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 June 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 August 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 Six-Month Period Ended June 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.......................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 11
Part II Other Information...................................... 13
Item 4. Submission of Matters to a Vote
of Security Holders.................................... 13
Item 6(b). Reports on Form 8-K......................... 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
AS OF
CURRENT ASSETS 6/30/97
----------
Cash $ 674,938
Marketable securities 99,000
Accounts receivable, trade, less allowance for doubtful
accounts of $41,382 1,397,138
Inventories (Note 2) 2,200,198
Other current assets 32,189
----------
TOTAL CURRENT ASSETS 4,403,463
----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation of
$301,712 (Note 2) 1,559,233
OTHER ASSETS
Goodwill, less accumulated amortization of $7,950 295,856
Loan costs, less accumulated amortization of $30,275 60,549
Organization costs, less accumulated
amortization of $6,800 33,709
Other 18,855
----------
TOTAL OTHER ASSETS 408,969
----------
TOTAL ASSETS $6,371,665
==========
3
<PAGE>
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS'EQUITY
(Unaudited)
AS OF
CURRENT LIABILITIES 6/30/97
-----------
Notes payable (Note 3) $ 710,997
Current portion of long-term debt, related parties 11,047
Current portion of long-term debt (Note 3) 222,681
Accounts payable 713,650
Accrued liabilities 216,889
-----------
TOTAL CURRENT LIABILITIES 1,875,264
LONG-TERM DEBT, related party, less current portion 362,476
DEFERRED RENT 103,936
LONG-TERM DEBT, less current portion (Note 3) 636,138
DEFERRED INCOME TAXES 45,000
COMMITMENTS AND CONTINGENCIES (Note 4) --
SHAREHOLDERS' EQUITY (Note 5)
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 (3,416,557)
Unrealized gain on marketable securities 99,000
Unrealized foreign currency translation loss 18,521
-----------
TOTAL SHAREHOLDERS' EQUITY 3,348,851
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,371,665
===========
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended June 30
-------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $ 1,935,629 $ 1,929,848
Cost of goods sold 1,802,492 1,265,954
----------- -----------
Gross Profit 133,137 663,894
----------- -----------
Operating Expenses:
Selling, general and administrative expenses 656,254 421,099
Research and development 16,493 41,876
Total operating expenses 672,747 462,975
----------- -----------
Income from operations (539,610) 200,919
Interest expense (88,053) (4,375)
Interest income 1,106 1,102
Other income 2,911 --
----------- -----------
Income before income taxes (623,646) 197,646
Provision for income taxes:
Current -- --
Deferred (Note 6) -- (24,000)
----------- -----------
Total provision for income taxes -- (24,000)
----------- -----------
Net income (loss) $ (623,646) $ 221,646
=========== ===========
Earnings per share:
Primary:
Net income (loss) $ (.07) $ .03
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 8,673,732 7,374,396
=========== ===========
Fully Diluted:
Net income (loss) not applicable $ .03
===========
Weighted average number of common and
common equivalent shares outstanding 7,414,352
===========
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months
Ended June 30
-------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $ 4,487,995 $ 3,558,894
Cost of goods sold 3,630,974 2,195,010
----------- -----------
Gross Profit 857,021 1,363,884
----------- -----------
Operating Expenses:
Selling, general and administrative expenses 1,311,362 824,713
Research and development 23,223 79,898
Total operating expenses 1,334,585 904,611
----------- -----------
Income from operations (477,564) 459,273
Interest expense (159,514) (8,212)
Interest income 2,183 2,240
Other income 2,911 3,500
----------- -----------
Income before income taxes (631,984) 456,801
Provision for income taxes:
Current -- --
Deferred (Note 6) (10,000) (24,000)
----------- -----------
Total provision for income taxes (10,000) (24,000)
----------- -----------
Net income (loss) $ (621,984) $ 480,801
=========== ===========
Earnings per share:
Primary:
Net income (loss) $ (.07) $ .07
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 8,673,732 7,171,287
=========== ===========
Fully Diluted:
Net income (loss) not applicable $ .07
===========
Weighted average number of common and
common equivalent shares outstanding 7,242,885
===========
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30
-------------
1997 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ($621,984) $ 480,801
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 116,574 25,509
Deferred income taxes (10,000) (24,000)
Inventory reserves 200,000 --
Changes in operating assets and liabilities:
Accounts receivable, trade, net 324,004 (930,037)
Inventories 151,390 223,291
Other current assets (10,992) 3,917
Other assets (1,221) --
Accounts payable (288,568) (56,322)
Accrued liabilities (39,492) (52,589)
Unearned revenues (50,820) --
Deferred rent 27,745 (7,267)
--------- ---------
Net cash provided by (used for) operating activities (203,364) (336,697)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, equipment, and leasehold
improvements (5,224) (19,076)
Acquisition of subsidiaries, net of cash acquired of
$186,304 -- (433,795)
Other assets -- (13,793)
--------- ---------
Net cash used for investing activities (5,224) (466,664)
--------- ---------
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit - advances (repayments) 5,000 --
Net increase in Nutek line of credit 152,342 171,145
Additional borrowings under long-term debt 100,000 --
Proceeds from issuance of common stock (Note 8) -- 777,390
Repayment of long-term debt (95,518) --
--------- ---------
Net cash provided by financing activities 161,824 948,535
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (1,468) (1,187)
--------- ---------
NET INCREASE IN CASH (48,232) 143,987
CASH AT BEGINNING OF PERIOD 723,170 641,695
CASH AT END OF PERIOD $ 674,938 $ 785,682
========= =========
8
</TABLE>
<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 at June 30, 1997, include the activity of two
subsidiaries, NUTEK, Inc. and LOGAN MEDICAL DEVICES, Inc., which were acquired
by the company in June, 1996.
