<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act Of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
COMMISSION FILE NUMBER 0-18583
POLYMER SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada, U.S.A. 88-0360526
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
1569 Dempsey Road
Vancouver, British Columbia
Canada V7K 1S8
(Address of principal executive offices)
(604) 683-3473
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of Dec. 31, 1998.
<TABLE>
<S> <C>
TITLE OF CLASS NO. OF SHARES
Common Shares, par value $0.001 6,410,833
</TABLE>
1
<PAGE> 2
POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Number Number
<S> <C>
PART I -- FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations for the periods ended
December 31, 1998 and 1997 ...................................................... 3
Consolidated Balance Sheets at December 31, 1998 and
March 31, 1998................................................................... 4
Consolidated Statements of Cash Flows for the periods ended
December 31, 1998 and 1997 ...................................................... 5
Consolidated Statements of Shareholders' Equity (Deficiency)
for the periods ended December 31, 1998 and 1997 ................................ 6
Notes to Consolidated Financial Statements............................................ 7
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .......................................................................... 14
PART II -- OTHER INFORMATION
4. Submission of matters to a vote of securities holders .................................... 16
5. Other Information ........................................................................ 16
6. Exhibits and Reports on Form 8-K ......................................................... 16
SIGNATURES .................................................................................... 16
</TABLE>
The accompanying interim consolidated financial statements and notes are
unaudited; However, in the opinion of management, they reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the results for the interim periods presented. Results of operations for the
periods ended December 31, 1998 are not necessarily indicative of results
expected for an entire year.
Certain statements in this Quarterly Report on Form 10-Q are not based on
historical facts, but are instead based upon a number of assumptions concerning
future conditions that may ultimately prove to be inaccurate. Actual events and
results may materially differ from anticipated results described in such
statements. The Company's ability to achieve such results is subject to certain
risks and uncertainties, including but not limited to, adverse business
conditions in the industries served by the Company and the general economy,
competition, new laws and regulations impacting the products that the Company
provides, and other risk factors affecting the Company's business which are
beyond the Company's control.
2
<PAGE> 3
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales revenue $ 1,966,646 $ 1,822,961 $ 5,658,954 $ 5,387,614
Costs of goods sold (Note 14) (1,419,281) (1,459,307) (4,190,070) (4,357,417)
----------- ----------- ----------- -----------
547,365 363,654 1,468,884 1,030,197
----------- ----------- ----------- -----------
Corporate and administrative expenses:
Marketing and sales 236,246 205,408 682,001 667,868
General and administrative 210,516 269,419 623,564 624,508
Research and development 134,691 85,015 374,144 239,715
----------- ----------- ----------- -----------
581,453 559,842 1,679,709 1,532,091
----------- ----------- ----------- -----------
Loss from operations (34,088) (196,188) (210,825) (501,894)
Interest expense (117,312) (53,643) (243,072) (137,790)
----------- ----------- ----------- -----------
Loss before provision for income taxes (151,400) (249,831) (453,897) (639,684)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (151,400) $ (249,831) $ (453,897) $ (639,684)
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (.02) $ (.06) $ (.08) $ (.17)
----------- ----------- ----------- -----------
Weighted average basic and diluted number
of shares outstanding 6,410,833 4,294,150 5,622,290 3,768,219
----------- ----------- ----------- -----------
</TABLE>
3
<PAGE> 4
POLYMER SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS -- UNAUDITED
<TABLE>
<CAPTION>
DEC. 31 MARCH 31
1998 1998
ASSETS
<S> <C> <C>
Current assets:
Cash $ 3,818 $ 1,177
Accounts receivable, net 888,096 976,201
Inventories 1,069,021 1,267,751
Prepaid expenses 129,590 33,841
