-----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, BSfdv3cW8vaAc7ODoEDPHad19SmH/UlVFeXJ99AAzkZLnOHnB+/2tTLIzMh1Gqpd zWoLX8rMRB8e3Vy/f0Dwxg== 0000950116-97-000528.txt : 19970324 0000950116-97-000528.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950116-97-000528 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NONE 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: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14119 FILM NUMBER: 97560493 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 10KSB40 1 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, 1996 [ ] 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 - $ 5,078,569 ----------- 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, 1997 was approximately $3,588,525 based on the last sale price of such stock. As of February 18, 1997, the Registrant had 1,397,820 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 1996, research revenues and products sales accounted for 85 percent and 15 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 the 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 several 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. The "typical" monthly payment to the Company under a research and development contract ranges from $20,000 to $40,000. Research revenue earned from foreign customers outside the United States aggregated $1,535,654 for 1996, representing approximately 35% of total annual research revenues. 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 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. 3 The Company employs 5 in-house sales persons plus 3 persons in training to market its research and development contracts, primarily through bulk mailings to targeted potential customers. To date, all of the Company's research and development services have been related to contracts for customers. PRODUCTION The Company manufactures products 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 1996, 1995 and 1994, no one customer of the Company accounted for more than 5% of its sales of 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. 4 EMPLOYEES AND EMPLOYEE RELATIONS As of December 31, 1996, the Company had 49 full-time employees. The President and the 16 other scientists in the Company's Research Department are engaged in research and development. The Products Department has 4 employees who are engaged in the production of items arising from research and textile inks. There are 8 employees in the sales and marketing departments. In addition, there are 16 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. 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. The fact that the Company's textile inks are solvent free and non-polluting makes its products, in management's view, more desirable than those of its competitors. 5 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 disposes 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. 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. 6 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, should these cases be adversely determined, the allowance the Company has provided is sufficient to cover the potential damages on these suits, 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 1996, 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 Since the third quarter of 1990, 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 ------- --- ---- 1996 October - December 2 2-5/8 July - September 2-5/16 3-1/4 April - June 3-5/8 5-1/4 January - March 3-5/8 4-3/4 1995 October - December 3 5-1/8 July - September 4-5/8 7-5/8 April - June 2-13/64 9-13/32 January - March 2-5/8 3-3/8 1994 October - December 2-3/4 3-1/2 July - September 2-1/4 3-1/8 April - June 2-5/8 3-3/4 January - March 3 4 7 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 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 February 21, 1995 the Company declared a 10% stock dividend to shareholders at March 6, 1995, paid March 20, 1995. 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 June 6, 1995 the Company declared a 5 for 4 stock split effected in the form of a 25% stock dividend, to its shareholders at June 19, 1995 and distributed June 27, 1995. (See Note 10 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 $25 (subject to adjustment, for each outstanding share of the Company's common stock. The rights will become excessible only if an "acquiring party" (as defined) acquires or announces a tender offer to acquire 15% or more of the Company's common stock. The rights expire July 31, 2005 (See Note 11 of Notes to Financial Statements). On January 18, 1994 the Company declared a 10% stock dividend to shareholders at January 31, 1994, paid February 22, 1994. The transaction was valued based upon the closing market price of the Company's stock on the day prior to the declaration. (See Note 9 of Notes to Financial Statements). As of February 18, 1997 there were 1,397,820 shares outstanding, which were held by 400 shareholders of record. 8 ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenue Analysis Year Ended December 31, ----------------------- Percentage of ($ In Thousands) Total Revenues -------------- 1996 1995 1994 1996 1995 1994 ----- ---- ------ ---- ---- ---- Research $4,326 $4,608 $4,392 85.0% 89.0% 91.4% Production 752 571 413 15.0 11.0 8.6 ------ ------ ------ ----- ----- ----- Total revenues $5,078 $5,179 $4,805 100.0% 100.0% 100.0% ====== ====== ====== ===== ===== ===== 1996 v. 1995 Total revenues decreased $101,000 or 2% from $5,179,000 in 1995 to $5,078,000 in 1996. Research revenues decreased 6% while production revenue increased $181,000 or 32.0% from 1995 to 1996. The decrease in research revenue was primarily attributable to turnover of personnel. During the latter part of 1995 and early 1996 several important sales department people left the Company. Their replacements were unable to offset the decrease in revenue generated by these former employees. 