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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 SEPTEMBER 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 (I.R.S. Employer Identification Number)
incorporation or organization)
1569 Dempsey Road
North 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of Sept. 30, 1998.
TITLE OF CLASS NO. OF SHARES
-------------- -------------
Common Shares, par value $0.001 6,410,833*
* including 633,883 shares to be issued subject to regulatory approval.
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POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three and Six Months Ended September 30, 1998
TABLE OF CONTENTS
Item Page
Number Number
- ------ ------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations
for the periods ended September 30, 1998 and 1997 ........................ 3
Consolidated Balance Sheets
at September 30, 1998 and March 31, 1998.................................. 4
Consolidated Statements of Cash Flows
for the periods ended September 30, 1998 and 1997 ........................ 5
Consolidated Statements of Shareholders' Equity (Deficiency)
for the periods ended September 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 .................................. 16
5. Other Information ...................................................................... 16
6. Exhibits and Reports on Form 8-K ....................................................... 16
SIGNATURES ..................................................................................... 16
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, 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.
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Sales revenue $ 1,957,047 $ 1,921,258 $ 3,692,308 $ 3,564,653
Costs of goods sold (Note 14) (1,389,359) (1,553,534) (2,770,789) (2,898,110)
------------- ------------- ------------- -------------
567,688 367,724 921,519 666,543
------------- ------------- ------------- -------------
Corporate and administrative expenses:
Marketing and sales 255,996 237,189 445,755 462,460
General and administrative 168,001 167,536 413,048 355,089
Research and development 150,571 76,768 239,453 154,700
------------- ------------- ------------- -------------
574,568 481,493 1,098,256 972,249
------------- ------------- ------------- -------------
Loss from operations (6,880) (113,769) (176,737) (305,706)
Interest expense (58,917) (43,156) (125,760) (84,147)
------------- ------------- ------------- -------------
Loss before provision for income taxes (65,797) (156,925) (302,497) (389,853)
Provision for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss $ (65,797) $ (156,925) $ (302,497) $ (389,853)
============= ============= ============= =============
Basic and diluted net loss per share $ (.01) $ (.04) $ (.06) $ (.10)
============= ============= ============= =============
Weighted average basic and diluted number
of shares outstanding 5,476,428 3,772,500 5,411,048 3,768,219
============= ============= ============= =============
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POLYMER SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
SEPT. 30 MARCH 31
1998 1998
------------- -------------
ASSETS
Current assets:
Cash $ 2,048 $ 1,177
Accounts receivable, net 1,037,611 976,201
Inventories 1,068,366 1,267,751
Prepaid expenses 122,433 33,841
------------- -------------
2,230,458 2,278,970
Fixed assets, net 986,401 982,774
Other assets 8,855 9,386
------------- -------------
$ 3,225,714 $ 3,271,130
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 1,081,298 $ 1,356,162
Salaries payable 252,202 262,035
Professional fees payable 47,448 70,681
Operating line of credit 918,901 879,967
Current portion of capital lease obligations 97,412 67,738
Current portion of mortgage payable -- 21,062
2,397,261 2,657,645
Long-term liabilities:
Capital lease obligations 534,610 402,456
Due to related parties 42,888 88,895
Mortgage payable -- 31,188
Convertible note payable -- 72,000
------------- -------------
2,974,759 3,252,184
------------- -------------
Minority interest 225,037 225,783
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (deficiency):
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,
9/30/98 - 6,410,833 shares including 633,833 shares to be issued 6,411 5,345
subject to regulatory approval, and 3/31/98 - 5,344,617 shares
Additional paid-in capital 10,309,359 9,775,173
Accumulated deficit (10,289,852) (9,987,355)
------------- -------------
25,918 (206,837)
------------- -------------
$ 3,225,714 $ 3,271,130
============= =============
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED SEPTEMBER 30
1998 1997
---------------- -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss (Note 14) $ (302,497) $ (389,853)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 116,334 45,560
Loss (gain) on disposal of assets (74,094) 299
Accounts receivable (61,410) (336,291)
