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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 DECEMBER 31, 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 December 31, 2000.
TITLE OF CLASS NO. OF SHARES
Common Shares, par value $0.001 9,596,663
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POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three Months and Nine Months Ended December 31, 2000
TABLE OF CONTENTS
Item Page
Number Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheets
at December 31, 2000 and March 31, 2000..............................3
Consolidated Statements of Operations
for the three and nine months ended December 31, 2000 and 1999.......4
Consolidated Statements of Cash Flows
for the nine months ended December 31, 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........................................................11
6. Exhibits Index and Reports on Form 8-K...................................11
SIGNATURES ...................................................................11
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 December 31, 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)
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DECEMBER 31, MARCH 31,
2000 2000
(UNAUDITED)
ASSETS
Current assets:
Cash $ 84,783 $ 65,097
Accounts receivable, net 1,886,209 2,374,065
Inventories, net 1,654,876 1,523,947
Prepaid expenses and other assets 107,714 120,360
Deferred income taxes, net 168,422 500,000
---------- -----------
3,902,004 4,583,469
Fixed assets, net 753,965 825,652
Goodwill, net 1,179,793 1,239,972
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$ 5,835,762 $ 6,649,093
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,053,504 $ 1,303,088
Payroll related and commissions payable 291,878 409,791
Current portion of capital lease obligations 183,969 159,498
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1,529,351 1,872,377
Long-term liabilities:
Bank loan facilities 548,275 1,752,667
Capital lease obligations 277,037 371,932
Severance plan liability 339,215 359,735
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2,693,878 4,356,711
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Minority interest 45,518 190,415
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Shareholders' equity:
Preferred stock, $0.001 par value;
Authorized - 4,000,000 shares; issued and outstanding - nil
Common stock, $0.001 par value;
Authorized - 20,000,000 shares; issued and outstanding,
December 31, 2000 - 9,596,663 and March 31, 2000 - 8,855,939 9,596 8,855
Additional paid-in capital 12,057,000 11,501,420
Accumulated deficit (8,970,230) (9,408,308)
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3,096,366 2,101,967
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$ 5,835,762 $ 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)
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THREE MONTHS ENDED DEC. 31, NINE MONTHS ENDED DEC. 31,
2000 1999 2000 1999
Sales revenue $3,768,986 $3,514,118 $11,673,111 $9,216,635
Cost of goods sold 2,635,634 2,364,080 8,095,192 6,280,070
---------- ---------- ----------- ----------
1,133,352 1,150,038 3,577,919 2,936,565
---------- ---------- ----------- ----------
Corporate and administrative expenses:
Marketing and sales 261,390 308,253 910,382 877,868
General and administrative 449,780 467,997 1,295,394 984,553
Research and development 124,301 146,257 411,600 432,706
---------- ---------- ----------- ----------
835,471 922,507 2,617,376 2,295,127
---------- ---------- ----------- ----------
Income from operations 297,881 227,531 960,543 641,438
Other income 879 9,981 945
Interest (expense) (49,984) (60,507) (192,866) (179,858)
---------- ---------- ----------- ----------
Income before income tax expense 248,776 167,024 777,658 462,525
Income tax expense 102,776 -- 339,578 --
---------- ---------- ----------- ----------
Net income $ 146,000 $ 167,024 $ 438,080 $ 462,525
========== ========== =========== ==========
Basic and diluted earnings per share $ .02 $ .02 $ .05 $ .06
========== ========== =========== ==========
Weighted average basic number
of shares outstanding 9,346,029 8,632,966 9,104,863 7,683,707
========== ========== =========== ==========
Weighted average diluted number
of shares outstanding 9,440,477 9,065,979 9,251,051 7,728,775
========== ========== =========== ==========
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)
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NINE MONTHS ENDED DEC. 31,
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 438,080 $ 462,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 256,241 201,487
Gain on disposals of fixed assets (7,458) (945)
Benefit from deferred income tax 331,577 --
Changes in operating assets and liabilities:
Accounts receivable 487,856 (533,452)
Inventories (130,929) (393,606)
Prepaid expenses and other assets 12,645 (55,486)
Accounts payable (249,584) 339,856
Payroll related and commissions payable (117,913) 24,468
Severance plan liability (20,520) --
----------- -----------
Net cash provided by operating activities 999,995 44,847
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CASH FLOWS FROM INVESTING ACTIVITIES:
Goodwill acquired in business acquisition (1,274,487)
Purchase of fixed assets (68,485) (66,719)
Proceeds from disposals of fixed assets 8,901 15,145
----------- -----------
Net cash used in investing activities (59,584) (1,326,061)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 411,423 1,158,036
(Payments) borrowings on operating line of credit, net (1,204,392) 409,637
Payments of capital lease obligations (127,756) (143,872)
----------- -----------
Net cash (used in) provided by financing activities (920,725) 1,423,801
----------- -----------
Increase in cash 19,686 142,587
Cash, beginning of year 65,097 39,303
----------- -----------
Cash, end of period $ 84,783 $ 181,890
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Minority interest shareholder exchange of shares $ 144,897 $ 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
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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
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America 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
DEC. 31, MARCH 31,
2000 2000
Raw materials and supplies $1,030,239 $ 951,843
Finished goods 965,363 872,504
Less allowance for slow-moving inventory (340,726) (300,400)
---------- ----------
$1,654,876 $1,523,947
========== ==========
3. INCOME TAXES
At December 31, 2000, the net deferred tax benefit was approximately
$168,000, net of a valuation allowance of approximately $1.9 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.
