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, 1997
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
For the Transition Period from _____ to _____
Commission file Number 0-14266
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POLLUTION RESEARCH AND CONTROL CORP.
------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
California 95-2746949
---------- ----------
(State of or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
506 Paula Ave.
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:
Class Date No. of shares outstanding
----------- -------------------- -------------------------
Common November 13, 1997 8,673,732
Traditional Small Business Disclosure Format (check one):
Yes X No
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<PAGE>
FORM 10-QSB
For the Nine-Month Period Ended September 30, 1997
TABLE OF CONTENTS
Page
----
Part I Financial Information
Item 1. Financial Statements........................ 3
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....... 10
Part II Other Information................................... 12
Item 4. Submission of Matters to a Vote
of Security Holders................................. 12
Item 6(b). Reports on Form 8-K...................... 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
AS OF
CURRENT ASSETS 9/30/97
-------
Cash $ 279,915
Marketable securities 23,000
Accounts receivable, trade, less allowance for
doubtful accounts of $41,382 1,329,006
Inventories (Note 2) 2,184,976
Other current assets 8,885
----------
TOTAL CURRENT ASSETS 3,825,782
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PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of $347,577 1,519,778
OTHER ASSETS
Goodwill, less accumulated amortization of $9,577 285,818
Loan costs, less accumulated amortization of $37,843 57,981
Other intangible assets, less accumulated
amortization of $7,225 33,284
Other 12,000
----------
TOTAL OTHER ASSETS 389,083
----------
TOTAL ASSETS $5,734,643
==========
3
<PAGE>
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS'EQUITY
(Unaudited)
AS OF
CURRENT LIABILITIES 9/30/97
-----------
Notes payable (Notes 2 and 5) $ 805,290
Accounts payable 610,963
Accrued liabilities 227,177
Current portion of long-term debt (Notes 2 and 5) 221,874
Current portion of long-term debt, related party 11,269
-----------
TOTAL CURRENT LIABILITIES 1,876,573
LONG-TERM DEBT, less current portion (Notes 2 and 5) 581,392
LONG-TERM DEBT, related party, less current portion 358,868
DEFERRED RENT, less current portion 103,303
DEFERRED TAXES (Note 6) 45,000
COMMITMENTS AND CONTINGENCIES (Note 4) --
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, 8,673,732 issued and outstanding 2,626,932
Less notes receivable (86,857)
Other paid in capital 4,107,812
Accumulated deficit (3,900,094)
Unrealized gain on marketable securities 23,000
Unrealized foreign currency translation loss (1,286)
TOTAL SHAREHOLDERS' EQUITY 2,769,507
-----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 5,734,643
===========
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended Sept.30
-------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues $ 1,229,983 $ 2,859,872
Cost of goods sold 1,016,224 1,860,188
------------ ------------
Gross Profit 213,759 999,684
------------ ------------
Operating Expenses:
Selling, general and administrative expenses 702,403 788,156
Research and development 9,309 46,263
Total operating expenses 711,712 834,419
------------ ------------
Income (Loss) from operations (497,953) 165,265
Interest expense (65,433) (68,225)
Interest income 2,126 2,258
Other income 77,724 267,444
------------ ------------
Income (Loss) before income taxes (483,536) 366,742
Provision (Benefit) for income taxes:
Current -- --
Deferred (Note 6) -- (88,000)
------------ ------------
Total provision (Benefit) for income taxes -- (88,000)
------------ ------------
Net income (loss) $ (483,536) $ 454,742
============ ============
Earnings per share:
Net income (loss) $ (.06) $ .04
============ ============
Weighted average number of common and
common equivalent shares outstanding 8,673,732 10,297,003
============ ============
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months
Ended Sept. 30
--------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $ 5,719,978 $ 6,418,766
Cost of goods sold 4,647,198 4,055,198
----------- -----------
Gross Profit 1,070,780 2,363,568
----------- -----------
