-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPyp6JngMYOF5nZurCDmnAM9NsERE6OyRgPeqfSWd4HNNXUjixHCU5vMLkRZZrx6 8dWpkL6WdHaS3EXQulaCWA== 0001011438-02-000389.txt : 20020520 0001011438-02-000389.hdr.sgml : 20020520 20020520165759 ACCESSION NUMBER: 0001011438-02-000389 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLLUTION RESEARCH & CONTROL CORP /CA/ CENTRAL INDEX KEY: 0000763950 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 952746949 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-09327 FILM NUMBER: 02657993 BUSINESS ADDRESS: STREET 1: 506 PAULA AVE CITY: GLENDALE STATE: CA ZIP: 91201 BUSINESS PHONE: 8182477601 MAIL ADDRESS: STREET 1: 506 PAULA AVE CITY: GLENDALE STATE: CA ZIP: 91201 FORMER COMPANY: FORMER CONFORMED NAME: DASIBI ENVIRONMENTAL CORP DATE OF NAME CHANGE: 19900529 10QSB 1 form10-qsb.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 [_] 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 0-14266 POLLUTION RESEARCH AND CONTROL CORP. (Exact Name of Small Business Issuer as Specified in its Charter) CALIFORNIA 95-2746949 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9300 WILSHIRE BOULEVARD, SUITE 308 BEVERLY HILLS, CALIFORNIA 90212 (Address of Principal Executive Offices) (310) 248-3655 (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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [_] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, no par value, 6,697,132 shares issued and outstanding as of May 1, 2002. Transitional Small Business Disclosure Format (check one): Yes [_] No [X] ================================================================================ POLLUTION RESEARCH AND CONTROL CORP. INDEX PAGE PART I FINANCIAL INFORMATION...............................................3 Item 1. Financial Statements................................................3 Condensed Consolidated Balance Sheet as of March 31, 2002...........3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and March 31, 2001................4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and March 31, 2001................5 Notes to Consolidated Financial Statements..........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................9 PART II OTHER INFORMATION..................................................21 Item 1. Legal Proceeding...................................................21 Item 2. Changes in Securities and Use of Proceeds..........................22 Item 4. Submission of Matters to a Vote of Security Holders................22 Item 6. Exhibits and Reports on Form 8-K...................................23 Page 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POLLUTION RESEARCH AND CONTROL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, 2002 ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash $ 5,905 Accounts receivable 30,000 Inventories 1,914,342 ------------- Total Current Assets $ 1,950,247 ============= IABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 146,257 Notes payable and convertible debt 1,565,000 Accrued interest expense 259,908 ------------- Total Current Liabilities 1,971,165 LONG-TERM NOTES PAYABLE AND CONVERTIBLE DEBT 450,000 ------------- Total Liabilities 2,421,165 ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, no par value, 20,000,000 shares authorized: Series A, $.01 par value, -0- issued and outstanding - Series B, $.01 par value, -0- issued and outstanding - Common stock, no par value, 30,000,000 shares authorized, 6,419,415 issued and outstanding 9,963,792 Additional paid-in capital 2,759,055 Accumulated (deficit) (13,193,765) ------------- Total Stockholders' Equity (Deficit) (470,918) ------------- $ 1,950,247 ============= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 3 POLLUTION RESEARCH AND CONTROL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months Ended Ended March 31, 2002 March 31, 2001 -------------- -------------- (Unaudited) (Unaudited) REVENUES $ 30,000 $ - ------------ ------------ COST OF GOODS SOLD 8,600 - ------------ ------------ GROSS PROFIT 21,400 - ------------ ------------ OPERATING EXPENSES: Selling, general and administrative $ 214,495 $ 391,565 ------------ ------------ (LOSS) FROM OPERATIONS (193,095) (391,565) ------------ ------------ OTHER (EXPENSE): Interest expense (58,775) (56,408) Beneficial conversion feature of convertible debt (113,000) - Amortization of loan fees - (187,213) ------------ ------------ Net Other (Expense) (171,775) (243,621) ------------ ------------ (LOSS) FROM CONTINUING OPERATIONS (364,870) (635,186) ------------ ------------ DISCONTINUED OPERATIONS: (Loss) from operations of discontinued subsidiaries (149,745) (82,256) Gain on disposal of subsidiary 1,490,553 - ------------ ------------ Total Income (Loss) From Discontinued Operations 1,340,808 (82,256) ------------ ------------ NET INCOME (LOSS) $ 975,938 $ (717,442) ============ ============ NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Continuing operations $ (0.06) $ (0.12) Discontinued operations: Loss from operations (0.03) (0.02) Gain on disposal 0.25 - ------------ ------------ $ 0.16 $ (0.14) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED 6,032,771 5,282,308 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4
POLLUTION RESEARCH AND CONTROL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED) TOTAL COMMON STOCK STOCKHOLDERS' ------------ ADDITIONAL ACCUMULATED EQUITY SHARES AMOUNT PAID-IN (DEFICIT) (DEFICIT) --------- ---------- ---------- ------------- ------------- Balances, December 31, 2001 5,949,616 $9,789,742 $2,485,062 $(14,169,703) $(1,894,899) Stock issued for consulting services 65,000 29,050 - - 29,050 Conversion of convertible debt 154,799 50,000 - - 50,000 Stock issued in Private Placement 250,000 95,000 - - 95,000 Value of stock based compensation issued for sale of Dasibi - - 160,993 - 160,993 Value of beneficial conversion feature of convertible debt - - 113,000 - 113,000 Net income for the period - - - 975,938 975,938 --------- ---------- ---------- ------------- ------------ Balances, March 31, 2002 6,419,415 $9,963,792 $2,759,055 $(13,193,765) $ (470,918) ========= ========== ========== ============= ============
Page 5
POLLUTION RESEARCH AND CONTROL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2002 2001 ------------- ------------ CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Reconciliation of net (loss) to net cash flows provided by (used in) operating activities: Net (loss) from continuing operations $ (364,870) $ (635,186) Depreciation and amortization - 248,580 Amortization of consulting fee - 164,932 Deferred rent - (3,634) Beneficial conversion feature of convertible debt 113,000 - Stock issued for services 29,050 - Changes in assets and liabilities Accounts receivable (30,000) 20,348 Inventories - (108,872) Other current assets - (2,190) Accounts payable and accrued expenses 70,971 (59,974) ------------ ------------ Net cash flows (to) continuing operations (181,849) (375,996) Net cash flows (to) discontinued operations - (82,256) ------------ ------------ Net Cash (Used in) Operating Activities (181,849) (458,252) ------------ ------------ CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Net Cash (Used in) Investing Activities - - ------------ ------------ CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from issuance of common stock 50,000 300,000 Payment of offering costs (5,000) - Advances on notes payable - 50,000 Employee stock plan receivable - (1,200) Advances on letter of credit - 431,021 ------------ ------------ Net Cash Provided by Financing Activities 45,000 779,821 ------------ ------------ INCREASE (DECREASE) IN CASH (136,849) 321,569 CASH, beginning of period 142,754 172,306 ------------ ------------ CASH, end of period $ 5,905 $ 493,875 ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 6 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Pollution Research and Control Corp. included in our Form 10-KSB for the fiscal year ended December 31, 2001. 2. STOCKHOLDERS' EQUITY During the three months ended March 31, 2002, the Company sold 250,000 shares of common stock for $100,000. $50,000 had been received prior to December 31, 2001 and had been recorded as a liability. The Company paid a $5,000 placement fee to a company controlled by the President and CEO of the Company. 