------------ -----------
2,090,525 2,278,970
Fixed assets, net 951,701 982,774
Other assets 8,589 9,386
------------ -----------
$ 3,050,815 $ 3,271,130
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 851,858 $ 1,356,162
Salaries payable 242,166 262,035
Professional fees payable 27,689 70,681
Operating line of credit 1,166,733 879,967
Current portion of capital lease obligations 97,412 67,738
Current portion of mortgage payable -- 21,062
------------ -----------
2,385,858 2,657,645
Long-term liabilities:
Capital lease obligations 530,421 402,456
Due to related parties 34,981 88,895
Mortgage payable -- 31,188
Convertible note payable -- 72,000
------------ -----------
2,951,260 3,252,184
------------ -----------
Minority interest 225,037 225,783
------------ -----------
Commitments and contingencies (Note 9)
Shareholders' equity (deficiency):
Preferred stock, $0.001 par value;
Authorized -- 4,000,000 shares;
issued and outstanding -- nil
Common stock, $0.001 par value;
Authorized -- 20,000,000 shares;
issued and outstanding, 12/31/98 --
6,410,833 shares, and 3/31/98 -- 5,344,617 6,411 5,345
Additional paid-in capital 10,309,359 9,775,173
Accumulated deficit (10,441,252) (9,987,355)
------------ -----------
(125,482) (206,837)
------------ -----------
$ 3,050,815 $ 3,271,130
============ ===========
</TABLE>
4
<PAGE> 5
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss (Note 14) $(453,897) $(639,684)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 179,712 73,479
Loss (gain) on disposal of assets (74,594) 299
Accounts receivable 88,105 (311,283)
Inventories (Note 14) 198,730 (265,161)
Prepaid expenses and other assets (95,749) (7,024)
Accounts payable (567,165) 415,149
--------- ---------
Net cash used in operating activities (724,858) (734,225)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital additions (420,264) (161,974)
Proceeds from disposal of assets 347,017
--------- ---------
Net cash used in investing activities (73,247) (161,974)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Cost of financing (49,156) --
Proceeds from private placement 293,876 596,438
Proceeds from conversion of debt to equity 289,785 300,236
Proceeds from (payments on) convertible note (72,000) 72,000
Proceeds from (payments on) due to related
parties, net (53,914) (220,488)
Proceeds from (payments on) mortgage payable (52,250) (14,279)
Borrowings on operating line of credit, net 286,766 212,972
(Payment) of capital lease obligations 157,639 --
--------- ---------
Net cash provided by financing activities 800,746 946,879
--------- ---------
Increase (decrease) in cash 2,641 50,680
Cash, beginning of period 1,177 2,538
--------- ---------
Cash, end of period $ 3,818 $ 53,218
========= =========
</TABLE>
5
<PAGE> 6
POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
-------------------------------------------------
COMMON COMMON
SHARES AMOUNT SHARES AMOUNT
----------------------- ------------------------
<S> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of period 5,344,617 $5,345 3,762,505 $3,763
Shares issued, pursuant to --
Private placement and other 432,333 432 885,339 885
Debt to equity conversion 633,883 634 424,324 424
(Shares to be issued subject
to regulatory approval)
Balance, end of period 6,410,833 6,411 5,072,168 5,072
--------- ----------- --------- -----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period -- 9,775,173 -- 8,674,356
Shares issued, pursuant to -
Private placement, conversion of
preferred shares and other -- 294,190 -- 696,089
Debt to equity conversion -- 289,151 -- 299,812
Cost of financing -- (49,155) -- --
Balance, end of period -- 10,309,359 -- 9,670,257
--------- ----------- --------- -----------
DEFICIT:
Balance, beginning of period -- (9,987,355) -- (9,117,265)
Net loss (Note 14) -- (453,897) -- (639,684)
--------- ----------- --------- -----------
Balance, end of period -- (10,441,252) -- (9,756,949)
--------- ----------- --------- -----------
TOTAL SHAREHOLDERS' EQUITY
(DEFICIENCY) 6,410,833 $ (125,482) 5,072,168 $ (81,620)
========= =========== ========= ===========
</TABLE>
6
<PAGE> 7
POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Polymer Solutions, Inc. ("PSI" or "Company") is a Nevada corporation
incorporated in July 1996. Through its wholly-owned subsidiary, Alternative
Materials Technology, Inc. ("AMT USA"), PSI is engaged in the development
and sale of water-based and solvent-based coatings, sealants and adhesives
to industrial users in California and neighboring states, including
manufacturers of furniture, cabinets, doors and moldings.
These consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern which assumes the
realization of assets and discharge of liabilities in the normal course of
business. The Company's significant losses from operations and capital
deficiency raise substantial doubt about its ability to continue as a going
concern and these consolidated financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
As of December 31, 1998, the Company's financial statements reflect a
reduction in losses from operations compared to prior periods, as restated
per Note 14. In addition, on October 30, 1998, the Company's operating
subsidiary obtained a new $1,800,000 asset-based line of credit, which is
expected to save approximately 10 percentage points per annum in interest
and fees, and which is expected to finance the continued growth of the
Company. See Note 5.
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. Differences
with respect to accounting principles generally accepted in Canada are
disclosed in Note 15.
BASIS OF CONSOLIDATION
The Company's consolidated financial statements include its wholly-owned
active subsidiary, AMT USA; wholly-owned inactive subsidiary, AMT
Environmental Products Inc. ("AMT"); and 99.9%-owned inactive subsidiary,
PSI Acquisitions Corp. ("PAC"). Intercompany transactions and accounts are
eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts
receivable from wood coatings customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers. The Company performs credit evaluations of its customers'
financial condition and generally does not require collateral on accounts
receivable. The Company maintains an allowance for doubtful accounts on its
receivables based on expected collectibility. Allowance for doubtful
accounts was $34,628 and $41,530 at December 31, 1998 and March 31, 1998,
respectively.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in
first-out basis, and net realizable value. The Company maintains a reserve
for slow-moving or obsolete inventory as well as the related disposal
costs.
7
<PAGE> 8
FIXED ASSETS
Equipment is recorded at cost and depreciated on a straight-line basis over
its estimated life, which varies between five and seven years. Building and
related improvements are recorded at cost and amortized on a straight-line
basis over an estimated life of 39 years.
OTHER ASSETS
Other assets consist of patent and trademark costs, representing the costs
incurred for the acquisition. Capitalized costs are amortized on a
straight-line basis over seven years commencing with production of related
products. When it is determined that a particular technology will no longer
be used, or a patent application is abandoned, related unamortized costs
are written off.
LONG-LIVED ASSETS
Long-lived assets are recorded at the lower of amortized cost or fair
value. As part of an ongoing review of the valuation of long-lived assets,
management assesses the carrying value of such assets if facts and
circumstances suggest they may be impaired. If this review indicates that
the carrying value of these assets may not be recoverable, as determined by
a nondiscounted cash flow analysis over the remaining useful life, the
carrying value would be reduced to its estimated fair value. There have
been no material impairments recognized in these financial statements.
STOCK OPTIONS
The Company accounts for its stock option plan in accordance with the
intrinsic value method, under which no compensation expense is recognized
in the financial statements except where the fair market value of the stock
exceeds the exercise price of the options granted on the date of the grant.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128, "Earnings per Share", which changes the basis
upon which earnings (or loss) per share is calculated. As required by this
statement, the Company adopted its provisions for the quarter ended
December 31, 1998, and retroactively for each quarter presented in the
financial statements.
Basic net loss per share is computed on the weighted average number of
common shares outstanding during each period. Diluted net loss per share is
the same as basic net loss per share because the diluted weighted average
shares outstanding do not include stock options, warrants and convertible
long-term debt because they are anti-dilutive.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as they are incurred.
REVENUE RECOGNITION
Revenue from the sale of products is recognized upon shipment.
