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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
COMMISSION FILE NUMBER 0-20866
WILSHIRE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 33-0433823
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5861 EDISON PLACE
CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices)
(760) 929-7200
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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The number of shares outstanding of the registrant's only class of
Common Stock, no par value, was 12,943,385 on March 31, 1999.
Transitional Small Business Disclosure Format. Yes No X
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WILSHIRE TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
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PART 1 - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of 3
February 28, 1999 and November 30, 1998
Condensed Consolidated Statements of Operations 4
for the Three Months Ended February 28, 1999 and
February 28, 1998
Condensed Consolidated Statements of Cash Flows 5
for the Three Months Ended February 28, 1999 and
February 28, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
or Plan of Operation
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, November 30,
1999 1998
------------ ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash ................................................. $ 163,000 $ 42,000
Accounts receivable trade, less allowance for doubtful
accounts of $6,000 at February 28, 1999
and $5,000 at November 30, 1998, respectively ..... 304,000 310,000
Inventories (Note 2) ................................. 1,283,000 1,228,000
Note receivable (Note 3) ............................. 96,000 127,000
Other current assets ................................. 300,000 246,000
------------ ------------
Total current assets ..................................... 2,146,000 1,953,000
Property and equipment, less accumulated depreciation .... 3,655,000 3,565,000
Goodwill, less accumulated amortization of $375,000
and $365,000 at February 28, 1999 and November 30,
1998, respectively ................................... 367,000 377,000
Patents and trademarks, net .............................. 118,000 116,000
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$ 6,286,000 $ 6,011,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable ..................................... $ 394,000 $ 412,000
Accrued expenses ..................................... 541,000 416,000
Interest payable ..................................... 831,000 578,000
Line of credit (Note 4) .............................. 9,438,000 8,407,000
------------ ------------
Total current liabilities ................................ 11,204,000 9,813,000
Shareholders' equity (net capital deficiency)
Preferred stock, no par value, 2,000,000
shares authorized and none issued and outstanding . -- --
Common stock, no par value, 50,000,000 shares
authorized; 12,943,385 shares issued and
outstanding at February 28, 1999 and
November 30, 1998 ................................. 25,907,000 25,907,000
Common stock warrants ................................ 387,000 370,000
Accumulated deficit .................................. (31,212,000) (30,079,000)
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Total shareholders' equity (net capital deficiency) ...... (4,918,000) (3,802,000)
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$ 6,286,000 $ 6,011,000
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Note: The condensed consolidated balance sheet at November 30, 1998 has been
derived from the audited financial statements at that date but does
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes.
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters Ended February 28,
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1999 1998
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Net sales ................................ $ 631,000 $ 1,053,000
Cost of sales ............................ 764,000 959,000
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Gross profit (loss) ...................... (133,000) 94,000
Operating expenses:
Marketing and selling ................ 156,000 130,000
General and administrative ........... 492,000 372,000
Research and development ............. 66,000 74,000
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Total operating expenses ................. 714,000 576,000
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Loss from operations ..................... (847,000) (482,000)
Other income ............................. 2,000 1,000
Interest income (expense), net ........... (287,000) (122,000)
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Loss before provision
for state income taxes ............... (1,132,000) (603,000)
Provision for state income taxes - current 1,000 1,000
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Net loss ................................. $ (1,133,000) $ (604,000)
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Weighted average shares outstanding ...... 12,943,000 12,943,000
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Basic and diluted loss per share ......... $ (0.09) $ (0.05)
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See accompanying notes.
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WILSHIRE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Quarters Ended February 28,
--------------------------------
1999 1998
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OPERATING ACTIVITIES
Net loss ............................................................... $(1,133,000) $ (604,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 191,000 59,000
Provision for loss on accounts receivable .................... 1,000 --
Net change in operating assets and liabilities:
(Increase) decrease in accounts receivable ................ 5,000 (155,000)
Increase in inventories ................................... (55,000) (190,000)
Increase in other current assets .......................... (54,000) (10,000)
Increase (decrease) in accounts payable and
accrued expenses ......................................... 107,000 885,000
Increase in interest payable .............................. 253,000 127,000
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Net cash provided by (used in) operating activities .................... (685,000) 112,000
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INVESTING ACTIVITIES
Purchase of equipment .................................................. (253,000) (947,000)
Decrease in note receivable from sale of
discontinued operations ................................................ 31,000 44,000
Increase in other assets ............................................... (3,000) (5,000)
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Net cash used in investing activities .................................. (225,000) (908,000)
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FINANCING ACTIVITIES
Proceeds from line of credit ........................................... 1,031,000 750,000
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Net cash provided by financing activities .............................. 1,031,000 750,000
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NET INCREASE (DECREASE) IN CASH ........................................ 121,000 (46,000)
CASH - BEGINNING OF PERIOD ............................................. 42,000 137,000
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CASH - END OF PERIOD ................................................... $ 163,000 $ 91,000
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See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wilshire Technologies, Inc. (the "Company") develops, manufactures and markets
engineered polymer products for industrial clean room use. The Company, based in
Carlsbad, California, markets products through its Wilshire Contamination
Control Division, and manufactures certain of its products in its wholly-owned
Mexican subsidiary, Wilshire International de Mexico S.A. de C.V. During 1996,
the Company divested its Medical Products and Transdermal Products divisions and
has since focused primarily on products used in industrial clean rooms, such as
gloves and contamination control products.
BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB for quarterly
reports under Section 13 or 15(d) of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter and three months ended February 28, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending November 30, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended November 30, 1998.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Significant intercompany amounts and transactions
have been eliminated.
2. FINANCIAL STATEMENT INFORMATION
Inventories consist of the following:
FEBRUARY 28, NOVEMBER 30,
1999 1998
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Raw materials ...................... $ 716,000 $ 604,000
Work in process .................... 357,000 239,000
Finished goods ..................... 210,000 385,000
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$1,283,000 $1,228,000
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3. NOTE RECEIVABLE
In June 1996, the Company sold its Medical Products division to Acacia
Laboratories of Texas, Inc.. Pursuant to the sale, the Company received a
$540,000 secured note, payable over 36 months, and bearing interest at a rate of
5% per annum.
4. LINE OF CREDIT
On January 5, 1996, the Company and Trilon Dominion entered into a Credit
Agreement (the "Agreement") for a credit line of $1,000,000 secured by the
Company's assets. Under the terms of the Agreement, the principal was due on
June 30, 1996 and the interest was payable monthly at a rate of prime plus
3.75%. In connection with the loan, the Company issued Trilon Dominion a
five-year warrant that entitles Trilon Dominion to purchase 100,000 shares of
the Company's authorized but unissued common stock at an exercise price of $0.75
per share, subject to adjustment to protect against dilution. The warrant is
exercisable immediately and expires on January 5, 2001. Also, under the terms of
the Agreement, the Company issued Trilon Dominion a second five-year warrant
which became exercisable when the Company and Trilon Dominion amended the
Agreement to extend the termination date of the Agreement to December 31, 1996.
The second warrant entitles Trilon Dominion to purchase 25,000 shares of the
Company's authorized but unissued common stock at an exercise price of $1.75 per
share and it expires on January 5, 2001. The holder of each of such five-year
warrants may, without payment to the Company, convert the warrant in whole or in
part into shares of the Company's common stock having a market value equal to
the difference between (x) the market value per share of common stock multiplied
by the number of warrants that are converted and (y) the warrant exercise price,
multiplied by the number of warrants that are converted.
The Agreement was amended further on September 30, 1996, April 15, 1997, and
September 19, 1997. Each amendment increased the credit line by $1,000,000, up
to a total of $4,000,000, and extended the termination date, to June 30, 1998.
Trilon Dominion received a warrant to purchase 100,000 shares at the market
price with each credit line increase, and a warrant to purchase 25,000 shares at
the market price with each termination date extension. Warrants for 225,000
shares were issued in each of fiscal years 1996 and 1997 and warrants for 50,000
shares were issued in fiscal year 1998. The Company recorded the estimated fair
value of the warrants issued in fiscal year 1997 and fiscal year 1998 at $0.07
per underlying common share with a corresponding charge to earnings of $16,000
in fiscal 1997 and $3,500 in fiscal year 1998.
On January 7, 1998, February 17, 1998 and March 10, 1998, the Company and Trilon
Dominion completed Demand Notes, each for $250,000 at an interest rate of
12.25%, to fund the Company's ongoing operations until a new credit facility
could be completed.
On March 31, 1998 the Company and Trilon Dominion completed an Amended and
Restated Credit Agreement and Revolving Line of Credit (the "Amended
Agreement":) which included the principal of $4,000,000 from the previous
Agreement and Amendments, the principal of $750,000 from the three Demand Notes,
the accrued interest and management fees of $543,297 on the Agreement and Notes,
and a new credit line commitment of $2,200,000. Under the terms of the Amended
Agreement, the principal of $7,493,297 was due on December 31, 1998, and the
interest was payable quarterly at an annual rate of 11.5%. In connection with
the Amendment Agreement, the Company paid Trilon $100,000 for debt issuance
costs and issued Trilon Dominion a five-year warrant that entitles Trilon
Dominion to purchase 650,000 shares of the Company's authorized but unissued
common stock at an exercise price of $0.41 per share, subject to adjustment to
protect against dilution. The warrant is exercisable immediately and expires on
March 31, 2003. The Company recorded the estimated fair value of the warrant to
purchase 650,000 shares as a debt issuance cost in the second quarter of fiscal
year 1998 at $0.07 per underlying common share. On December 31, 1998, under the
terms of the Amended Agreement, the Company issued Trilon Dominion a second
five-year warrant which became
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exercisable when the Company and Trilon Dominion agreed to extend the due date
of the principal and interest from December 31, 1998 to January 31, 2000. The
second warrant entitles Trilon Dominion to purchase 250,000 shares of the
Company's authorized but unissued common stock at an exercise price of $0.42 per
underlying common share and expires on March 31, 2003. On December 31, 1998, the
Company recorded the estimated fair value of the warrants at $0.07 per
underlying common share with a corresponding charge to earnings of $17,500.
