-----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, NtAsRsAdQ+CDQ5KNPXuI8VBOFmz4JDdGFjAuDqA5Wp66GBgLXG7dLkHCvCSeVOx+ DjRMcslpxDiLG6z3bQdBnA== 0000891554-99-000607.txt : 19990331 0000891554-99-000607.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891554-99-000607 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLYMER RESEARCH CORP OF AMERICA CENTRAL INDEX KEY: 0000079424 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 112023495 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-14119 FILM NUMBER: 99577830 BUSINESS ADDRESS: STREET 1: 2186 MILL AVE CITY: BROOKLYN STATE: NY ZIP: 11234 BUSINESS PHONE: 7184444300 MAIL ADDRESS: STREET 1: 2186 MILL AVE CITY: BROOKLYN STATE: NY ZIP: 11234 10KSB 1 FORM 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file No. 0-14119-NY POLYMER RESEARCH CORP. OF AMERICA (Name of small business issued in its charter) NEW YORK 11-2023495 (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 2186 Mill Avenue, Brooklyn, NY 11234 (Address of principal executive offices) (Zip Code) Issuers telephone number including area code: (718) 444-4300 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: 4,000,000 shares of $.01 par value Common Stock Check whether the issuers: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or 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 [_] Registrant's revenues for its most recent fiscal year - $5,647,189 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Yes [X] No [_] The aggregate market value of voting stock held by non-affiliates of the Registrant at February 18, 1999 was approximately $2,554,000 based on the last sale price of such stock. As of February 18, 1999, the Registrant had 1,593,947 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE -1- ITEM 1 - BUSINESS Polymer Research Corp. of America ("the Company") was incorporated under the laws of New York State in 1963. It is principally engaged in research and development in polymer chemistry, on a contract basis, particularly in the application of chemical "grafting," i.e., techniques for modification of organic and inorganic substances. The Company also manufactures and sells products arising from research activities and textile printing inks. During 1998, research revenues and products sales accounted for 81 percent and 19 percent of the Company's net revenues, respectively. For a detailed breakdown of segments of the Company's revenues, income, capital expenditures and identifiable assets, see Note 13 of Notes to Financial Statements. RESEARCH AND DEVELOPMENT CONTRACT WORK The Company's principal business is that of research and development on a contract basis for other companies in the field of polymer chemistry, i.e., the chemical creation and use of polymers. "Polymers" are essentially compounds of high molecular weight, such as plastics and resins. Polymers result from chemical reactions of compounds with low molecular weights, called "monomers," which react to form a polymer. Generally, a polymerization reaction (i.e., the chemical creation of a polymer) entails the application of heat to a solution containing the appropriate monomers, in the presence of a catalyst; the result of the reaction can include one or more kinds of polymers. The Company owns a number of patented processes for chemical "grafting" technology. Chemical "grafting" refers to processes by which surfaces are bonded together, or a coating is affixed to a surface, or in depth, through various polymerization reactions. Chemical "grafting" is done by treating a surface with one or more solutions containing monomers, polymers and/or other chemicals. By using heat, catalysts and/or other appropriate techniques, small "whiskers" grow on the surface being treated. These "whiskers" are generally polymers which include in their chemical makeup molecules that remain part of the surface being treated. The "whiskers" can themselves form a protective coating on a surface or join the "whiskers" from another surface thus bonding the two surfaces together. Alternately, by suitable methods, grafting can take place in depth throughout the body of the substrate, i.e. the product to be grafted. -2- By using chemical "grafting" techniques, the Company can form a permanent scratch and corrosion-resistant protective coating on plastics, rubber, metals, and other substances. Based upon the Company's research, management believes that there are many other practical applications of these techniques that have not yet been fully developed or discovered. Research and development contract work for specific application of its chemical "grafting" techniques has been done for pharmaceutical companies and manufacturers of industrial equipment, tires, packaging material, pipes, tubes and plastic films, and other enterprises. The Company continues to seek and obtain such research and development contract work. A majority of the Company's research and development work in chemical "grafting" is done for customers in the private sector. The Company markets its research and development services by contacting businesses which might have a use for chemical "grafting." Typically the Company and the prospective customer determine the possible application of chemical "grafting" in which the customer has an interest. The Company then submits a research proposal based on specifications provided by the prospective customer. If the proposal is accepted, or if an acceptable proposal is negotiated, the Company enters into a contract with the customer and commences the research that is required. A majority of the Company's research and development contracts are for specified periods of time. Most such contracts extend for a period of three to four months and are renewable. The remainder of the Company's research and development contract work is done either on a lump sum or month-to-month basis. Research revenue earned from foreign customers outside the United States aggregated $2,342,500 for 1998, representing approximately 51% of total annual research revenues for 1998. Almost all of the research and development contracts provide that if the Company successfully develops a patentable new process while working on the contract, the Company will assign patent rights to the customer who then will have the exclusive right to use that process. This right generally extends only for uses which the Company was hired to do the research, and in some instances, is dependent upon the customer making specified payments to the Company. The Company believes that these provisions in its contracts are necessary and have not unreasonably inhibited the Company's research and development projects for other customers. The Company employs 10 in-house sales persons plus 1 person in training to market its research and development contracts, primarily through bulk mailings and presence on the Internet to targeted potential customers. To date, all of the Company's research and development services have been related to contracts for customers. -3- PRODUCTION The Company manufactures formulations resulting from research work as an accommodation for the companies for whom the research work was done. The Company also has, since its inception, produced and sold color inks, and components thereof. These products are used by textile businesses for the printing of textiles. The manufacture of textile inks is essentially a process of mechanically mixing solvents, resins, emulsions, gums, oils and pigments to produce a colored ink which can be printed onto cloth. The Company owns and operates the mixing machinery for this manufacturing process and acquires the required ingredients from a variety of sources. The Company is not dependent upon a particular supplier for the ingredients. The Company's textile inks are solvent-free and non-polluting. During 1998, 1997 and 1996, no one customer of the Company accounted for more than 5% of its sales of formulation products or textile inks. The Company has no long-term contracts with its customers for textile inks and maintains approximately a one-month supply of the ingredients for the textile inks in inventory. The Company fills 95% of all textile ink orders within two business days after their receipt. The Company's sales of textile inks are dependent upon the decision of textile companies as to whether they will dye or print their fabrics. Such a decision is primarily based on fashion trends, with one-color fabrics requiring dyeing and multi-colored fabrics requiring printing. However, these trends have not had a material adverse effect on the Company's revenues because the Company has maintained a reliable customer base in the United States. The sales of printing inks has not been a significant source of revenues or profits for the Company. The Company employs 1 in-house salesperson to sell its textile inks. The Company markets its textile inks to the United States and foreign customers. Foreign customers account for less than 5% of the Company's textile ink sales. EMPLOYEES AND EMPLOYEE RELATIONS As of December 31, 1998, the Company had 53 full-time employees. The President and the 19 other scientists in