1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CONFORMED COPY
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 JUNE 30, 1998
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 incorporation or organization) (I.R.S. Employer Identification Number)
410 - 1055 West Hastings Street
Vancouver, British Columbia
Canada V6E 2E9
(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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1998.
TITLE OF CLASS NO. OF SHARES
Common Shares, par value $0.001 5,344,950
2
POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 1998
TABLE OF CONTENTS
Item Page
Number Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations
for the periods ended June 30, 1998 and 1997 .............................................. 3
Consolidated Balance Sheets
at June 30, 1998 and March 31, 1998........................................................ 4
Consolidated Statements of Shareholders' (Deficiency) Equity
for the periods ended June 30, 1998 and 1997 .............................................. 5
Consolidated Statements of Cash Flows
for the periods ended June 30, 1998 and 1997 .............................................. 6
Notes to Consolidated Financial Statements........................................................... 7
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................................................... 14
PART II - OTHER INFORMATION
4. Submission of matters to a vote of securities holders ....................................................... 15
5. Other Information ........................................................................................... 15
6. Exhibits and Reports on Form 8-K ............................................................................ 15
SIGNATURES ........................................................................................................... 15
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 June 30, 1998 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.
2
3
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
June 30
---------------------------------
1998 1997
----------- -----------
Sales revenue $ 1,735,261 $ 1,643,395
Costs of goods sold (Note 14) (1,381,430) (1,344,576)
----------- -----------
353,831 298,819
----------- -----------
Corporate and administrative expenses:
Marketing and sales 189,759 225,271
General and administrative 245,047 187,553
Research and development 88,882 77,932
----------- -----------
523,688 490,756
----------- -----------
Loss from operations (169,857) (191,937)
Interest expense (66,843) (40,991)
----------- -----------
Loss before provision for income taxes (236,700) (232,928)
Provision for income taxes -- --
----------- -----------
Net loss $ (236,700) $ (232,928)
=========== ===========
Basic and diluted net loss per share $ (.04) $ (.07)
----------- -----------
Weighted average basic and diluted number
of shares outstanding 5,344,950 3,566,476
=========== ===========
4
POLYMER SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30 MARCH 31
1998 1998
ASSETS
Current assets:
Cash $ 1,119 $ 1,177
Accounts receivable, net 932,247 976,201
Inventories 1,082,339 1,267,751
Prepaid expenses 139,500 33,841
------------ -----------
2,155,205 2,278,970
Fixed assets, net 1,177,549 982,774
Other assets 9,121 9,386
------------ -----------
$ 3,341,875 $ 3,271,130
============ ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Accounts payable $ 1,214,939 $ 1,356,162
Salaries payable 257,018 262,035
Professional fees payable 41,136 70,681
Operating line of credit 969,793 879,967
Current portion of capital lease obligations 83,471 67,738
Current portion of mortgage payable 21,379 21,062
------------ -----------
2,587,736 2,657,645
Long-term liabilities:
Capital lease obligations 480,558 402,456
Due to related parties 114,965 88,895
Mortgage payable 27,490 31,188
Convertible note payable 78,588 72,000
Subscription received 272,108 --
------------ -----------
3,561,445 3,252,184
------------ -----------
Minority interest 225,036 225,783
------------ -----------
Commitments and contingencies (Note 9)
Shareholders' (deficiency) 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, 6/30/98 - 5,344,950 shares and
12/31/98 - 5,344,617 shares 5,345 5,345
Additional paid-in capital 9,774,104 9,775,173
Accumulated deficit (10,224,055) (9,987,355)
------------ -----------
(444,606) (206,837)
------------ -----------
$ 3,341,875 $ 3,271,130
============ ===========
4
5
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30
1998 1997
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net loss (Note 14) $(236,700) $(232,928)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 53,843 22,336
Accounts receivable 43,954 (226,004)
Inventories (Note 14) 185,412 (4,621)
Prepaid expenses and other assets (105,659) (51,940)
Accounts payable (175,785) 374,190
--------- ---------
Net cash used in operating activities (234,935) (118,967)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital additions (248,353) (13,666)
Net cash used in investing activities (248,353) (13,666)
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Cost of financing (1,815) --
Proceeds from subscription received 272,108 --
Proceeds from (payments on) due to related
parties, net 26,070 76,975
Proceeds from (payments on) mortgage payable (3,381) (4,653)
