of Directors in
an affirmative vote.
For 4,696,358
Against 0
Abstain 24,555
3) To approve the granting of stock options to directors of the Company.
For 3,570,101
Against 189,819
Abstain 0
4) To amend the 1998 Director, Consultant and Employee Stock Option Plan
to increase the total number of Common Shares available for future
stock option grants under the Plan from 1,000,000 Common Shares to
1,650,000 Common Shares.
For 3,565,708
Against 194,662
Abstain 960,543
5) To approve a replacement agreement of the original Escrow Agreement,
by extending the original agreement for ten years from the date of
reorganization of the Company effective from November 12, 1996.
For 3,729,357
Against 32,024
Abstain 959,532
6) To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
For 4,703,919
Against 14,794
Abstain 2,200
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports filed under Form 8-K during the period.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
27.1 [1] Financial Data Schedule for Commercial and
Industrial Companies
------------------------------------------------------------------------
[1] Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLYMER SOLUTIONS, INC.
(Registrant)
Date: October 30, 2000 /s/ E. Laughlin Flanagan
------------------------
E. Laughlin Flanagan
President and CEO
Date: October 30, 2000 /s/ Charlene Bellante
------------------------
Charlene Bellante
Corporate Controller, Assistant
Secretary/Treasurer
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