<PAGE> 1
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 September 30, 1996
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
For the Transition Period from ______ to ______
Commission File Number 0-14266
POLLUTION RESEARCH AND CONTROL CORP.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
<TABLE>
<S> <C>
California 95-2746949
- ---------- ----------
(State of or Other Jurisdiction of (I.R.S Employer Identification No.)
Incorporation or Organization)
</TABLE>
506 Paula Avenue
Glendale, California 91201
----------------------------------------
(Address of Principal Executive Offices)
(818) 247-7601
--------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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 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
---- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Date No. of Shares Outstanding
----- ---- -------------------------
<S> <C> <C>
Common November 8, 1996 8,549,565
</TABLE>
Traditional Small Business Disclosure Format (check one):
Yes X No
---- ----
<PAGE> 2
FORM 10-QSB
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Financial Information Page
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet ............................................................... 3
Consolidated Statements of Operations .................................................... 5
Consolidated Statements of Cash Flows .................................................... 7
Notes to Financial Statements ............................................................ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................................... 15
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders .......................... 18
Item 6(b). Reports on Form 8-K .......................................................... 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
09/30/96
-----------
<S> <C>
CURRENT ASSETS
Cash $ 552,448
Marketable securities 100,000
Accounts receivable, trade, less allowance for doubtful
accounts of $44,734 1,961,704
Inventories (Note 3) 2,788,531
Deferred tax assets (Note 6) 169,956
Other current assets 63,708
-----------
TOTAL CURRENT ASSETS 5,636,347
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of $160,819 (Note 2) 1,654,939
OTHER ASSETS
Goodwill, less accumulated amortization of $1,407 (Note 4) 223,817
Loan costs, less accumulated amortization of $7,569 (Note 4) 83,255
Organization costs, less accumulated amortization of $4,250 12,750
Deferred tax assets (Note 6) 81,000
Other 35,024
----------
TOTAL OTHER ASSETS 435,846
----------
TOTAL ASSETS $7,727,132
==========
</TABLE>
See notes to the financial statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
09/30/96
------------
<S> <C>
CURRENT LIABILITIES
Notes payable (Notes 2 and 5) $ 659,248
Accounts payable 969,838
Accrued liabilities 264,472
Current portion of long-term debt (Notes 2 and 5) 184,786
----------
TOTAL CURRENT LIABILITIES 2,078,344
LONG-TERM DEBT, less current portion (Notes 2 and 5) 1,087,350
DEFERRED RENT, less current portion 90,837
DEFERRED INCOME TAXES (Note 6) 445,000
COMMITMENTS AND CONTINGENCIES (Note 7) -
SHAREHOLDERS' EQUITY (Note 8)
Preferred Stock, no par value; 20,000,000 shares -
authorized, no shares issued and outstanding
Common Stock, no par value; 30,000,000 shares
authorized, 8,549,565 issued and outstanding 6,509,013
Less notes receivable (86,857)
Accumulated deficit (2,499,442)
Unrealized gain on marketable securities 100,000
Unrealized foreign currency translation gain 2,887
----------
TOTAL SHAREHOLDERS' EQUITY 4,025,601
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,727,132
==========
</TABLE>
See notes to the financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
---------------------
1996 1995
---- ----
<S> <C> <C>
Net Revenues $2,859,872 $1,376,286
Cost of Goods Sold 1,860,188 895,057
--------- ---------
Gross Profit 999,684 481,229
Operating Expenses:
Selling, general and administrative expenses 788,156 493,720
Research and development 46,263 69,370
---------- ----------
Total Operating Expenses 834,419 563,090
---------- ----------
Income (Loss) from Operations 165,265 (81,861)
Interest Expense (68,225) (2,008)
Interest Income 2,258 --
Other Income 267,444 1,111
---------- ----------
Income (Loss) before Income Taxes 366,742 (82,758)
Provision (Benefit) for Income Taxes:
Current -- --
Deferred (Note 6) (88,000) --
---------- ----------
Total Provision (Benefit) for Income Taxes (88,000) --
---------- ----------
Net Income (Loss) $ 454,742 $ (82,758)
========== ==========
Earnings per Share (Note 10):
Net Income (Loss) $ .05 $ (.01)
========== ==========
Weighted Average Number of Common and Common
Equivalent Shares Outstanding 10,297,003 6,932,662
========== =========
See Notes to Financial Statements.