Proceeds from convertible debt-interest 6,588
Borrowings on operating line of credit, net 89,826 59,221
Payment of capital lease obligations 93,834 --
--------- ---------
Net cash provided by financing activities 483,230 131,543
--------- ---------
Increase (decrease) in cash (58) (1,090)
Cash, beginning of period 1,177 2,538
--------- ---------
Cash, end of period $ 1,119 $ 1,448
========= =========
5
6
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
THREE MONTHS ENDED JUNE 30,
1998 1997
COMMON COMMON
SHARES AMOUNT SHARES AMOUNT
COMMON STOCK:
Balance, beginning of period 5,334,617 $ 5,345 3,762,505 $ 3,763
Shares issued, pursuant to -
Private placement and other 333 -- 5,767 5
------------ ------------ ------------ ------------
Balance, end of period 5,334,950 5,345 3,768,272 3,768
------------ ------------ ------------ ------------
ADDITIONAL PAID -IN CAPITAL:
Balance, beginning of period -- 9,775,173 -- 8,674,356
Shares issued, pursuant to -
Private placement and other -- 746 -- 12,925
Cancellation of debt -- (1,815) -- --
------------ ------------ ------------ ------------
Balance, end of period -- 9,774,104 -- 8,687,281
------------ ------------ ------------ ------------
DEFICIT:
Balance, beginning of period -- (9,987,355) -- (9,117,265)
Net loss -- (236,700) -- (80,664)
------------ ------------ ------------ ------------
Balance, end of period -- (10,224,055) -- (9,197,929)
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' (DEFICIENCY)
EQUITY 5,334,950 $ (444,606) 3,768,272 $ (506,880)
============ ============ ============ ============
6
7
POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three Months Ended June 30, 1998
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Polymer Solutions, Inc. ("PSI" or "Company") is a Nevada corporation
incorporated in July 1996. Through its wholly-owned subsidiary,
Alternative Materials Technology, Inc. ("AMT USA"), PSI is engaged in the
development and sale of water-based coatings, sealants and adhesives to
industrial users in California and neighboring states, including
manufacturers of furniture, cabinets, doors and moldings. One customer
accounted for 10% of net revenue in the prior fiscal year.
These consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern which assumes the
realization of assets and discharge of liabilities in the normal course of
business. The Company's significant losses from operations and capital
deficiency raise substantial doubt about its ability to continue as a
going concern and these consolidated financial statements do not include
any adjustments that may result from the outcome of this uncertainty. The
Company is negotiating with financing institutions regarding both
short-term and senior equity financing.
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Differences with respect to accounting principles generally accepted in
Canada are disclosed in Note 16.
BASIS OF CONSOLIDATION
The Company's consolidated financial statements include its wholly-owned
active subsidiary, AMT USA; wholly-owned inactive subsidiary, AMT
Environmental Products Inc. ("AMT"); and 99.9%-owned inactive subsidiary,
PSI Acquisitions Corp. ("PAC"). Intercompany transactions and accounts are
eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts
receivable from wood coatings customers. Concentrations of credit risk
with respect to trade accounts receivable are limited due to the large
number of customers. The Company, and its lender of the operating line of
credit, perform credit evaluations of its customers' financial condition
and generally do not require collateral on accounts receivable. The
Company maintains an allowance for doubtful accounts on its receivables
based on expected collectibility. Allowance for doubtful accounts was
$41,530 at both June 30, 1998 and March 31, 1998.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in
first-out basis, and net realizable value. The Company maintains a reserve
for slow-moving or obsolete inventory as well as the related disposal
costs.
FIXED ASSETS
Equipment is recorded at cost and depreciated on a straight-line basis
over its estimated life, which varies between five and seven years.
Building and related improvements are recorded at cost and amortized on a
straight-line basis over an estimated life of 39 years.
7
8
OTHER ASSETS
Other assets consist of patent and trademark costs, representing the costs
incurred for the acquisition. Capitalized costs are amortized on a
straight-line basis over seven years commencing with production of related
products. When it is determined that a particular technology will no
longer be used, or a patent application is abandoned, related unamortized
costs are written off.
LONG-LIVED ASSETS
Long-lived assets are recorded at the lower of amortized cost or fair
value. As part of an ongoing review of the valuation of long-lived assets,
management assesses the carrying value of such assets if facts and
circumstances suggest they may be impaired. If this review indicates that
the carrying value of these assets may not be recoverable, as determined
by a nondiscounted cash flow analysis over the remaining useful life, the
carrying value would be reduced to its estimated fair value. There have
been no material impairments recognized in these financial statements.