3. SALE OF DASIBI In March 2002, the Company entered into an agreement to sell Dasibi to one of its note holders in exchange for the forgiveness of $1,500,000 of debt, including $1,220,000 which was outstanding at December 31, 2001. The purchaser assumed all liabilities of Dasibi as of the date of the closing of the sale and all liabilities of the Company incurred on behalf of Dasibi. As part of the transaction, Dasibi assigned all of its inventory to the Company. The agreement also amended and restated the option grants to purchase common stock of the Company to the purchaser as follows: 50,000 at $0.25 per share, 100,000 at $0.50 per share, 528,571 at $0.875 per share, 100,000 at $1.00 per share and 21,875 at $3.10 per share. The options are vested immediately and expire in March 2005. The options are valued at the fair market value of $160,993 on the date of grant utilizing the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.73%, volatility was estimated at 99.86%, the expected life was three years. The Company was granted a perpetual non-exclusive license to, among other matters, make use and otherwise exploit all products, software, technologies and other intellectual property (including the use of the name Dasibi and Dasibi Environmental Corp.) of Dasibi throughout the world with the exception of the Peoples Republic of China. The Company recorded a gain on the sale of Dasibi of $1,490,553 because the liabilities assumed by the purchaser exceed the fair market value of the assets transferred in the sale. 4. CONVERTIBLE DEBT During the three month ended March 31, 2002, a convertible debt holder converted $50,000 to 154,799 shares of the Company's common stock. The convertible debt holder agreed to extend the due date of the debt to February 23, 2004, and the Company agreed to reduce the conversion Page 7 rate on the convertible debt from 85% of the market price of the Company's common stock to 70% of the market price of the Company's common stock. The Company recorded the $113,000 as an expense for the beneficial conversion feature of the new conversion rate. The following were the results of operations of Dasibi during the period from January 1, 2002 to March 25, 2002 and for the three months ended March 31, 2001: 2002 2001 ---------- ---------- Net sales $ 319,486 $ 694,358 Cost of sales 118,042 467,262 ---------- ---------- Gross profit 201,444 227,096 ---------- ---------- Operating expenses 351,370 309,352 ---------- ---------- (Loss) from discontinued operations $ (149,926) $ (82,256) ========== ========== 5. SUBSEQUENT EVENTS During April 2002, note and convertible debt holders converted $255,000 of debt and $15,788 of accrued interest to 1,069,585 shares of the Company's common stock. During April 2002, the Company issued 225,000 shares of common stock for consulting services valued at $76,500, based upon the closing price of the Company's common stock on the date the stock was issued. During April 2002, the Company borrowed $22,526, due the earlier of June 29, 2002, or upon the Company raising additional funds in excess of $30,000. The loan bears interest at 10% per annum. If the loan is not repaid within 30 days after the due date, the loan will bear interest at 14% per annum. Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-QSB. THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS OF POLLUTION RESEARCH AND CONTROL CORP. FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS." OVERVIEW Historically, our core business has been the design, manufacture and marketing of automated continuous monitoring instruments used to detect and measure various types of air pollution, such as "acid rain," "ozone depletion" and "smog episodes," primarily through our then wholly-owned subsidiary, Dasibi Environmental Corp., which we refer to throughout this report as Dasibi. These products generally are used to measure air pollution levels in geographic areas that range in size from small industrial sites to entire states or countries. We also supplied computer-controlled calibration systems that verify the accuracy of our instruments, data loggers to collect and manage pollutant information and our final reporting software for remote centralized applications. In more recent years, we focused our marketing efforts towards The People's Republic of China. Beginning in the fourth quarter of fiscal 2001, we began to shift our business focus and strategy to the bio-terrorism detection device and medical diagnostic equipment markets. RECENT DEVELOPMENTS On March 19, 2002, upon approval by our board of directors, we entered into a binding letter of intent to sell all of the outstanding shares of Dasibi to an individual. Effective March 25, 2002, we consummated the sale pursuant to the terms and conditions of the binding letter of intent. The consideration we received in exchange for the stock of Dasibi included, among other things, cancellation of indebtedness of $1.5 million, a perpetual, nonexclusive license to exploit all of Dasibi's intellectual property rights outside of mainland China, and an assignment by Dasibi of its inventory to us. Our board of directors believes that the sale of Dasibi will assist us in pursuing our business strategy which emphasizes the bio-terrorism detection device and medical diagnostic equipment markets. In early February 2002, we announced the launch of a pilot program geared towards early adopters of our bio-terrorism detection devices currently in development. Under this program, we will make available our current Model 7001 to select customers for installation and use while we continue our ongoing modification and reengineering of the device to enable real-time detection of airborne biological and chemical agents. We sold our first Model 7001 device to Summit Sportswear and expect to obtain valuable performance data from that installation which will assist us in our Page 9 continued efforts to develop the technology necessary to detect airborne chemical and biological agents. We also intend to concentrate on further research and development to extend our applications of our nitric oxide machine to the medical diagnostics market. We previously have participated in developing an asthma detection instrument with a research institute for these applications, but the project was halted due to a lack of funding. We are once again starting to enter research collaborations to pursue this plan. Currently, we do not plan to pursue any business in the air pollution monitoring market; however, we may determine to engage in that business at a later date. BIO-TERRORISM DETECTION DEVICE MARKET The attacks of September 11, 2001, and the subsequent spread of anthrax spores have created a new sense of urgency in the public health systems across the world, and especially in the United States. The United States government has responded to this urgent need for preparedness against bio-terrorism by approving federal legislation to spend over $3 billion in 2002 to prepare the country against future bio-terrorist attacks. The objective is to accelerate development of technologies that lead to cost effective and timely detection of biological and chemical warfare agents as well as effective treatments. Spending, as well as additional research and development support, has been allocated to both the private and public sectors. We have obtained an outside consultant specialized in government grants, to consistently screen the applicable grants for us. At this time, we have not received any portion of these grants, and cannot assure you that we will receive any portion in the future. GOVERNMENTAL APPROVAL The EPA administers the federal Clean Air Act, as amended by the Clean Air Act Amendments of 1990, and approves ambient air pollution monitoring equipment meeting certain requirements as either reference or equivalent methods for measuring pollutants. The EPA established the reference method as the basic method for measuring a pollutant. An equivalent method measures the same pollutant utilizing a different technique that achieves results identical to those of the referenced method. As a practical matter, before a monitoring instrument can be sold in the United States, it must receive EPA-approval as either a "reference" or "equivalent" method. These approvals are given only after rigorous and expensive testing by the applicant and the submission to, and approval by, the EPA of the results of the testing. The testing and approval process generally requires between 12 and 18 months. Following approval, the EPA typically acquires and tests a production model of the device. If the model being tested does not meet the standards established by the approval process, the approval may be withdrawn. COMPANY PRODUCTS In 1991, we completed development of a Model 7001 beta-gauge to measure air-borne biological particles in the ambient air. The Series 7001 measures the amount of air-borne particulate matter, or dust, which is collected as a series of independent, sequential samples on a self contained filter tape. Ambient air is drawn into the sample system through an inlet head located outside, Page 10 directly above the instrument. Dust concentration calculations are performed automatically by a self-contained microprocessor and are displayed by the instrument. The operator of the instrument can vary the measurement cycle from minutes to hours over a 24-hour period, as desired. In February 2002, we sold our first Model 7001 airborne particle detector to Summit Sportswear, a leading producer of custom private labeled sportswear based in Orange County, California. The Model 7001 enables analysis of particles on a periodic or on-demand basis. We are continuing to modify and reengineer the Model 7001 to enable real-time detection of airborne biological and chemical agents. As a condition to the sale of Dasibi, we have been assigned all of the inventory of Dasibi as of the date of the sale, which we plan to utilize, to the extent practicable, in manufacturing our bio-terrorism detection products. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Under accounting principles generally accepted in the United States, we are required to make assumptions and estimates that directly impact the consolidated financial statements and related disclosures. Because of the uncertainties inherent in making assumptions and estimates, actual results in future periods may differ significantly from our assumptions and estimates. We base our assumptions and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. The following represents what we believe are the critical accounting policies most affected by our significant estimates and judgments. CONSOLIDATION The consolidated financial statements include the accounts of Pollution Research and Control Corp. and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. INVENTORIES Inventories are stated at the lower of cost (first-in first-out) basis or market. STOCK-BASED COMPENSATION We account for stock based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." This standard requires us to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees. We did not change our method of accounting with respect to employee stock options; we continue to account for these under the "intrinsic value" method and to furnish the proforma disclosures required by SFAS 123. VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by us have been valued at the market value of our common stock on the date the transaction was entered into or have been valued using the Black-Scholes Model to estimate the fair market value. Page 11 EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, to conform to Statement 128 requirements. CASH EQUIVALENTS For purposes of reporting cash flows, we consider all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt approximate fair value because of the short maturity of these items. IMPAIRMENT OF LONG-LIVED ASSETS We evaluate our long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets has been made. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At December 31, 2001, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 reporting period. Actual results could differ from those estimates. Page 12 RECLASSIFICATION Certain amounts reported in our financial statements for the year ended December 31, 2000 have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS 142 effective January 1, 2002. Management has determined that the adoption of the provisions of SFAS 142 will have no material impact on our results of operations and financial position. In December 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101A was released on March 24, 2000 and deferred the effective date to no later than the second fiscal quarter beginning after December 15, 1999. In June 2000, the SEC issued SAB 101B which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We have adopted this SAB and do not believe that adoption of this SAB will have a material impact on our financial statements. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is effective for the Company for the fiscal year beginning January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. We estimate that the new standard will not have a material impact on our financial statements but are still in the process of evaluating the impact on our financial statements. SFAS No. 143, Accounting for Asset Retirement Obligations, addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 will be effective for us for the fiscal year beginning January 1, 2002, and early adoption is encouraged. SFAS No. 143 requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. We estimate that the new standard will not have a material impact on our Page 13 financial statements but are still in the process of evaluating the impact on our financial statements. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001 The following discussion does not include the discontinued operations of Dasibi, which are discussed later in this section REVENUES. Revenues for the three months ended March 31, 2002, were $30,000 compared to $0 for the three months ended March 31, 2001. This increase was due to the sale of one Model 7001 during the three months ended March 31, 2002. GROSS MARGIN. Gross margin was 71% of consolidated net revenues for the three months ended March 31, 2002. For the three months ended March 31, 2001, sales were from Dasibi only. COST OF SALES. Cost of sales were $8,600 or 29%, of sales for the three months ended March 31, 2002. For the three months ended March 31, 2001, sales were from Dasibi only. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses totaled $214,495 for the three months ended March 31, 2002 and $391,565 for the three months ended March 31, 2001. The decrease is a result of selling Dasibi and a reduction in overhead costs. Selling, general and administrative costs consisted primarily of accounting fees, legal fees, bio-detection product consulting and other expenses. INCOME (LOSS) FROM OPERATIONS. Operating loss for the three months ended March 31, 2002 was $364,870 compared to operating loss of $635,186 for the three months ended March 31, 2001. This decrease primarily is due to decreased operating costs, lower salaries, and lower loan fee and interest costs. OPERATIONS OF DASIBI-DISCONTINUED OPERATIONS. We have reported the operations of Dasibi as discontinued operations. We entered into a plan to spin-off Dasibi effective October 1, 2001, but later determined that the spin-off was not in the best interests of the shareholders. We sold Dasibi effective March 25, 2002. Dasibi had assets of approximately $967,000 and liabilities of approximately $2,072,000 as of December 31, 2001 and a loss from operations from October 1, 2001 to December 31, 2001 of approximately $813,770. Dasibi had a loss from operations of approximate $150,000 during the three months ended March 31, 2002. The Company recognized a gain of approximately $1,491,000 on the sale of Dasibi. Page 14 The following are comparative results of operations of Dasibi for the period from January 1, 2002 to March 25, 2002 and for the three months ended March 31, 2001: 2002 2001 ----------- ----------- Net sales $ 319,486 $ 694,358 Cost of sales 118,042 467,262 ----------- ----------- Gross profit 201,444 227,096 ----------- ----------- Operating expenses 351,370 309,352 ----------- ----------- (Loss) from discontinued operations $ (149,926) $ (82,256) =========== =========== Sales and cost of sales for Dasibi decreased during the three months ended March 31, 2002, compared to the prior period because of a lack of available financing and a reduction in the workforce of Dasibi. Operating expenses increased due increased interest charges from Dasibi's primary lender, who purchased Dasibi on March 25, 2002. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) our operating activities during the three months ended March 31, 2002 was ($181,849), primarily attributable to a net loss from continuing operations. Net cash provided by financing activities during the three months ended March 31, 2002 was $45,000, primarily due to the issuance of the Company's common stock. Our total cash and cash equivalent balance at March 31, 2002, was $5,905, as compared to December 31, 2001, which was $142,754. Because of the reductions in our cash balances, we may not be able to continue operations at our current levels. We are dependent upon current cash collections to meet our operating needs and pay our current liabilities. Our cash flow is dependent on development of products which are commercially accepted in a timely and cost efficient manner, acceptance of our technology, collections and the signing of new contracts, all of which are difficult to predict with accuracy. Historically, we have financed operations through bank borrowings and the issuance of common stock. Since our financial statements have deteriorated, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been relatively expensive. During the past two fiscal years and through the date of this report, we have received debt financing upon various terms, as follows: (A) Three one-year loans from unaffiliated individuals evidenced by promissory notes with an aggregate face amount of $300,000, maturing June 1, 2001, with interest at the rate of 12% per annum. These loans were initially made in 1999 and restructured in 2000. Page 15 (B) One subordinated convertible debenture with a face amount of $500,000, due June 2002, with interest at the rate of 12% per annum, convertible at a conversion price of the lesser of $2.25 or 80% of the market price on the date of conversion. The initial March 2000 due date of the debenture was previously extended to December 2000. The initial interest rate was 12% per annum. As of the date of this report, the outstanding balance is $400,000. (C) One convertible debenture with a face amount of $300,000, due June 30, 2001, with interest at the rate of 12% per annum, convertible at a conversion price of the lesser of $2.25 or 80% of the market price on the date of conversion. The initial due date of the debenture was June 1, 2000. As of the date of this report, a total of 119,108 shares of common stock have been issued upon conversion of the debenture at conversion prices in a range from $1.20 to $2.25, and the outstanding principal balance is $50,000. (D) One convertible debenture with a face amount of $500,000, due June 30, 2002, with interest at the rate of 12% per annum, convertible at a conversion price of the lesser of $2.00 or 80% of the market price on the date of conversion. The initial due date of the debenture was March 31, 2001. (E) One loan to Dasibi China, Inc., a wholly-owned subsidiary of Pollution Research, evidenced by a promissory note with a face amount of $75,000, maturing on the extended due date of June 30, 2002, with interest at the rate of 10% per annum. (F) One loan to Delta Capital evidenced by a promissory note with a face amount of $200,000, maturing on the extended due date of June 2002, with interest at the rate of 18% per annum. (G) Eight convertible debentures with a total face amount of $340,000, due July 17, 2002, with interest at the rate of 9% per annum, convertible at a conversion price of the lesser of $2.34 or 80% of the market price on the date of conversion. (H) One loan payable for $22,526 due the earlier of June 29, 2002 or upon the Company raising additional funds in excess of $30,000. The loan bears interest at 10% per annum. If the loan is not repaid within 30 days after the due date, the loan will bear interest at 14% per annum. Our working capital deficit at March 31, 2002, was $20,918. We require immediate financing to repay our indebtedness and continue operations. We require at least $1.5 million in the next six to twelve months to complete the re-engineering of our existing products, continue development of future products and continue to execute our business plan, which includes increasing our presence in the bio-terrorism detection and medical diagnostic equipment markets. We actively continue to pursue additional equity or debt financings but to date have not received any funding commitments other than as reported in this report. We intend to improve liquidity by enhancing the efficiency of our operations, the continued monitoring and reduction of administrative costs and through sales of existing products including the model 7001 series. Currently, our cash on hand, together with cash generated by operations, cannot sufficiently fund future operating losses and capital requirements. If we are unable to obtain financing on terms acceptable to us, or at all, or if we are not able immediately to recognize significant revenue from sales of our new products, we may not be able to Page 16 accomplish any or all of our initiatives and could be forced to consider steps that would protect our assets against our creditors. CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ from those projected or forecast are included in the statements below. In addition to other information contained in this report, readers should carefully consider the following cautionary statements and risk factors. THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. We have experienced significant operating losses in the current and prior years. Our cash and short-term investment balances continue to decline since December 31, 2001, and we expect to experience further declining balances. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms. We expect that our cash on hand and short-term investments, together with cash generated by operations, cannot sufficiently fund future operating losses and capital requirements. We have attempted to raise additional capital through debt or equity financing and to date have had nominal success. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and could be forced to consider steps that would protect our assets against our creditors. WE HAVE A HISTORY OF LOSSES AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO ACHIEVE PROFITABLE OPERATIONS IN FISCAL 2002. We have not been profitable in the past years and have an accumulated deficit of $13.2 million. During fiscal 2001, we incurred a net loss of $7.4 million. Because we have shifted our business towards new markets, achieving profitability depends upon our ability to generate and sustain substantially higher revenues through sales of our new products. Although we have implemented plans to increase revenues and operating margin, we cannot assure you that we will be able to do so and consequently we may experience additional losses in fiscal 2002. WE HAVE LIMITED RIGHTS TO EXPLOIT THE TECHNOLOGY THAT OUR EXISTING AIR MONITORING PRODUCTS INCORPORATE. AS A RESULT, OUR REVENUES AND PROFITABILITY FROM SALES OF THIS PRODUCT WILL SUBSTANTIALLY DECLINE. As part of the sale of Dasibi, we have obtained a nonexclusive license to exploit all of the technology currently owned by Dasibi anywhere in the universe outside of mainland China. In recent years, we focused substantially all of our marketing efforts towards, and substantially all of our revenue was derived from, sales of our air pollution product in China. Our agreement not to compete in that market will cause our revenue to decline substantially. WE NEED ADDITIONAL CAPITAL TO FUND PRODUCT DEVELOPMENT, MARKETING ACTIVITIES AND SALES. IF WE CANNOT OBTAIN ADEQUATE FINANCING, WE MAY CEASE OPERATIONS. Recently we shifted our research and development, marketing and business development efforts away from the air pollution market in China towards the bio-medical and bio-terrorism arena and to other medical applications for our products. If we cannot raise additional capital, we will not Page 17 be able to pursue these strategies as scheduled, or at all, and we may cease operations. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. Any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot be certain that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. If adequate funds are not available on acceptable terms, we may not be able to fund continued development and sales of our existing products, the expansion of our business into the bio-medical and bio-terrorism markets or markets for other medical applications of our products, which could cause us to cease operations. WE ARE NOT RETAINING ANY OF THE DASIBI EMPLOYEES WHO HAVE SIGNIFICANT EXPERIENCE AND KNOWLEDGE IN DEVELOPING, ENHANCING OR MARKETING DASIBI'S CURRENT PRODUCTS, AND AS A RESULT, WE MAY LOSE REVENUE AND MARKET SHARE. If we cannot effectively manage the design, development, manufacture and marketing of the various monitoring instruments previously manufactured by Dasibi, our revenue and profitability will decline and we may lose customers and market share. Our management team does not have substantial experience in the air pollution monitoring instruments business and may not be able to timely identify or anticipate all of the material risks associated with operating that business. We may not be able to retain a sufficient number of additional qualified employees on a timely business, or at all. If we cannot timely and cost-effectively manage the air pollution monitoring