Inventories (Note 14) 199,385 (129,220)
Prepaid expenses and other assets (88,592) (32,814)
Accounts payable (307,930) 569,807
------------- -------------
Net cash used in operating activities (518,804) (272,512)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital additions (392,352) (77,406)
Proceeds from disposal of assets 347,017
Net cash used in investing activities (45,335) (77,406)
------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Cost of financing (49,156) --
Proceeds from private placement 293,876 --
Proceeds from conversion of debt to equity 289,785
Proceeds from (payments on) convertible note (72,000) 72,000
Proceeds from (payments on) due to related
parties, net (46,007) 111,759
Proceeds from (payments on) mortgage payable (52,250) (9,412)
Proceeds from convertible debt - interest -- --
Borrowings on operating line of credit, net 38,934 191,047
(Payment) of capital lease obligations 161,828 --
------------- -------------
Net cash provided by financing activities 565,010 365,394
------------- -------------
Increase (decrease) in cash 871 15,476
Cash, beginning of period 1,177 2,538
------------- -------------
Cash, end of period $ 2,048 $ 18,014
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
UNAUDITED
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997
------------------------------- -----------------------------
COMMON COMMON
SHARES AMOUNT SHARES AMOUNT
------------ ------------- --------- -------------
COMMON STOCK:
Balance, beginning of period 5,344,617 $ 5,345 3,762,505 $ 3,763
Shares issued, pursuant to -
Private placement and other 432,333 432 10,139 9
Debt to equity conversion 633,883 634 --
(Shares to be issued subject
to regulatory approval)
Balance, end of period 6,410,833 6,411 3,772,644 3,772
------------ ------------- --------- -------------
ADDITIONAL PAID -IN CAPITAL:
Balance, beginning of period -- 9,775,173 -- 8,674,356
Shares issued, pursuant to -
Private placement, conversion of
preferred shares and other -- 294,190 -- 22,664
Debt to equity conversion -- 289,151 -- --
Cost of financing -- (49,155) -- --
Balance, end of period -- 10,309,359 -- 8,697,020
------------ ------------- --------- -------------
DEFICIT:
Balance, beginning of period -- (9,987,355) -- (9,117,265)
Net loss (Note 14) -- (302,497) -- (389,853)
------------ ------------- --------- -------------
Balance, end of period -- (10,289,852) -- (9,507,118)
------------ ------------- --------- -------------
TOTAL SHAREHOLDERS' EQUITY
(Deficiency) 6,410,833 $ 25,918 3,772,644 $ (806,326)
============ ============= ========= =============
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 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.
As of September 30, 1998, the Company's financial statements reflect both a
positive shareholders' equity and a reduction in losses from operations
compared to prior periods, as restated per Note 14. In addition, subsequent
to September 30, 1998, the Company's operating subsidiary obtained a new
$1,800,000 asset-based line of credit, which is expected to save
approximately 10 percentage points per annum in interest and fees, and
which is expected to finance the continued growth of the Company. See Note
5.
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 15.
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 $34,628 and
$41,530 at September 30, 1998 and March 31, 1998, respectively.
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.
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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.
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.
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
September 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.
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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 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
SEPT. 30, MARCH 31,
1998 1998
------------- -------------
Raw materials and supplies $ 657,938 $ 830,174
Finished goods 671,971 684,502
Less allowance for a slow-moving inventory (261,543) (246,925)
------------- -------------
$ 1,068,366 $ 1,267,751
4. FIXED ASSETS
SEPTEMBER 30, 1998
-----------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET
------------- ------------- -------------
Land $ -- $ -- $ --
Laboratory equipment 142,573 69,357 73,216
Office equipment 180,747 83,786 96,961
Production Equipment - owned and leased 1,005,141 330,187 674,954
Building -- -- --
Leasehold improvements 147,358 6,088 141,270
------------- ------------- -------------
$ 1,475,819 $ 489,418 $ 986,401
============= ============= =============
MARCH 31, 1998
-----------------------------------------------------
ACCUMULATED
COST DEPRECIATION NET
------------- ------------- -------------
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
============= ============= =============
On July 22, 1998, the Company sold the land and building of its previous
operations facility.