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 industry for polymer coatings. The rate of inflation has not had a material impact upon the results of operations. 1995 v 1994 Total revenues increased $374,000 or 8% from $4,805,000 in 1994 to $5,179,000 in 1995. The increase in research revenue accounted for 58% of the increase in revenue as production revenue increased $158,000 or 38.3% from 1994 to 1995. The increase was primarily attributable to the continuing strong marketing activities in recent years, increased demand for research over the last year as well as continued expansion of the Company's reputation in the industry because of its technical abilities. The rate of inflation has not had a material impact upon the results of operations. 9 Cost of Revenues Analysis Year Ended December 31, ----------------------- Percentage of ($ In Thousands) Total Revenues -------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Research $1,017 $1,311 $1,187 20.0% 25.3% 24.7% Production 623 505 392 12.3 9.8 8.2 ------ ------ ------ ----- ----- ---- Total cost of revenues $1,640 $1,816 $1,579 32.3% 35.1% 32.9% ====== ====== ====== ===== ===== ===== The cost of research revenues for 1995 and 1994, set forth above, have been adjusted to exclude sales salaries, which have been reclassified to selling, general and administrative expenses. 1996 V 1995 Costs of revenues as a percentage of sales decreased from 35.1% in 1995 to 32.3% in 1996. The primary cause is decreased labor costs. 1995 V 1994 Costs of revenues as a percentage of sales increased slightly from 32.9% in 1994 to 35.1% in 1995. The primary cause is increased labor costs. Selling, General and Administrative Expenses Analysis Year Ended December 31, ----------------------- Percentage of ($ In Thousands) Total Revenues -------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Selling, General & Administrative Expenses $2,681 $2,451 $2,297 52.8% 47.3% 47.8% ====== ====== ====== ===== ===== ===== Selling, general and administrative expenses for 1995 and 1994, set forth above, have been adjusted to include sales salaries, which were previously charged to costs of research revenues. 1996 V 1995 Selling, general and administrative expenses, as a percentage of sales, increased to 52.8% in 1996, as compared to 47.3% during 1995. The increase is attributed to increased support salaries and related expenses, increased insurance costs, and increased travel expenses. 10 1995 V 1994 Selling, general and administrative expenses, as a percentage of sales, decreased slightly to 47.3% in 1995, as compared to 47.8% during 1994. The increase is attributed to increased officer salaries and related expenses to support the additional volume, increased professional fees and increases in selling expenses. Income Taxes 1996 V 1995 A total of $158,000 was provided for income taxes for 1996 as compared to $359,000 in 1995. The provision for income taxes in 1996 and 1995 were calculated based on the statutory federal income tax rate of 34% plus state and local taxes. (See Note 12 of Notes to Financial Statements). 1995 v 1994 A total of $359,000 was provided for income taxes for 1995 as compared to $290,000 in 1994. The provision for income taxes in 1995 and 1994 were calculated based on the statutory federal income tax rate of 34% plus state and local taxes. (See Note 12 of Notes to Financial Statements). CAPITAL RESOURCES AND LIQUIDITY During 1996, 1995 and 1994, the Company had net cash provided by operating activities of $393,000, $608,000 and $184,000, respectively. During 1996, 1995 and 1994 the Company used $275,000, $774,000 and $771,000 to purchase investments, consisting of mutual bond funds and certificate of deposits. In addition the Company used $18,000, $41,000 and $157,000 to acquire property and equipment during 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994 the Company made principal payments on long-term debt aggregating $831,000, $32,000 and $35,000, respectively. The principal payments for 1996 includes an $800,000 principal installment paid in connection with the mortgage renegotiation. (See Note 6 of Notes to Financial Statements). Cash has decreased from $1,474,034 at December 31, 1995 to $709,170 at December 31, 1996. (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 1996, nor expected to be in 1997, significant sources of cash. 11 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). 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 (see above). The Company's cash position at December 31, 1996 is deemed sufficient to cover any unforeseen sales downturn as it is equal to approximately 3 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, 1996 was 2.41 to 1.0 as compared to 4.26 to 1.0 at December 31, 1995. 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 due on June 1, 2000 related to the building mortgage (see Note 6 of Notes to the Financial Statements). Management intends to provide for this payment by accumulating cash prior to the payment due date. It is the intent of management to continue on the steady course direction of recent years which includes steadily increasing research sales yielding sufficient cash flow to fund operations and provide funds for the future balloon payment due on the building mortgage and very little in the way of balance sheet asset or liability increases which will use or provide cash. No significant changes to operating expenses are anticipated within the next 1 to 3 years. 