U.S. 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 period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-21279
THERMACELL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-3223708
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5419 PROVOST DRIVE, HOLIDAY, FLORIDA 34690
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 938-3269
Securities registered pursuant to Section 12(b) of the Act: NONE
Check Whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
State issuer's revenues for its most recent reporting period (ten
months)........$1,036,376.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at January 9, 1998 was $6,933,204. The bid price of the common stock
at that date was $2.75.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Company's definitive proxy statement for the Annual Meeting of the
Company's stockholders to be held on April 15, 1998 are incorporated by
reference into part III of this Form.
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THERMACELL TECHNOLOGIES, INC.
FORM 10-KSB - Index
FOR THE TEN MONTHS ENDED SEPTEMBER 30, 1997
PART I Page
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Item 1. Business 1.
Item 2. Properties 8.
Item 3. Legal Proceedings 8.
Item 4. Submission of Matters to a Vote of Security Holders 9.
PART II
Item 5. Market of the Registrant's Securities and Related
Stockholder Matters 9.
Item 6. Selected Financial Data 11.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11.
Item 8. Consolidated Financial Statements and Supplementary
Data 15.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 16.
PART III
Item 10. Directors and Executive Officers of the Registrant 16.
Item 11. Executive Compensation 16.
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16.
Item 13. Certain Relationships and Related Transactions 16.
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K 17.
Signatures 19.
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This Form 10-KSB contains forward looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, regarding future events and the future performance of the
Company involve risks and uncertainties which may cause the Company's actual
results in future periods to be materially different from any future performance
suggested herein. The Company believes that the patents it is seeking on its
microshell technologies are unique in manufacture and application. There can be
no assurance that such patents will be granted. The patent approval process is
both involved and time dependent. There can be no assurance that approval will
be granted in a manner that protects the Company's technologies or that others
have not claimed aspects of these technologies in patents or pending patents. As
to the Company's performance, actual results could differ materially from those
projected in the forward looking statements contained herein.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company was incorporated in Florida in August 1993, for the purpose of
developing, manufacturing and marketing insulating materials and coatings using
partially evacuated glass microspheres (sometimes referred to as "shells"). The
process of evacuation removes air and other gases from the sphere and thereby
creates a vacuum. A shell is a very small glass sphere (generally the size of a
grain of salt) made by crushing glass particles. The insertion of shells into
various materials and products ("shell technology") can substantially improve
the thermal resistive characteristics of such materials and products resulting
in improved insulation ("R") values. The more a shell is evacuated, the higher
the thermal resistive characteristics of the product or material to which the
shells are added.
Management of the Company believes that there is a broad range of applications
for introduction in products of evacuated or partially evacuated shells, the
effect of which is improved energy efficiency of such products because of the
inherent insulating characteristics provided by the glass spheres. The Company's
strategy is to commercially exploit the use of its shell technology to improve
the "R" values of a number of products. In fiscal year 1995, the Company
completed the development of its first product line that consisted of paints and
coatings containing shells in order to reduce heat transmission and improve the
insulation values of the products. The products are marketed under the
ThermaCool(TM) label.
On November 30, 1995, the Company acquired the assets of C.F. Darling Paint &
Chemicals, Inc., a paint manufacturing company, located in New Port Richey,
Florida ("Darling Paint") for approximately $250,000 in cash. The Company also
assumed the real estate lease for the Darling Paint facility. The Company
acquired these assets and assumed this real estate lease so that it would have a
facility to produce and develop paints and coatings for its ThermaCool(TM)
product line which incorporates its shell technology. Prior to this acquisition,
the Company was required to purchase paints and coatings from independent paint
and coating manufacturers.
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On March 19, 1997, the Company completed a public offering for 1,375,000 Units,
with each Unit consisting of one share of Common Stock, $.0001 par value, and
one Series A Redeemable Common Stock Purchase Warrant, at a price of $4.00 per
Unit. In addition, the underwriter exercised its over-allotment purchase option
and purchased 206,250 additional Units at the initial per Unit public offering
price, less the underwriting discounts and commissions.