On August 5, 1998, September 1, 1998, October 1, 1998, November 2, 1998,
December 1, 1998, January 4, 1999, February 1, 1999, February 23, 1999 and April
1, 1999 the Company and Trilon Dominion completed Demand Notes at an interest
rate of 11.5% to fund the Company's ongoing operations. The August and September
notes each were in the amount of $220,000, the October, January, both February
notes and the April notes each were in the amount of $250,000, the November note
was in the amount of $240,000 and the December note was in the amount of
$260,000.
5. COMMITMENTS AND CONTINGENCIES
BREAST IMPLANT LITIGATION
During the first three months of 1999, there have been no significant
developments in the Breast Implant Litigation. For information regarding legal
proceedings, refer to the information contained in the Company's Annual Report
on Form 10-KSB for the fiscal year ended November 30, 1998, under Note 6 to the
financial statements included therein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
During the first quarter of 1999, the Company focused upon completing the
start-up phase of the its new glove production line in the Company's leased
plant facility in Tijuana, Mexico. Consequently, management expects to begin
production of the Company's DuraCLEAN(R) polyurethane gloves mid-second quarter
of fiscal year 1999.
The Company also implemented product improvement projects and expanded its sales
organization during the first quarter ended February 28, 1999. Management
focused the product improvement projects to meet and exceed present demands of
the semi-conductor and disk drive marketplace. The Company expanded its sales
organization by forming a national sales organization of technical field
specialists and forming partnerships with key distributors. In February 1999,
the Company entered into an exclusive distribution agreement with VWR Scientific
Corporation, granting VWR exclusive U.S. distribution of the Company's
UltraSOLV(R) polyurethane chamber cleaning products.
From time to time the Company may report, through its press releases and/or
Securities and Exchange Commission filings, certain forward-looking statements
that are subject to risks and uncertainties. Important factors that could cause
actual results to differ materially from those projected by such forward-looking
statements are set forth in Exhibit 99 to the Company's Annual Report on Form
10-KSB for the fiscal year ended November 30, 1996. These include operating
losses, liquidity, reliance on major distributors, new product development,
competition, technological change, patents, trade secrets, product liability,
dependence on key suppliers, and dependence on key personnel.
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RESULTS OF OPERATIONS
NET SALES
The Company markets its products directly to end users through an internal sales
force utilizing outside distributors. Revenue for all sales is recognized when
title transfers, generally when products are shipped.
Net sales deceased by $422,000 (40.0%) to $631,000 in the first quarter of 1999
as compared to $1,053,000 in the first quarter of 1998. The decease in sales was
attributable to the loss of the Company's largest consumer of UltraSOLV(TM)
wipers due to price erosion during the second quarter of fiscal year 1998.
Consequently, the Company has continuously focused on cost reduction programs to
improve its price position in the market.
GROSS PROFIT (DEFICIT)
The Company recorded a gross loss of $133,000 as compared to gross profit of
$94,000 in the same period of 1998. Although the Company recognized gross
profits on the sale of its contamination control products, the loss was
attributable to the significant start-up costs associated with the new glove
manufacturing plant located in Tijuana, Mexico.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include additional costs related to
the Company's marketing activities and administrative costs (such as executive
and office salaries, related payroll expenses, investor relations, professional
fees, supplies and utilities).
General and administrative expenses increased $120,000 (32%) to $492,000 in the
first quarter of 1999 from $372,000 in the first quarter of 1998. The increase
in expense was due primarily to an accrual of a severance reserve of $50,000 for
Mr. Van Egmond, additions in headcount in executive management, and costs
associated with the start-up of the glove's manufacturing operation in Tijuana,
Mexico. In the first three months of 1999, marketing and selling expenses
increased by $26,000 (20%) to $156,000 from $130,000 in the same period of 1998.
The increase was primarily due to additional personnel expenses, increased
travel, and the implementation of a sales commissions plan for the Company's
technical field specialists.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased $8,000 (11%) to $66,000 in the first
quarter of 1999 as compared to $74,000 in the first quarter of 1998. The decline
was primarily due to decreased project expenses.