12 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 production. ANALYTIC REVIEW OF QUARTERLY RESULTS Total revenue for the fourth quarter decreased substantially from the average of the prior three quarters. However, the Company entered into many new contracts during the month of December, 1996 resulting in the Company reporting deferred revenue of $393,300 at December 31, 1996. Deferred revenue represents research revenue received but not yet earned. Other income and expenses were significantly higher in the fourth quarter principally as a result of legal settlements provided for during the quarter. In addition there were normal year end expenses including bonuses and holiday expenses as well as legal, travel, and entertainment expenses in connection with increased year-end selling efforts. 3/31/96 6/30/96 9/30/96 12/31/96 ------- ------- ------- -------- Total revenue $1,315,557 $1,359,253 $1,442,155 $ 961,604 Cost of revenue 479,508 471,333 372,432 317,507 Gross profit 836,049 887,920 1,069,723 644,097 SG&A expenses 634,867 682,227 689,668 673,743 Income (loss) from operations 201,182 205,693 380,055 (29,646) Other expenses (45,617) (48,360) (91,874) (243,908) Pre-tax income (loss) 155,565 157,333 288,181 (273,554) Income tax expense (benefit) 75,500 78,000 134,500 (130,303) Net income (loss) 80,065 79,333 153,681 (143,251) During the years ended 1996, 1995 and 1994, the quarterly financial statements reflected a charge for an annualized profit sharing contribution of $100,000. Such amount is paid in the subsequent year and is included in accrued expenses. 13 POLYMER RESEARCH CORP. OF AMERICA FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 POLYMER RESEARCH CORP. OF AMERICA CONTENTS Page Independent Auditors' Report F-1 Financial Statements Balance Sheets at December 31, 1996 and 1995 F-2 - F-3 Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 F-4 Statement of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 - F-7 Notes to Financial Statements F-8 - F-19 Financial Statement Schedules For the Years Ended December 31, 1996, 1995 and 1994: Report of Independent Certified Public Accountants on Financial Statement Schedules F-20 VIII Valuation and Qualifying Accounts and Reserves F-21 X Supplementary Income Statement Information F-22 XI Property, Equipment and Accumulated Depreciation F-23 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. [LETTERHEAD] 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, 1996 and 1995, and the related statements of income, stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ Castellano, Korenberg & Co. CPAs, P.C. --------------------------------------------------- CASTELLANO, KORENBERG & CO. CPAs, P.C. Westbury, New York February 18, 1997 F-1 POLYMER RESEARCH CORP. OF AMERICA BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 ---- ---- CURRENT ASSETS: Cash $ 709,170 $1,474,034 Certificates of deposit 554,338 142,611 Investment securities available for sale 473,283 588,481 Accounts receivable, less allowance for doubtful accounts of $-0- for 1996 and $4,000 for 1995 91,850 59,816 Inventories 85,822 72,713 Prepaid income taxes 167,000 -0- Prepaid expenses and other current assets 28,086 12,595 ---------- ---------- Total Current Assets 2,109,549 2,350,250 ---------- ---------- PROPERTY AND EQUIPMENT 2,939,514 3,014,588 ---------- ---------- OTHER ASSETS: Deferred financing costs, less accumulated amortization of $2,728 for 1996 and $2,366 for 1995 11,814 12,177 ---------- ---------- $5,060,877 $5,377,015 ========== ========== See independent auditors' report and notes to financial statements. F-2 POLYMER RESEARCH CORP. OF AMERICA BALANCE SHEETS DECEMBER 31, 1996 AND 1995 LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995 ---- ---- CURRENT LIABILITIES: Current maturities of long-term debt $ 28,143 $ 39,146 Accounts payable 56,907 13,142 Deferred revenue 393,300 170,837 Income taxes payable -0- 33,400 Accrued expenses and other current liabilities 417,714 295,083 ---------- ---------- Total Current Liabilities 896,064 551,608 ---------- ---------- LONG-TERM LIABILITY: Long-term debt, less current maturities 1,483,080 2,303,355 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock - $.01 par value; 4,000,000 shares authorized; 1,489,657 and 1,354,234 shares issued at December 31, 1996 and 1995 respectively 14,896 13,542 Capital in excess of par value 2,632,037 2,091,699 Retained earnings 103,654 475,518 Unrealized holding losses (12,117) (1,970) ---------- ---------- 2,738,470 2,578,789 Less: Treasury stock, at cost - 91,837 shares in 1996 and 83,488 shares in 1995 56,737 56,737 ---------- ---------- Total Stockholders' Equity 2,681,733 2,522,052 ---------- ---------- $5,060,877 $5,377,015 ========== ==========
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, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- NET REVENUES: Research $4,326,424 $4,607,889 4,391,701 Production 752,145 571,256 412,693 ---------- ---------- ---------- 5,078,569 5,179,145 4,804,394 ---------- ---------- ---------- COST OF REVENUES: Research 1,017,460 1,310,643 1,186,968 Production 623,320 504,621 392,421 ---------- ---------- ---------- 1,640,780 1,815,264 1,579,389 ---------- ---------- ---------- GROSS PROFIT 3,437,789 3,363,881 3,225,005 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,680,505 2,450,509 2,297,423 ---------- ---------- ---------- INCOME FROM OPERATIONS 757,284 913,372 927,582 ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest income 58,965 55,358 44,363 Interest expense (227,683) (227,195) (272,452) Net rental income (expense) 2,850 5,000 (26,384) Litigation settlements (217,270) (40,641) (33,773) Loss on disposition of property and equipment -0- -0- (13,762) Realized gain (loss) on investment in marketable securities (1,621) 9,890 (3,779) ---------- ---------- ---------- Mortgage modification expense (45,000) -0- -0- ---------- ---------- ---------- Total Other Expense (429,759) (197,588) (305,787) ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES 327,525 715,784 621,795 PROVISION FOR INCOME TAXES 157,697 358,841 290,397 ---------- ---------- ---------- NET INCOME $ 169,828 $ 356,943 $ 331,398 ========== ========== ========== EARNINGS PER SHARE $ .12 $ .26* $ .24** ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,397,820 1,397,820* 1,398,634** ========== ========== ==========