STOCK OPTIONS
The Company accounts for its stock option plan in accordance with the
intrinsic value method, under which no compensation expense is recognized
in the financial statements except where the fair market value of the
stock exceeds the exercise price of the options granted on the date of the
grant. The pro forma disclosures of the compensation expense under the
fair value method of Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" are included in Note 12.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128, "Earnings per Share", which changes the basis
upon which earnings (or loss) per share is calculated. As required by this
statement, the Company adopted its provisions for the quarter ended June
30, 1998, and retroactively for each quarter presented in the financial
statements.
Basic net loss per share is computed on the weighted average number of
common shares outstanding during each period. Diluted net loss per share
is the same as basic net loss per share because the diluted weighted
average shares outstanding do not include stock options, warrants and
convertible long-term debt because they are anti-dilutive.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as they are incurred.
REVENUE RECOGNITION
Revenue from the sale of products is recognized upon shipment.
FOREIGN CURRENCY TRANSLATION
The Company's operations are primarily conducted in the United States and
the United States dollar is the Company's functional currency. The Company
and its subsidiaries are considered to be integrated operations and the
accounts are translated as follows:
Monetary assets and liabilities at the rates of exchange in effect at the
balance sheet date; non-monetary assets at historical rates; revenue and
expense items (except depreciation and amortization) at the average rates
for the period; depreciation and amortization at the same rates as for the
assets to which they relate. The net effect of the foreign currency
translation is included in current operations.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments for cash, accounts
receivable, accounts payable, salaries payable and professional fees
payable approximate carrying value due to their short-term nature. The
fair value of the operating line of credit approximates carrying value due
to the floating rate interest terms. The fair value of the mortgage
payable approximates carrying value as its interest rate approximates
market for borrowings with similar
8
9
terms. The fair value of Due to related parties cannot be estimated
because of the nature of the relationships involved.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current presentation.
3. INVENTORIES
JUNE 30, MARCH 31,
1998 1998
Raw materials and supplies $ 725,079 $ 830,174
Finished goods 604,185 684,502
Less allowance for a slow-moving inventory (246,925) (246,925)
------------ ------------
$ 1,082,339 $ 1,267,751
4. FIXED ASSETS
JUNE 30, 1998
ACCUMULATED
COST DEPRECIATION NET
Land $ 110,000 $ -- $ 110,000
Laboratory equipment 89,614 65,510 24,104
Office equipment 175,713 76,836 98,877
Production Equipment - owned and leased 962,816 283,197 679,619
Building 177,935 14,785 163,150
Leasehold improvements 104,425 2,626 101,799
------------ ------------ ------------
$ 1,620,503 $ 442,954 $ 1,177,549
============ ============ ============
MARCH 31, 1998
Land $ 110,000 $ -- $ 110,000
Laboratory equipment 84,830 63,298 21,532
Office equipment 113,567 70,766 42,801
Production equipment - owned and leased 842,401 241,526 600,875
Building and improvements 177,935 13,426 164,509
Leasehold improvements 43,419 362 43,057
------------ ------------ ------------
$ 1,372,152 $ 389,378 $ 982,774
============ ============ ============
At June 30, 1998, the Company is in the process of selling the land and
building of its previous operations facility. The carrying value of this
facility is $274,509 and the facility is expected to be sold by the second
quarter of fiscal year 1999.
5. OPERATING LINE OF CREDIT
The Company has a short-term line of credit for up to $1,000,000, which is
secured by accounts receivable, inventories and other assets. Funds
available to be advanced are limited to 80% of accounts receivable, to a
maximum of $750,000, and 25% of inventories, to a maximum of $250,000.
Interest is payable on funds advanced at the rate of 1.71% per month.
Terms of the line of credit require repayment from collections of accounts
receivable. This line of credit expires on May 1, 1999. On May 26, 1998,
the Company increased its inventory credit line to $300,000. The Company
also obtained a $100,000 loan, which bears interest at a variable
9
10
rate payable in monthly payments of interest only, and is secured by the
Company's land and building. Principal is due upon the sale of the
Company's old operations facility (Note 4).