Operating Expenses:
Selling, general and administrative expenses 2,013,765 1,612,869
Research and development 32,532 126,161
Total operating expenses 2,046,297 1,739,030
----------- -----------
Income (Loss) from operations (975,517) 624,538
Interest expense (224,947) (76,437)
Interest income 4,309 4,498
Other income 80,635 270,944
----------- -----------
Income (Loss) before income taxes (1,115,520) 823,543
Provision (Benefit) for income taxes:
Current -- --
Deferred (Note 6) (10,000) (112,000)
----------- -----------
Total provision (Benefit) for income taxes (10,000) (112,000)
----------- -----------
Net income (loss) $(1,105,520) $ 935,543
=========== ===========
Earnings per share (Note 10):
Net income (loss) $ (.13) $ .12
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 8,673,732 7,585,481
=========== ===========
Fully Diluted:
Net income (loss) Not applicable $ .12
===========
Weighted average number of common and
common equivalent shares outstanding 7,726,140
===========
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended Sept 30
-------------
1997 1996
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (Loss) ($1,105,520) $ 935,543
Adjustments to Reconcile Net Income To Net Cash
Used for Operating Activities:
Depreciation and Amortization 172,578 72,587
Deferred Income Taxes (10,000) (112,000)
Inventory Reserves 200,000 --
Changes in Operating Assets and Liabilities:
Accounts Receivable, Trade, Net 388,710 (1,044,708)
Inventories 158,056 127,231
Other Current Assets 11,940 (22,521)
Other Assets 634 --
Accounts Payable (390,884) (149,749)
Accrued Liabilities (28,926) (242,339)
Unearned Revenues (50,820) --
Deferred Rent 27,112 (10,900)
----------- -----------
Net Cash Used For Operating Activities (627,120) (446,856)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property, Equipment, and Leasehold
Improvements (12,491) (43,058)
Acquisition of Subsidiaries, Net of Cash Acquired of
$186,304 -- (433,795)
Reduction in Certificate of Deposit -- 21,750
Other assets -- (29,012)
----------- -----------
Net Cash Used for Investing Activities (12,491) (484,115)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Bank Line of Credit 18,450 100,000
Proceeds fromCommon Stock (Note 8) -- 1,077,390
Payoff of LRL Secured Overdraft -- (90,942)
Net Borrowings (Reduction) in Nutek Line of Credit 133,182 (125,821)
Additional Borrowings Under Long-Term Debt 100,000 --
Repayments of long-term debt (53,752) (117,473)
----------- -----------
Net cash provided by financing activities 197,880 843,154
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (1,524) (1,430)
-----------
NET DECREASE IN CASH (443,255) (89,247)
CASH AT BEGINNING OF PERIOD 723,170 641,695
CASH AT END OF PERIOD $ 279,915 $ 552,448
=========== ===========
</TABLE>
7
<PAGE>
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, 1996.
2. Inventories:
Inventories at September 30, 1997 consisted of the following:
Materials and Supplies $ 1,875,381
Work-in-Process 423,581
Finished Goods 86,014
Reserve (200,000)
------------
$ 2,184,976
============
3. Notes Payable and Long Term Debt:
Since the filing of the Company's Annual Report on Form 10-K, the Company
has increased its borrowings under the Nutek working capital facility by
$133,182 and increased the term loan by an additional $100,000.
4. Commitments and Contingencies:
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.
5. Shareholders' Equity:
Options and Warrants
- --------------------
As of September 30, 1997, the Company had 3,205,500 options and 1,275,836
warrants outstanding at exercise prices ranging from $0.55 to $2.00 which, if
exercised, would generate proceeds to the Company of $4,821,386.
6. Earnings per Share:
Earnings per share is computed by dividing net income or loss by the
weighted average number of common and common equivalent shares (options and
warrants) outstanding during the period. Options and warrants which are dilutive
8
<PAGE>
are included as common equivalents under the treasury stock method, unless the
dilutive options and warrants would, if exercised, generate proceeds sufficient
to repurchase more than 20% of the Company's outstanding common stock at market
prices, in which case the modified treasury stock method applies. During the
quarter ended June 30, 1997, there were not sufficient number of dilutive
options and warrants to cause application of the modified treasury stock method.