FOREIGN CURRENCY TRANSLATION
The Company's operations are primarily conducted in the United States and
the United States dollar is the Company's functional currency. The Company
and its subsidiaries are considered to be integrated operations and the
accounts are translated as follows:
Monetary assets and liabilities at the rates of exchange in effect at the
balance sheet date; non-monetary assets at historical rates; revenue and
expense items (except depreciation and amortization) at the average rates
for the period; depreciation and amortization at the same rates as for the
assets to which they relate. The net effect of the foreign currency
translation is included in current operations.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
8
<PAGE> 9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments for cash, accounts
receivable, accounts payable, salaries payable and professional fees
payable approximate carrying value due to their short-term nature. The fair
value of the operating line of credit approximates carrying value due to
the floating rate interest terms. The fair value of the mortgage payable
approximates carrying value as its interest rate approximates market for
borrowings with similar terms. The fair value of Due to related parties
cannot be estimated because of the nature of the relationships involved.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current presentation.
3. INVENTORIES
<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1998 1998
<S> <C> <C>
Raw materials and supplies $ 643,242 $ 830,174
Finished goods 665,620 684,502
Less allowance for a slow-moving inventory (239,841) (246,925)
---------- ----------
$1,069,021 $1,267,751
</TABLE>
4. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
ACCUMULATED
COST DEPRECIATION NET
<S> <C> <C> <C>
Land $ -- $ -- $ --
Laboratory equipment 138,579 73,661 64,918
Office equipment 181,206 90,600 90,606
Production Equipment -- owned and leased 1,026,611 377,976 648,635
Building -- -- --
Leasehold improvements 147,329 9,562 137,767
Assets in hands of customers 10,478 703 9,775
---------- --------- --------
$1,504,203 $ 552,502 $951,701
========== ========= ========
MARCH 31, 1998
Land $ 110,000 $ -- $110,000
Laboratory equipment 84,830 63,298 21,532
Office equipment 113,567 70,766 42,801
Production equipment -- owned and leased 842,401 241,526 600,875
Building and improvements 177,935 13,426 164,509
Leasehold improvements 43,419 362 43,057
---------- --------- --------
$1,372,152 $ 389,378 $982,774
========== ========= ========
</TABLE>
On July 22, 1998, the Company sold the land and building of its previous
operations facility.
5. OPERATING LINE OF CREDIT
The Company, on October 30, 1998, through its operating subsidiary,
replaced its prior loan arrangements with a new $1,800,000 asset-based
revolving line of credit. Funds available to be advanced are limited to 85%
of eligible accounts receivable up to the maximum loan amount, and to 50%
of eligible inventories to a maximum of $600,000. Interest is payable on
funds advanced at prime rate as published by Citibank, N.A. plus 2.75% per
annum.
9
<PAGE> 10
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at December 31, 1998 and March 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
12/31/98 3/31/98
<S> <C> <C>
Capital lease obligations bearing interest ranging from 12 1/2% $627,833 $470,194
to 18 2/3%, payable in monthly principal and interest payments
and secured by the related equipment
Mortgage payable bearing interest of 9%, payable in monthly
principal and interest payments of $2,075 and secured by the
related property and equipment $ -- 52,250
Convertible note bearing simple interest of 10%, payable in a balloon
payment of principal and interest in June, 1999; note is
convertible at US$.72 per common share -- 72,000
-------- --------
627,833 594,444
Less current portion 97,412 88,800
-------- --------
$530,421 $505,644
======== ========
</TABLE>
7. RELATED PARTY TRANSACTIONS
At December 31, 1998, $34,981 was due to related parties of the Company.
8. INCOME TAXES
The Company and its subsidiaries have operating loss carry-forwards in
excess of $5,000,000 expiring at various dates through 2013, as well as
certain federal and state tax credits, which are indefinite as to duration.
These operating loss carry-forwards and tax credits are available for
offset against future taxable incomes arising from Canadian and United
States operations. There are no other material temporary differences.