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at June 30, 1998 and March 31, 1998 consisted of the
following:
6/30/98 3/31/98
Capital lease obligations bearing interest ranging from 12 1/2% $ 564,029 $ 470,194
to 18 2/3%, payable in monthly principal and interest payments
and secured by the related equipment
Mortgage payable bearing interest of 9%, payable in monthly
principal and interest payments of $2,075 and secured by the
related property and equipment $ 48,869 52,250
Convertible note bearing simple interest of 10%, payable in a balloon
payment of principal and interest in June, 1999; note is
convertible at US$.72 per common share 78,588 72,000
------------ ------------
691,486 594,444
Less current portion 104,850 88,800
------------ ------------
$ 586,636 $ 505,644
------------ ------------
7. RELATED PARTY TRANSACTIONS
At June 30, 1998, $114,965 was due to entities owned by a director of the
Company.
8. INCOME TAXES
The Company and its subsidiaries have operating loss carry-forwards in
excess of $5,000,000 expiring at various dates through 2013, as well as
federal and state tax credits of $188,000 and $87,000, which are
indefinite. These operating loss carry-forwards and tax credits are
available for offset against future taxable incomes arising from Canadian
and United States operations. There are no other material temporary
differences. Considering the Company's cumulative losses, the Company has
provided a valuation allowance of 100% against all available loss
carry-forwards and tax credits.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities under arrangements which contain
renewal options and provide for periodic cost of living adjustments. The
Company's operating lease for its primary operating facility includes an
option to purchase the facility which can be exercised prior to February
1, 2000.
LEGAL MATTERS
The Company is party to legal proceedings and potential claims arising in
the ordinary course of business. In the opinion of management, the Company
has adequate legal defense or insurance coverage with respect to these
matters so that the ultimate resolution of these matters will not have a
material adverse effect on its financial position, results of operations,
or cash flows.
10. PREFERRED STOCK
AUTHORIZED
The Company is authorized to issue up to 4,000,000 shares of preferred
stock, which is divided into four series of 1,000,000 shares each. With
respect to each series, the Company's Board of Directors determines all
rights and preferences including rights related to dividends, conversion,
and voting.
10
11
11. COMMON STOCK
REORGANIZATION
By a reorganization completed February 26, 1997, the Company acquired all
11,752,907 common shares of the issued share capital of AMT in
consideration for the issue of 3,762,505 common shares of the Company and
155,130 preferred shares of PSI's 99.9% owned subsidiary, PAC. The purpose
of the reorganization was to consolidate the issued share capital on a 1:3
basis and to redomicile the publicly-listed parent company from British
Columbia, Canada to the United States. PSI and PAC were organized by AMT
for purposes of the reorganization and had no businesses or operations of
their own prior thereto. The reorganization was accounted for in a manner
similar to a pooling of interests and certain comparative amounts relating
to share capital, loss per share, outstanding stock options and
outstanding warrants were restated on a post-reorganization basis.
MINORITY INTEREST
In completing the Reorganization, the Company consolidated its shares on
the basis of one common share of PSI, in exchange for three previously
existing common shares of AMT. Canadian shareholders holding 465,388
common shares of AMT elected to receive 155,130 non-transferable preferred
shares of PAC in order to defer the tax consequences of receiving a U.S.
security. The preferred shares of PAC are convertible or redeemable into
common shares of PSI on a 1:1 basis at any time and have certain rights
and benefits of PSI common shares, particularly relating to the
declaration of dividends and proceeds from liquidation, dissolution or
wind-up of the Company. PAC preferred shares are non-voting and the
Company may redeem the PAC preferred shares for common shares of PSI at
any time after September 1, 2001. During fiscal 1998, 54,431 preferred
shares were exchanged or redeemed for 54,431 shares of the Company's
common stock.
FOUNDERS' SHARES
An aggregate of 197,774 shares were held in escrow by the Company's
transfer agent at March 31, 1998. These were issued at a price of US$0.13
(Cdn$0.18) per share in March 1987, pursuant to AMT's incorporation and
initial public offering. These shares will be released on the basis of one
share for each US$10.27 (Cdn$14.22) of accumulated "cash flow" of the
Company, as defined in the Escrow Agreement. Any of the 197,774 shares
that are not released from escrow on or before December 15, 1997 may be
canceled. The Company is currently awaiting a response from the Vancouver
Stock Exchange to review and further extend the expiration date. No
founders' shares have been released or canceled from escrow.