instruments business, we will lose revenue, customers and market share, and our results of operations will be materially adversely affected. OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bio-terrorism detection device market, establish brand recognition and compete effectively depend upon many factors, including broad commercial acceptance of our products. If our products are not commercially accepted, we will not recognize meaningful revenue and our results of operation will be materially adversely affected. The success of our products will depend in large part on the breadth of the information these products capture and the timeliness of delivery of that information. The commercial success of our products also depends upon the quality and acceptance of other competing products, general economic and political conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products will achieve significant market acceptance or will generate significant revenue. If the marketplace does not broadly accept our products, our results of operations and financial condition could be materially and adversely affected. WE HAVE ISSUED DEBENTURES CONVERTIBLE AT A PRICE DISCOUNT TO MARKET AND CONVERSION OF THESE SECURITIES MAY DEPRESS THE MARKET VALUE OF OUR SHARES. As of March 31, 2002, we have issued an aggregate of $1,190,000 in convertible debentures which are convertible into our common stock at 70-85% of the market price on the date of conversion. It may be difficult to raise financing and the market price of our common stock may decline because of the indeterminable overhang that is created by the discount to market conversion feature of these debentures. If the holders of these debentures convert their debentures at the Page 18 discounted price of 15-30% below the market price the existing shareholders will suffer substantial dilution and our stock price may substantially decline. In addition, large numbers of shares purchased at a discount could cause short sales to occur which would lower the bid price of the common stock. WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH WOULD ADVERSELY EFFECT THE LIQUIDITY OF OUR STOCK. In order to continue to be listed on Nasdaq, we must meet the following requirements: o minimum bid price of $1.00; o net tangible assets of at least $2,000,000, or a market capitalization of $35,000,000 or $500,000 in net income for two of the last three years; o two market makers; o 300 stockholders; o at least 500,000 shares in the public float or a minimum market value for the public float of $1,000,000; and o compliance with certain corporate governance standards. In July 2001, we were notified by The Nasdaq Stock Market that we did not meet the minimum bid price requirement of the continued listing requirements of the Nasdaq SmallCap Market. Subsequently, Nasdaq suspended the notification until early 2000. On February 14, 2002, we were notified by The Nasdaq Stock Market that we have until August 13, 2002, to regain compliance with the minimum bid requirement. In order to comply with the minimum bid requirement, our common stock bid price must closes at $1.00 per share or more for a minimum of 10 consecutive trading days. Currently, our stock trades below the minimum bid price of $1.00. On April 17, 2002, The Nasdaq Stock Market notified us that we were not in compliance with the net tangible assets or stockholders' equity requirement and requested that we provide them with a specific plan on how we aimed to achieve and sustain compliance with all The Nasdaq SmallCap Market listing requirements. On May 1, 2002, we responded to Nasdaq's request. Currently, we are awaiting a response from Nasdaq on this matter. If we are delisted from The Nasdaq Small Capital Market, we anticipate that we would apply for our common stock to trade on the Over The Counter Bulletin Board. We cannot assure you that we would be approved for trading on the Over The Counter Bulletin Board. If we are delisted, it may be more difficult to raise additional debt or equity financing and an investor likely would find it more difficult to sell or obtain quotations as to the price of our common stock. OUR OUTSTANDING OPTIONS AND WARRANTS, AND CONVERTIBLE DEBENTURES MAY DILUTE OUR SHAREHOLDERS' INTERESTS. As of March 31, 2002, we have granted options and warrants to purchase a total of 1,946,427 shares of common stock that have not been exercised and an aggregate of $1,190,000 outstanding debentures that are convertible based upon a conversion price of 70-85% of the market Page 19 price on the date of conversion. To the extent these outstanding options and warrants are exercised or the convertible debentures are converted, our shareholder's interests will be diluted. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER MAY DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Mr. Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi could adversely affect the development of our business and our ability to realize or sustain profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain such insurance. WE HAVE LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OF OUR PRODUCTS. We regard all or portions of the designs and technologies incorporated into our products as proprietary and attempt to protect them under trade secret laws. It has generally been our policy to proceed without patent protection. It may be possible for unauthorized third parties to copy certain portions of our products or to "reverse engineer" or otherwise obtain and use to our detriment information that we regard as proprietary. We cannot assure you that any of our efforts to protect our proprietary technology will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. WE DO NOT MAINTAIN PRODUCTS LIABILITY INSURANCE. In the event that we experience a material liability as a result of a products liability claim, such a liability could have a material adverse effect on us, as we would have to repair and service the products at our cost. Should our products fail to perform or require repair under warranty, we may not be able to afford such repairs or to do so in a timely manner, which could adversely affect our relations with our customers. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bio-terrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations also may adversely affect the future trading price of our common stock. WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK. We have never paid dividends on the shares of our common stock and do not intend to pay any dividends in the foreseeable future. Page 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SOLTANI, ETEMAD, PIC COMPUTERS ET AL. V. POLLUTION RESEARCH AND CONTROL CORP. Case No. BC227020 Los Angeles Superior Court In March, 2000, the above plaintiffs filed a lawsuit against us alleging breach of contract and fraud surrounding both the purchase and return of real property in the form of a training facility or business property in Macau, China and certain service contracts between us and the plaintiffs. We filed a cross complaint against the plaintiffs alleging that Mr. Soltani had breached his fiduciary duties as a director and sought a judicial ruling that the real property transaction was properly rescinded by us. In October 2001, a judgment was entered against Dasibi in the amount of approximately $130,000, of which $100,000 was still owing at the time of the sale of Dasibi. TAYLOR, TAYLOR & DREIFUS V POLLUTION RESEARCH AND CONTROL CORP. No. 99-1100-CA01 Circuit Court Escambia, Florida In June, 1999, a lawsuit was filed against us by Taylor, Taylor, & Dreifus, a Florida general partnership alleging default by our company under a promissory note and failing to make lease payments, all relating to a former subsidiary bankruptcy of 1998. The amount of claim is estimated at $300,000. We are vigorously defending the litigation and have filed a counterclaim against the partnership alleging that the note and lease payments are not due because of fraudulent representations made at the time of acquisition of the former subsidiary business. Plaintiff has failed to pursue this action and no discovery has taken place through the date of this report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During the three months ended March 31, 2002, we sold 250,000 shares of our common stock to an accredited investor for $100,000. Astor Capital received a placement fee of $5,000 for this transaction. The issuance and sale of these securities was exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 26, 2002, we held the Annual Meeting of Shareholders for fiscal 2000. The following sets forth the identity of the directors elected to hold office for three years and until their respective successors have been elected.