* Restated for 1996 10% stock dividend ** Restated for 1996 10% stock dividend and 1995 10% stock dividend and 5 for 4 stock split See independent auditors' report and notes to financial statements. F-4 POLYMER RESEARCH CORP. OF AMERICA STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock, $.01 Par Value Authorized; 4,000,000 Shares Capital Unrealized Treasury Stock - At Cost ----------------------- in Excess Retained Holding ------------------------ Shares Amount of Par Earnings Losses Shares Amount ------ ------ ------ -------- ------ ------ ------ BALANCE, DECEMBER 31, 1993 895,319 $ 8,953 $ 1,484,587 $ 398,878 $ -0- 53,839 $ (52,286) STOCK DIVIDEND 89,578 896 312,627 (313,523) -0- 5,384 -0- PURCHASE OF TREASURY STOCK -0- -0- -0- -0- -0- 1,496 (4,451) UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE -0- -0- -0- -0- (27,198) -0- -0- NET INCOME -0- -0- -0- 331,398 -0- -0- -0- ---------- ---------- ----------- ----------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1994 984,897 9,849 1,797,214 416,753 (27,198) 60,719 (56,737) STOCK DIVIDEND 98,490 985 294,485 (295,470) -0- 6,072 -0- STOCK SPLIT 270,847 2,708 -0- (2,708) -0- 16,697 -0- UNREALIZED GAIN ON INVESTMENT SECURITIES AVAILABLE FOR SALE -0- -0- -0- -0- 25,228 -0- -0- NET INCOME -0- -0- -0- 356,943 -0- -0- -0- ---------- ---------- ----------- ----------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1995 1,354,234 13,542 2,091,699 475,518 (1,970) 83,488 (56,737) STOCK DIVIDEND 135,423 1,354 540,338 (541,692) -0- 8,349 -0- UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE -0- -0- -0- -0- (10,147) -0- -0- NET INCOME -0- -0- -0- 169,828 -0- -0- -0- ---------- ---------- ----------- ----------- --------- ---------- ---------- BALANCE DECEMBER 31, 1996 1,489,657 $ 14,896 $ 2,632,037 $ 103,654 $ (12,117) 91,837 $ (56,737) ========= ========== =========== =========== ========= ========== ==========
See independent auditors' report and notes to financial statements. F-5 POLYMER RESEARCH CORP. OF AMERICA STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $5,266,656 $5,260,240 $4,753,698 Interest received 58,965 55,358 44,363 Rent received 2,850 5,000 20,200 ---------- ---------- ---------- Cash Provided By Operating Activities 5,328,471 5,320,598 4,818,261 ---------- ---------- ---------- Cash paid for merchandise (1,572,608) (1,752,829) (1,566,462) Cash paid to suppliers and employees (2,585,381) (2,354,309) (2,321,280) Interest paid (227,683) (227,195) (272,452) Income taxes paid (358,097) (348,556) (450,955) Cash paid for litigation settlement (146,770) (30,141) (23,273) Mortgage modification fee paid (45,000) -0- -0- ---------- ---------- ---------- Cash Disbursed For Operating Activities (4,935,539) (4,713,027) (4,634,422) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 392,932 607,571 183,839 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of certificates of deposit 142,611 136,086 49,948 Proceeds from sale of marketable securities 378,619 807,290 589,606 ---------- ---------- ---------- Cash Provided By Investing Activities 521,230 943,376 639,554 ---------- ---------- ---------- Purchase of certificates of deposits (554,338) (142,611) -0- Purchase of marketable securities (275,189) (773,517) (771,386) Purchase of property and equipment (18,221) (41,445) (156,681) ---------- ---------- ---------- Cash Disbursed For Investing Activities (847,748) (957,573) (928,067) ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (326,518) (14,197) (288,513) ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term borrowings (831,278) (32,460) (34,560) Purchase of treasury stock -0- -0- (4,451) ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (831,278) (32,460) (39,011) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH (764,864) 560,914 (143,685) CASH, BEGINNING OF YEAR 1,474,034 913,120 1,056,805 ---------- ---------- ---------- CASH, END OF YEAR $ 709,170 $1,474,034 $ 913,120 ========== ========== ==========
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, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 169,828 $ 356,943 $ 331,398 ---------- ---------- ---------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Loss on disposition of property and equipment -0- -0- 13,762 Depreciation and amortization 93,658 103,824 99,052 Bad debt expense 2,342 6,255 3,328 Realized (gain) loss on investment in marketable securities 1,621 (9,890) 3,779 Changes in assets (increase) decrease: Accounts receivable (34,376) (6,026) (37,696) Inventories (13,109) (1,043) 282 Prepaid income taxes (167,000) -0- -0- Prepaid expenses and other current assets (15,491) 41,699 (43,164) Other assets -0- 8,199 9,774 Changes in liabilities increase (decrease): Accounts payable 43,765 (8,111) (17,640) Deferred revenue 222,463 85,837 (13,000) Income taxes payable (33,400) 10,275 (160,558) Accrued expenses and other current liabilities 122,631 19,609 (5,478) ---------- ---------- ---------- Total Adjustments 223,104 250,628 (147,559) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 392,932 $ 607,571 $ 183,839 ========== ========== ========== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock dividend paid $ 1,354 $ 985 $ 896 ========== ========== ========== Stock split paid $ -0- $ 2,708 $ -0- ========== ========== ========== Unrealized gain (loss) on investment securities $ (10,147) $ 25,228 $ (27,198) ========== ========== ==========