</TABLE>
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
Net Revenues $6,418,766 $4,279,630
Cost of Goods Sold 4,055,198 2,614,674
---------- ----------
Gross Profit 2,363,568 1,664,956
Operating Expenses:
Selling, General and Administrative
Expenses 1,612,869 1,404,970
Research and Development 126,161 187,353
---------- ----------
Total Operating Expenses 1,739,030 1,592,323
---------- ----------
Income from Operations 624,538 72,633
Interest Expense (76,437) (2,008)
Interest Income 4,498 --
Other Income 270,944 2,127
---------- ----------
Income Before Income Taxes 823,543 72,752
Provision (Benefit) for Income Taxes:
Current -- --
Deferred (Note 6) (112,000) --
---------- ----------
Total Provision (Benefit) for Income Taxes (112,000) --
---------- ----------
Net Income $ 935,543 $ 72,752
========== ==========
Earnings Per Share (Note 10):
Primary:
Net Income $ .12 $ .01
========== ==========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 7,585,481 6,932,662
========== ==========
Fully Diluted:
Net Income $ .12
==========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 7,726,140
==========
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 935,543 $ 72,752
Adjustments to Reconcile Net Income to Net Cash
Used for Operating Activities:
Depreciation and Amortization 72,587 74,004
Deferred Income Taxes (112,000) --
Changes in Operating Assets and Liabilities:
Accounts Receivable, Trade, Net (1,044,708) 130,192
Inventories 127,231 (17,805)
Other Current Assets (22,521) (6,739)
Accounts Payable (149,749) (70,503)
Accrued Liabilities (242,339) (201,933)
Deferred Rent (10,900) 13,323
---------- ----------
Net Cash Used for Operating Activities (446,856) (6,709)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property, Equipment, and Leasehold
Improvements (43,058) (38,432)
Acquisition of Subsidiaries, Net of Cash Acquired of
$186,304 (433,795) --
Reduction in Certificate of Deposit 21,750 --
Other Assets (29,012) (107,000)
---------- ----------
Net Cash Used for Investing Activities (484,115) (145,432)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in PRCC Bank Line of Credit 100,000 95,000
Proceeds from Issuance of Common Stock (Note 8) 1,077,390 --
Payoff of LRL Secured Overdraft (90,942) --
Net Reduction in Nutek Line of Credit (125,821) --
Repayments of Long-Term Debt (117,473) --
---------- ----------
Net Cash Provided by Financing Activities 843,154 95,000
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH (1,430) --
---------- ----------
NET DECREASE IN CASH (89,247) (57,141)
CASH AT BEGINNING OF PERIOD 641,695 464,821
---------- ----------
CASH AT END OF PERIOD $ 552,448 $ 407,680
========== ==========
</TABLE>
See Notes to the Financial Statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The information furnished herein reflects all adjustments, consisting only
of normal recurring adjustments which are, in the opinion of management,
necessary to a fair presentation of the financial statements for the
periods presented. Interim results are not necessarily indicative of
results for a full year.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
2. SIGNIFICANT EVENTS AND TRANSACTIONS:
Effective June 19, 1996, the Company acquired 100% of the outstanding
stock of Nutek, Inc. ("Nutek"), a Florida corporation engaged in the
manufacture of electrical control panels for utility, pulp and paper mill
and other industrial process control applications. The Company paid
$315,000 in cash (inclusive of acquisition costs), and financed the
balance of the total purchase price of approximately $1,900,000 (including
the assumption of debt) with asset-based financing of $1,290,000, seller
financing of $150,000, with miscellaneous debt incurred or assumed
representing the remainder.
