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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 2000
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)
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<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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2000.
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<S> <C>
TITLE OF CLASS NO. OF SHARES
Common Shares, par value $0.001 9,300,539
</TABLE>
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POLYMER SOLUTIONS, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 2000
TABLE OF CONTENTS
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Item Page
Number Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
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Consolidated Balance Sheets
at June 30, 2000 and March 31, 2000....................................... 3
Consolidated Statements of Operations
for the three months ended June 30, 2000 and 1999......................... 4
Consolidated Statements of Cash Flows
for the three months ended June 30, 2000 and 1999......................... 5
Notes to Consolidated Financial Statements....................................... 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 9
PART II - OTHER INFORMATION
1. Legal Proceedings ...................................................................... 11
2. Changes in Securities and Use of Proceeds .............................................. 11
3. Defaults Upon Senior Securities ........................................................ 11
4. Submission of matters to a vote of securities holders .................................. 11
5. Other Information
6. Exhibits Index and Reports on Form 8-K ................................................. 11
SIGNATURES ..................................................................................... 11
</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 June 30, 2000 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.
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POLYMER SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS)
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<CAPTION>
JUNE 30, MARCH 31,
2000 2000
(UNAUDITED)
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ASSETS
Current assets:
Cash $ 303,239 $ 65,097
Accounts receivable, net 2,016,111 2,374,065
Inventories, net 1,597,724 1,523,947
Prepaid expenses and other assets 195,326 120,360
Deferred income taxes, net 390,000 500,000
------------ ------------
4,502,400 4,583,469
Fixed assets, net 839,986 825,652
Goodwill, net 1,222,565 1,239,972
------------ ------------
$ 6,564,951 $ 6,649,093
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 974,088 $ 1,303,088
Payroll related and commissions payable 300,842 409,791
Current portion of capital lease obligations 181,618 159,498
------------ ------------
1,456,548 1,872,377
Long-term liabilities:
Bank loan facilities 1,662,896 1,752,667
Capital lease obligations 368,581 371,932
Severance plan liability 355,855 359,735
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3,843,880 4,356,711
------------ ------------
Minority interest 190,415 190,415
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Shareholders' equity:
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,
June 30, 2000 - 9,300,539 and March 31, 2000 - 8,855,939 9,300 8,855
Additional paid-in capital 11,772,284 11,501,420
Accumulated deficit (9,250,928) (9,408,308)
------------ ------------
2,530,656 2,101,967
------------ ------------
$ 6,564,951 $ 6,649,093
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. DOLLARS)
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THREE MONTHS ENDED JUNE 30,
2000 1999
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Sales revenue $ 3,914,812 $ 2,795,623
Costs of goods sold 2,666,933 1,922,453
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1,247,879 873,170
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Corporate and administrative expenses:
Marketing and sales 339,749 303,117
General and administrative 408,902 231,057
Research and development 149,297 136,875
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897,948 671,049
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Income from operations 349,931 202,121
Other income 3,741 --
Interest (expense) (78,292) (61,450)
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Income before income tax expense 275,380 140,671
Income tax expense 118,000 --
----------- -----------
Net income $ 157,380 $ 140,671
=========== ===========
Basic and diluted earnings per share $ .02 $ .02
=========== ===========
Weighted average basic and diluted number
of shares outstanding 8,704,856 6,241,044
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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POLYMER SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. DOLLARS)
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THREE MONTHS ENDED JUNE 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 157,380 $ 140,671
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 83,448 60,987
Gain on disposals of fixed assets (3,558) --
Benefit from deferred income tax 110,000 --
Changes in operating assets and liabilities:
Accounts receivable 357,954 (267,691)
Inventories (73,777) (43,499)
Prepaid expenses and other assets (74,966) (116,445)
Accounts payable (329,000) 61,950
Payroll related and commissions payable (108,949) 10,627
Severance plan liability (3,880) --
--------- ---------
Net cash provided by (used in) operating activities 114,652 (153,400)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (25,185) (7,563)
Proceeds from disposals of fixed assets 5,701 --
Other investing activities -- (85,803)
--------- ---------
Net cash used in investing activities (19,484) (93,366)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 271,309 25,866
Borrowings on operating line of credit, net (89,771) 222,845
Payments of capital lease obligations (38,564) (31,476)
Other financing activities -- 5,075
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Net cash provided by financing activities 142,974 222,310
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Increase (decrease) in cash 238,142 (24,456)
Cash, beginning of year 65,097 39,303
--------- ---------
Cash, end of period $ 303,239 $ 14,847
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Minority interest shareholder exchange of shares $ -- $ 33,525
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Acquisition of equipment under capital leases $ 57,333 $ 37,912
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the United
States Securities and Exchange Commission. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations. The consolidated financial statements include the accounts
of the company and its wholly owned subsidiaries. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for this period are not necessarily indicative of the
results to be expected for the whole year. These statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000, as filed with the Securities and Exchange
Commission.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
2. INVENTORIES
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JUNE 30, MARCH 31,
2000 2000
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Raw materials and supplies $ 991,163 $ 951,843
Finished goods 929,695 872,504
Less allowance for slow-moving inventory (323,134) (300,400)
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$ 1,597,724 $ 1,523,947
=========== ===========
</TABLE>
3. INCOME TAXES
At June 30, 2000, the net deferred tax benefit was approximately
$390,000, net of a valuation allowance of approximately $2.1 million.