See independent auditors' report and notes to financial statements. F-7 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 an international research concern. The Company is predominately engaged in the research and development of the applications of chemical grafting. Secondarily, the Company 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. F-8 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd) Revenue Recognition Revenue from research contracts is recognized based upon two criteria: first, client approval of performance of specific stage of the contract and second, collection of the resulting revenue is assured. Revenue from production is recognized when the product is shipped for sale to customers. 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 shareholders' equity, whereas realized gains and losses flow through the Company's yearly operations. F-9 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd) 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. 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. F-10 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies (cont'd). 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." The adoption of the new standard did not have a material impact on the Company's financial position or results of operations. 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 Earnings per share is computed based upon the weighted average number of common shares outstanding during each year. 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. F-11 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 2 - Investment Securities At December 31, 1996 and 1995, the investment securities portfolio is comprised of securities classified as available for sale, in conjunction with the adoption of FASB 115, resulting in investment securities available for sale being carried at market value. The amortized cost and fair values of investment securities available for sale at December 31, 1996 are: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- --------- --------- U.S. Treasury securities $ 148,367 $ -0- $ (2,332) $ 146,035 Obligations of other U.S. government agencies 194,572 -0- (9,407) 185,165 Other securities 149,999 -0- (7,916) 142,083 --------- ---------- --------- --------- $ 492,938 $ -0- $ (19,655) $ 473,283 ========= ========== ========= ========= The amortized cost and fair values of investment securities available for sale at December 31, 1995 are: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- --------- --------- U.S. Treasury securities $ 104,239 $ 2,221 $ -0- $ 106,460 Obligations of other U.S. government agencies 344,400 1,038 (7,139) 338,299 Other securities 149,999 -0- (6,277) 143,722 --------- ---------- --------- --------- $ 598,638 $ 3,259 $ (13,416) $ 588,481 ========= ========== ========= ========= The amortized cost and fair values of investment securities available for sale December 31, 1996 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. F-12 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 2 - Investment Securities (cont'd) Securities Available For Sale ------------------------- Amortized Fair Cost Value --------- -------- Due in one year or less $ 3,956 $ 3,750 Due after one year but less than five years 55,705 55,457 Due after five years but less than ten years 36,671 35,874 Due after ten years 52,035 50,954 --------- -------- 148,367 146,035 Mortgage-backed securities 194,572 185,165 Other securities 149,999 142,083 -------- -------- $492,938 $473,283 ======== ======== Proceeds from sales and maturities of investment securities available for sale during 1996 and 1995 were $258,279 and $751,163, respectively. Gross gains on 1996 sales and maturities were $578. Gross losses on 1995 sales and maturities were $4,026. Included in shareholders' equity at December 31, 1996 and 1995 is $12,117 and $1,970 respectively, of net unrealized losses on investment securities available for sale. Note 3 - Inventories Inventories at December 31, 1996 and 1995 are as follows: 1996 1995 ---- ---- Raw materials $ 73,515 $ 57,087 Finished goods 12,307 15,626 ---------- ---------- $ 85,822 $ 72,713 ========== ========== F-13 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 4 - Property and Equipment Property and equipment is summarized as follows: 1996 1995 ---- ---- Land $ 450,000 $ 450,000 Land improvements 80,211 80,211 Building 2,550,000 2,550,000 Building improvements 289,505 273,755 Transportation equipment 12,967 12,967 Machinery and equipment 200,259 200,259 Furniture and fixtures 98,213 95,742 Office equipment 60,664 60,664 ---------- ---------- 3,741,819 3,723,598 Less: Accumulated depreciation and amortization 802,305 709,010 ---------- ---------- $2,939,514 $3,014,588 ========== ========== Depreciation and amortization expense related to property and equipment amounted to $93,295, $103,824 and $99,052 for the years ended December 31, 1996, 1995 and 1994 respectively. Note 5 - Deferred Revenue At December 31, 1996 and 1995 the Company had received research contract payments not yet earned aggregating $393,300 and $170,837, respectively. Note 6 - Mortgage Payable On August 20, 1996 the Company renegotiated the mortgage on its building. The terms of the agreement required the Company to make an $800,000 principal installment and pay a renegotiation 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 $1,511,223 and $2,342,501 of which $28,143 and $39,146 represent current maturities of the mortgage at December 31, 1996 and 1995 respectively. F-14 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 6 - Mortgage Payable (cont'd). Aggregate maturities of the mortgage note payable are as follows: Years Ending December 31: ------------------------- 1997 $ 28,143 1998 31,244 1999 34,688 2000 1,417,148 ---------- $1,511,223 ========== Note 7 - Contingencies At December 31, 1996, the Company is a defendant in various lawsuits which arose in the ordinary course of business. At December 31, 1996, the Company has provided $150,000, included in current liabilities, as a provision for unfavorable findings and/or settlements 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. 