the Company's Research Department are engaged in research and development. The Production Department has 4 employees who are engaged in the production of items arising from research and textile inks. There are 11 employees in the sales and marketing departments. In addition, there are 14 clerical employees and 4 maintenance employees. The Company's technical staff sign nondisclosure agreements whereby they agree to keep the technical information and processes of the Company confidential. In those agreements, such technical personnel also agree to unconditionally assign to the Company all techniques and inventions developed by them in furtherance of or related to Company projects. -4- None of the Company's employees are members of a labor union. There have been no strikes or work stoppages and the Company believes its employee relations are satisfactory. COMPETITION The fields in which the Company does business are highly competitive. In its contract research and development business, the Company competes with the in-house research and development staffs of its customers and scientists at educational institutions and foundations who will do private grant research on processes to produce materials with characteristics of the types desired by the Company's customers. The Company also faces potential competition from research and development companies which are substantially larger than the Company, and various private laboratories, although the Company believes that it is presently the only Company doing contract research and development work in the field of chemical "grafting" for other companies. The Company's "grafting" techniques include the use of innocuous or mild non-alkaline and non-acidic chemicals. In addition, the Company's method of grafting, by use of chemicals, is less expensive than other methods such as gamma-ray grafting. In its textile ink business, the Company faces intense competition from a variety of competitors, many of whom are substantially larger and have significantly greater resources, reputations and marketing abilities than does the Company, and the Company is not a significant factor in this business. ENVIRONMENTAL CONSIDERATION The Company does not believe that its operations are adversely affected by existing environmental regulations. The Company's primary waste products are non-toxic and non-corrosive such as wood, paper and cardboard and are disposed of by a private sanitation company. The small amount of chemicals that the Company disposes of are sealed in non-corrosive containers and are removed from the premises by a company that is licensed to dispose of corrosive waste. PATENTS The Company's President and other employees of the Company have assigned a total of 16 United States patents to the Company, 9 of which have expired. The assigned patents, which cover the basic grafting process, were issued between 1968 and 1996. Each patent is effective for 17 years from the date of its issuance. Management can give no assurance that any of the patents which the Company possesses or might possess in the future, will be enforceable or, if enforceable, will provide the Company or the holder thereof with an advantage over its competitors. -5- ITEM 2. PROPERTY The Company's offices, research and development and manufacturing facilities are located in a 64,000 square foot three-story building at 2186 Mill Avenue, Brooklyn, New York. On June 4, 1990, the Company purchased the building and adjoining property. The Company had previously leased this facility under the terms of a long-term operating lease. The purchase price of the property was $3,000,000 of which the Company paid $500,000 and granted a $2,500,000 seller-financed mortgage, which was renegotiated during 1996. Under the terms of the renegotiated mortgage the Company made an $800,000 principal installment and paid a $45,000 renegotiation fee. (See Note 6 of Notes to Financial Statements). The Company utilizes the space in the following manner: approximately 11,000 square feet is devoted to office space; approximately 10,000 square feet is devoted to production of items resulting from research and textile inks; approximately 35,000 square feet is devoted to research and laboratory facilities and 8,000 square feet is devoted to warehousing inventory. The Company believes that its facility is adequate for its current needs and those of the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in certain lawsuits which arose in the normal course of the Company's business. In the opinion of management the allowance the Company has provided is sufficient to cover the potential damages and expenses that may be incurred in these proceedings, and they will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, no matters were submitted to a vote of the Company's security holders. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock has traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") small capital market. The following table sets forth the high and low bid prices for the periods indicated where the Common Stock is traded under the symbol PROA. The indicated prices are interdealer prices without retail markups, markdowns or commissions and do not necessarily represent actual sales. The limited amount of sales within these ranges should not be interpreted to indicate that an established trading market exists for the shares of Common Stock, nor do these prices necessarily accurately reflect the true value of such shares. The prices indicated have not been adjusted for stock dividends and stock splits referred to below. Bid Prices ---------- Quarter LOW HIGH ------- --- ---- 1998 ---- October - December 1-7/8 2-7/8 July - September 2-1/2 4-1/4 April - June 3-3/4 6-7/8 January - March 1-15/16 5 1997 ---- October - December 2-1/8 3 July - September 2 2-5/16 April - June 2 2-1/2 January - March 2-1/2 3-7/8 -6- DIVIDEND POLICY The Company has paid no cash dividends to its stockholders since its incorporation and has no present intention to do so. The payment of dividends in the future will be determined by the Board of Directors based on the Company's earnings, financial condition, capital requirements and other factors at the time. On March 2, 1998, the Company declared a 5% stock dividend to stockholders of record at March 23, 1998, paid April 2, 1998. The transaction was valued based upon the closing market price of the Company's stock on the day prior to declaration (See Note 9 of Notes to Financial Statements). On March 20, 1997 the Company declared a 5% stock dividend to shareholders at April 1, 1997, paid April 8, 1997. The transaction was valued based upon the closing market price of the Company's stock on the day prior to the declaration. (See Note 9 of Notes to Financial Statements). On March 1, 1996 the Company declared a 10% stock dividend to shareholders at March 15, 1996, paid March 29, 1996. The transaction was valued based upon the closing market price of the Company's stock on the day prior to declaration (See Note 9 of Notes to Financial Statements). On July 20, 1995 the Company adopted a Shareholders Rights Plan. The Rights Plan provides for the issuance of one stock right, entitling the holder to buy one share of common stock at a price of $25 (subject to adjustment), for each outstanding share of the Company's common stock. The rights will become excersizable only if an "acquiring party" (as defined) acquires or announces a tender offer to acquire 15% or more of the Company's common stock. The rights expire July 31, 2005 (See Note 10 of Notes to Financial Statements). On February 11, 1999, the Company declared a 5 % stock dividend to stockholders of record on March 19, 1999, payable on April 2, 1999 (See Note 16 of Notes to Financial Statements). As of February 18, 1999 there were 1,593,947 shares outstanding, which were held by approximately 900 shareholders, 398 shareholders of record and approximately 500 additional beneficial owners. -7- ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue Analysis Year Ended December 31, ----------------------- Percentage of ($) In Thousands Total Revenues ---------------- -------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ------ ------ ------ Research $4,554 $4,214 $4,326 80.6% 77.3% 85.0% Production 1,093 1,234 752 19.4 22.7 15.0 ------ ------ ------ ------ ------ ------ Total Revenues $5,647 $5,448 $5,078 100.0% 100.0% 100.0% ====== ====== ====== ====== ====== ====== 1998 v. 1997 Total revenues increased $199,000 or 4% from $5,448,000 in 1997 to $5,647,000 in 1998. Research revenue increased $340,000 or 8% while production revenue decreased $141,000 or 11.0% from 1997 to 1998. The increase in research revenues was primarily achieved during the first quarter of 1998 resulting from the Company's strong marketing efforts during the latter part of 1997. In addition, the strong domestic and European economies helped improve research revenue. The decrease in production revenue was primarily attributable to decrease in demand from research customers as well as an inventory buildup by customers which occurred during the latter part of 1997. The rate of inflation has not had a material impact upon the results of operations. 