Considering the Company's cumulative losses, the Company has provided a
valuation allowance of 100% against all available loss carry-forwards and
tax credits.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities under arrangements which contain
renewal options and provide for periodic cost of living adjustments. The
Company's operating lease for its primary operating facility includes an
option to purchase the facility which can be exercised prior to February 1,
2000.
LEGAL MATTERS
The Company is party to legal proceedings and potential claims arising in
the ordinary course of business. In the opinion of management, the Company
has adequate legal defense or insurance coverage with respect to these
matters so that the ultimate resolution of these matters will not have a
material adverse effect on its financial position, results of operations,
or cash flows.
10. PREFERRED STOCK
AUTHORIZED
The Company is authorized to issue up to 4,000,000 shares of preferred
stock, which is divided into four series of 1,000,000 shares each. With
respect to each series, the Company's Board of Directors determines all
rights and preferences including rights related to dividends, conversion,
and voting.
10
<PAGE> 11
11. COMMON STOCK
REORGANIZATION
By a reorganization completed February 26, 1997, the Company acquired all
11,752,907 common shares of the issued share capital of AMT in
consideration for the issue of 3,762,505 common shares of the Company and
155,130 preferred shares of PSI's 99.9% owned subsidiary, PSI Acquisitions
Corp. (PAC). The purpose of the reorganization was to consolidate the
issued share capital on a 1:3 basis and to redomicile the publicly-listed
parent company from British Columbia, Canada to the United States. PSI and
PAC were organized by AMT for purposes of the reorganization and had no
businesses or operations of their own prior thereto. The reorganization was
accounted for in a manner similar to a pooling of interests and certain
comparative amounts relating to share capital, loss per share, outstanding
stock options and outstanding warrants were restated on a
post-reorganization basis.
MINORITY INTEREST
In completing the Reorganization, the Company consolidated its shares on
the basis of one common share of PSI, in exchange for three previously
existing common shares of AMT. Canadian shareholders holding 465,388 common
shares of AMT elected to receive 155,130 non-transferable preferred shares
of PAC in order to defer the tax consequences of receiving a U.S. security.
The preferred shares of PAC are convertible or redeemable into common
shares of PSI on a 1:1 basis at any time and have certain rights and
benefits of PSI common shares, particularly relating to the declaration of
dividends and proceeds from liquidation, dissolution or wind-up of the
Company. PAC preferred shares are non-voting and the Company may redeem the
PAC preferred shares for common shares of PSI at any time after September
1, 2001. To date a total of 54,764 preferred shares have been exchanged or
redeemed for 54,764 shares of the Company's common stock.
FOUNDERS' SHARES
An aggregate of 197,774 shares were held in escrow by the Company's
transfer agent at March 31, 1998. These were issued at a price of US$0.13
(Cdn$0.18) per share in March 1987, pursuant to AMT's incorporation and
initial public offering. These shares will be released on the basis of one
share for each US$10.27 (Cdn$14.22) of accumulated "cash flow" of the
Company, as defined in the Escrow Agreement. Any of the 197,774 shares that
are not released from escrow on or before December 15, 1997 may be
canceled. The Company is currently awaiting a response from the Vancouver
Stock Exchange to review and further extend the expiration date.
SHARES FOR DEBT
At September 30, 1998, the number of common shares of common stock
outstanding and the equity portion of the balance sheet reflected the
conversion of $289,785 of debt to 633,883 shares, which were to be issued
subject to regulatory approval. Such regulatory approval was obtained
during the quarter ended December 31, 1998.
12. STOCK OPTION PLANS AND WARRANTS
Management of the Company, in the Proxy relating to the August 6, 1998
Annual General Meeting of the Company, received shareholder approval to
adopt a 1998 Economic Value Added Incentive Compensation Plan (EVA Plan).
This Plan authorizes the grant of options for the purchase of 1,000,000
Common shares of the Company and reservation of the 1,000,000 Common
shares.