This transaction was a "material event" and was reported on a Form 8-K
filed with the Securities and Exchange Commission on July 3, 1996.
The acquisition was accounted for as a purchase. The purchase price was
assigned to current assets and liabilities at their fair values, with the
balance of approximately $1,500,000 assigned to property and equipment.
Effective June 1, 1996, the Company acquired 100% of the outstanding stock
of Logan Medical Devices, Inc. ("LMD"), a Colorado corporation, and its
wholly-owned subsidiary Logan Research Limited ("LRL") of Kent, England, a
private United Kingdom company limited by shares. LMD is essentially a
start-up company engaged in the manufacture of medical instrumentation for
non-invasive asthma diagnostic applications.
8
<PAGE> 9
The Company invested $284,000 in cash inclusive of acquisition costs (of
which LMD received $250,000) and issued $300,000 in notes to the former
shareholders of LRL. This acquisition was also accounted for as a
purchase. The balance sheet and operating results of LMD and LRL were not
material to the consolidated financial position or operations of the
Company.
Due to the acquisitions mentioned above occurring in June 1996, the
results for the nine months ended September 30, 1996 will not be
indicative of annual results.
3. INVENTORIES:
Inventories at September 30, 1996 consisted of the following:
<TABLE>
<S> <C>
Materials and Supplies $1,496,255
Work-in-Process 743,438
Finished Goods 548,838
----------
$2,788,531
==========
</TABLE>
The significant increase in inventories from the amount reported in the
Company's annual report on Form 10-K was due to the acquisitions described
above.
4. GOODWILL AND LOAN COSTS:
Since the filing of the Company's annual report on Form 10-K, the
following assets were acquired in addition to those mentioned elsewhere.
The goodwill arose in connection with the acquisition of LMD and LRL (see
Note 2), and represents the excess of the purchase price over the tangible
net assets of LMD and LRL as of the acquisition date. The goodwill will
be amortized over 40 years. The loan costs were related to the financing
of the Nutek acquisition, and will be amortized over the 3-year period of
the asset-based financing facility described below.
5. NOTES PAYABLE AND LONG TERM DEBT:
Since the filing of the Company's annual report on Form 10-K, significant
debt has been incurred.
In June 1996, the Company entered into an extension of its line of credit
agreement with a bank which provides for borrowings up to $300,000 through
June 3, 1997. Borrowings under this agreement bear interest at 2% above
the bank's prime rate and are collateralized by substantially all of the
Company's assets. Borrowings of $250,000 were outstanding at September
30, 1996.
In connection with the acquisition of Nutek, the Company obtained a
working capital facility for
9
<PAGE> 10
Nutek from an asset-based lender for the lesser of $1,000,000 or the
borrowing base (as defined). A total of $540,000 was advanced on this
facility in connection with the Nutek acquisition (see Note 2); $409,248
was outstanding at September 30, 1996. The note bears interest at 2 1/2%
over the large commercial bank prime rate and matures June 28, 1999.
Substantially all of Nutek's assets are pledged as collateral for this
note and the term loan described below, which were obtained from the same
asset-based lender. The related Loan and Security Agreement contains
numerous restrictive covenants common to asset-based financing.
Additionally, the Company has guaranteed these asset-based loans.
Long-term debt at September 30, 1996 consists of the following:
<TABLE>
<S> <C>
Nutek, Inc.
-----------
Term Loan $ 725,000
Notes payable to former shareholders 150,000
Installment Loans 74,998
---------
949,998
Logan Medical Devices, Inc.
---------------------------
Notes payable to former shareholders of
Logan Research Limited 300,000
-----------
Logan Research Limited
----------------------
Advances from officer 22,138
----------
Total 1,272,136
Less Current Portion 184,786
----------
Long-Term Debt $1,087,350
==========
</TABLE>
The term loan bears interest at the large commercial bank prime rate plus
3 1/2%. Monthly payments of $12,500 plus interest are required until June
28, 1999 at which time the remaining balance is due. The term loan was
received from the same asset-based lender who provided Nutek's working
capital facility - see the description of Nutek's working capital facility
above.