1997 v. 1996 Total revenues increased $370,000 or 7% from $5,078,000 in 1996 to $5,448,000 in 1997. Research revenues decreased $112,000 or 3% while production revenue increased $482,000 or 64% from 1996 to 1997. The decrease in research revenue was primarily attributable to continuing turnover of personnel in the marketing department. -8- The increase in production sales was primarily the result of increased demand resulting from research findings for customers in prior years and increased demand from the building industry for polymer coatings. The rate of inflation has not had a material impact upon the results of operations. Cost of Revenues Analysis Year Ended December 31, ----------------------- Cost as a Percentage of ($ In Thousands) Total Revenues -------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ------ ------ ------ Research $1,048 $1,002 $1,017 18.6% 18.4% 20.0% Production 789 1,018 623 14.0 18.7 12.3 ------ ------ ------ ------ ------ ------ Total cost of revenues $1,838 $2,020 $1,640 32.6% 37.1% 32.3% ====== ====== ====== ====== ====== ====== 1998 v.1997 The cost of revenues as a percentage of sales decreased from 37.1% in 1997 to 32.6% in 1998. The decrease in cost of revenues is primarily caused by a decrease in the percentage of product sales which have a higher percentage cost of sales than research sales. Production sales dropped as a percentage of total sales from 22.7% in 1997 to 19.4% in 1998. 1997 v. 1996 The cost of revenues as a percentage of sales increased from 32.3% in 1996 to 37.1% in 1997. The increase in cost of revenues is primarily caused by an increase in the percentage of product sales, which have a higher cost of sales than research revenue. Production sales as a percentage of total sales increased to 22.7% in 1997 compared to 14.8% in 1996. Selling, General and Administrative Expenses Analysis Year Ended December 31, ----------------------- Expenses as a Percentage of ($ In Thousands) Total Revenues ---------------- -------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Selling, General & Administrative Expenses $3,310 $2,902 $2,898 58.6% 53.2% 57.1% ======= ====== ====== ===== ===== ===== -9- 1998 v. 1997 Selling, general and administrative expenses, as a percentage of sales, increased to 58.6% in 1998, as compared to 53.2% during 1997. The increase is directly related to the Company's efforts to increase sales. During 1998, the Company hired additional salespeople and directed resources to generate additional revenue. In addition, during 1998, the Company issued shares of common stock to its employees as compensation aggregating $85,315 (See Note 11 of Notes to Financial Statements). 1997 v. 1996 Selling, general and administrative expenses, as a percentage of sales, increased $4,000 during 1997, but decreased as a percentage of sales, from 57.1% in 1996 to 53.2% in 1997. The Company's 7% sales increase in 1997 was supported by slightly increased support staff. In addition, legal proceeding expenses dropped from 1996 to 1997. CAPITAL RESOURCES AND LIQUIDITY Cash and certificates of deposit have increased from $1,522,316 at December 31, 1997 to $1,960,559 at December 31, 1998. (See the statement of cash flows for a more detailed analysis of opening versus closing cash). Cash is generated and used by the Company through its operations. Neither the issuance of stock nor the acquisition of debt was in 1998, nor expected to be in 1999, significant sources of cash. In an attempt to secure a better, yet safe, return on excess cash, management has elected to invest certain cash amounts in marketable securities. These securities include U.S. Government and New York State Mutual Bond Funds. The Company closely monitors these investments which are subject to price fluctuation (See Note 2 to Financial Statements). Except with respect to the mortgage on the Company's building, there are no known demands for cash related to capital expenditures seen as imminent in the upcoming three years based on stable sales. Capital expenditures anticipated in the next year are anticipated to approximate those in the past three years. During June, 2000, the Company anticipates the use of approximately $1,400,000 to satisfy the balloon payment due on the building mortgage (See Note 6 of Notes to Financial Statements). The Company's cash position at December 31, 1998 is deemed sufficient to cover any unforeseen sales downturn as it is equal to approximately 7 months of selling, general and administrative expenses. Over both the long and short term, liquidity will be the direct result of sales. The ratio of current assets to current liabilities at December 31, 1998 was 2.98 to 1.0 as compared to 2.95 to 1.0 at December 31, 1997. -10- GENERAL DISCUSSION Cash flow of the Company is a direct result of net income and net cash provided from operating activities. Credit extended by the Company in the form of receivables and received in the form of payables has not had and will not have a significant impact on cash flow. Cash flow from financing and investing activities is not expected to have an impact on cash flow in the next 1 to 3 years. However, the Company is preparing for the building mortgage balloon payment of approximately $1,400,000 due on June 1, 2000 (See Note 6 of Notes to Financial Statements). The Company intends to provide for this payment by accumulating cash prior to the payment due date. No significant changes to operating expenses are anticipated within the next 1 to 3 years. SEGMENT DISCUSSION The Company is primarily in the business of research sales. The sale of textile inks and chemical products is an accommodation to research customers and is not seen as a segment that could stand on its own as an independent business. Availability of production of research breakthroughs is an important marketing tool of the Company to its research customers. No significant capital expenditures are foreseen in the next 1 to 3 years as necessary for the continued production of textile inks and chemical products, including potential increases in such productions. ANALYTIC REVIEW OF QUARTERLY RESULTS Consistent with recent years, sales and gross profits for the fourth quarter decreased from the average of the prior three quarters. This is a result of a drop in revenue without a corresponding decrease in costs and an increase in fourth quarter production sales, which yield a lower gross profit than research. Selling, general and administrative expenses increased significantly in the fourth quarter resulting from increased legal proceedings expenses and normal year-end expenses including bonuses and holiday expenses as well as year-end commissions earned in 1998. -11-
3/31/98 6/30/98 9/30/98 12/31/98 ------- ------- ------- -------- Total revenue $ 2,188,176 $ 1,362,085 $ 1,130,831 $ 996,097 Cost of revenue 658,736 437,123 319,312 423,304 Gross profit 1,529,440 924,962 811,519 542,793 SG&A expenses 827,931 813,865 764,981 903,255 Income (loss) from operations 701,509 111,097 46,538 (360,462) Other expenses (22,615) (10,164) (3,070) (18,668) Pre-tax income (loss) 678,894 100,933 43,468 (379,130) Income tax expense (benefit) (321,500) (43,500) (30,050) 193,205 Net income (loss) $ 357,394 $ 57,433 $ 13,418 $ (185,925)
During the years ended 1997 and 1996, the quarterly financial statements reflected a charge for an annualized profit sharing contribution of $100,000. Such amount was paid in the subsequent year and is included in accrued expenses. Management has elected to not make a contribution for 1998. ITEM 9. DISAGREEMENTS ON FINANCIAL AND ACCOUNTING DISCLOSURES None -12- POLYMER RESEARCH CORP. OF AMERICA FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 POLYMER RESEARCH CORP. OF AMERICA CONTENTS Page ---- Independent Auditors' Report F-1 Financial Statements Balance Sheets at December 31, 1998 and 1997 F-2 - F-3 Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 F-4 Statements of Comprehensive Income for the Years Ended December 31, 1998 and 1997 F-5 Statement of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-6 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-7 - F-8 Notes to Financial Statements F-9 - F-21 Financial Statement Schedules For the Years Ended December 31, 1998, 1997 and 1996: Report of Independent Certified Public Accountants on Financial Statement Schedules F-22 VIII Valuation and Qualifying Accounts and Reserves F-23 X Supplementary Income Statement Information F-24 XI Property, Equipment and Accumulated Depreciation F-25 All other schedules have been omitted because the required information is included in the financial statements or the notes thereto or because they are not required. INDEPENDENT AUDITORS' REPORT To The Stockholders and Board of Directors Polymer Research Corp. of America Brooklyn, New York We have audited the accompanying balance sheets of Polymer Research Corp. of America at December 31, 1998 and 1997, and the related statements of income, comprehensive income, stockholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polymer Research Corp. of America at December 31, 1998 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. CASTELLANO, KORENBERG & CO. CPAs, P.C. Hicksville, New York February 18, 1999 F-1 BALANCE SHEETS POLYMER RESEARCH CORP. OF AMERICA BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS ------