11
<PAGE> 12
13. FINANCING
On June 4, 1998, the Company entered into a Letter of Engagement with a
brokerage firm to market up to 900,000 special warrants. Each special
warrant entitled the holder to receive one common share and one common
share purchase warrant. The exercise of two warrants entitled the holder to
purchase one additional common share for a period of two years following
the closing of placement. The warrant exercise price was Cdn$1.00 for the
first twelve months and Cdn$1.25 for the second twelve months.
During the quarter ended September 30, 1998, the Company issued 400,000
shares of its common stock related to the aforementioned transaction, along
with warrants to purchase a further 200,000 common shares. Net proceeds
totaled $272,108. Additionally, a commission, paid in special warrants,
consisted of 32,000 common shares and warrants to purchase 16,000 common
shares, and agents who arranged the placement of the above financing
warrants received 80,000 additional warrants exercisable into 80,000 common
shares. The agents' warrants have the same components, terms and conditions
as the share purchase warrants.
14. FOURTH QUARTER ADJUSTMENT TO FISCAL YEAR 1998 (UNAUDITED)
In the fourth quarter of fiscal 1998, the Company recorded an adjustment of
approximately $590,000 to increase cost of goods sold to properly state
obsolete and slow moving inventory, to reflect other inventory costing
adjustments and to increase the estimated warranty expense. The Company has
analyzed the timing of the adjustments, and has determined that an
appropriate restatement of the application of the $590,000 adjustment to
the four quarters of fiscal year 1998 is as follows:
<TABLE>
<CAPTION>
Adjustment
----------
<S> <C>
First quarter $152,264
Second quarter $214,059
Third quarter $121,863
Fourth quarter $101,814
--------
Total $590,000
========
</TABLE>
For comparison with quarterly data for the fiscal year ending 3/31/99, the
cost of goods sold and inventories for each of the first three quarters of
the fiscal year ending 3/31/98 have been adjusted as depicted above in
order to reflect the impact of the $590,000 adjustment on a quarterly
basis.
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN ACCOUNTING PRINCIPLES AND
PRACTICES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S.
basis") which differ in certain respects from those principles and
practices that the Company would have followed had its consolidated
financial statements been prepared in accordance with accounting principles
and practices generally accepted in Canada ("Canadian basis").
12
<PAGE> 13
Had the Company followed the Canadian basis, the balance sheets contained
within the consolidated financial statements would have been reported as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
U.S. CANADIAN U.S. CANADIAN
BASIS BASIS BASIS BASIS
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 2,090,525 $ 2,090,525 $ 2,278,970 $ 2,278,970
Fixed assets (a) 951,701 936,477 982,774 967,550
Other assets 8,589 8,589 9,386 9,386
------------ ----------- ------------ -----------
$ 3,050,815 $ 3,035,591 $ 3,271,130 $ 3,255,906
------------ ----------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities $ 2,385,858 $ 2,385,858 $ 2,657,645 $ 2,657,645
Long term liabilities 565,402 565,402 594,539 594,539
Minority interest 225,037 225,037 225,783 225,783
Common shares 6,411 6,411 5,345 5,345
Additional paid-in capital (a)(c) 10,309,359 9,509,317 9,624,750 8,822,110
Deficit (a)(c) (10,441,252) (9,656,434) (9,836,932) (9,049,516)
------------ ----------- ------------ -----------
$ 3,050,815 $ 3,035,591 $ 3,271,130 $ 3,255,906
------------ ----------- ------------ -----------
</TABLE>
Had the Company followed the Canadian basis, the Statements of Operations
contained within the consolidated financial statements would have been
reported as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
<S> <C> <C>
Net loss under U.S. basis $(453,897) $(639,684)
Effect of change in reporting currency (a) -- --
Effect of Arrangement costs (c) -- --
--------- ---------
Net loss under Canadian basis $(453,897) $(639,684)
========= =========
Basic and diluted net loss per share under
U.S. basis $ (.08) $ (.17)
========= =========
Basic and diluted net loss per share under
Canadian basis (b) $ (.08) $ (.16)
========= =========
</TABLE>
- ----------
(a) For Canadian purposes, the Company adopted the U.S. dollar as the
functional currency for the consolidated financial statements effective
January 1, 1995. The comparative amounts reported in Canadian dollars for
share capital and non-monetary assets and liabilities were translated into
U.S. dollars at the December 31, 1994 exchange rate of one U.S. dollar
equal to Cdn $1.4018.