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 March 1, 1993 the Company extended its employment contract with its President which expires on May 16, 1998. The contract provides for a current minimum annual salary of $160,000 for 1996 and annual increases of $10,000 throughout its duration. Note 9 - Stock Dividends 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. F-15 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 9 - Stock Dividends (cont'd). On February 21, 1995 the Company declared a 10% stock dividend to stockholders of record at March 6, 1995, paid March 20, 1995. The transaction was valued based upon the closing market price of the Company's stock on February 21, 1995, which was $3.00 per share. Retained earnings was charged for $295,470 as a result of the issuance of 98,490 shares. On January 18, 1994 the Company declared a 10% stock dividend to stockholders of record at January 31, 1994, paid February 22, 1994. The transaction was valued based upon the closing market price of the Company's stock on February 21, 1995 which was $3.50 per share. Retained earnings was charged for $313,523 as a result of the issuance of 89,578 shares. Per share data were retroactively restated for the effects of the 1996, 1995 and 1994 stock dividends. Note 10- Stock Split On June 6, 1995 the Company declared a 5 for 4 stock split effected in the form of a 25% stock dividend, to stockholders of record at June 19, 1995, distributed June 27, 1995. As a result of this transaction, an additional 270,847 shares were issued. The Company did not distribute fractional shares from the stock split. The Company's par value of $.01 per share remained unchanged. Per share data was retroactively restated for the effects of the stock split. Note 11- 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 will be 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 F-16 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 11- Shareholder Rights Plan (cont'd) 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. 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 12- Provision For Income Taxes The provision for income taxes is summarized as follows: 1996 1995 1994 ---- ---- ---- Federal $ 92,054 $207,140 $174,824 State and local 65,643 151,701 115,573 -------- -------- -------- Provision for income taxes $157,697 $358,841 $290,397 ======== ======== ======== The reconciliation between the maximum effective income tax rates with federal statutory tax rates for the year ended December 31, 1996 and the rates reflected in the accompanying financial statements is as follows: Income taxes at U.S. statutory rates $ 111,358 (Decrease) increase in federal income tax expense resulting from: Federal tax arising from non- deductible financial statement expenses 6,426 Benefit from utilization of lower federal tax brackets (3,411) Benefit from deduction for state and local taxes (22,319) State and local taxes 65,643 ---------- Provision for Income Taxes $ 157,697 ========== F-17 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS 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 fro research activities and the sale of textile printing inks and accessories. Information on industry segments for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- NET REVENUES: Research $4,326,424 $4,607,889 $4,391,701 Production 752,145 571,256 412,693 ---------- ---------- ---------- Total Net Revenues $5,078,569 $5,179,145 $4,804,394 ========== ========== ========== GROSS PROFIT: Research $3,308,964 $3,297,246 $3,204,733 Production 128,825 66,635 20,272 ---------- ---------- ---------- Total Gross Profit 3,437,789 3,363,881 3,225,005 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,680,505 2,450,509 2,297,423 ---------- ---------- ---------- INCOME FROM OPERATIONS $ 757,284 $ 913,372 $ 927,582 ========== ========== ========== CAPITAL EXPENDITURES: Research $ 3,603 $ 12,189 $ 51,231 Production 2,881 9,747 26,075 Corporate 5,766 19,509 59,819 Rental Allocation -0- -0- 19,556 ---------- ---------- ---------- Total $ 12,250 $ 41,445 $ 156,681 ========== ========== ========== DEPRECIATION AND AMORTIZATION: Research $ 27,545 $ 30,309 $ 16,825 Production 22,028 24,239 13,460 Corporate 44,085 49,276 58,673 Rental allocation -0- -0- 10,094 ---------- ---------- ---------- Total $ 93,658 $ 103,824 $ 99,052 ========== ========== ==========
F-18 POLYMER RESEARCH CORP. OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 13- Industry Segments (cont'd). 1996 1995 1994 ---- ---- ---- IDENTIFIABLE ASSETS: Research $ 886,238 $ 885,752 $ 776,240 Production 831,529 818,175 707,707 Corporate 3,343,110 3,673,088 2,985,004 Rental allocation -0- -0- 450,743 ---------- ---------- ---------- Total $5,060,877 $5,377,015 $4,919,694 ========== ========== ========== Net income from operations represents net sales less operating expenses for each segment and corporate expenses which are not directly attributable to any segment. A ratable portion of corporate expenses have been charged to rental operations. 