1998 1997 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $ 823,238 $ 938,218 Certificates of deposit 1,137,321 584,098 Investment securities available for sale 412,341 482,940 Accounts receivable, less allowance for doubtful accounts of $-0- for 1998 and 1997 245,669 137,827 Inventories 103,130 99,654 Deferred tax charge 39,000 -0- Prepaid expenses and other current assets 13,178 17,504 ---------- ---------- Total Current Assets 2,773,877 2,260,241 ---------- ---------- PROPERTY AND EQUIPMENT 2,814,511 2,863,416 ---------- ---------- OTHER ASSETS: Deferred financing costs, less accumulated amortization of $3,456 for 1998 and $3,093 for 1997 11,087 11,450 Security deposits 1,195 -0- 12,282 11,450 ---------- ---------- $5,600,670 $5,135,107 ========== ==========
See independent auditors' report and notes to financial statements. F-2 POLYMER RESEARCH CORP. OF AMERICA BALANCE SHEETS DECEMBER 31, 1998 AND 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997 ----------- ----------- CURRENT LIABILITIES: Current maturities of long-term debt $ 34,688 $ 31,244 Accounts payable 74,288 75,548 Deferred revenue 496,650 252,450 Income taxes payable 89,431 56,100 Accrued expenses and other current liabilities 235,685 349,802 ----------- ----------- Total Current Liabilities 930,742 765,144 ----------- ----------- LONG-TERM LIABILITY: Long-term debt, less current maturities 1,417,082 1,451,770 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock - $.01 par value; 4,000,000 shares authorized; 1,685,784 and 1,580,548 shares issued at December 31, 1998 and 1997, respectively 16,857 15,805 Capital in excess of par value 3,120,685 2,850,332 Retained earnings 167,259 111,029 Accumulated other comprehensive income (loss) 4,782 (2,236) ----------- ----------- 3,309,583 2,974,930 Less: Treasury stock, at cost - 91,837 shares in 1998 and 1997 56,737 56,737 ----------- ----------- Total Stockholders' Equity 3,252,846 2,918,193 ----------- ----------- $ 5,600,670 $ 5,135,107 =========== ===========
See independent auditors' report and notes to financial statements. F-3 POLYMER RESEARCH CORP. OF AMERICA STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- NET REVENUES: Research $ 4,554,400 $ 4,214,293 $ 4,326,424 Production 1,092,789 1,233,979 752,145 ----------- ----------- ----------- 5,647,189 5,448,272 5,078,569 ----------- ----------- ----------- COST OF REVENUES: Research 1,048,560 1,001,818 1,017,460 Production 789,915 1,018,505 623,320 ----------- ----------- ----------- 1,838,475 2,020,323 1,640,780 ----------- ----------- ----------- GROSS PROFIT 3,808,714 3,427,949 3,437,789 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,310,032 2,902,474 2,897,775 ----------- ----------- ----------- INCOME FROM OPERATIONS 498,682 525,475 540,014 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income 92,687 65,886 58,965 Interest expense (154,241) (157,320) (227,683) Net rental income -0- -0- 2,850 Realized gain (loss) on investment in marketable securities 7,037 1,604 (1,621) Mortgage modification expense -0- -0- (45,000) ----------- ----------- ----------- Total Other Expense (54,517) (89,830) (212,489) ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 444,165 435,645 327,525 PROVISION FOR INCOME TAXES 201,845 229,066 157,697 ----------- ----------- ----------- NET INCOME $ 242,320 $ 206,579 $ 169,828 =========== =========== =========== BASIC EARNINGS PER SHARE $ .15 $ .13* $ .11** =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,586,268 1,558,215* 1,543,148** =========== =========== ===========
* Restated for 1998 5% stock dividend ** Restated for 1998 5% stock dividend and 1997 5% stock dividend See independent auditors' report and notes to financial statements. F-4 POLYMER RESEARCH CORP. OF AMERICA STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- --------- --------- NET INCOME $ 242,320 $ 206,579 $ 169,828 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized gain (loss) during the period 7,018 9,881 (10,147) --------- --------- --------- OTHER COMPREHENSIVE INCOME (LOSS) 7,018 9,881 (10,147) --------- --------- --------- COMPREHENSIVE INCOME $ 249,338 $ 216,460 $ 159,681 ========= ========= =========
See independent auditors' report and notes to financial statements. F-5 POLYMER RESEARCH CORP. OF AMERICA STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock, $.01 Par Value Authorized; 4,000,000 Shares Capital -------------------------- in Excess Retained Shares Amount of Par Earnings --------- ---------- ---------- ----------- Balance, December 31, 1995 1,354,234 $ 13,542 $2,091,699 $ 475,518 Net Income -0- -0- -0- 169,828 Stock Dividend 135,423 1,354 540,338 (541,692) Unrealized Loss on Investment Securities Available for Sale -0- -0- -0- -0- --------- ---------- ---------- ----------- Balance, December 31, 1996 1,489,657 14,896 2,632,037 103,654 --------- ---------- ---------- ----------- Net Income -0- -0- -0- 206,579 Stock Bonus Issued 20,000 200 19,800 -0- Stock Dividend 70,891 709 198,495 (199,204) Unrealized Gain Investment Securities Available for Sale -0- -0- -0- -0- --------- ---------- ---------- ----------- Balance, December 31, 1997 1,580,548 15,805 2,850,332 111,029 --------- ---------- ---------- ----------- Net Income -0- -0- -0- 242,320 Stock Bonus Issued 30,800 308 85,007 -0- Stock Dividend 74,436 744 185,346 (186,090) Unrealized Gain on Investment Securities Available for Sale -0- -0- -0- -0- --------- ---------- ---------- ----------- Balance, December 31, 1998 1,685,784 $ 16,857 $3,120,685 $ 167,259 --------- ---------- ---------- -----------
Accumulated Other Comprehensive Treasury Stock - At Cost ------------ --------------------------- Income(Loss) Shares Amount ------------ ------ ------ Balance, December 31, 1995 $ (1,970) 83,488 $ (56,737) Net Income -0- -0- -0- Stock Dividend -0- 8,349 -0- Unrealized Loss on Investment Securities Available for Sale (10,147) -0- -0- ----------- ------ ----------- Balance, December 31, 1996 (12,117) 91,837 (56,737) ----------- ------ ----------- Net Income -0- -0- -0- Stock Bonus Issued -0- -0- -0- Stock Dividend -0- -0- -0- Unrealized Gain Investment Securities Available for Sale 9,881 -0- -0- ----------- ------ ----------- Balance, December 31, 1997 (2,236) 91,837 (56,737) ----------- ------ ----------- Net Income -0- -0- -0- Stock Bonus Issued -0- -0- -0- Stock Dividend -0- -0- -0- Unrealized Gain on Investment Securities Available for Sale 7,018 -0- -0- ----------- ------ ----------- Balance, December 31, 1998 $ 4,782 91,837 $ (56,737) =========== ====== ===========
See independent auditors' report and notes to financial statements. F-6 POLYMER RESEARCH CORP. OF AMERICA STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 5,779,942 $ 5,255,070 $ 5,266,656 Interest received 92,687 65,886 58,965 Rent received -0- -0- 2,850 ----------- ----------- ----------- Cash Provided By Operating Activities 5,872,629 5,320,956 5,328,471 ----------- ----------- ----------- Cash paid for merchandise (1,790,321) (1,961,416) (1,572,608) Cash paid to suppliers and employees (3,298,625) (2,899,200) (2,732,151) Interest paid (154,241) (157,320) (227,683) Income taxes paid (207,514) (5,966) (358,097) Mortgage modification fee paid -0- -0- (45,000) ----------- ----------- ----------- Cash Disbursed For Operating Activities (5,450,701) (5,023,902) (4,935,539) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 421,928 297,054 392,932 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of certificates of deposit -0- 399,030 142,611 Proceeds from sale of marketable securities 95,610 551,452 378,619 ----------- ----------- ----------- Cash Provided By Investing Activities 95,610 950,482 521,230 ----------- ----------- ----------- Purchase of certificates of deposit (553,223) (428,790) (554,338) Purchase of marketable securities (10,956) (549,624) (275,189) Purchase of property and equipment (37,095) (11,865) (18,221) ----------- ----------- ----------- Cash Disbursed For Investing Activities (601,274) (990,279) (847,748) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (505,664) (39,797) (326,518) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term borrowings (31,244) (28,209) (831,278) ----------- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (31,244) (28,209) (831,278) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (114,980) 229,048 (764,864) CASH, BEGINNING OF YEAR 938,218 709,170 1,474,034 ----------- ----------- ----------- CASH, END OF YEAR $ 823,238 $ 938,218 $ 709,170 =========== =========== ===========