(b) On a U.S. basis, common shares returnable to the issuer if specified
conditions are not met are excluded from the determination of weighted
average number of common shares used for calculation of earnings per share
if those conditions are not currently being attained. On a Canadian basis,
the 197,774 common shares escrowed for release pursuant to cumulative cash
flow earned from operations would have been included for reporting loss per
share.
(c) On a U.S. basis, expenses related to a pooling of interests are charged to
income in the period the expenses are incurred. On a Canadian basis, the
costs of the Reorganization are treated as a capital transaction, charged
to paid-in capital.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Nine Months ended December 31, 1998
RESULTS FROM OPERATIONS
Sales revenue increased 8% to $1,966,646 and 5% to $5,658,954 for the three and
nine month periods ended December 31, 1998, respectively, over sales revenue for
the comparable periods one year ago, reflecting continued growth in demand for
the Company's coatings and other products.
Gross profit increased to 28% from 20% during the third quarter and to 26% from
19% for the first nine months from the comparable periods last year. This is
from lower raw material costs and bringing in-house the toll manufacturing
previously done by sub-contract manufacturers. Cost of goods sold for the
year-ago periods has been adjusted as described in Note 14 of the Notes to
Financial Statements in order to reflect the impact of a year-end $590,000
adjustment on each quarter of the fiscal year ended March 31, 1998.
Marketing and sales expense for the three months ended December 31, 1998 totaled
$236,246, an increase of 15% from $205,408 in the comparable period a year ago,
due primarily to a strengthening of the marketing and sales staff in order to
expand the customer base and distribution channels. For the nine months ended
December 31, 1998 and 1997, marketing and sales expense totaled $682,001 and
$667,868, respectively.
General and administrative expense totaled $210,516 for the quarter ended
December 31, 1998 compared to $269,419 for the year-ago period. For the nine
months ended December 31, 1998 and 1997, general and administrative expense
totaled $623,564 and $624,508, respectively.
Research and development expenses were $134,691 for the three months ended
December 31, 1998, up 58% from $85,015 in the year-ago comparable period,
reflecting an increase in the allocation of the Company's resources relating to
product development. Research and development expenses for the nine months
ending December 31, 1998 and 1997 were $374,144 and $239,715, respectively.
Interest expense totaled $117,312 for the quarter ended December 31, 1998,
compared with $53,643 for the same quarter a year ago. The increase was due to
the following: $45,752 of primarily one-time fees on the Company's new $1.8
million asset-based revolving line of credit; an increase in operating line of
credit borrowings from $996,743 at December 31, 1997 to $1,166,733 at December
31, 1998, offset by an effective interest rate reduction as a result of the new
credit facility of approximately 10 percentage points; and also to the addition
of capital lease obligations. Interest expense for the nine months ended
December 31, 1998 and 1997 was $243,072 and $137,790, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $3,818 in cash compared to $1,177 at the
end of fiscal 1998. Cash flow used in operating activities totaled $724,858 in
the first nine months of 1998 versus $734,225 in the comparable period last
year. Additionally, capital additions were $420,264 in the nine months ended
December 31, 1998 compared to $161,974 for the same period a year ago. These
requirements were financed primarily from a private placement, sale of the
Company's former operating facility, conversion of debt to common equity, lease
financing and borrowings on the Company's line of credit.
The Company has a working capital deficiency of $295,333 at December 31, 1998
versus $378,675 at the end of fiscal 1998. The current ratio at December 31,
1998 was 0.9 versus 0.9 for the fiscal 1998 year-end ratio.