10
<PAGE> 11
The notes payable to the former shareholders of Nutek bear interest at 8%.
Monthly interest-only payments are required until June 30, 1997, after
which time the principal and interest is payable in 48 equal monthly
installments aggregating $3,661.95. The notes are unsecured.
The installment loans bear interest at rates ranging from 6 1/2% to 9% and
mature at various dates from February 1997 to April 2000. The loans are
secured by purchase money liens on the underlying assets.
The notes payable to the former shareholders of Logan Research Limited
bear interest at 9% per annum. Quarterly payments of accrued interest are
required commencing June 30, 1998. The notes are callable by the Company
at any time after December 28, 1996, and are callable by the holders at
any time after June 28, 1998. The notes are secured by substantially all
of the assets of LMD and LRL.
The advances from an officer of LRL are represented by an open advance
account. Management does not expect to repay the advances in the
foreseeable future.
6. DEFERRED TAXES:
The following significant items arose since the filing of the Company's
annual report on Form 10-K.
A deferred tax liability of $452,000 arose in connection with the
acquisition of Nutek, and primarily represents taxes on the difference
between the amount assigned to property and equipment in the purchase and
the tax bases of those assets.
Deferred tax assets of $105,000 in connection with the acquisition of
Nutek and $41,000 in connection with the acquisition of LMD and LRL were
recorded at the respective acquisition dates, representing the estimated
future tax benefits of the deductible temporary differences and net
operating loss carryforwards of these entities.
At December 31, 1995, the Company had a net operating loss carryforward of
approximately $2,600,000 for income tax purposes, and a related deferred
tax asset of $1,020,000 against which a 100% valuation allowance had been
made.
Management has reevaluated this valuation allowance and, commencing in the
second quarter of 1996, has begun to reduce the valuation allowance and
recognize income, as management now believes there is a greater
probability the net operating loss carryforwards will ultimately be
realized. Deferred taxes of $112,000 were credited to income in the nine
months ended September 30, 1996.
11
<PAGE> 12
7. COMMITMENTS AND CONTINGENCIES:
Since the filing of the Company's annual report on Form 10-K, the
following additional commitments have been entered into. In connection
with the acquisition of Nutek, a 5-year lease on the real estate of Nutek
was executed which provides for the following minimum rental payments:
<TABLE>
<CAPTION>
Twelve Months
Ended June 30
-------------
<S> <C>
1997 $ 36,000
1998 48,000
1999 60,000
2000 72,000
2001 84,000
--------
$300,000
========
</TABLE>
Nutek has the option to purchase the property at fair market value at any
time during the term of the lease.
In connection with the acquisition of LMD and LRL, LMD and LRL entered
into an employment agreement with Mr. Ronald Bruce Logan-Sinclair, Chief
Executive Officer of LMD and LRL, providing for minimum salary payments of
45,000 pounds per year (approximately $70,000 at current exchange rates)
until June 1999.
In October 1996, the Company terminated its agreement with a public
relations firm and cancelled 1,300,000 options held by the public
relations firm. The matter is presently in dispute. The probability or
amount of any loss to the Company cannot be determined at this time.
8. SHAREHOLDERS' EQUITY:
Since the filing of the Company's annual report on Form 10-K, significant
changes in shareholders' equity have occurred. In March 1996, the Company
received proceeds of $160,140 from the exercise of 266,900 warrants. In
June 1996, proceeds of $17,250 were received from the exercise of 25,000
warrants. In May 1996, the Company issued 1,000,003 units, consisting of
one share of common stock and one warrant exercisable at $1.00 in a
private placement, receiving proceeds of $600,000. In September 1996, the
Company issued 350,000 shares and 300,000 warrants exercisable at $1.50 in
a private placement, realizing proceeds of $300,000.
Options and Warrants
12
<PAGE> 13
On January 18, 1996, 5,000 options issued to an employee and 500,000
options issued to a public relations firm were canceled.