INTEREST INCOME (EXPENSE), NET
The Company reported higher interest expense in the first quarter versus the
same period of 1998 due to increased debt outstanding. The interest expense was
related primarily to the line of credit due to Trilon Dominion Partners, LLC.
(see Note 4).
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INCOME TAXES
For the quarters ended February 28, 1999 and February 28, 1998, the Company
sustained losses for both financial reporting and income tax purposes. A tax
provision of $1,000 related to state income taxes was recorded in the financial
statements for 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash to
fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; adequate lines of credit; and
financial flexibility to attract long-term capital on satisfactory terms.
During 1998 and the first three months of 1999, the Company has not generated
sufficient cash from operations to fund its working capital and equipment
purchase requirements. Net cash used in operating activities was $685,000 in the
first three months of 1999 versus net cash of $112,000 provided by operating
activities in the first quarter of 1998. The increase in the cash used in
operating activities was primarily due to higher interest expense and start-up
costs of the Company's glove manufacturing plant.
Net cash used in investing activities was $225,000 in the first three months of
1999, versus net cash used by investing activities of $908,000 in the first
three months of 1998. The higher investing activities in the first quarter of
the prior year was due to major purchases of glove production equipment that
occurred in the first part of fiscal 1998.
Net cash provided by financing activities was $1,031,000 in the first three
months of 1999 versus $750,000 in the first three months of 1998. The debt
financing in both years was obtained from Trilon Dominion Partners, LLC.
On January 5, 1996, the Company and Trilon Dominion entered into an Agreement
for a credit line of $1,000,000 secured by the Company's assets. Under the terms
of the Agreement, the principal was due on June 30, 1996 and the interest was
payable monthly at a rate of prime plus 3.75%. The Agreement was amended on June
30, 1996, September 30, 1996, April 15, 1997, and September 19, 1997 to a total
credit line of $4 million and a termination date of June 30, 1998. See Note 4 to
the financial statements for details of the Agreement and Amendments.
On January 7, 1998, February 17, 1998, and March 10, 1998 the Company and Trilon
Dominion completed Demand Notes, each for $250,000 at an interest rate of
12.25%, to fund the Company's ongoing operations until a new credit facility
could be completed.
On March 31, 1998 the Company and Trilon Dominion completed an Amended and
Restated Credit Agreement and Revolving Line of Credit (the "Amended Agreement")
which included the principal of $4,000,000 from the previous Agreement and
Amendments, the principal of $750,000 from the three Demand Notes, the accrued
interest and management fees of $543,297 on the Agreement and Notes, and a new
credit line commitment of $2,200,000. Under the terms of the Amended Agreement,
the principal of $7,493,297 is due on December 31, 1998, and the interest is
payable quarterly at an annual rate of 11.5%. In connection with the Amended
Agreement, the Company paid Trilon Dominion $100,000 for debt issuance costs and
issued Trilon Dominion a five-year warrant that entitles Trilon Dominion to
purchase 650,000 shares of the Company's authorized but unissued common stock at
an exercise price of $0.41 per share, subject to adjustment to protect against
dilution. The warrant is exercisable immediately and expires on March 31, 2003.
The Company recorded the estimated fair value of the warrant to purchase
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650,000 shares as a debt issuance cost in the first quarter of fiscal year 1998
at $0.07 per underlying common share. Also, under the terms of the Amended
Agreement, the Company issued Trilon Dominion a first five-year warrant which
became exercisable when the Company did not pay the principal and interest due
on December 31, 1998 and expires on March 31, 2003. The first warrant entitles
Trilon Dominion to purchase 250,000 shares of the Company's authorized but
unissued common stock at an exercise price equal to the market price on December
31, 1998. On December 31, 1998, the Company recorded the estimated fair value of
the warrants at $0.07 per underlying common share with a corresponding charge to
earnings of $17,500.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
For information regarding legal proceedings, refer to the information
contained in the Company's annual report on Form 10-KSB for the fiscal
year ended November 30, 1998 under the heading, "Legal Proceedings" and
Note 6 to the financial statements therein.
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.133 Demand Note dated February 23, 1999 between the Registrant
and Trilon Dominion Partners, L.L.C.
10.134 Employment Agreement dated February 8, 1999 between the
Registrant and Ms. Kathleen Terry.
10.135 Demand Note dated April 1, 1999 between the Registrant and
Trilon Dominion Partners, L.L.C.
10.136 Form of stock option granted on May 18, 1998 to Mr. Paul
Fennell.
10.137 Form of stock option granted on August 17, 1998 to Mr. Kevin
Mulvihill.
10.138 Form of stock option granted on February 8, 1999 to Ms.
Kathleen Terry.
(b) REPORTS ON FORM 8-K:
None
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SIGNATURES
In accordance with requirements of the Securities Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WILSHIRE TECHNOLOGIES, INC.
Dated: April 13, 1999 By: /s/ Kathleen E. Terry
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Kathleen E. Terry
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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