OUTLOOK
During the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999,
the Company's Board of Directors made strategic organizational changes and key
senior management additions to the Company in order to provide an infrastructure
of experienced management professionals dedicated to maximizing shareholder
value. Their tasks include strengthening controls and achieving profitability
with the present Company base, along with growing the Company externally through
joint ventures, acquisitions, product licenses, new product development,
synergistic strategic alliances and any other opportunities that could result in
a meaningful increase in shareholder value.
14
<PAGE> 15
YEAR 2000
Certain computerized systems have historically used two digits rather than four
to define a year, which could result in the recognition of "00" as the year 1900
rather than the year 2000. This could result in system failures and
miscalculations. This is generally referred to as the "year 2000 issue".
With regard to the state of readiness regarding the year 2000 issue, the Company
has begun the evaluation and risk assessment relating to the potential impact of
the Year 2000 issue in the areas of plant systems, external parties and
information technology. As to plant systems, it has been determined that none of
the Company's plant operating machinery is triggered by date, with the exception
of the time clock. With regard to external parties, the Company plans to survey
its key suppliers and service providers to determine their year 2000 readiness
and their ability to provide raw materials and supplies and services without
interruption. With regard to information technology, the Company plans to
upgrade its plant operation system software and accounting system software to
year 2000 compliant versions by the end of the fourth quarter of fiscal 1999.
The Company believes that with these computer system software upgrades, the Year
2000 issue will not pose significant plant operation system or accounting system
problems. The Company will utilize both internal and external resources to
implement the aforementioned upgrades.
The total cost of the Company's year 2000 activities, including the
aforementioned computer system software upgrades, is not expected to exceed
$20,000. Therefore, such cost is not expected to be material to the Company's
operations, liquidity or capital resources.
With regard to the risks relating to the Company's year 2000 issue, there is
still uncertainty as to those risks, and the Company cannot at this time
quantify the total potential impact. The Company's year 2000 efforts are being
directed toward issues within the Company's control. These efforts are expected
to minimize, but not to eliminate, the issues of external parties.
The Company's contingency plans will be developed based upon the results of the
year 2000 readiness surveys described above.
Note to Readers
Certain statements identified as "forward-looking statements" in this Quarterly
Report on Form 10-Q are not based on historical facts, but are instead based
upon a number of assumptions concerning future conditions that may ultimately
prove to be inaccurate. Actual events and results may materially differ from
anticipated results described in such statements. The company's ability to
achieve such results is subject to certain risks and uncertainties, including
but not limited to, adverse business conditions in the industries served by the
Company and the general economy, competition, new laws and regulations impacting
the products that the Company provides, and other risk factors affecting the
Company's business beyond the Company's control.
15
<PAGE> 16
PART II -- OTHER INFORMATION
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its 1998 Annual General Meeting of Shareholders on
August 6, 1998. The shareholders approved:
a) the appointment of Price Waterhouse LLP (now PricewaterhouseCoopers),
Sacramento, California as auditors for fiscal 1999;
b) the election of directors;
c) the adoption of the Polymer Solutions, Inc. 1998 Economic Value Added
Incentive Compensation Plan.
5. OTHER INFORMATION
Directors as at December 31, 1998
<TABLE>
<S> <C>
Gordon L. Ellis Darryl F. Jones
Stephen H. Silbernagel John J. Sutherland
Gerald A. Habib William A. Maligie
E. Laughlin Flanagan
</TABLE>
6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits.
The Company filed a Current Report on Form 8-K, dated December 8, 1998,
which reported an issuance of shares pursuant to Shares for Debt agreements with
certain creditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLYMER SOLUTIONS, INC.
(Registrant)
Date: February 10, 1999 /s/ Gordon L. Ellis
----------------------------------------
Gordon L. Ellis
Chairman
Date: February 10, 1999 /s/ Stephen Silbernagel
----------------------------------------
Stephen Silbernagel
Director