On March 29, 1996, 1,839,098 warrants which had not been exercised
expired.
On April 1, 1996, 10,000 options were issued to an individual at $0.68
(above market on the date of the grant), expiring March 31, 2000. The
options were exercised October 18, 1996.
On May 30, 1996, 1,000,003 warrants were issued to investors in connection
with the private placement agreement at $1.00 (above market value at the
date of the grant), expiring May 29, 2000.
On May 30, 1996, in connection with its agreement with a public relations
firm, as amended, the Company granted 1,000,000 options at $0.94 and
300,000 at $1.25 (all above market on the date of the grant), expiring May
29, 2000. As of October 25, 1996 the Company terminated its agreement
with the public relations firm and cancelled the 1,300,000 options. See
Note 7 to financial statements included herewith.
On June 1, 1996, in connection with its agreement to acquire Nutek, the
Company granted 500,000 options to various individuals at $1.10 (above
market at the date of the grant). The options are exercisable beginning
January 7, 1998 and expire May 31, 2000. On August 6, 1996, 160,000 of
these options were canceled.
On June 1, 1996, in connection with its agreement to acquire LMD, the
Company issued 600,500 options at $1.10 (above market on the date of the
grant) in exchange for the 1,201,000 shares of LMD outstanding it did not
already own, exercisable beginning on January 7, 1998 and expiring May
31, 2000.
On June 1, 1996, the Company granted 320,000 options at $1.10 (above
market on the date of the grant) to various individuals, expiring May 31,
2000.
On June 5, 1996, the Company granted 20,000 options to an employee at
$1.50 (above market on the date of the grant), exercisable beginning
December 6, 1996 and expiring June 4, 2000. These options were cancelled
in September 1996.
On July 1, 1996, the Company granted 25,000 options at $1.38 (above market
on the date of the grant) to an employee, expiring June 30, 2000.
In September 1996, the company issued 300,000 warrants to an investor in
connection with a private placement at $1.50 (above market price on the
date of the grant) expiring in September 2000.
13
<PAGE> 14
As of November 8, 1996, the Company had 1,505,500 options and 1,365,003
warrants outstanding at exercise prices ranging from $0.55 to $2.00
which, if exercised, would generate proceeds to the Company of
$3,147,553.
9. NON-CASH TRANSACTIONS
In June 1996, the Company's subsidiary Logan Medical Devices, Inc. issued
$300,000 in long-term notes to the former shareholders of Logan Research
Limited, and the Company exchanged 600,500 of its options for the
1,201,000 shares of Logan Medical Devices it did not already own, in
connection with the acquisition of LMD and LRL.
10. EARNINGS PER SHARE
The Company has a number of options and warrants outstanding. Generally,
under the treasury stock method, if dilutive, options and warrants are
included as common stock equivalents to the extent that the number of
shares able to be repurchased at market prices during the period using the
proceeds from the assumed exercise of the dilutive options and warrants
were less than the number of shares issuable from the assumed exercise of
dilutive options and warrants. Under generally accepted accounting
principles, if the proceeds from the assumed exercise of dilutive options
and warrants are sufficient to repurchase 20% of the shares of common
stock outstanding at the end of the period at market prices, the treasury
stock method is modified. Under the modified treasury stock method, the
proceeds from the assumed exercise of dilutive options and warrants are
assumed to be used first to repurchase 20% of the shares of common stock
outstanding at the end of the period at market prices, with the remaining
hypothetical proceeds assumed to first reduce short-term of long-term
borrowings, and any excess is assumed to be invested in U.S. government
securities or commercial paper.
During the nine month periods ended September 30, 1996 and 1995, and the
three-month period ended September 30, 1995, the treasury stock method was
used. During the three month period ended September 30, 1996, sufficient
dilutive options and warrants existed to require application of the
modified treasury stock method. The computation of earnings per share for
the three months ended September 30, 1996 (modified treasury stock method)
is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1996
--------------------
<S> <C>
Net Income $ 454,742
Assumed Reduction to Interest Expense 43,000
-----------
Adjusted Net Income $ 497,742
===========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 10,297,003
Earnings Per Share $ .05
===========
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
GENERAL
The Company designs, manufactures and markets automated continuous
monitoring instruments used to detect and measure various types of air
pollution through its wholly-owned subsidiary Dasibi Environmental Corp.
