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 March 31, 1998
--------------
{ } Transition Report pursuant to Section 13 or 15(d) of the Securities
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)
California 95-2746949
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
506 Paula Avenue, Glendale, California 91201
--------------------------------------------
(Address of Principal Executive Offices)
(818) 247-7601
----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the Small Business Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 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 of 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 May 5, 1998 8,673,732
Traditional Small Business Disclosure Format (check one):
YES X No
----- -----
1
<PAGE>
POLLUTION RESEARCH AND CONTROL CORP.
Form 10-QSB
For the Three-Month Period Ended March 31, 1998
TABLE OF CONTENTS
Page
----
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information 10
Item 6(b) Reports on Form 8-K 10
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
As Of
03/31/98
--------
CURRENT ASSETS
Cash $ 215,899
Marketable securities 3,250
Accounts receivable, trade, less allowanc
for doubtful accounts of $19,381 660,711
Inventories (Note 2) 2,076,648
Other current assets 10,444
----------
TOTAL CURRENT ASSETS 2,966,952
----------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, less accumulated depreciation
of $418,299 (Note 6) 1,419,095
----------
OTHER ASSETS
Advances to related party (Note 5) 187,854
Loan costs, less accumulated amortization
of $50,458 40,366
Other intangibles 23,509
Other 5,110
----------
TOTAL OTHER ASSETS 256,839
----------
TOTAL ASSETS $4,642,886
==========
See notes to financial statements
3
<PAGE>
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
As of
CURRENT LIABILITIES 3/31/98
-------
Notes payable $ 405,037
Accounts payable 521,427
Accrued liabilities 132,222
Current portion of long-term debt - related party 11,728
Current portion of long-term debt (Note 6) 619,442
-----------
TOTAL CURRENT LIABILITIES 1,689,856
LONG-TERM DEBT, less current portion (Note 6) 86,233
LONG-TERM DEBT, related party, less current portion 30,069
DEFERRED RENT 102,036
DEFERRED INCOME TAXES --
COMMITMENTS AND CONTINGENCIES (Note 3) --
-----------
TOTAL LIABILITIES 1,908,194
-----------
SHAREHOLDERS' EQUITY (Note 4)
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 6,588,980
Less notes receivable (86,857)
Other paid in capital 145,764
Accumulated deficit (3,916,445)
Unrealized gain on marketable securities 3,250
-----------
TOTAL SHAREHOLDERS' EQUITY 2,734,692
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,642,886
===========
See notes to financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Net Revenues $ 1,270,887 $ 2,357,260
Cost of goods sold 722,950 1,730,278
----------- -----------
Gross profit 547,937 626,982
----------- -----------
Operating expenses:
Selling, general and administrative expenses 536,543 619,275
Research and development 960 6,730
----------- -----------
Total operating expenses 537,503 626,005
----------- -----------
Income from operations 10,434 977
Interest expense (30,620) (71,523)
Interest and other income 1,130 1,077
----------- -----------
Income (loss) from continuing operations (19,056) (69,469)
before income taxes
Provision for income taxes (all deferred) -- (10,000)
----------- -----------
Income (loss) from continuing operations (19,056) (59,469)
----------- -----------
Discontinued operations (Note 5)
Income (loss) from discontinued operations (26,418) 61,132
Gain on Disposal 154,575 --
----------- -----------
128,157 61,132
----------- -----------
Net Income $ 109,101 $ 1,663
=========== ===========
Earnings per share
Net Income (loss) from continuing operations $ (.002) $ (.0068)
=========== ===========
Net Income (loss) from discontinued operations $ .01 $ .0010
=========== ===========
Net Income (loss) $ .01 $ .0002
=========== ===========
Weighted Average Shares 8,673,732 8,739,815
=========== ===========
See notes to financial statements
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31
--------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 109,101 $ 1,663
Adjustments to reconcile net income to net cash
used for operating activities:
Gain on disposal of subsidiary (154,575) --
Losses on disposed subsidiary 26,418 --
Depreciation and amortization 37,917 58,150
Deferred income taxes -- (10,000)
Deferred rent 22,379 25,379
Changes in operating assets and liabilities:
Accounts receivable, trade, net (56,988) (101,990)
Inventories 224,587 54,570
Other current assets 9,776 6,022
Other assets 998 4,004
Accounts payable (99,011) (200,933)
Accrued liabilities (119,814) (54,482)
Unearned revenue (143,695) (50,820)
--------- ---------
Net cash used for operating activities (142,907) (268,437)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold (1,919) (3,689)
--------- ---------
improvements
Net cash used for investing activities (1,919) (3,689)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank line of credit - advances (repayments) (20,000) (100,000)
Net increase (decrease) in Nutek line of credit (104,086) 291,104
Repayments of long-term debt (30,084) (61,176)
Additional borrowing under long-term debt -- 100,000
--------- ---------
Net cash provided by financing activities (154,170) 229,928
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (1,124)
--------- ---------
NET INCREASE (DECREASE) IN CASH (298,996) (43,322)
CASH AT BEGINNING OF PERIOD 514,895 723,170
--------- ---------
CASH AT END OF PERIOD $ 215,899 $ 679,848
========= =========
Supplemental Disclosure:
Cash paid for:
Interest $ 23,870 --
Taxes $ -- --
See notes to financial statements
6
</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 period 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, 1997.
2. Inventories:
Inventories at March 31, 1998 consisted of the following:
Raw Materials $1,310,580
Work-in-Progress 154,065
Finished Goods 612,003
----------
$2,076,648
==========
3. 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.