Pro-forma results for the six months ended June 30, 1996, presented as if
the acquisition of Nutek had occurred at the beginning of the quarter is
presented below:
Six Months
Ended
June 30
1996
Revenues $ 5,315,000
============
Net income (loss) $ 371,000
=============
Earnings per share:
Primary:
Net income (loss) $ .05
=============
Weighted average common and common
equivalent shares outstanding 7,258,787
=============
Fully diluted:
Net income $ .05
=============
Weighted average common and common
equivalent shares outstanding 7,518,395
Results of operations for Logan Medical Devices, Inc. for the six months
ended June 30, 1996 are not material to the consolidated results of operations.
The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10KSB for the year ended December 31, 1996.
9
<PAGE>
2. Inventories:
Inventories at June 30, 1997 consisted of the following:
Materials and Supplies $ 682,812
Work-in-Process 386,745
Finished Goods 1,330,641
Reserve (200,000)
-----------
$ 2,200,198
============
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
$291,104 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 June 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
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.
10
<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 ("Dasibi"). The
Company currently derives the majority of its revenue from sales of Dasibi's
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 30% 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 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 ability to effectively manage expense growth relative to
revenue growth in anticipation of continued pressure on gross margins.
RESULTS OF OPERATIONS
Net revenues increased 26% from $3,559,000 during the six-month period
ended June 30, 1996 to $4,488,000 during the six-month period ended June 30,
1997, primarily as a result of the acquisition of Nutek, Inc. in June 1996.
However, core business revenues declined 30% for the three month period because
of fewer instrument orders obtained in an escalating competitive price
environment. Gross margin declined from 38% to 19% for the six month period, and
from 34% to 7% for the three month period, primarily due to three factors.
First, Nutek is operating at a lower gross margin of 23%, secondly, because
Dasibi is operating at lower margins of 21% due to ongoing competitive price
pressures, and finally, due to the write off of possible obsolete inventory for
both Nutek and Dasibi.
Selling, general and administrative expenses increased $487,000 from
$825,000 in the six months ended June 30, 1996 to $1,311,000 in the six months
ended June 30, 1997 and increased $235,000 for the three months ended June 30,
1997 as compared to the same period in 1996, primarily due to the full inclusion
of Nutek in the Company's business.
Research and development expenditures declined $57,000 and $25,000 during
the six month 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, none of the subsidiaries reached
"break-even" revenues, and net income decreased $1,103,000 for the six-month
period ended June 30, 1997 over the same period in 1996, and decreased $845,292
for the three month period over the comparable period of the prior year.
11
<PAGE>
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 six months ended June 30, 1997, operations generated all but
$204,000 of the cash needs of the Company. An additonal $162,000 was generated
through borrowings under the Nutek line of credit and term loan. This resulted
in a decrease in cash of $48,000.
Working capital at June 30, 1997 was approximately $2,500,000, a decrease
of $700,000 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 June 30, 1997, Nutek had borrowings of $515,997 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 June
30, 1997, Dasibi had borrowed $200,000 under this agreement, $190,000 of which
was outstanding at July 30, 1997.
The Company has no material commitments for capital expenditures as of June
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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 18, 1997 the Company's Annual Meeting of Shareholders was held.
The following members of the Board of Directors were re-elected with the
following vote:
Name Vote For Vote Withheld
---- -------- -------------
Albert E. Gosselin, Jr. 7,836,805 396,636
Gary L. Dudley 7,266,786 966,655
Craig E. Gosselin 7,254,600 978,841
Barbara L. Gosselin 7,264,594 968,847
Marcia Smith 7,268,700 964,741
Barry Soltani 7,263,725 969,716
No other matters were submitted to the shareholders.
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 six months
ended June 30, 1997.
13
<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: August 13, 1997 By: /s/ Albert E. Gosselin, Jr.
--------------------------------
Albert E. Gosselin, Jr.,
President and
Chief Executive Officer
Date: August 13, 1997 By: /s/ Cynthia L. Gosselin
-------------------------------
Cynthia L. Gosselin,
Chief Financial Officer
14
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 674
<SECURITIES> 0
<RECEIVABLES> 1,397
<ALLOWANCES> 0
<INVENTORY> 2,200
<CURRENT-ASSETS> 4,403
<PP&E> 1,860
<DEPRECIATION> 301
<TOTAL-ASSETS> 6,371
<CURRENT-LIABILITIES> 1,875
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,371
<SALES> 4,487
<TOTAL-REVENUES> 0
<CGS> 3,630
<TOTAL-COSTS> 3,630
<OTHER-EXPENSES> 1,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (631)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (631)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
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