The Company currently derives approximately 50% of its revenue from sales
of its instruments and their replacement parts.
The Company designs, manufactures and markets electrical control panels
for automation use in utility, pulp and paper mill and various other
industrial process applications through its wholly-owned subsidiary Nutek,
Inc. ("Nutek") and currently derives approximately 45% of its revenues
from Nutek sales.
The Company designs, manufactures and markets medical instrumentation
through its wholly-owned subsidiary Logan Medical Devices, Inc. ("LMD"),
a start-up company applying the Company's technology to non-invasive
asthma diagnostics. The Company currently derives approximately 5% of its
revenue from medical sales.
The company's future operating results may be affected by a number of
factors, including: uncertainties relative to global economic conditions;
industry factors; the availability and cost of components; the Company's
ability to develop, manufacture and sell its products profitably; the
Company's ability to successfully increase its market share in its core
business while expanding its product base into other markets; the strength
of its distribution channels; and the Company's ablility to effectively
manage expense growth relative to revenue growth in anticipation of
continued pressure on gross margins.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1995
Net revenues increased 50% from $4,279,630 during the nine months ended
September 30, 1995 to $6,418,766 during the nine months ended September
30, 1996. The increase was primarily due to the two acquisitions
completed in June 1996 (see notes to financial statements included
herein), although revenues from the core air pollution instrument business
also improved 4%.
Gross profit was 37% during the nine months ended September 30, 1996
compared to 39% during the nine months ended September 30, 1995. The
decline was due to the effect of the Nutek acquisition in June; Nutek
operates on lower gross margins than the Dasibi instrument business.
Selling, general and administrative expenses increased $207,899 or 15%
during the nine months ended September 30, 1996 over the comparable period
in 1995. This was due to the expenses of the two companies acquired in
June 1996, offset in part by cost reduction measures the
15
<PAGE> 16
Company implemented.
Research and development expense declined $61,192 or 49% during the nine
months ended September 30, 1996 compared to the nine months ended
September 30, 1995, due to cost reduction measures. Interest expense
increased from $2,008 during the nine months ended September 30, 1995 to
$76,437 during the nine months ended September 30, 1996, due to the debt
incurred relating to the two acquisitions.
The Company recorded gains totalling $270,944 during the nine months ended
September 30, 1996 from the sale of a portion of its stock in Atlanta
Technology Group. The Company also recorded $112,000 in deferred tax
credits during the nine months ended September 30, 1996 (see notes to
financial statements included herein).
As a result of the foregoing factors, net income improved $862,791, from
$72,752 during the nine months ended September 30, 1995 to $935,543 during
the nine months ended September 30, 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1995
Net revenues increased 108% from $1,376,286 during the three months ended
September 30, 1995 to $2,859,872 during the three months ended September
30, 1996. The increase was primarily due to the two acquisitions
completed in June 1996 (see notes to financial statements included
herewith), although revenues from the core air pollution instrument
business also improved slightly (2%).
Gross margin was 35% during the third quarter of 1996 and 1995. Nutek,
Inc., added in June 1996, would be expected to reduce the overall gross
margin because it operates at lower margins than the core air pollution
instrument business; during the third quarter of 1995, the gross margin
was lower than the Company's traditional margin of approximately 40% due
to product mix.
Selling, general and administrative expenses increased $294,436 or 60%
during the third quarter of 1996 over the same period in 1995, principally
due to the expenses of the two companies acquired in June 1996.
Research and development declined $23,107, or 33% during the third quarter
of 1996 compared to the third quarter of 1995 due to cost reduction
measures.
Interest expense was $68,225 during the third quarter of 1996 compared to
$2,008 during the third quarter of 1995. The increase was due to the debt
incurred in connection with the two acquisitions in June 1996.