YES NO ABSTAIN BROKER NON ELECTION OF DIRECTORS: Jacques Tizabi 3,465,012 258 202,868 Michael Collins 3,460,012 258 202,868 Matin Emouna 3,459,762 258 202,868
Page 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 Executive Employment Agreement, dated as of September 24, 2001, by and between Registrant and Jacques Tizabi. (b) Reports on Form 8 K Current Report on Form 8-K/A filed January 11, 2002, Items 1, 2, and 5-7. Current Report on Form 8-K filed March 22, 2002, Items 5 and 7. Current Report on Form 8-K filed March 22, 2002, Item 2. Page 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLLUTION RESEARCH AND CONTROL CORP. Date: May 20, 2002 /S/ JACQUES TIZABI ------------------------------------------- By: Jacques Tizabi Its: President, Chief Executive Officer and Chairman of the Board Page 23 EX-10 3 exhibit10-1.txt EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of September 25, 2001, by and between Pollution Research and Control Corp., a California corporation (the "COMPANY") and Jacques Tizabi, an individual ("OFFICER"). R E C I T A L S A. The Company and Officer desire to assure that the Company retains the services of Officer, whose experience, knowledge and abilities are extremely valuable to the Company. B. As an inducement to retain the services of Officer, the Company has agreed to grant Officer an option to purchase 1,150,000 shares of common stock of the Company, $.001 par value, at $.30 per share (the "INCENTIVE OPTIONS"). A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, the Company and Officer agree as follows: 1. EMPLOYMENT. Company hereby employs Officer, and Officer hereby accepts such employment, as Chairman of the Board, Chief Executive Officer and President of the Company, on the terms and subject to the conditions set forth herein. 2. CAPACITY AND DUTIES. 2.1 Officer shall serve the Company as its Chairman of the Board, Chief Executive Officer and President and shall report directly to the Board of Directors of the Company (the "BOARD OF DIRECTORS"). 2.2 Subject to the direction and control of the Board of Directors, Officer shall have the full authority and responsibility to operate and manage, on a day to day basis, the business and affairs of the Company, and shall perform such other duties and responsibilities as are prescribed by the Bylaws of the Company and which are customarily vested in the office of president of a corporation. 2.3 Officer shall devote his business time, energy and efforts faithfully and diligently to promote the Company's interests. 2.4 The terms of this Section 2 shall not prevent Officer from performing his duties for Astor Capital, Inc. in such form or manner as he chooses and spending such time, whether or not during business hours, as he deems necessary, so long as he is able to fulfill his duties pursuant to Section 2 above. Page 1 2.5 Except for routine travel incident to the business of the Company, Officer shall perform his duties and obligations under this Agreement principally from an office provided by the Company in Los Angeles, California or the surrounding area. 3. TERM. This Agreement shall be effective as of the date hereof (the "EFFECTIVE DATE") and shall govern Officer's employment from and after such date. As of any given date, (the "DATE OF DETERMINATION"), Officer's employment shall terminate on the fifth anniversary of the Date of Determination, unless sooner terminated in accordance with the provisions of this Agreement or extended by an amendment executed by the Company and the officer (the "Term"). Accordingly, there shall always for all purposes be a minimum of at least five years remaining on the Term under this Agreement. 4. COMPENSATION. 4.1 BASE SALARY. 4.1.1 As compensation for services rendered under this Agreement, the Company shall pay to Officer a base salary (the "BASE SALARY") computed in accordance with Section 4.1.2 below during the Term, payable in accordance with the normal payroll procedures of the Company. 4.1.2 During the Term, Officer's Base Salary shall be $250,000 and shall be adjusted as provided in this Section. Commencing on January 1, 2003, and on each anniversary thereafter, or from time to time at the sole discretion of the Compensation Committee of the Board of Directors (the "COMPENSATION COMMITTEE"), Officer's Base Salary shall be reviewed by the Compensation Committee and may be increased, but may never be decreased, in the sole discretion of the Compensation Committee. In determining whether to increase Officer's Base Salary, the Compensation Committee may engage a reputable compensation consulting firm to determine comparable compensation packages provided to executives in similarly situated companies. 4.1.3 The Company may deduct from the Base Salary amounts sufficient to cover applicable federal, state and/or local income tax withholdings and any other amounts which the Company is required to withhold by applicable law. 4.2 CASH BONUS PLAN. The Compensation Committee shall adopt a cash bonus plan designed to provide Officer an opportunity to earn annual cash bonuses during each calendar year during his employment which, when added to Officer's Base Salary, shall provide officer a level of compensation comparable to compensation generally prevailing for other chief executive officers of publicly traded companies which are comparable to the Company. The factors to be used to select which companies are comparable to that of the Company shall include, but not be limited to, industry group, revenues, operating income, growth rate, number of employees and location. The annual performance goals to be met (the, "ANNUAL PERFORMANCE GOAL") in order to earn portions or all of the bonus provided under the plan shall be determined through consultation between the Officer and the Compensation Committee. If requested by the Compensation Committee or Officer, the Company shall retain a reputable, Page 2 nationally recognized compensation consultant to assist the Compensation Committee in identifying comparable companies and to make recommendations regarding the structure and amount of the cash bonus plan. The amount of the cash bonus for any particular calendar year shall be determined as follows: (i) if Officer substantially achieves the Annual Performance Goal for such calendar year, officer shall receive a cash bonus of at least 50% of the Officer's Base Salary for such calendar year; and (ii) if Officer exceeds the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus between 50% and 100% of the Officer's Base Salary for such calendar year. If this Agreement is terminated in the middle of a calendar year, Officer shall receive a cash bonus for services rendered through the Termination Date (as defined below) equal to the cash bonus he would have received for the entire calendar year, pro rated through the Termination Date. All cash bonuses hereunder shall be paid to Officer within five business days following the date the audited consolidated financial statements for the Company for the applicable calendar year become available. 4.3 STOCK OPTIONS. The Company hereby grants to Officer the Incentive Options, which are fully vested as of the date hereof. All options to purchase the Company's common stock currently outstanding or which may be granted to Officer whether pursuant to a Company Stock Option Plan or otherwise and notwithstanding the provisions of any other agreement to the contrary, may be exercised by Officer or by Officer's family by delivery of a promissory note in the amount of the total exercise price of the option (the "EXERCISE PRICE"). The promissory note shall bear interest at the minimum Applicable Federal Rate, shall be nonrecourse except to the security referred to in the following clause, shall be secured by the common stock of the Company so purchased, and shall be payable in full (principal and interest) on the fourth anniversary of the date of the purchase of the shares. Notwithstanding the foregoing, Officer shall apply all proceeds from the sale of the shares so purchased by delivery of a promissory note to the repayment of principal and interest outstanding under the promissory note until all principal and interest is paid in full. The Company shall maintain an effective registration statement covering the shares underlying the options granted to Officer whether pursuant to a Company Stock Option Plan or otherwise. 4.4 BENEFITS. 