12. STOCK OPTION PLANS AND WARRANTS
Management of the Company, in the Proxy relating to the August 6, 1998
Annual General Meeting of the Company, is seeking shareholder approval of
a resolution to adopt a 1998 Economic Value Added Incentive Compensation
Plan (EVA Plan). This Plan would authorize the grant of options for the
purchase of 1,000,000 Common shares of the Company and reservation of the
1,000,000 Common shares.
13. FINANCING
On June 4, 1998, the Company entered into a Letter of Engagement with a
brokerage firm to market up to 900,000 special warrants. Each special
warrant will entitle the holder to receive one common share and one-half
of one share purchase warrant. Exercise of each full warrant will entitle
the holder to purchase one additional common share for a period of two
years following the closing of placement. The warrant exercise price will
be Cdn$1.00 for the first twelve months and Cdn$1.25 for the second twelve
months.
Additionally, finders' fees are payable in common shares and agents
arranging the placement of the warrants will be entitled to receive
additional warrants equal to 20% of those placed. The agents' warrants
have the same components, terms and conditions as the special warrants.
11
12
14. FOURTH QUARTER ADJUSTMENT TO FISCAL YEAR 1998 (UNAUDITED)
In the fourth quarter of fiscal 1998, the Company recorded an adjustment
of approximately $590,000 to increase cost of goods sold to properly state
obsolete and slow moving inventory, to reflect other inventory costing
adjustments and to increase the estimated warranty expense. The Company
has analyzed the timing of the adjustments, and has determined that an
appropriate restatement of the application of the $590,000 adjustment to
the four quarters of fiscal year 1998 is as follows:
Adjustment
----------
First quarter $152,264
Second quarter $214,059
Third quarter $121,863
Fourth quarter $101,814
--------
Total $590,000
For comparison with quarterly data for fiscal year 1999, the cost of goods
sold and inventories for each quarter of 1998 will be adjusted as depicted
above in order to reflect the impact of the $590,000 adjustment on a
quarterly basis.
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN ACCOUNTING PRINCIPLES AND
PRACTICES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
basis") which differ in certain respects from those principles and
practices that the Company would have followed had its consolidated
financial statements been prepared in accordance with accounting
principles and practices generally accepted in Canada ("Canadian basis").
Had the Company followed the Canadian basis, the balance sheets contained
within the consolidated financial statements would have been reported as
follows:
JUNE 30, MARCH 31,
1998 1998
U.S. CANADIAN U.S. CANADIAN
BASIS BASIS BASIS BASIS
------------ ------------ ------------ ------------
ASSETS
Current assets $ 2,155,205 $ 2,155,205 $ 2,278,970 $ 2,278,970
Fixed assets (a) 1,177,549 1,162,325 982,774 967,550
Other assets 9,121 9,121 9,386 9,386
------------ ------------ ------------ ------------
$ 3,341,875 $ 3,326,651 $ 3,271,130 $ 3,255,906
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities $ 2,587,736 $ 2,587,736 $ 2,657,645 $ 2,657,645
Long term liabilities 973,709 973,709 594,539 594,539
Minority interest 225,036 225,036 225,783 225,783
Common shares 5,345 5,345 5,345 5,345
Additional paid-in capital (a) (c) 9,623,681 8,821,038 9,624,750 8,822,110
Deficit (a) (c) (10,073,632) (9,286,213) (9,836,932) (9,049,516)
------------ ------------ ------------ ------------
$ 3,341,875 $ 3,326,651 $ 3,271,130 $ 3,255,906
============ ============ ============ ============
12
13
Had the Company followed the Canadian basis, the Statements of Operations
contained within the consolidated financial statements would have been
reported as follows:
1998 1997
Net loss under U.S. basis $ (236,700) $ (232,928)
Effect of change in reporting currency (a) -- --
Effect of Arrangement costs (c) -- --
----------- -----------
Net loss under Canadian basis $ (236,700) $ (232,928)
=========== ===========
Basic and diluted net loss per share under
U.S. basis $ (.04) $ (.07)
=========== ===========
Basic and diluted net loss per share under
Canadian basis (b) $ (.04) $ (.06)
=========== ===========
(a) For Canadian purposes, the Company adopted the U.S. dollar as the
functional currency for the consolidated financial statements
effective January 1, 1995. The comparative amounts reported in
Canadian dollars for share capital and non-monetary assets and
liabilities were translated into U.S. dollars at the December 31,
1994 exchange rate of one U.S. dollar equal to Cdn $1.4018.