During the year ended March 31, 2000, the Company reduced its deferred
tax benefit valuation allowance by $500,000 based on an assessment of the
Company's ability to utilize deferred tax benefits in the future. This
assessment was based on management's analysis of the fiscal 2000 pre-tax
income, projected future income, improved gross margins generated from a
new plant, acquisition of U.S. Cellulose Co. and an augmented management
team. The amount of the deferred tax benefit valuation allowance could be
further reduced in the near term if fiscal 2001 pre-tax income and
estimates of future taxable income continue to improve.
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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At June 30, 2000, management believes that it is more likely than not
that the $390,000 tax benefit will be realized. The total amount of
future taxable income necessary to realize the benefit is approximately
$975,000. The remaining valuation allowance is considered necessary due
to the uncertainty of future income estimates.
4. EARNINGS PER SHARE ("EPS")
The Company's basic net income per share is computed by dividing net
income by the weighted average number of outstanding common shares. The
diluted EPS amounts are the same as the basic EPS for all periods
presented. At June 30, 2000, there were warrants and options for
1,912,242 shares that were not included in the diluted EPS because they
were antidilutive for the period; however, these shares could potentially
dilute basic EPS in the future.
5. ACQUISITION AND MERGER
In October 1999, the Company purchased the outstanding capital stock of
U.S. Cellulose Co. ("USC"), a paint coatings company based in California
with annual revenues of approximately $3,300,000. Pursuant to a Stock
Purchase Agreement dated October 15, 1999 the consideration paid was
$1,000,000 in cash. In connection with the purchase, the Company adopted
the USC Employee Severance Plan, which entitles former USC employees to
receive up to $384,400 in benefits, which will be paid over a six-year
period. The acquisition was accounted for using the purchase method of
accounting. USC's assets and liabilities were recorded at their fair
value at the date of the acquisition. The excess of acquisition cost over
the fair value of tangible net assets acquired ("goodwill") is being
amortized on a straight-line basis over fifteen years.
6. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS The Company is subject to environmental related
claims in the normal course of business. Management believes these
liabilities, if any, will not materially affect the Company's financial
position or results of operations.
7. COMMON STOCK
During the first quarter of fiscal year 2001, the Company issued 445,000
shares on the exercise of warrants and options, at exercise prices
ranging from $0.61 (Cdn$.90) to $.68 (Cdn$1.00) per share, for which the
Company received $271,309 in cash.
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POLYMER SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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8. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999 with earlier application
encouraged. The Company is currently assessing the impact, if any, of the
adoption of SAB 101 on the Company's financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB 25.
This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, however certain conclusions in
this Interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000. The
Company is currently assessing the impact, if any, of adopting this
interpretation.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding the Company's
expectations, beliefs, intentions or future strategies that are signified by the
words "expects", "anticipates", "intends", "believes", or similar language. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from those projected in any such forward-looking statements.
In evaluating the Company's business, prospective investors should carefully
consider the information set forth below under the caption "Risk Factors" set
forth herein. The Company cautions investors that its business and financial
performance are subject to substantial risks and uncertainties.
OVERVIEW
Polymer Solutions, Inc. (the "Company"), develops, manufactures and distributes
paints, coatings and adhesives to various industries, primarily in California.
In 1998, PSI constructed a new production facility in Chico, California that
allows the Company significant growth opportunities both internally and by way
of acquisition. Presently, the new facility has excess production capacity and
with the addition of a minor amount of capital equipment and some additional
labor, capacity can be increased significantly.