7. Non-cash Transactions:
In June 1996 the Company's subsidiary Logan Medical Services, Inc. issued
$300,000 in notes to the former shareholders of Logan Research Limited, and the
Company exchanged 600,500 options for the 1,201,000 shares of Logan Medical
Services it did not already own, in connection with the acquisition of LMD and
LRL.
9
<PAGE>
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 the majority of its revenue from sales of its instruments and
their replacement parts, referred to as the "core business".
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 70% of its revenue 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 12% 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 ability to effectively manage expense growth relative to
revenue growth in anticipation of continued pressure on gross margins.
RESULTS OF OPERATIONS
Net revenues decreased 10% from $6,419,000 during the nine month period
ended September 30, 1996 to $5,718,000 during the nine month period ended
September 30, 1997, primarily as a result of a decline in core business revenues
of 56% for the three month period because of fewer orders for Dasibi's
instruments as a result of an escalating, ongoing competitive price environment
in a reduced overall market. Gross margin declined from 37% to 19% for the
nine-month period, and from 35% to 17% for the three month period, primarily due
to three factors. First, the Nutek acquisition normally operates at a lower
gross margin of less than 20%, secondly, Dasibi operated at lower margins of 21%
and 11% for the respective periods due to the ongoing competitive price
pressures described above, and finally, the Company wrote off possible obsolete
inventory for both Nutek and Dasibi.
Selling, general and administrative expenses increased $401,000 from
$1,613,000 in the nine months ended September 30, 1996 to $2,014,000 in the nine
months ended September 30, 1997, due to the acquisition of Nutek and LMD in
fiscal 1996, but decreased $86,000 for the three months ended September 30, 1997
as compared to the same period in 1996. In the core business fixed expenses
decreased during the nine-month period from $227,400 per month to $100,000 per
month, and fixed expenses for the third quarter of 1997 decreased to
approximately $300,000 from approximately $682,000 in the same period of 1996.
10
<PAGE>
Research and development expenditures decreased by $94,000 and $37,000
during the nine and three month periods, respectively, due to cost reduction
measures, which included the closure of the Company's Texas R&D facility.
As a result of the foregoing factors, net income decreased $2,041,000 for
the nine-month period ended September 30, 1997 versus the same period in 1996,
and decreased $938,000 for the three month period versus the comparable period
of the prior year.
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.
During the nine months ended September 30, 1997, operations generated all
but $627,000 of the cash needs of the Company. An additional $198,000 was
generated through borrowings under the Nutek line of credit and term loan. This
resulted in a decrease in cash of $443,000.
Working capital at September 30, 1997 was approximately $1,950,000, a
decrease of $550,000 from the previous quarter. This decrease is due primarily
to the loss from operations arising as a result of the lower production levels.
As of September 30, 1997, Nutek had borrowings of $597,000 under its line
of credit which has a maximum of the lesser of $1,000,000 or the borrowing base
(as defined in the loan agreement). Dasibi renewed its line of credit with a
bank, which provides for borrowings of up to $200,000 through June 3, 1998. As
of September 30, 1997, Dasibi had borrowed $168,000 under this agreement, of
which $160,000 was outstanding at November 5, 1997.
The Company has no material commitments for capital expenditures as of
September 30, 1997. 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.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable.
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997
12
<PAGE>
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 14, 1997 By: /s/ Albert E. Gosselin, Jr.
---------------------------------
Albert E. Gosselin, Jr., President
and Chief Executive Officer
Date: November 14, 1997 By: /s/ Cynthia L. Gosselin
--------------------------------
Cynthia L. Gosselin, Chief
Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 279
<SECURITIES> 0
<RECEIVABLES> 1,329
<ALLOWANCES> 0
<INVENTORY> 2,184
<CURRENT-ASSETS> 3,825
<PP&E> 1,866
<DEPRECIATION> 347
<TOTAL-ASSETS> 5,734
<CURRENT-LIABILITIES> 1,876
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,734
<SALES> 5,719
<TOTAL-REVENUES> 0
<CGS> 4,647
<TOTAL-COSTS> 4,647
<OTHER-EXPENSES> 2,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> (1,194)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,105)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