See independent auditors' report and notes to financial statements. F-7 POLYMER RESEARCH CORP. OF AMERICA STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- --------- ---------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 242,320 $ 206,579 $ 169,828 --------- --------- --------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Bonus paid through issuance of stock 85,315 20,000 -0- Depreciation and amortization 86,363 88,327 93,658 Bad debt expense 3,605 6,375 2,342 Realized (gain) loss on investment in marketable securities (7,037) (1,604) 1,621 Changes in assets (increase) decrease: Accounts receivable (111,447) (52,352) (34,376) Inventories (3,476) (13,832) (13,109) Deferred tax charge (39,000) -0- -0- Prepaid income taxes -0- 167,000 (167,000) Prepaid expenses and other current assets 4,326 10,582 (15,491) Security deposits (1,195) -0- -0- Changes in liabilities increase (decrease): Accounts payable (1,260) 18,641 43,765 Deferred revenue 244,200 (140,850) 222,463 Income taxes payable 33,331 56,100 (33,400) Accrued expenses and other current liabilities (114,117) (67,912) 122,631 --------- --------- --------- Total Adjustments 179,608 90,475 223,104 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 421,928 $ 297,054 $ 392,932 ========= ========= ========= SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock dividend paid $ 186,090 $ 199,204 $ 541,692 ========= ========= ========= Other comprehensive income (loss) $ 7,018 $ 9,881 $ (10,147) ========= ========= ========= Stock bonus paid $ 85,315 $ 20,000 -0- ========= ========= =========
See independent auditors' report and notes to financial statements. F-8 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Business Activity Polymer Research Corp. of America ("the Company") is predominately engaged in the research and development of the applications of chemical grafting for both domestic and international companies. The Company also produces and sells products arising from research activities and textile printing inks. Revenue for research and production is derived from various manufacturers throughout the United States and worldwide. Credit Risk Financial instruments that potentially subject the Company to credit risk include investments in United States Treasury bills, notes and other certificates of deposit, government agencies' securities and U.S. Government and New York State mutual bond funds. Future changes in economic conditions may make the investments less valuable. In addition, financial instruments that potentially subject the Company to credit risk also include accounts receivable. Accounts receivable resulting from product sales are not collateralized. The Company maintains deposits with financial institutions in excess of amounts insured by the FDIC. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue from research contracts is recognized upon satisfaction of the following two criteria: first, client approval of performance of specific stage of the contract and second, when collection of the resulting revenue is assured. Revenue from production is recognized when the product is shipped for sale to customers. F-9 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd) Cash Equivalents The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents. Investment Securities The Company determines the appropriate classification of securities at the time of purchase. If the Company has the intent and the ability at the time of purchase to hold securities until maturity or on a long-term basis, they are classified as investment securities and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Company's yearly operations. Inventories Inventories, which consists of raw materials and finished goods is valued at the lower of cost or market, with cost determined using the first-in, first-out method and with market defined as the lower of replacement cost or realizable value. Property and Equipment Property and equipment is stated at cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income. F-10 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd) Property and Equipment (cont'd). The Company capitalizes leased equipment where the terms of the lease result in the transfer to the Company of substantially all of the benefits and risks of ownership of the equipment. Depreciation and amortization of property and equipment is provided utilizing both the straight-line and accelerated methods over the estimated useful lives of the respective assets as follows: Building and building improvements 40 years Land improvements 20 years Transportation equipment 3 to 5 years Machinery and equipment 5 years Furniture and fixtures 5 to 10 years Office equipment 5 years Deferred Financing Costs Costs incurred in obtaining the mortgage used to finance the purchase of its building have been capitalized and are being amortized over the term of the related obligation utilizing the straight-line method. Deferred Revenue The Company records as deferred revenue payments received from research contracts prior to the culmination of the revenue process. Income Taxes The Company accounts for its income taxes utilizing Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" which requires that the Company follow the liability method of accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as "temporary differences." F-11 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd). Profit Sharing Plan The Company maintains a qualified noncontributory profit sharing plan. The plan provides all eligible employees with a source of retirement income, as well as assistance in other circumstances such as death or disability. Eligible employees must meet two requirements to become participants; attainment of age 21 and completion of one year of service with the Company. Employer contributions are determined by an annual resolution of the Board of Directors. A percentage of the benefits vest after three years of qualifying service. Earnings Per Share In 1997, the Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per Share." SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares. Diluted earnings per share is computed using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of employee stock options, restricted stock, warrants and convertible securities. Basic earnings per share amounts for all periods have been presented. Comprehensive Income In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components. SFAS 130 has been adopted by the Company, effective January 1, 1998. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. Reclassifications Certain accounts relating to the prior years have been reclassified to conform to the current year's presentation. These reclassifications have no effect on previously reported income. Note 2 - Investment Securities At December 31, 1998 and 1997, the investment securities portfolio is comprised of securities classified as available for sale, in conjunction with FASB 115, resulting in investment securities available for sale being carried at market value. F-12 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 2 - Investment Securities (cont'd). The amortized cost and fair values of investment securities available for sale at December 31, 1997 are:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- U.S. Treasury securities $ 99,418 $ 17,006 $ (20,184) $ 96,240 Obligations of other U.S. government agencies 196,102 3,400 (287) 199,215 Other securities 120,835 -0- (3,949) 116,886 --------- --------- --------- --------- $ 416,355 $ 20,406 $ (24,420) $ 412,341 ========= ========= ========= =========
The amortized cost and fair values of investment securities available for sale at December 31, 1998 are:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- U.S. Treasury securities $ 90,181 $ 2,053 $ -0- $ 92,234 Obligations of other U.S. government agencies 254,177 12,601 (20,948) 245,830 Other securities 149,999 -0- (5,123) 144,876 --------- --------- --------- --------- $ 494,357 $ 14,654 $ (26,071) $ 482,940 ========= ========= ========= =========
The amortized cost and fair values of investment securities available for sale December 31, 1998 by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities Available For Sale ---------------------- Amortized Fair Cost Value --------- ----- Due in one year or less $ -0- $ -0- Due after one year but less than five years 70,176 65,472 Due after five years but less than ten years 6,697 6,950 Due after ten years 22,545 23,817 ------ ------ 99,418 96,239 F-13 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 2 - Investment Securities (cont'd). Amortized Fair Cost Value Mortgage-backed securities 196,102 199,215 Other securities 120,835 116,887 -------- -------- $416,355 $412,341 ======== ======== Proceeds from sales and maturities of investment securities available for sale during 1998 and 1997 were $95,610 and $551,452, respectively. Note 3 - Inventories Inventories at December 31, 1998 and 1997 are as follows: 1998 1997 -------- -------- Raw materials $ 92,254 $ 85,556 Finished goods 10,876 14,098 -------- -------- $103,130 $ 99,654 ======== ======== Note 4 - Property and Equipment Property and equipment is summarized as follows: 1998 1997 ---------- ---------- Land $ 450,000 $ 450,000 Land improvements 80,211 80,211 Building 2,550,000 2,550,000 Building improvements 289,505 289,505 Transportation equipment -0- 12,967 Machinery and equipment 225,480 206,917 Furniture and fixtures 