On July 28, 1997, the Company acquired all the outstanding common stock,
representing 100% ownership of Atlas Chemical Co., a paint manufacturer and
distributor, located in Miami, Florida. The Company acquired this firm so that
it would have a larger manufacturing facility to both expand production of
paints and coatings and to obtain an established marketing and distribution
channel which include major accounts such as Builders Square, Ace Hardware,
Lowes, and others. For the fiscal year ending June 30, 1997, Atlas Chemical had
annual revenues of $2.4 million and sustained an operating loss of approximately
$68,000.
The Company has sustained significant operating losses since its inception.
Management's strategy of expanding the ThermaCool(TM) product line, developing a
commercially viable manufacturing process for shells, and expansion into new
markets for its shell technology may result in the Company incurring additional
losses due to the costs associated with these strategies. The Company expects to
incur losses until it is able to increase its sales, expand its product line and
increase its distribution capabilities to a sufficient revenue level to offset
ongoing operating and expansion costs. The Atlas Chemical acquisition should
accelerate the Company's plan to achieve profitable operations.
The Company's long-term business strategy is to (i) expand the marketing and
distribution of ThermaCool(TM) paints and coatings (ii) develop and manufacture
the Company's own shells and (iii) expand the shell technology to other
products, such as drywall, gypsum board, home siding materials and space foam
insulation. Other markets in which the Company may utilize its technology
include refrigeration and cooling systems, automotive and transportation
applications and cups and thermoses. There is no assurance that the Company will
continue to be successful in penetrating the market for the ThermaCool(TM)
product line, developing commercially viable manufacturing techniques, or
addressing other markets.
BUSINESS STRATEGY
The Company's business strategy is to become profitable by commercially
exploiting its shell technologies along with the manufacture and distribution of
conventional paint and coating products. An important element in the Company's
present strategy incorporates the recent acquisition of Atlas Chemical Co., a
paint manufacturer and distributor that was established in 1919. With Atlas'
established distribution channels, the Company anticipates marketing
ThermaCool(TM) coatings that complement established paint and coating products.
The Company's business strategy is dependent upon the successful implementation
of the following:
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(i) EXPAND THE MARKETING AND DISTRIBUTION OF THERMACOOL(TM) PAINTS AND
COATINGS.
The use of shells in paints and coatings is the Company's initial attempt to
commercially apply its shell technology. Although the ultimate objective of the
Company is to commercially exploit fully evacuated shells in a variety of
products, management believes that the use of partially evacuated shells
properly combined with paints and coatings can improve the insulating properties
of these products. Management believes that the acquisition of the assets of
Darling Paint and the Atlas Chemical Co. acquisition, combined with the
implementation of a successful marketing program will enable the Company to
generate revenues from the sale of its ThermaCool(TM) paint and coating
products.
The initial ThermaCool(TM) product is a roof coating material which incorporates
the partially evacuated shells into a roof coating mixture which the Company is
able to manufacture through the assets it had acquired from Darling Paint. This
product can be used to coat new roofs as well as existing tiles, shingles and
flat roofs and can be applied by manufacturers of concrete and ceramic tiles.
The Company is also marketing a ThermaCool(TM) exterior wall coating which it
believes can also reduce emissivity and thermal conductivity.
Coatings are characterized as protective barriers that can be applied to various
surfaces for protection from the elements. Paint is characterized as a product
to change the color of a particular surface. By this definition, some paints may
be classified as coatings, such as a semi-gloss enamel, while flat wall paint
would not. The basic difference between a roof and a wall coating is the
viscosity or thickness of the product. A roof, being less vertical than a wall,
can accept a thicker coating without the product running or sagging. A thicker
coat for a roof is preferable due to its exposure to the elements. The
application of shell technology to the Company's products is limited to the
ThermaCool(TM) roof and exterior wall coatings where the insulative and energy
efficiency characteristics of the product are most beneficial. To date, more
than 90% of the Company's sales of ThermaCool(TM) products are for roof
application.