During the third quarter of 1996, the Company recorded a gain of $267,444
from the sale of a portion of its holdings in Atlanta Technology Group.
The Company also recorded deferred tax credits of $88,000 in the third
quarter of 1996 (see notes to financial statements included herewith).
As a result of the foregoing factors, net income improved $537,500, from a
net loss of $82,758 during the three months ended September 30, 1995 to
net income of $454,742 during the three
16
<PAGE> 17
months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth and cash needs primarily
through borrowings, and the public and private sales of its securities.
Net cash used in operating activities in the nine months ended September
30, 1996 amounted to $446,856, due principally to higher accounts
receivable resulting from higher levels of shipments. The Company
realized $1,077,390 from private placements and the exercise of warrants.
Approximately $433,795 was used for acquisitions; borrowings were reduced
a net $234,235; the remainder was available for operations.
Working capital was $3,558,003 at September 30, 1996.
In June 1996, the Company entered into an extension of its line of credit
with a bank, which now provides for borrowings of up to $300,000 through
June 3, 1997. As of September 30, 1996, $250,000 was outstanding. At
September 30, 1996, Nutek had borrowings of $409,248 under its line of
credit, which has a maximum of the lesser of $1,000,000 or the borrowing
base (as defined).
The Company has no material commitments for capital expenditures as of
September 30, 1996. The Company believes it will be able to meet its current
obligations with funds generated from operations and the existing credit
facilities during the next twelve months.
INFLATION
The Company believes that inflation has not had a material impact on its
business.
SEASONALITY
The Company does not believe that its business is seasonal.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 27, 1996, the Company's Annual Meeting of Shareholders was
held. The following members of the Board of Directors were re-elected
with the following vote:
<TABLE>
<CAPTION>
NAME VOTE FOR VOTE WITHHELD ABSTENTION BROKER NON-VOTES
- --------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Albert E. Gosselin, Jr 5,507,361 76,325 None None
Gary L. Dudley 5,505,761 77,925 None None
Craig E. Gosselin 5,484,329 99,357 None None
Barbara L. Gosselin 5,504,061 79,625 None None
Marcia Smith 5,511,761 71,925 None None
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company filed three (3) reports on Form 8-K during the period ended
September 30, 1996. On June 14, 1996, the Company filed a Current Report
on Form 8-K describing the retaining of Liviakis Financial Communications,
Inc. ("Liviakis") as its investor relations consultant, and the issuance of
stock options to Liviakis in connection therewith. On July 3, 1996, the
Company filed a Current Report on Form 8-K describing the acquisition of
Nutek, Inc. and the incurrence of debt related thereto. On August 29,
1996, the Company filed Amendment No. 1 to the Form 8-K filed on July 3, to
report the financial information required as a result of Nutek acquisition.
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POLLUTION RESEARCH AND CONTROL CORP.
------------------------------------
(Registrant)
Date: November 12, 1996 By: /s/ Albert E. Gosselin, Jr.
------------------- -------------------------------------------
Albert E. Gosselin, Jr.,
President and
Chief Executive Officer
Date: November 12, 1996 By: /s/ Cynthia L. Gosselin
------------------- --------------------------------------------
Cynthia L. Gosselin,
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 552
<SECURITIES> 1
<RECEIVABLES> 2,006
<ALLOWANCES> 45
<INVENTORY> 2,789
<CURRENT-ASSETS> 5,636
<PP&E> 1,815
<DEPRECIATION> 160
<TOTAL-ASSETS> 7,727
<CURRENT-LIABILITIES> 2,078
<BONDS> 0
0
0
<COMMON> 6,509
<OTHER-SE> (2,483)
<TOTAL-LIABILITY-AND-EQUITY> 7,727
<SALES> 6,419
<TOTAL-REVENUES> 6,419
<CGS> 4,055
<TOTAL-COSTS> 5,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 824
<INCOME-TAX> (112)
<INCOME-CONTINUING> 935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 935
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