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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At December 31, 2000, management believes that it is more likely than not
that the $168,000 tax benefit will be realized. The total amount of future
taxable income necessary to realize the benefit is approximately $420,000.
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 December 31 2000, there were warrants and options for
1,009,250 shares that were dilutive and included in the diluted EPS. At
December 31, 2000, there were warrants and options for 2,242,666 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 makes a 100% matching contribution up to a
maximum of 2% of the employees' gross earnings.
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 benefits 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.
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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8. COMMON STOCK
During the third quarter of fiscal year 2001, the Company issued 61,291
common shares upon the exchange of 61,291 PSI Acquisition preferred shares
on a one to one basis pursuant to a reorganization of the Company
completed in 1997.
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 NINE MONTHS ENDED DECEMBER 31, 2000
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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.
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 beyond the Company's control.
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, this 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 benefits 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 7% to $3,768,986 for the three months ended December
31, 2000, compared to the same prior year period, reflecting a 6% decrease in
water-based products and a 19% increase in the Company's low volatile organic
compound ("VOC") solvent-based products. This contributed to the 27% increase in
sales revenues to $11,673,111 for the nine months ended December 31, 2000,
compared to the same prior year period, reflecting a 7.5% increase in
water-based products and a 45% increase in the Company's VOC solvent-based
products. This increase is
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
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.
Gross profit for the third quarter decreased to $1,133,352 from $1,150,038 for
the comparable period last year. For the nine months ended December 31, 2000
gross profit increased to $3,577,919 from $2,936,565 compared to the same prior
year period. This 22% improvement in gross profit for the nine month period was
due to the aforementioned sales increase.
Marketing and sales expense for the three months ended December 31, 2000 totaled
$261,390, a decrease of 15% from $308,253 in the comparable prior year period
due to lower compensation and commission expenses during the quarter. For the
nine months ended December 31, 2000 marketing and sales expense totaled
$910,382, an increase of 4% from $877,868 in the comparable prior year period.
General and administrative expenses for the third quarter were $449,780 versus
$467,997 for the same prior year period, a decrease of 4%. For the nine months
ended December 31, 2000 general and administrative expenses were $1,295,394,
versus $984,553 for the same prior year period, representing a 32% increase.
These increases are associated with the acquisition of USCC and the related
general and administrative expenses.
Research and development expenses were $124,301 during the third quarter, versus
$146,257 for the same prior year period, reflecting a 15% decrease due to lower
compensation expenses. For the nine months ended December 31, 2000 research and
development expenses were $411,600, versus $432,706 for the same prior year
period, reflecting a 5% decrease.
Interest expense totaled $49,984 for the three months ended December 31, 2000
compared to $60,507 in the same prior year period reflecting a 17% decrease due
primarily to a pay down of the operating line of credit. For the nine months
ended December 31, 2000 interest expense totaled $192,866 compared to $179,858
in the same prior year period reflecting a 7% increase.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000 the Company had $84,783 in cash compared to $65,097 at the
end of fiscal 2000. Cash flow provided by operating activities totaled $999,995
for the first nine months of fiscal year 2001, versus cash provided by
operations of $44,847 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. There have been no acquisitions in
fiscal year 2001; however, the Company acquired goodwill related to USCC on
October 15, 1999 in the amount of $1,274,487. Capital additions were $68,485 in
the nine months ended December 31, 2000, compared to $66,719 for the same period
a year ago. Proceeds from issuance of common stock at the end of the third
quarter were $411,423 versus $1,158,036 in the comparable prior period.
The Company has a positive working capital of $2,372,653 at December 31, 2000,
versus $2,711,092 at March 31, 2000. The current ratio at December 31, 2000 was
2.6:1 compared with 2.4:1 for the fiscal 2000 year end ratio.
The operating line of credit at December 31, 2000 is $548,275 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 NINE MONTHS ENDED DECEMBER 31, 2000
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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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports filed under Form 8-K during the period.
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)
/s/ E. Laughlin Flanagan
Date: January 31, 2001 ------------------------------------
E. Laughlin Flanagan
President and CEO
/s/ Charlene Bellante
Date: January 31, 2001 ------------------------------------
Charlene Bellante
Corporate Controller, Assistant
Secretary/Treasurer
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