(b) On a U.S. basis, common shares returnable to the issuer if specified
conditions are not met are excluded from the determination of
weighted average number of common shares used for calculation of
earnings per share if those conditions are not currently being
attained. On a Canadian basis, the 197,774 common shares currently
escrowed for release pursuant to cumulative cash flow earned from
operations would have been included for reporting loss per share.
(c) On a U.S. basis, expenses related to a pooling of interests are
charged to income in the period the expenses are incurred. On a
Canadian basis, the costs of the Reorganization are treated as a
capital transaction, charged to paid-in capital.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three Months ended June 30, 1998
RESULTS FROM OPERATIONS
Sales revenues for the quarter ended June 30, 1998 were $1,735,261, an increase
of 6% over the same quarter a year ago, reflecting continued growth in demand
for the Company's coatings and other products.
Gross profit for the quarter ended June 30, 1998 increased to $353,831 from
$298,819 for the same period a year ago. Cost of goods sold for the year-ago
quarter has been adjusted as described in Note 14 of the Notes to Financial
Statements in order to reflect the impact of a year-end $590,000 adjustment on
each quarter of the fiscal year ended March 31, 1998.
Marketing and sales expense for the three months ended June 30, 1998 totaled
$189,759, a decrease of 16% from $225,271 in the comparable period a year ago.
In spite of the decrease, due primarily to reduced marketing wages, the Company
was able to generate sales in the quarter ended June 30, 1998 which were 6% over
the year-ago quarter.
General and administrative expense totaled $245,047 for the quarter ended June
30, 1998, a 31% increase from $187,553 for the year-ago period. The increase was
due primarily to the costs associated with bringing aboard a new CEO/President
for the Company.
Research and development expenses were $88,882 for the three months ended June
30, 1998, up 14% from $77,932 in the year-ago comparable period, due primarily
to increased laboratory wages.
Interest expense totaled $66,843 for the quarter ended June 30, 1998, compared
to $40,991 for the same quarter a year ago. The 63% increase was due to the
increased use of the Company's operating line of credit and the addition of
capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $1,119 in Cash compared to $1,177 at the end
of fiscal 1998. Cash flow used in operating activities totaled $234,935 in the
current quarter of 1998 versus $118,967 in the comparable quarter in 1997.
Additionally, capital additions were $248,353 in the three months ended June 30,
1998 compared to $13,666 for the same quarter a year ago. These requirements
were financed primarily from a $272,108 subscription received and borrowings on
the Company's line of credit.
The Company has a working capital deficiency of $432,531 at June 30, 1998 versus
$378,675 at the end of fiscal 1998. The current ratio at June 30, 1998 was 0.8
versus 0.9 for the fiscal 1998 year-end ratio.
OUTLOOK
At the end of fiscal 1998, the Company's Board of Directors made strategic
organizational changes and key senior management additions to the Company in
order to provide an infrastructure of experienced management professionals
dedicated to maximizing shareholder value. Their tasks include strengthening
controls and achieving profitability with the present Company base, along with
growing the Company externally through joint ventures, acquisitions, product
licenses, new product development, synergistic strategic alliances and any other
opportunities that could result in a meaningful increase in shareholder value.
Note to Readers
Certain statements identified as "forward-looking 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 beyond the Company's control.
14
15
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company will hold its 1998 Annual General Meeting of Shareholders on
August 6, 1998. The shareholders will be asked to approve:
a) the appointment of Price Waterhouse LLP, Sacramento, California as
auditors for fiscal 1999;
b) the election of directors;
c) the adoption of the Polymer Solutions, Inc. 1998 Economic Value
Added Incentive Compensation Plan.
5. OTHER INFORMATION
Directors as at June 30, 1998
Gordon L. Ellis Darryl F. Jones
Stephen H. Silbernagel John J. Sutherland
Gerald A. Habib William A. Maligie
E. Laughlin Flanagan
6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits.
No reports on Form 8-K were filed during the three month period ended June
30, 1998.
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: August 5, 1998 /s/ Gordon L. Ellis
-----------------------------------------
GORDON L. ELLIS
CHAIRMAN
Date: August 5, 1998 /s/ Stephen Silbernagel
-----------------------------------------
STEPHEN SILBERNAGEL
DIRECTOR
15