4.4.1 VACATION. Officer shall be entitled to five weeks paid vacation for each calendar year during Officer's employment; provided, however, that vacation shall only be taken at such times as not to interfere with the necessary performance of Officer's duties and obligations under this Agreement. 4.4.2 AUTOMOBILE. The Company shall provide Officer with the use of a luxury automobile that is selected by Officer and approved by the Compensation Committee (the "AUTOMOBILE Cost"). Commencing January 1, 2003, and annually thereafter, the Automobile Cost may, at Officer's sole discretion, be increased 5% per annum. On the earlier of significant damage or destruction or attaining two years of age, the Company shall replace such automobile with a new automobile selected by Officer and approved by the Compensation Committee. The Company shall pay all costs of insurance, repair, maintenance and operation of such automobile. At the end of the two year period referred to herein (or the Termination Date, if earlier), Officer may, but is not obligated to, purchase the automobile for the book value of the automobile on the Company's financial records. Page 3 4.4.3 CLUB MEMBERSHIPS. The Company shall reimburse Officer for the initiation and monthly dues for Officer's membership in two health clubs and one country club selected by Officer, provided the aggregate of such dues shall not exceed $1,500 per month during the first year of the Term. Commencing January 1, 2003, and continuing annually thereafter, such monthly dues may, at Officer's sole discretion, increase 5% per annum. 4.4.4 OTHER BENEFITS; INSURANCE. During the term of Officer's employment under this Agreement, if and to the extent eligible, Officer shall be entitled to participate in all operative officer benefit and welfare plans of the Company then in effect ("COMPANY OFFICER BENEFIT PLANS"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, however, that nothing contained in this Section 4.4.4 shall, in any manner whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the Term) except that the Company will at all times during the Term and any severance period referred to in Section 8 or 9 hereof maintain medical insurance covering Officer and his dependents with benefits at least as favorable as those provided by the Company to its executives as of the Termination Date. 4.4.5 ENTERTAINMENT. The Company shall reimburse Officer for the cost of entertainment provided by Officer to the Company's customers, vendors, employees and strategic partners, provided the aggregate of such annual cost does not exceed $100,000 per annum during the first year of the Term. Commencing January 1, 2003 and continuing annually thereafter, the cost of entertainment may, at Officer's sole discretion, be increased 5% per annum. 4.4.6 REIMBURSEMENT. Officer shall be entitled to reimbursement from the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Agreement. Reimbursement shall be paid upon prompt presentation of expense statements or vouchers and such other supporting information as the Company may from time to time require. 5. INDEMNIFICATION. The Company and Officer are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and conditions therein set forth, to indemnify officer against certain claims arising by reason of the fact that he is or was an officer or director of the Company. 6. TRADE SECRETS. Officer will not at any time during the Term and for the three year period thereafter, in any fashion, form, or manner, unless specifically consented to in writing by the Company, either directly or indirectly use or divulge, disclose or communicate to any person, firm or corporation, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company, except in the ordinary course of the Company's business. All equipment, notebooks, documents, memoranda, report, files, samples, books, Page 4 correspondence, lists, other written and graphic records, and the like, affecting or relating to the business of the Company, which Officer shall prepare, use, construct, observe, possess or control, shall be and remain the Company's sole property. Officer's obligation under the preceding sentence shall continue in effect after the end of Officer's employment with the Company and the obligations shall be binding on Officer's assigns, heirs, executors, administrators, and other legal representatives. 7. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. Upon termination of this Agreement for any reason, Officer, or his estate in the event of his death, shall turn over to the Company all correspondence, property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or any of its subsidiaries or affiliates or comprising or relating to the Trade Secrets. 8. TERMINATION OF EMPLOYMENT. 8.1 TERMINATION IN CASE OF DEATH. 8.1.1 Officer's employment hereunder shall terminate immediately upon the death of Officer. 8.1.2 Upon termination of Officer's employment pursuant to this Section 8.1, the Company shall pay to Officer's estate, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount officer would have earned as Base Salary during the remaining scheduled Term of the Agreement (computed without regard to the termination of the Agreement pursuant to this Section 8.1). 8.2 TERMINATION IN CASE OF DISABILITY. 8.2.1 If Officer suffers a physical or mental disability which results in officer being unable to perform his duties hereunder for a 26 consecutive week period, then the Board of Directors shall select a qualified physician to examine officer and review his physical and mental capacity. If such physician determines in good faith that such physical or mental disability renders Officer incapable of performing his duties hereunder for a period of at least 26 consecutive weeks following the date of such physician's written opinion, then Officer's employment shall terminate effective as of the date of such physician's written opinion. 8.2.2 Upon termination of Officer's employment pursuant to this Section 8.2, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount officer would have earned as Base Salary during the remaining scheduled Term of the Agreement (computed without regard to the termination of the Agreement pursuant to this Section 8.2); provided, however, such amount shall be reduced by the amount of Page 5 any payments to be paid to Officer under any long-term disability insurance policy maintained by the Company for the benefit of officer pursuant to Section 4.4.4. 8.3 TERMINATION BY OFFICER FOR CAUSE. 8.3.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by Officer to the Company upon the occurrence of any of the following events: 8.3.1.1 The willful breach of any of the material obligations of the Company to Officer under this Agreement following written notice delivered to the Company and a reasonable cure period not to exceed 30 days; 8.3.1.2 The Company's chief executive offices are moved to a location outside of Los Angeles County, California; or 8.3.1.3 Officer fails to be reelected to, or is removed from, the Board of Directors of the Company. 8.3.2 Upon termination of Officer's employment pursuant to this Section 8.3, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount officer would have earned as Base Salary during the remaining scheduled Term of the Agreement (computed without regard to the termination of the Agreement pursuant to this Section 8.3), plus an amount equal to five times (i) in the event no previous bonus has been paid or is payable pursuant to this Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Agreement (computed without regard to the termination of the Agreement pursuant to this Section 8.3). 8.4 TERMINATION BY OFFICER WITHOUT CAUSE. 8.4.1 This Agreement shall terminate immediately upon delivery to the Company of written notice of termination by Officer without cause. 8.4.2 Upon termination of this Agreement pursuant to this Section 8.4, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date. Page 6 8.5 TERMINATION BY THE COMPANY FOR CAUSE. 8.5.1 The Company may terminate Officer's employment pursuant to this Agreement only for cause by delivering a written notice to Officer. For purposes of this Section 8.5, cause is defined as conviction (including any plea of guilty or no contest) of (x) any felony involving the embezzlement, theft or misappropriation of monies or other property, of the Company or otherwise, or (y) any crime of moral turpitude. 8.5.2 Upon termination of this Agreement pursuant to this Section 8.5, the Company shall pay to Officer, on the Termination Date, all accrued and unpaid salary and other compensation, payable to Officer by the company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by the Officer to the Company through the Termination Date in a lump sum payment. The Company shall have no further obligation to the Officer pursuant to this Agreement. 