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. Note 14 - Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities aresummarized as follows: 1996 1995 ---- ---- Accrued profit sharing $ 100,000 $ 100,000 Accrued legal settlements 150,000 79,500 Accrued vacation 25,584 23,513 Accrued professional fees 30,000 30,000 Other items (none in excess of 5% of total current liabilities) 112,130 62,070 ---------- ---------- $ 417,714 $ 295,083 ========== ========== Note 15 - Profit Sharing Plan Profit sharing expense under the Company's noncontributory profit sharing plan charged to operations amounted to $100,000 for the years ended December 31, 1996, 1995 and 1994. F-19 [LETTERHEAD] 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 1996, 1995 and 1994, 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. /s/ Castellano, Korenberg & Co., CPAs, P.C. ------------------------------------------- CASTELLANO, KORENBERG & CO., CPAs, P.C. Westbury, New York February 18, 1997 -20- 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 Balance Beginning Costs and to Other At End Description of Year Expenses Accounts Deductions of Year - ----------- ---------- ---------- ---------- ---------- ---------- Allowance for Doubtful Accounts: Year ended December 31, 1996 $ 4,000 $ 2,342 $ -0- $ 6,342 $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1995 $ -0- $ 6,255 $ -0- $ 2,255 $ 4,000 ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1994 $ -0- $ 2,360 $ -0- $ 2,360 $ -0- ---------- ---------- ---------- ---------- ---------- Reserve for Sales Credits: Year ended December 31, 1996 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1995 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1994 $ -0- $ -0- $ -0- $ -0- $ -0- ---------- ---------- ---------- ---------- ----------
F-21 POLYMER RESEARCH CORP. OF AMERICA SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Charged To Costs and Expenses ----------------------------- December 31, ------------ 1996 1995 1994 ---- ---- ---- 1. MAINTENANCE AND REPAIR $ 56,208 $ * $ 83,269 -------- -------- -------- 2. DEPRECIATION $ 93,295 $103,824 $ 99,052 -------- -------- -------- 3. TAXES, OTHER THAN PAYROLL AND INCOME TAXES * * * 4. ROYALTIES * * * 5. ADVERTISING COSTS * * * Note: * Less than 1% of revenue. F-22 POLYMER RESEARCH CORP. OF AMERICA SCHEDULE XI - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION YEAR ENDED DECEMBER 31, 1996
Gross Amount At Which Carried At Initial Cost to Company Close of Period Life On Which ----------------------- -------------------------------- Depreciation In Latest Land Land Income Building and Building and Accumulated Date Statement Description Encumbrances Improvements Equipment Improvements Equipment Total Depreciation Acquired is Computed - ----------- ------------ ------------ --------- ------------ --------- ---------- ------------ ---------- ----------- Land, Building and Improvements $1,511,223 $3,369,716 $ -0- $3,369,716 $ -0- $3,369,716 $ 640,379 June 4, 1990 20-40 Years Equipment -0- -0- 372,103 -0- 372,103 372,103 161,926 Various 3-10 Years ---------- ---------- ---------- ---------- ---------- ---------- ---------- $1,511,223 $3,369,716 $ 372,103 $3,369,716 $ 372,103 $3,741,819 $ 802,305 ========== ========== ========== ========== ========== ========== ==========
F-23 ITEM 9. DISAGREEMENTS ON FINANCIAL AND ACCOUNTING DISCLOSURES None ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company as of December 31, 1996 are as follows: NAME AGE POSITION - ---- --- -------- Carl Horowitz 73 President and Director Irene Horowitz 73 Senior Vice President and Director John M. Ryan 41 Director, Executive Vice President, Corporate Research Alice J. Horowitz 37 Director Boris Jody 77 Director Anna Dichter 83 Secretary, Treasurer George V. Sawey 68 Vice President, Chemicals Terry J. Wolfgang 35 Director Dr. Mohan Sanduja, 61 Vice President, R & D PHD Director Clare Chamow 62 Vice President, Office Management Betty Friedman 65 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. 14 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. Alice J. Horowitz was a Senior Vice President. In 1987, she became a Director. During 1995 Ms. Horowitz relocated outside of New York. 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. George V. Sawey has been employed full time by the Company since 1972 and is Vice President in charge of chemical products. He is responsible for the manufacture of textile inks and chemical products resulting from research. 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 and law firms with whom she has been associated occasionally have performed legal services for the Company. Payments in 1996, 1995 and 1994 amounted to $43,873, $16,664, and $31,227 respectively. 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. 15 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. 16 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during the uears ended December 31, 1996, 1995 and 1994 to the chief executive officer and those three executive officers of the Company who earned in excess of $100,000 for the year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) NAME OTHER RESTRICTED AND ANNUAL STOCK LTIP ALL OTHER PRINCIPAL COMPEN- AWARDS OPTIONAL PAYOUTS COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) ($) SAR'S(#) ($) SATION($) (1) - ------------------------------------------------------------------------------------------------------ CARL HOROWITZ 1996 $150,000 $25,000 $10,836 $0 $0 $0 $7,460 CEO, PRESIDENT 1995 135,915 25,000 27,616 0 0 0 8,084 1994 130,471 25,000 28,093 0 0 0 4,490 IRENE HOROWITZ 1996 153,923 10,000 0 0 0 0 7,650 SENIOR VICE 1995 152,525 10,000 0 0 0 0 7,940 PRESIDENT 1994 144,452 10,000 0 0 0 0 4,474 JOHN M. RYAN 1996 241,167 20,000 0 0 0 3,524 EXECUTIVE VICE 1995 218,227 7,738 0 0 0 0 3,374 PRESIDENT 1994 191,154 7,511 0 0 0 0 12,002 MOHAN SANDUJA 1996 114,080 1,500 0 0 0 0 10,592 VICE PRESIDENT 1995 102,930 2,000 0 0 0 0 9,493 RESEARCH AND 1994 99,519 2,000 0 0 0 0 7,141 DEVELOPMENT