108,965 99,018 Office equipment 45,527 65,066 ---------- ---------- 3,749,688 3,753,684 Less: Accumulated depreciation and amortization 935,177 890,268 ---------- ---------- $2,814,511 $2,863,416 ========== ========== F-14 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 4 - Property and Equipment (cont'd). Depreciation and amortization expense related to property and equipment amounted to $86,000, $87,963 and $93,294 for the years ended December 31, 1998, 1997 and 1996 respectively. Note 5 - Deferred Revenue At December 31, 1998 and 1997 the Company had received research contract payments not yet earned aggregating $496,650 and $252,450, respectively. Note 6 - Mortgage Payable On August 20, 1996, the Company renegotiated the existing mortgage on its building. The terms of the agreement required the Company to make an $800,000 principal installment and pay a re-negotiation fee of $45,000. The remaining balance of the mortgage is being paid pursuant to a 25-year amortization in monthly installments of $15,457 including principal and interest at the rate of 10.50% per annum. The entire unpaid principal balance at the end of the mortgage term, anticipated to be $1,398,330, is due in a balloon payment on June 1, 2000. The mortgage is secured by a lien on the building. The principal balances payable on the mortgage amounted to $1,451,770 and $1,483,014 of which $34,688 and $31,244 represent current maturities of the mortgage at December 31, 1998 and 1997, respectively. Aggregate maturities of the mortgage note payable are as follows: Years Ending December 31: ------------------------- 1999 $ 34,688 2000 1,417,082 ---------- $1,451,770 ========== Note 7 - Contingencies At December 31, 1998, the Company is a defendant in various lawsuits which arose in the ordinary course of business. At December 31, 1998, the Company has provided a reserve of $100,000, included in current liabilities, as a provision for legal expenses and potential unfavorable rulings in certain of these cases. It is management's opinion that the ultimate liability, if any, which might result from the remainder of such actions would not have a material effect on the Company's financial position. F-15 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 8 - Commitments On July 26, 1994 the Company entered into retirement agreements with 2 key executives. The agreements set a compensation rate of 60% of the average 5 preceding years' annual compensation, payable for the remainder of the executive's life. The Company is also responsible to maintain the executives medical insurance. On October 23, 1998 the Company extended its employment contract with its President which expires on May 16, 2003. The contract provides for a current minimum annual salary of $170,000 for 1998 and annual increases of $10,000 throughout its duration. In addition, the Company has entered into various noncancellable operating leases requiring future minimum rentals as follows: Years Ending December 31: ------------------------- 1999 $ 55,893 2000 34,839 -------- 2001 21,521 2002 16,419 2003 13,682 -------- $142,354 ======== Lease expenses charged to operations for the years ended December 31, 1998 and 1997 amounted to $41,978 and $11,191, respectively. During 1998, the Company entered into a lease for an office facility in Phoenix, Arizona under a noncancellable operating lease requiring future minimum rental as follows: Years Ending December 31: ------------------------- 1999 $13,651 2000 7,026 ------- $20,677 ======= In addition, the lease provides for escalation clauses for increases in real estate taxes and building maintenance. Rent expense charged to operations for the year ended December 31, 1998 amounted to $7,975. F-16 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 9 - Stock Dividends On March 2, 1998, the Company declared a 5% stock dividend to stockholders of record at March 23, 1998, paid April 2, 1998. The transaction was valued based upon the closing market price of the Company's stock on February 27, 1998, which was $2.50 per share. Retained earnings was charged for $186,090 as a result of the issuance of 74,436 shares. On March 20, 1997 the Company declared a 5% stock dividend to stockholders of record at April 1, 1997, paid April 8, 1997. The transaction was valued based upon the closing market price of the Company's stock on April 7, 1997 which was $2.81 per share. Retained earnings was charged for $199,204 as a result of the issuance of 70,891 shares. On March 1, 1996 the Company declared a 10% stock dividend to stockholders of record at March 15, 1996, paid March 29, 1996. The transaction was valued based upon the closing market price of the Company's stock on March 15, 1996 which was $4.00 per share. Retained earnings was charged for $541,692 as a result of the issuance of 135,423 shares. Per share data were retroactively restated for the effects of the 1998, 1997 and 1996 stock dividends. Note 10 - Shareholders Rights Plan On July 20, 1995, the Company adopted a Shareholders Rights Plan. The Company adopted the plan to protect shareholders against unsolicited attempts to acquire control of the Company. The rights were issued to shareholders of record on July 31, 1995 and will expire on July 31, 2005. The Rights Plan provides for the issuance of one stock right for each outstanding share of the Company's common stock. The rights will become exercisable only if an "acquiring party" (as defined in the rights plan) acquires 15% or more of the Company's common stock or announces a tender offer that would result in ownership of 15% or more of the Company's common stock. Each right will entitle the holder to buy one share of common stock at an exercise price of $25, subject to adjustment. Upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's stock or shares in an "Acquiring Entity" at 50% of those shares market value. F-17 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 10 - Shareholders Rights Plan (cont'd). The Company will generally be entitled to redeem all rights for $.01 per right at any time prior to the tenth day following the acquisition of 15% or more of the Company's common stock by a person or group. Note 11 - Stock Bonuses On April 2, 1998, subsequent to the 1998 5% stock dividend record date, the Company's Board of Directors authorized the issuance of 30,800 shares of the Company's stock to employees of the Company. The shares have not been registered under the Securities Act of 1933 and sales of the shares are subject to restrictions and limitations. The Company valued the shares issued at $2.77 per share aggregating $85,315. On April 1, 1997, prior to the 1997 5% stock dividend record date, the Company paid an Executive Vice President a bonus by issuing to him 20,000 restricted shares of the Company's stock. The shares have not been registered under the Securities Act of 1933 and sales of the shares are subject to restrictions and limitations. The Company valued the shares at $20,000. Note 12 - Provision For Income Taxes The provision for (benefit from) income taxes is summarized as follows: 1998 1997 1996 --------- --------- --------- Current: Federal $ 154,381 $ 135,754 $ 92,054 State and local 86,464 93,312 65,643 --------- --------- --------- 240,845 229,066 157,697 --------- --------- --------- Deferred: Federal (23,900) -0- -0- State and local (15,100) -0- -0- --------- --------- --------- (39,000) -0- -0- Provision for income taxes $ 201,845 $ 229,066 $ 157,697 ========= ========= ========= F-18 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 12 - Provision For Income Taxes (cont'd). The reconciliation between the maximum effective income tax rates with federal statutory tax rates for the year ended December 31, 1998 and the rates reflected in the accompanying financial statements is as follows: Income taxes at U.S. statutory rates $ 151,016 (Decrease) increase in federal income tax expense resulting from: Federal tax arising from non-deductible financial statement expenses 22,640 Benefit from deduction for state and local taxes (58,275) State and local taxes 86,464 ----------- Provision for Income Taxes $ 201,845 =========== Note 13 - Industry Segments The Company's operations are classified into the following two industry segments: Research - Providing laboratory research services in the area of polymer chemistry. Production - Manufacture and sale of products arising from research activities and the sale of textile printing inks and accessories. Information on industry segments for the years ended December 31, 1998, 1997 and 1996 are as follows: 1997 1996 1998 ---------- ---------- ---------- NET REVENUES: Research $4,554,400 $4,214,293 $4,326,424 Production 1,092,789 1,233,979 752,145 ---------- ---------- ---------- Total Net Revenues $5,647,189 $5,448,272 $5,078,569 ========== ========== ========== GROSS PROFIT: Research $3,505,840 $3,212,475 $3,308,964 Production 302,874 215,474 128,825 ---------- ---------- ---------- Total Gross Profit 3,808,714 3,427,949 3,437,789 ========== ========== ========== F-19 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 13 - Industry Segments (cont'd).