8.6 TERMINATION DATE. For purposes of this Section 8, the term, "TERMINATION DATE" shall mean that date on which officer's employment is terminated pursuant to this Section 8. 9. SEVERANCE PAYMENTS UPON CHANGE IN CONTROL. 9.1 SEVERANCE PAYMENT. Upon the occurrence of a Change in Control (as defined in Section 9.5 below) of the Company, the employment of Officer hereunder shall terminate and the Company, in lieu of any payment otherwise due under Section 8 hereof, shall pay to Officer in cash, on the fifth day following the date on which the Change of Control occurs (which for the purposes of this Section 9 shall be the Termination Date), the following: 9.1.1 All accrued and unpaid salary and other compensation payable to Officer by the Company for services rendered by Officer to the Company through the Termination Date; 9.1.2 All accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date; and 9.1.3 Severance pay in an amount equal to (x) the Base Salary Officer would have earned during the remaining scheduled Term of the Agreement (computed without regard to the Change in Control described in this Section 9), plus an amount equal to five times (y) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Agreement, or (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Agreement. 9.2 CONTINUATION OF BENEFITS. The Company shall continue for the remaining scheduled Term of the Agreement (computed without regard to the Change in Control described in this Section 9), to provide Officer with all benefits that would have been payable to him Page 7 pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof if Officer had been employed by the Company during such period. 9.3 VESTING OF OPTIONS. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, upon the occurrence of a Change in Control, all options to purchase common stock of the Company which have been granted to Officer by the Company shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option. 9.4 PROVISION OF SERVICES FOLLOWING CHANGE IN CONTROL. At the request of the Company, Officer shall continue to serve hereunder for a period of up to 180 days following the Termination Date. If the Company requests Officer to perform such services, Officer shall be compensated from and after the Termination Date for the period that officer actually remains employed by the Company at his then current Base Salary. Any such amounts payable to Officer shall be in addition to and not in lieu of the amounts payable to officer under Section 9.1 above. Upon the later to occur of an occurrence of a Change of Control or the termination of any period during which officer continues to provide services as aforesaid, Officer's employment hereunder shall terminate. 9.5 CHANGE IN CONTROL. For purposes of this Section 9, a "Change in Control" shall mean (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and the Company's subsidiaries (if any), taken as a whole, to any unaffiliated entity in an arm's length transaction; (ii) the Company consolidates with or merges into an unaffiliated entity or an unaffiliated entity consolidates with, or merges into, the Company, in any such event pursuant to an arm's length transaction in which the outstanding shares of common stock of Company are changed into or exchanged for cash, securities or other property, other than any such transaction where the holders of the shares of common stock of Company immediately prior to such transaction own, directly or indirectly, not less than a controlling interest in the voting equity of the surviving or resulting entity immediately after such transaction; or (iii) the consummation of any transaction or series of transaction (including, without limitation, any merger or consolidation) the result of which is that any unaffiliated entity or person, becomes the beneficial owner (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of 51% or more of the voting equity of Company. The parties believe that the payments pursuant to Sections 8 and 9 hereof do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "CODE"). Notwithstanding such belief, if any benefit under these sections constitutes an "Excess Parachute Payment" the Company shall pay to Officer an additional amount ("TAX PAYMENT") such that the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. Such Tax Page 8 Payment shall be paid to Officer concurrently with the severance payment referred to in Section 9.1 above. 10. NO MITIGATION. The payments required to be paid to Officer by Company pursuant to Sections 8 and 9 shall not be reduced by or mitigated by amounts which Officer earns or is capable of earning during any period following his Termination Date. 11. INJUNCTIVE RELIEF. Officer hereby recognizes, acknowledges and agrees that in the event of any breach by Officer of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Officer therefore agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Officer of any of the covenants, agreements, duties or obligations hereunder, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of Officer hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 11 shall be deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against officer at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Officer of any of his covenants, agreements, duties or obligations hereunder. 12. MISCELLANEOUS. 12.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto relating to the subject matter hereof and cannot be changed or terminated except in writing signed by both Officer and the Company. 12.2 LIMITED LIABILITIES. All liabilities incurred by Officer in his capacity as an officer hereunder shall be incurred for the account of the Company, and Officer shall not be personally liable therefor. Officer shall not be liable to the Company, or any of its respective subsidiaries, affiliates, employees, officers, directors, agents, representatives, successors, assigns, stockholders, and their respective subsidiaries and affiliates. The Company shall, and hereby agrees to, indemnify, defend and hold Officer harmless from and against any and all damages and/or loss or liability (including, without limitation, all costs of defense thereof), for any acts or omissions in the performance of service under and within the scope of this Agreement on the part of Officer. 12.3 NOTICES. All notices, requests and other communications (collectively, "Notices") given pursuant to this Agreement shall be in writing, and shall be delivered by Page 9 facsimile transmission with a copy delivered by personal service or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below: If to the Company: Pollution Research and Control Corp. 9300 Wilshire Blvd., Suite 308 Beverly Hills, CA 90210 Attention: Board of Directors Facsimile No.: (310) 273-2661 If to Officer: Jacques Tizabi 10560 Wilshire Blvd., #1703 Los Angeles, CA 90024 Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 12.3. 12.4 GOVERNING LAW. This Agreement has been made and entered into in the state of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. 12.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.6 SEVERABLE PROVISIONS. The provisions of this Agreement are severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 12.7 SUCCESSORS AND ASSIGNS. This Agreement and all obligations and benefits of Officer and the Company hereunder shall bind and inure to the benefit of Officer and the Company, their respective affiliates, and their respective successors and assigns; provided, however, that Officer may not assign any or all of his rights or duties hereunder except following the prior written consent of the Company. 12.8 AMENDMENTS AND WAIVERS. No amendment or waiver of any term or provision of this Agreement shall be effective unless made in writing. Any written amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. Page 10 12.9 TITLE AND HEADINGS. The titles and headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties. 12.10 SURVIVAL. Notwithstanding anything to the contrary contained herein, the provisions of sections 6, 7, 8, 9, 10 and 11 shall survive the termination of this Agreement. Page 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first set forth above. POLLUTION RESEARCH AND CONTROL CORP., A CALIFORNIA CORPORATION By: /S/ MICHAEL COLLINS ------------------------------ Its: DIRECTOR ------------------------------ ACCEPTED AND AGREED TO: /S/ JACQUES TIZABI - ------------------------------ Jacques Tizabi Page 12 -----END PRIVACY-ENHANCED MESSAGE-----