(1) Represents premiums on officer's life insurance policy in which Mr. Horowitz has the right to designate the beneficiary. 17 STOCK OPTIONS No executive officer owns any stock options. EMPLOYMENT AGREEMENTS On March 1, 1993, the Company and Carl Horowitz agreed to extend Mr. Horowitz's employment agreement through May 16, 1998. Mr. Horowitz's maximum base salary under the new agreement is $160,000 for 1996 with annual increases of $10,000 thereafter. 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, 1997, 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 $.01 par value Carl Horowitz 361,206 24.2% 2719 Whitman Drive Brooklyn, NY 11234 Irene Horowitz 32,507 2.2% 2719 Whitman Drive Brooklyn, NY 11234 18 John M. Ryan 16,637 1.1% 3035 Lonni Lane Merrick, N.Y. 11566 Alice J. Horowitz 46,585 3.1% 3046 West Tonopah Drive Phoenix, Arizona 85027 Boris Jody -0- 0.0% 4301 N. Ocean Blvd. Boca Raton, Fl. Anna Dichter 770 0.0% 1757 E. 54th Street Brooklyn, N.Y. George Sawey 74 0.0% 59 Squaw Brook Road N. Haldon, N.J. Terry J. Wolfgang 13,970 0.9% 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 First Wilshire Securities 124,396 8.85% Management Corp. 600 South Lake St. Pasadena, CA 91106 All executive officers and directors 471,749 31.7% as a group (11 in number) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other than legal fees paid, as disclosed in Item 10, there were no related party transactions. 19 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) 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) (10) Material Contracts (.1) Employment Contract of Carl Horowitz, the Company's President, dated March 1, 1993 (incorporated by reference as previously filed with United States Security and Exchange Commission in March, 1994 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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLYMER RESEARCH CORP. OF AMERICA /s/ -------------------------------- CARL HOROWITZ, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ March 19, 1997 - ---------------------------- Director ---------------------- Carl Horowitz Date /s/ March 19, 1997 - ---------------------------- Director ---------------------- Irene Horowitz Date /s/ March 19, 1997 - ---------------------------- Director ---------------------- John M. Ryan Date - ---------------------------- Director ---------------------- Alice J. Horowitz Date - ---------------------------- Director ---------------------- Boris Jody Date /s/ March 19, 1997 - ---------------------------- Director ---------------------- Dr. Mohan Sanduja, PhD Date - ---------------------------- Director ---------------------- Terry Wolfgang Date EX-10.2A 2 MORTGAGE MODIFICATION AGREEMENT EXHIBIT 10.2A MORTGAGE MODIFICATION AGREEMENT THIS AGREEMENT, made as of August 20, 1996, BETWEEN: TAMA REALTY CO., 11 Rutland Road, Great Neck, New York 11020, hereinafter designated "Tama" AND: POLYMER RESEARCH CORP. OF AMERICA, 2186 Mill Avenue, Brooklyn, New York 11234, hereinafter designated "Polymer" WITNESSETH: WHEREAS, Tama is the owner and holder of a Mortgage Note of Polymer for $2,500,000.00 made the 4th day of June, 1990, and secured by a Mortgage recorded in the office of the Register of Kings County, State of New York, in Reel 2565 at Page 1837, on June 6, 1990; and WHEREAS, there will be due and owing upon the aforementioned Note and Mortgage after the September, 1996 payment the principal sum of $2,317,744.84: and WHEREAS, Polymer has requested that it be allowed to prepay the sum of $800,000.00 and to modify its monthly payment; and WHEREAS, the parties hereto are desirous of modifying the terms of the above mentioned Note and Mortgage upon the terms hereinafter mentioned; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained and the sum of One Dollar ($1.00) to each of the parties hereto to the other duly paid, the receipt of which is hereby acknowledged, it is hereby mutually covenanted and agreed that the terms of the payment of the aforesaid Note and Mortgage be and the same are hereby modified to the extent that Polymer pay to Tama on September 1, 1996 the sum of $800,000.00 in reduction of the principal balance on the aforesaid Note and Mortgage together with the sum of $45,000.00 as prepaid interest on such amount, and that Polymer shall thereafter pay to Tama $15,457.13 in equal monthly installments commencing October 1, 1996. Said payments shall be continued until the first day of June, 2000, on which date the whole of the principal sum then remaining due on said indebtedness, together with the interest which may be due, shall become due and payable. This agreement is made upon the express condition and Polymer covenants that it is the owner of the premises described in the said Mortgage and that there are no defects or defenses to the said Note and Mortgage; and that Tama Realty Co. covenants that it is the sole holder of the mortgage, has not assigned the mortgage or any interest therein and that this Agreement has been duly authorized and executed by or on behalf of Tama and constitutes the legal, valid and binding obligation of Tama enforceable in accordance with its terms. Nothing herein contained shall invalidate any of the security now held for the said indebtedness, nor impair any of the terms, conditions, covenants and provisions of the said Note and Mortgage, except as herein specifically modified. This agreement shall bind the parties hereto, their successors, heirs, legal representatives and assigns. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly executed the day and year first above written. WITNESS: TAMA REALTY CO. /s/Marvin A. Bass By: /s/ Elaine Bass ------------------------------ ELAINE BASS WITNESS: POLYMER RESEARCH CORP. OF AMERICA /s/ Ella Maystich By: /s/ Carl Horowitz Pres. ------------------------------ CARL HOROWITZ, President EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the December 31, 1996 audited financial statements and is qualified as its entirety by reference to such financial statements. 12-MOS DEC-31-1996 JAN-01-1996 DEC-01-1996 1,263,000 473,000 91,000 0 85,000 2,109,000 3,742,000 802,000 5,060,000 896,000 1,483,000 0 0 14,900 2,735,000 5,060,000 752,145 5,078,000 623,000 2,680,000 490,000 0 272,000 327,000 157,000 170,000 0 0 0 170,000 .12 .12
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