On October 18, 1999 the Company acquired all the issued and outstanding shares
of U. S. Cellulose Co., Inc. ("USCC") a California based paint coatings company
for a total purchase price of $1,000,000 in cash. This purchase price has been
allocated to assets and liabilities based on their estimated fair market values.
To finance the transaction, the Company sold common shares as detailed on Form
8-K/A dated October 18, 1999, page F-9.
In connection with the purchase, the Company adopted a USCC Employee Severance
Plan, which entitles former USCC employees to receive up to $384,400 in
benefits, which will be paid over a six-year period. The acquisition was
accounted for using the purchase method of accounting. The excess of acquisition
cost over the fair value of net assets acquired ("goodwill") is being amortized
on a straight-line basis over fifteen years.
RESULTS OF OPERATIONS
Sales revenues increased 40% to $3,914,812 for the three months ended June 30,
2000, compared to the same prior year period, reflecting a 22% increase in
water-based products and a 58% increase in the Company's low volatile organic
compound ("VOC") solvent-based products. This increase is due both to the
acquisition of U.S. Cellulose and the continued growth in the number of
customers and the volume of sales to existing customers covering all of the
Company's wood coating products lines.
9
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
Gross profit increased to $1,247,879 from $873,170 during the first quarter from
the comparable period last year. This 43% improvement in gross profit was due to
the aforementioned sales increase and the effect of improved production
efficiencies.
Marketing and sales expense for the three months ended June 30, 2000 totaled
$339,749, an increase of 12% from $303,117 in the comparable prior year period.
This is due to higher expenses of the marketing and sales staff required to
maintain the expansion of the customer base.
General and administrative expenses were $408,902 during the first quarter,
versus $231,057 for the same prior year period. The 77% increase is associated
with the acquisition of U.S. Cellulose and the related increases in wages,
consulting fees, rent, insurance, legal and audit fees, the amortization of
goodwill, and an increase in allowance for bad debts.
Research and development expenses were $149,297 during the first quarter, versus
$136,875 for the same prior year period, reflecting a 9% increase.
Interest expense totaled $78,292 for the three months ended June 30, 2000
compared to $61,450 in the same prior year period reflecting a 27% increase.
This increase was due to higher borrowing on the operating line of credit.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 the Company had $303,239 in cash compared to $65,097 at the end
of fiscal 2000. Cash flow provided by operating activities totaled $114,652 in
the first quarter versus cash used in operations of $153,400 in the comparable
prior year period. This is primarily due to the reduction of accounts
receivable, the benefit from deferred income tax, and reduction in accounts
payable. Capital additions were $25,185 in the three months ended June 30, 2000,
compared to $7,563 for the same period a year ago. Proceeds from issuance of
common stock in the first quarter were $271,309 versus $25,866 in the comparable
prior period.
The Company has a positive working capital of $3,045,852 at June 30, 2000,
versus $2,711,092 at March 31, 2000. The current ratio at June 30, 2000 was
3.1:1 and 2.4:1 for the fiscal 2000-year end ratio. Primary reasons for the
increase in working capital and current ratio are increased sales volume and
cash raised from the issuance of common stock.
VOTE TO SECURITIES HOLDERS
In the Proxy relating to the August 2, 2000 Annual General Meeting, Management
of the Company obtained shareholder approval to amend the 1998 Director,
Consultant and Employee Stock Option Plan to increase the total number of Common
Shares available for future stock option grants under the Plan from 1,000,000
Common Shares to 1,650,000 Common Shares.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
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OUTLOOK
In fiscal year 2001 the Company is pursuing additional internal sales growth,
and will continue to aggressively seek opportunities to create a meaningful
increase in shareholder value for our investors through future acquisitions,
joint ventures, and other strategic alliances that will utilize capacity of our
state of the art manufacturing plant by adding new customers and improved
products.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company's Annual General Meeting of Shareholders was held on
August 2, 2000 and a report of such matters voted upon will be
disclosed in the next quarterly report on Form 10-Q for the period
ending September 30, 2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports filed under Form 8-K during the period.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
27.1 [1] Financial Data Schedule for Commercial and
Industrial Companies
---------------------------------------------------------------------
[1] Filed herewith.
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: August 8, 2000 /s/ Larry Flanagan
----------------------------------------
E. Laughlin Flanagan
President and CEO
Date: August 8, 2000 /s/ Charlene Bellante
----------------------------------------
Charlene Bellante
Corporate Controller, Assistant
Secretary/Treasurer
11