The Company has recently entered the auto racing market with several racing
related products. The Company has filed for patent protection for those products
and plans to vigorously pursue this market. The Company has only recently
developed an interior paint using its ThermaCool(TM) process. There is no
assurance that the Company will be able to develop products other than roof and
exterior wall coatings utilizing its ThermaCool(TM) process.
(ii) DEVELOP AND MANUFACTURE THE COMPANY'S OWN SHELLS.
The Company has applied for a patent involving the production of insulating
shells in a manner to enable the evacuation of gases or the addition of low
conductive gas into the shells. Such evacuation results in lower gas pressure or
gases within the shells that can reduce thermal conductivity, thus providing
improved insulating qualities. The manufacturing process involves the formation
of water vapor in the shells and then the subsequent evacuation of the shells by
heating the shells. This process causes out-permeation of the water vapor. Other
patents have been granted relating to various processes to evacuate glass
shells.
To the best of management's knowledge, no one has been able to develop a
commercially viable process for the production of fully evacuated glass shells,
due to, among other factors, manufacturing and technical restraints. Currently,
the Company is aware of three large multinational companies that manufacture
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shells. The essential difference between the manufacturing process for partially
evacuated shells as compared to substantially or fully evacuated shells is the
technique employed to evacuate gases from the shells which improve its thermal
conductivity or insulating value. The Company plans to market non-evacuated
shells for several uses and will compete directly with others in this market.
The Company will have non-evacuated shells available to sell in the general
market because not all shells during the manufacturing process will be
evacuated. They will be separated and sold for general use as fillers, but will
be produced at a substantially reduced cost.
Management believes that the Company's current facilities and equipment can be
used to manufacture partially evacuated shells. The Company has had limited
success in manufacturing shells.
(iii) EXPAND THE SHELL TECHNOLOGY TO OTHER PRODUCTS.
Management of the Company believes the potential exists to commercially exploit
other markets suitable for the Company's shell technologies. Since 1992, the
Company's founders have been investigating the possibility of using evacuated
glass shells in a variety of products. Management has identified construction
components such as drywall, gypsum board, home siding materials and space foam
insulation as potential markets. Other potential markets include refrigeration
and cooling systems, automotive and transportation applications, and cups and
thermoses. There is no assurance the Company will be successful in penetrating
other markets. The Company will only be able to achieve this strategy if it is
able to economically manufacture its own highly or partially evacuated shells.
SHELL TECHNOLOGY
The Company has the rights to certain patent applications relating to evacuated
shells. The first involves a technique for manufacturing insulating shells in a
manner that enables the evacuation of retained gases within the shells. This
evacuation results in low gas pressure within the shell that can reduce the
thermal conductivity, thus improving insulation qualities. Evacuated shells are
capable of forming vacuums which limit heat transfer.
The use of evacuated glass shells as an important component of improved
insulation and the use of a reflective layer within or outside of the shells has
also been referred to in prior patents. The Company's patent application
describes a procedure which uses water vapor and heat, combined with the
introduction of certain gases, to cause the evacuation or substantial evacuation
of the gases contained in the interior of the shells.
The Company's other patent application uses evacuated shells introduced into a
coating. Such coatings may be used for roofs, exterior paints, interior paints
and other uses. The addition of evacuated or substantially evacuated shells,
into a coating provides the following characteristics: (i) a reduction in
radiant heat transfer by use of reflective coatings, (ii) the reduction of heat
transfer between shells by restricting the transfer to point contact, and (iii)
a reduction in the heat transfer across a shell by the use of a partial or full
vacuum.