4. Shareholders' Equity:
Options and Warrants
- --------------------
As of March 31, 1998, the Company had 4,268,336 options and warrants outstanding
at exercise prices ranging from $0.55 to $2.00 which, if exercised, would
generate proceeds to the Company of $4,547,376.
5. Discontinued Operations:
Effective February 28, 1998 the Company disposed of one of its subsidiaries,
Logan Research, Ltd. a private United Kingdom company engaged in the design,
manufacture and marketing of medical instrumentation. This subsidiary accounted
for 7% of the 1997 consolidated revenues of the Company. The disposal was
accomplished through a return of 100% of LRL's stock to the original owner in
exchange for release from a $300,000 note payable, as well as related accrued
interest of $47,250. Prior to the disposal, the Company advanced funds to this
subsidiary. These advances are expected to be repaid.
6. Notes Payable and Long Term Debt:
The Company is in violation of its loan with its Nutek subsidiary's asset-based
lender. As a result, the Company has classified the related debt as current.
Further, should a liquidation of equipment be required there is no assurance
that the indicated liquidation value may not be realized and the Company may be
subjected to a deficiency judgment. No independent appraisal has been done at
this time.
7
<PAGE>
7. Subsequent Events:
a. Chapter 11
Attempts to sell Nutek, Inc. as a going business failed. Management then decided
that every effort should be made to maximize the liquidated value of fabrication
equipment and that the "printed circuit board" portion of Nutek, Inc. had
operating value as a vehicle to eventually pay off deficiency sums, if any, and
unsecured creditors. Nutek was therefore placed into Chapter 11 reorganization.
The major secured lender has opposed this filing, but as of the date of this
report, the filing has been upheld. There is no assurance that the Chapter 11
status can be maintained since further hearings are scheduled for June, 1998.
b. Negotiations regarding sale of Dasibi and LMD.
Low cash levels resulting from the third quarter of 1997, coupled with
increasing cash requirements from Nutek, prompted the adoption of a
reorganization plan by the Company to attempt to raise equity money from the
Company's intangible technology assets. On May 5, 1998 the Company began
negotiating a stock purchase agreement with a 100% stock sale of Dasibi and LMD.
The intention of both parties is to effect a Company dividend in kind of
$3,450,000 in stock face value and retain the balance of stock in the Company.
The nominal or face value of the transaction is a minimum value of $6,000,000 or
a maximum value of $8,000,000. The transaction must be approved by a majority
vote of the outstanding shares of the Company.
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 in the first
quarter derived approximately 44% of its revenue from sales of its instruments
and their replacement parts.
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 4% of its revenues from medical
sales.
The balance of revenues was derived from Nutek, Inc. whose fabrication
operations were suspended during March, 1998. See Note 6 of Notes to Finacial
Statements.
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
8
<PAGE>
products 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; and the Company's
ability to retain its NASDAQ small cap listing since the Company's stock price
is currently trading below $1.00.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998, versus Three Months Ended March 31, 1997
Net revenues decreased 46% from $2,357,260 during the first quarter of 1997 to
$1,270,887 during the first quarter of 1998. The decrease was primarily due to a
decrease of $583,000 of Dasibi revenue, resulting from a continuation of price
pressure levels realized in the third and fourth quarters of 1997. The remaining
decrease resulted from ending the control panel business of Nutek in March, 1998
and a slowdown of contract awards to LMD in January and February of 1998.
Gross margin was 43% for the first quarter of 1998 versus 27% for the first
quarter of 1997, because the Company downsized in accordance with the indicated
revenues of the third and fourth quarters of 1997.
Selling, general and administrative expenses decreased $82,732, or 13%, during
the first quarter of 1998, over the same period in 1997, principally due to the
downsizing discussed above.
As a result of the foregoing factors, net operating loss decreased from a net
operating loss of ($69,469) during the three months ended March 31, 1997 to a
net operating loss of ($19,056) during the three months ended March 31, 1998.
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. The low
market value of the Company's securities and the unstable operating performance
has severely restricted access to capital.
Net cash used in operating activities in the three months ended March 31, 1998,
amounted to $142,907, due to inventory buildup because of decreased sales. The
Company's cash level decreased 68% as compared to the end of the first quarter
of 1997, a total of $299,000 consisting of $143,000 applied to operating
activities, $2,000 to property acquisition, and $154,000 applied to reduction of
long-term liabilities including $104,000 decrease in the Nutek line of credit.
Working capital was $1,277,096 at March 31, 1998.
The Company has no material commitments for capital expenditures as of March 31,
1998. 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.
9
<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 March 31, 1998.
10
<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: May 5, 1998 By: /s/ Albert E. Gosselin Jr
------------------- ------------------------------------
Albert E. Gosselin, Jr.,
President and
Chief Executive Officer
Date: May 5, 1998 By: /s/ Donald Ford
-------------------- ------------------------------------
Donald Ford, Chief Financial
Officer
11
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 216
<SECURITIES> 3
<RECEIVABLES> 680
<ALLOWANCES> (19)
<INVENTORY> 2,076
<CURRENT-ASSETS> 2,967
<PP&E> 1,837
<DEPRECIATION> 418
<TOTAL-ASSETS> 4,643
<CURRENT-LIABILITIES> 1,690
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,643
<SALES> 1,271
<TOTAL-REVENUES> 0
<CGS> 723
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (19)
<DISCONTINUED> 128
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