5. OPERATING LINE OF CREDIT
At September 30, 1998, the Company had a short-term line of credit for up
to $750,000, secured by the Company's assets. Funds available to be
advanced were limited to 80% of eligible accounts receivable. Also, on
September 30, 1998, the Company had an inventory term loan of $240,000,
which required principal repayments of $30,000 per month. Interest was
payable on funds advanced at the rate of prime rate as
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published by the Comerica Bank - California plus 10% per annum. This line
of credit was to expire on May 1, 1999.
Subsequent to September 30, 1998, the Company, on October 30, 1998, through
its operating subsidiary, replaced the above-mentioned loan arrangements
with a new $1,800,000 asset-based revolving line of credit. Funds available
to be advanced are limited to 85% of eligible accounts receivable up to the
maximum loan amount, and to 50% of eligible inventories to a maximum of
$600,000. Interest is payable on funds advanced at prime rate as published
by Citibank, N.A. plus 2.75% per annum.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at September 30, 1998 and March 31, 1998 consisted of the
following:
9/30/98 3/31/98
------------- -------------
Capital lease obligations bearing interest ranging from 12 1/2% $ 632,022 $ 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 $ -- 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 -- 72,000
------------- -------------
632,022 594,444
Less current portion 97,412 88,800
------------- -------------
$ 534,610 $ 505,644
============= =============
7. RELATED PARTY TRANSACTIONS
At September 30, 1998, $42,888 was due to related parties 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.
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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.
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. To date a total of 54,764 preferred shares have been exchanged or
redeemed for 54,764 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.
SHARES FOR DEBT
At September 30, 1998, the number of common shares of common stock
outstanding and the equity portion of the balance sheet reflect the
conversion of $289,785 of debt to 633,883 shares, which are to be issued
subject to regulatory approval.
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, received shareholder approval to
adopt a 1998 Economic Value Added Incentive Compensation Plan (EVA Plan).
This Plan authorizes 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.
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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 entitled the holder to receive one common share and one common
share purchase warrant. The exercise of two warrants entitled the holder to
purchase one additional common share for a period of two years following
the closing of placement. The warrant exercise price was Cdn$1.00 for the
first twelve months and Cdn$1.25 for the second twelve months.
During the quarter ended September 30, 1998, the Company issued 400,000
shares of its common stock related to the aforementioned transaction, along
with warrants to purchase a further 200,000 common shares. Net proceeds
totaled $272,108. Additionally, a commission, paid in special warrants,
consisted of 32,000 common shares and warrants to purchase 16,000 common
shares, and agents who arranged the placement of the above financing
warrants received 80,000 additional warrants exercisable into 80,000 common
shares. The agents' warrants have the same components, terms and conditions
as the share purchase warrants.
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 of the first three quarters 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").
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Had the Company followed the Canadian basis, the balance sheets contained
within the consolidated financial statements would have been reported as
follows:
SEPTEMBER 30, MARCH 31,
1998 1998
------------------------------------ ------------------------------------
U.S. CANADIAN U.S. CANADIAN
BASIS BASIS BASIS BASIS
------------- ------------- ------------- -------------
ASSETS
Current assets $ 2,230,458 $ 2,230,458 $ 2,278,970 $ 2,278,970
Fixed assets (a) 986,401 971,177 982,774 967,550
Other assets 8,855 8,855 9,386 9,386
------------- ------------- ------------- -------------
$ 3,225,714 $ 3,210,490 $ 3,271,130 $ 3,255,906
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities $ 2,397,261 $ 2,397,261 $ 2,657,645 $ 2,657,645
Long term liabilities 577,498 577,498 594,539 594,539
Minority interest 225,037 225,037 225,783 225,783
Common shares 6,411 6,411 5,345 5,345
Additional paid-in capital (a) (c) 10,309,359 9,509,317 9,624,750 8,822,110
Deficit (a) (c) (10,289,852) (9,505,034) (9,836,932) (9,049,516)
------------- ------------- ------------- -------------
$ 3,225,714 $ 3,210,490 $ 3,271,130 $ 3,255,906
============= ============= ============= =============
Had the Company followed the Canadian basis, the Statements of Operations
contained within the consolidated financial statements would have been
reported as follows:
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
------------- -------------
Net loss under U.S. basis $ (302,497) $ (389,853)
Effect of change in reporting currency (a) -- --
Effect of Arrangement costs (c) -- --
------------- -------------
Net loss under Canadian basis $ (302,497) $ (389,853)
============= =============
Basic and diluted net loss per share under
U.S. basis $ (.06) $ (.10)
============= =============
Basic and diluted net loss per share under
Canadian basis (b) $ (.05) $ (.10)
============= =============
(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.