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Although patent counsel to the Company believes that patent protection is
available for these inventions, there is no assurance that such patents will be
granted. Although management believes that the processes described in the patent
applications are based upon sound scientific principles, and the machinery and
equipment are available to implement the production techniques necessary to
manufacture evacuated shells on a commercial basis, there is no assurance the
Company will be able to economically and profitably manufacture evacuated shells
or otherwise exploit these inventions. The ThermaCool(TM) product line currently
offered by the Company does not rely upon these inventions because
ThermaCool(TM) paint and coatings use partially, rather than fully or
substantially, evacuated shells.
MANUFACTURING FACILITIES AND TECHNIQUES
Management has used approximately $132 thousand of its successful underwriting
to acquire machinery, tooling, furnaces and other items necessary to manufacture
evacuated shells at its Holiday, Florida location. Production of quantities of
shells sufficient for the Company's immediate needs is anticipated during fiscal
year 1998. Management anticipates the Company will continue to lease this
facility on a three to five year term and acquire additional equipment necessary
to manufacture greater quantities of micro-shells. Internal cost estimates
prepared by management indicate that the Company will require at least
$1,000,000 to build a shell manufacturing facility sufficient to provide
commercial quantities of shells to outside parties as a separate business
endeavor.
The basic process for manufacturing glass shells involves heating glass and then
partially drying and crushing the glass composition. The glass composition is
then size separated for different applications. Glass shells are then formed and
blown at high temperatures with the use of heat in a vertical furnace. The
completed glass shells are then separated from the shell residue.
Management is aware of three other companies that currently manufacture glass
shells. These glass shells are primarily used as filler material for plastics
and ceramics. The non-evacuated glass shells are used because they provide an
improved "ball bearing" effect for better flow, and as a low cost filler
material in compounding. The manufacturing techniques proposed by the Company
would be similar to those currently utilized to manufacture shells, except that
the Company would also employ procedures which evacuate or substantially
evacuate the shells in the final stages of the production process.
The Company currently produces its ThermaCool(TM) product line at its Holiday
facility. The Company also continues to produce and sell general paint products
which have been expanded with the acquisition of Atlas Chemical Co. With this
recent Atlas acquisition, the Company presently has the capability for
production of 500,000 gallons per year. The current plant facilities are capable
of producing up to $10,000,000 in gross product sales.
COMPETITION
The Company's ThermaCool(TM) products compete in the special purpose coatings
market that is an extremely competitive market principally composed of large
multinational companies which have significantly greater assets, working
capital, and marketing personnel than the Company. Special purpose coatings are
similar to architectural coatings such as normal house paints, but differ in
that they are formulated for special applications or environmental conditions,
such as extreme temperatures, chemicals or corrosive conditions.
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Major producers of special purpose coatings include PPG Industries, DuPont,
Sherwin-Williams, RPM, Inc., Inmont, Courtaulds, PLC, Glidden, Azkon.V. and
Valspar Corp. The U.S. Bureau of Census valued the special purpose coatings
market at approximately $3 billion in 1995. The roofing, coating and industrial
construction coating market segment represents approximately 15% of the total
"special purpose coatings" market, or 28,000,000 gallons valued at approximately
$450,000,000.
Management believes that the primary competitive factors in the special coatings
product segment are quality, ease of use, service, warranty, availability, and
price. The cost per gallon of ThermaCool(TM) is at the high end of the price
spectrum for paints and coatings ($17.00 to $25.00 per gallon). Although
management believes that the improved insulating characteristics of
ThermaCool(TM) add significant value and justify the higher cost, there is no
assurance that the Company's products will be accepted because of the higher
cost.
The Company's current supply sources of shells could become competitors. The
Company expects that if its products become successful, competitors will be more
likely to develop and introduce into the market place comparable products and
technologies. There is no assurance that the Company will be able to compete in
the special purpose coatings or other similar markets.