1998 1997 1996 ---------- ---------- ---------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,310,032 2,902,474 2,897,775 ---------- ---------- ---------- INCOME FROM OPERATIONS $ 498,682 $ 525,475 $ 540,014 ========== ========== ========== CAPITAL EXPENDITURES: Research $ 8,901 -0- $ 3,603 Production 4,289 -0- 2,881 Corporate 23,904 11,864 5,766 ---------- ---------- ---------- Total $ 37,094 $ 11,864 $ 12,250 ========== ========== ========== DEPRECIATION AND AMORTIZATION: Research $ 35,690 $ 36,505 $ 27,545 Production 17,200 17,593 22,028 Corporate 33,110 33,865 44,085 ---------- ---------- ---------- Total $ 86,000 $ 87,963 $ 93,658 ========== ========== ========== IDENTIFIABLE ASSETS: Research $1,145,853 $1,262,411 886,238 Production 901,017 718,512 831,529 Corporate 3,553,800 3,154,184 3,343,110 ---------- ---------- ---------- Total $5,600,670 $5,135,107 $5,060,877 ========== ========== ==========
Net income from operations represents net sales less operating expenses for each segment and corporate expenses which are not directly attributable to any segment. Segment identifiable assets include accounts receivable, inventories and property and equipment for use in, or directly attributable to, the individual segments. Corporate identifiable assets include cash, property and equipment and other assets which are not directly attributable to any individual segment. There was no individual customer from which the Company derived 10% or more of its revenues during the periods presented. F-20 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 14 - Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are summarized as follows: 1998 1997 -------- -------- Accrued profit sharing $ -0- $100,000 Accrued provision for legal proceedings 100,000 100,000 Accrued vacation 23,435 26,042 Accrued professional fees 35,000 30,000 Accrued officers' bonuses -0- 37,899 Other items (none in excess of 5% of total current liabilities) 77,250 55,861 -------- -------- $235,685 $349,802 ======== ======== Note 15 - Profit Sharing Plan Profit sharing expense under the Company's noncontributory profit sharing plan charged to operations amounted to $-0- for the year ended December 31, 1998 and $100,000 for the years ended December 31, 1997 and 1996. Note 16 - Subsequent Event On February 11, 1999, the Company declared a 5% stock dividend to stockholders of record at March 16, 1999, payable April 2, 1999. F-21 To The Stockholders Polymer Research Corp. of America Brooklyn, New York Our report on our audits of the basic financial statements of Polymer Research Corp. of America for 1998, 1997 and 1996, appears on page F-1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. -------------------------------------- CASTELLANO, KORENBERG & CO., CPAs, P.C. Hicksville, New York February 18, 1999 F-22 POLYMER RESEARCH CORP. OF AMERICA SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E - -------- -------- -------- --------- -------- Additions --------- Balance at Charged to Charged Beginning Costs and to Other Accounts Balanced at Of Year Expenses Beginning Deductions End of Year Allowance for Doubtful Accounts: Year ended December 31, 1998 $ -0- $ 3,605 $ -0- $ 3,605 $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1997 $ -0- $ 6,375 $ -0- $ 6,375 $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1996 $ 4,000 $ 2,342 $ -0- $ 6,342 $ -0- ---------- ---------- ---------- ---------- ---------- Reserve for Sales Credits: Year ended December 31, 1998 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1997 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1996 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ----------
F-23 POLYMER RESEARCH CORP. OF AMERICA SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Charged To Costs and Expenses December 31, 1998 1997 1996 ---------- ---------- -------- 1. MAINTENANCE AND REPAIR $ 61,832 $ * $ 56,208 ---------- ---------- --------- 2. DEPRECIATION $ 86,000 $ 87,963 $ 93,658 ---------- ---------- --------- 3. TAXES, OTHER THAN PAYROLL AND INCOME TAXES * * * 4. ROYALTIES * * * 5. ADVERTISING COSTS * * * Note: * Less than 1% of revenue. F-24 POLYMER RESEARCH CORP. OF AMERICA SCHEDULE XI - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION YEAR ENDED DECEMBER 31, 1998
Initial Cost to Company Gross Amount At Which Carried - ----------------------- At Close of Period ----------------------------- Land Land Building and Building and Accumulateed Description Encumbrances Improvements Equipment Improvements Equipment Total Depreciation - ------------------ ------------ ------------ --------- ------------ --------- ---------- ------------ Land, Building and $1,451,770 $3,369,716 $ -0- $3,369,716 $ -0- $3,369,716 $ 608,624 Improvements Equipment -0- -0- 379,972 -0- 379,972 379,972 326,553 ---------- ---------- --------- ---------- --------- ---------- ---------- $1,451,770 $3,369,716 $ 379,972 $3,369,716 379,972 3,749,688 935,177 ========== ========== ========= ========== ========= ========== ========== Life On Which Depreciation In Latest Income Date Statement Description Acquired is Computed - ------------------ ------------ ------------- Land, Building and June 4, 1990 20-40 Years Improvements Equipment Various 3-10 Years
F-25 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company as of December 31, 1998 are as follows:
NAME AGE POSITION - ---- --- -------- Carl Horowitz 75 President and Director Irene Horowitz 75 Senior Vice President and Director John M. Ryan 43 Director, Executive Vice President, Corporate Research Alice J. Horowitz 39 Director and Vice President of Polymer West branch Boris Jody 79 Director Anna Dichter 85 Secretary, Treasurer Terry J. Wolfgang 37 Director Dr. Mohan Sanduja 63 Vice President, R & D Director Clare Chamow 64 Vice President, Office Management Betty Friedman 67 Vice President, Personnel
Carl Horowitz founded the Company and has devoted his full time and efforts to the affairs of the Company, as its President and as a Director, since 1963. Mr. Horowitz received a B.S. in Chemical Engineering at Columbia University in New York in 1950, and a Master of Science degree in Polymer Chemistry from Polytechnic Institute of Brooklyn in 1961. Mr. Horowitz is the husband of Irene Horowitz and the father of Alice J. Horowitz and Terry J. Wolfgang. Irene Horowitz has been a Director and a Senior Vice President of the Company since 1980. Mrs. Horowitz devotes her full time and efforts to the affairs of the Company, and her primary responsibility as Senior Vice President is to oversee the operations of the Company. Mrs. Horowitz is the wife of Carl Horowitz and the sister of Anna Dichter and the mother of Alice J. Horowitz and Terry J. Wolfgang. John M. Ryan has been a Director since September, 1984. Mr. Ryan has been employed by the Company since 1981 as a technical director of Special Product Development and has been the Executive Vice President of Corporate Research since 1985. -13- Alice J. Horowitz was a Senior Vice President. In 1987, she became a Director. During 1995 Ms. Horowitz relocated outside of New York and now operates a sales office of Polymer Research Corp. of America in Arizona. Ms. Horowitz is the daughter of Carl and Irene Horowitz. Boris Jody was elected a Director of the Company in 1984. Mr. Jody is currently retired. Mr. Jody previously was with Standard Motor Products, Inc., where