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POLYMER SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Six Months ended September 30, 1998
RESULTS FROM OPERATIONS
Sales revenue increased 2% to $1,957,047 and 4% to $3,692,308 for the three and
six month periods ended September 30, 1998, respectively, over sales revenue for
the comparable periods one year ago, reflecting continued growth in demand for
the Company's coatings and other products.
Gross profit increased to 29% from 19% during the second quarter and to 25% from
19% for the first six months from the comparable periods last year. Cost of
goods sold for the year-ago periods 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 September 30, 1998
totaled $255,996, an increase of 8% from $237,189 in the comparable period a
year ago, due primarily to a strengthening of the marketing and sales staff in
order to expand the customer base and distribution channels. For the six months
ending September 30, 1998 and 1997, marketing and sales expense totaled $445,755
and $462,460, respectively.
General and administrative expense totaled $168,001 for the quarter ended
September 30, 1998, approximately the same level as $167,536 for the year-ago
period. For the six months ended September, 1998 and 1997, general and
administrative expense totaled $413,048 and $355,089, respectively.
Research and development expenses were $150,571 for the three months ended
September 30, 1998, up 96% from $76,768 in the year-ago comparable period,
reflecting an increase in the allocation of the Company's resources relating to
product development. Research and development expenses for the six months ending
September 30, 1998 and 1997 were $239,453 and $154,700, respectively.
Interest expense totaled $58,917 for the quarter ended September 30, 1998,
compared with $43,156 for the same quarter a year ago. The 37% increase was due
to the increased use of the Company's operating line of credit and the addition
of capital lease obligations. Interest expense for the six months ended
September 30, 1998 and 1997 was $125,760 and $84,147, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $2,048 in Cash compared to $1,177 at the
end of fiscal 1998. Cash flow used in operating activities totaled $518,804 in
the first six months of 1998 versus $272,512 in the comparable period last year.
Additionally, capital additions were $392,352 in the six months ended September
30, 1998 compared to $77,406 for the same period a year ago. These requirements
were financed primarily from a private placement, sale of the Company's former
operating facility, conversion of debt to common equity, lease financing and
borrowings on the Company's line of credit.
The Company has a working capital deficiency of $166,803 at September 30, 1998
versus $378,675 at the end of fiscal 1998. The current ratio at September 30,
1998 was 0.9 versus 0.9 for the fiscal 1998 year-end ratio.
OUTLOOK
During the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999,
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.
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15
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.
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PART II - OTHER INFORMATION
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its 1998 Annual General Meeting of Shareholders on August
6, 1998. The shareholders approved:
a) the appointment of Price Waterhouse LLP (now PricewaterhouseCoopers),
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 September 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.
The Company filed a Current Report on Form 8-K, dated September 23, 1998,
which reported an issuance of shares pursuant to a Private Placement of
Special Warrants.
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: November 12, 1998 /s/ Gordon L. Ellis
-------------------------------
Gordon L. Ellis
Chairman
Date: November 12, 1998 /s/ Darryl Jones
-------------------------------
Darryl Jones
Director
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