he had been Vice President of Corporate Affairs. Anna Dichter joined the Company in 1968 as Controller. She was elected Secretary/Treasurer of the Company in 1977. Mrs. Dichter, who devotes her full time and efforts to the affairs of the Company, is in charge of maintaining the Company's books on a day-to-day basis. She is the sister of Irene Horowitz. Terry J. Wolfgang has been a Director of the Company since 1989. She has been engaged in the private practice of law in New York City. Ms. Wolfgang is the daughter of Carl and Irene Horowitz. Ms. Wolfgang has occasionally performed legal services for the Company. Dr. Mohan Sanduja, PHD joined the Company in 1979 as Assistant Director of Research. In 1982, he became a Director of Research and Development. In 1987, he became a Director of the Company and Vice President of Research and Development. Clare Chamow joined the Company in 1982. She became a Vice President in March of 1996 and is responsible for office management. She is a graduate of Brooklyn College with a B.A. Degree in Education. Betty Friedman joined the Company in 1976. She became a Vice President in March of 1996 and is in charge of personnel and purchasing for production. -14- ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during the years ended December 31, 1998, 1997 and 1996 to the chief executive officer and those three executive officers of the Company who earned in excess of $100,000 for the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE LONGTERM COMPENSATION --------------------- ANNUAL COMPENSATION AWARDS PAYOUTS - ----------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (I) NAME OTHER RESTRICTED AND ANNUAL STOCK LTIP ALL OTHER PRINCIPAL COMPEN- AWARDS OPTIONAL PAYOUTS COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) ($) SAR'S(#) ($) SATION - ----------------------------------------------------------------------------------------------------------------- (1) CARL HOROWITZ 1998 $170,000 $ -0- $ 13,233 $ -0- $-0- $-0- $ -0- CEO, PRESIDENT 1997 160,000 25,000 13,236 -0- -0- 12,985 1996 150,000 25,000 10,836 -0- -0- -0 7,460 IRENE HOROWITZ 1998 80,703 -0- -0- -0- -0- SENIOR VICE 1997 158,349 10,000 -0- -0- -0- -0- 12,985 PRESIDENT 1996 153,923 10,000 -0- -0- -0- -0- 7,650 JOHN M. RYAN 1998 276,984 12,324 -0- -0- -0- -0- -0- EXECUTIVE VICE 1997 241,167 -0- -0- 20,000 -0- -0- 3,359 PRESIDENT 1996 218,227 20,000 -0- -0- -0- -0- 3,524 MOHAN SANDUJA 1998 125,367 1,500 -0- -0- -0- -0- -0- VICE PRESIDENT 1997 117,780 1,624 -0- -0- -0- -0- 9,905 RESEARCH AND 1996 114,080 1,500 -0- -0- -0- -0- 10,592 DEVELOPMENT
(1) Represents premiums on officer's life insurance policy in which Mr. Horowitz has the right to designate the beneficiary. -15- STOCK OPTIONS No executive officer owns any stock options. EMPLOYMENT AGREEMENTS On May 17, 1998, the Company and Carl Horowitz agreed to extend Mr. Horowitz's employment agreement through May 16, 2003. Mr. Horowitz's maximum base salary under the new agreement is $170,000 for 1998 with annual increases of $10,000 thereafter until January 1, 2003, when the maximum base salary increases to $240,000. On July 26, 1994 the Company entered into retirement agreements with the Company's President and Senior Vice President. The agreements set a compensation rate of 60% of the average 5 preceding year's annual compensation, payable for the remainder of the individuals' life. In addition the Company is to maintain the individuals' medical benefits. Directors who are not employees of the Company receive a fee of $500 for each regular meeting of the Board of Directors that they attend. Effective January 1, 1990, the Company adopted a qualified noncontributory profit sharing plan. Eligible employees must meet two requirements to become participants; attainment of age 21 and completion of one year of service with the Company. Employer contributions, if any, are determined at the Board of Directors' discretion. A percentage of the benefits vest after three years of qualifying service. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of February 18, 1999, with respect to each person known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, each executive officer named on the Summary Compensation table, and by all officers and directors as a group: AMOUNT NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE TITLE OF CLASS BENEFICIAL OWNER OWNED OF CLASS Common stock Carl Horowitz 367,914 23.1% $.01 par value 2719 Whitman Drive Brooklyn, NY 11234 Irene Horowitz 70,811 4.4% 2719 Whitman Drive Brooklyn, NY 11234 John M. Ryan 29,184 1.8% 3035 Lonni Lane Merrick, N.Y. 11566 Alice J. Horowitz 1,517 0.1% 3046 West Tonopah Drive Phoenix, Arizona 85027 Boris Jody -0- 0.0% 4301 N. Ocean Blvd. Boca Raton, Fl. Anna Dichter 1,400 0.1% 1757 E. 54th Street Brooklyn, N.Y. Terry J. Wolfgang 3,700 0.2% 440 West End Avenue New York, N.Y. 10750 Dr. Mohan Sanduja -0- 0.0% 144-90 91st Avenue Flushing, N.Y. Clare Chamow -0- 0.0% 5613 Fillmore Avenue Brooklyn, N.Y. 11234 Betty Friedman -0- 0.0% 7219 Avenue N Brooklyn, N.Y. 11234 All executive officers and Directors as a group (11 in number) 474,526 29.8 -17- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NONE ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K 1. Financial Statements. See Item 8 above for a list of financial statements included as part of this Annual Report on Form 10-K. 3. Exhibits (3.1) Registrant's Certificate of Incorporation, as amended, and By-Laws, as amended (incorporated by reference as previously filed with the United States Securities and Exchange Commission on January 7, 1986 on Form 10). Amendment to the Certificate of Incorporation dated July 23, 1988, (incorporated by reference as previously filed with the United States Security and Exchange Commission in March 1991 with Form 10K) (3.2) By Laws, as amended (incorporated by reference as previously filed with the United States Securities and Exchange Commission on January 7, 1986 on Form 10K) (10) Material Contracts (.1) Employment Contract of Carl Horowitz, the Company's President, dated March 17, 1998 (filed with 1998 Form 10K). (.2) Mortgage agreement between the Company and Tama Realty Co., dated June 4, 1990 (incorporated by reference as previously filed with the United States Security and Exchange Commission in March 1991 with Form 10K). (.2A) Mortgage modification agreement between the Company and Tama Realty Co., dated August 26, 1996 (incorporated by reference as previously filed with the United States Security and Exchange Commission in March, 1997 with Form 10K). (.3) Retirement benefits agreement between the Company and Carl Horowitz, dated July 26, 1994 (incorporated by reference as previously filed with the United States Security and Exchange Commission in March, 1995 with Form 10K). -18- (.4) Retirement benefits agreement between the Company and Irene Horowitz, dated July 26, 1994 (incorporated by reference as previously filed with the United States Security and Exchange Commission in March, 1995 with Form 10K). (27) Financial Data Schedule EX-27 2 FDS --
5 12-mos Dec-31-1998 Dec-31-1998 823,238 1,549,662 245,669 0 103,130 2,773,877 3,749,688 935,177 5,600,670 930,742 0 0 0 16,857 3,068,730 5,600,670 5,647,189 5,647,189 1,838,475 5,148,507 (99,724) 0 154,241 444,165 201,845 201,845 0 0 0 242,320 0.15 0.15
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