MARKETING AND DISTRIBUTION
The Company intends to market its ThermaCool(TM) products to roofers, painters,
distributors and manufacturers of special purpose coatings. The Company's
initial target markets include industrial and residential construction,
maintenance, storage tanks and roof coatings. The Company intends to place
advertisements in trade journals for the plastics, glass and construction
industries. In addition, the Company intends to participate in trade shows and
intends to aggressively promote the energy saving characteristics of its
ThermaCool(TM) product lines.
Currently, management believes that contractors, who purchase from distributors,
will be the primary customers for the Company's products. The Company also
intends to solicit established contractor distribution centers as a source of
marketing its ThermaCool(TM) products. Management's strategy is to attract
individuals that have significant contacts in the special purpose coatings
industry. There is no assurance that the Company will be able to attract these
individuals or that such individuals will be successful in their marketing
efforts. Currently, the Company has a limited sales staff that is concentrating
on direct sales of conventional paint products until such time as the Company
has adequate production availability for its ThermaCool(TM) products.
The Company currently has retail locations in Miami, Florida and Holiday,
Florida that are both adjacent to its manufacturing facilities. It is
management's intention to sell the Holiday retail facility and concentrate on
the manufacture and distribution of its ThermaCool(TM) and conventional paint
products. The Miami retail location will be retained for customer convenience.
In addition, the Company plans to market directly to specialty industries such
as the RV motor home industry and manufactured housing industry. The Company
will also target chains such as Home Depot and Builder's Square as point of sale
distribution outlets for its products. The Company believes that viable business
opportunities for franchising and distribution relationships with existing
painting and coating contractors are additional marketing and distribution
strategies that can expand the sale of the Company's products. The Company also
believes that its products may be distributed through private label arrangements
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with other distributors. There is no assurance that any of these marketing or
distribution strategies will be successful.
NEW PRODUCT APPLICATIONS AND DEVELOPMENT
The Company has utilized funding from its IPO to initiate a pilot plant
production facility at its Holiday, Florida location. This effort focuses on the
initial stages of production of evacuated shells that will prove adequate for
near term demand of its ThermaCool(TM) products. Concentration of its efforts
will focus on applications utilizing shell technologies for paints and coatings.
Management has identified construction components such as drywall, gypsum board,
home siding materials and space foam insulation as future potential markets.
Other potential markets include refrigeration and cooling systems, automotive
and transportation applications, and cups and thermoses. Research and
development will eventually focus on the techniques and procedures necessary to
combine evacuated shells into materials which can benefit from improved
insulation ("R") values. There is no assurance that the Company will be
successful in developing any new applications for evacuated shells.
PRODUCT LIABILITY INSURANCE AND WARRANTIES
The Company currently has product liability insurance in force with limits of
$1,000,000 per occurrence and a $2,000,000 aggregate limit. There is no
assurance that these limits will be adequate to protect the Company.
The Company supplies the following warranties for its Scientific Coatings
products: (1) All ThermaCool(TM) products have eight year warranties; (2) #44000
Acrylic House Paint has a nine year warranty; (3) #4000 Acrylic House Paint has
a seven year warranty; (4) #2400 Acrylic Latex House Paint has a five year
warranty; (5) #2200 100% Vinyl Acrylic House Paint has a five year warranty. All
remedies as to warranty failures require only replacement for these products.
The Company supplies its Atlas Chemical products with warranties for varying
periods of five to twenty years. Such warranties provide for replacement of
defective product with new product of equivalent price. The Company makes no
other warranties as to its products.
EMPLOYEES
As of September 30, 1997, the Company had 26 employees, of whom five are
salaried and the balance are paid hourly. Of these employees, seven are located
at the Holiday facility and the balance are at Atlas Chemical in Miami, Florida.
The Company considers its relations with its employees to be excellent.
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ITEM 2. PROPERTIES.
The Company currently leases and occupies 5,000 sq. ft. of space in Holiday,
Florida where it maintains its corporate offices and where the Scientific
Coating products are manufactured and distributed. This lease expires in 1998.
Current lease payments are approximately $3,100 per month. The facility consists
of approximately 2,000 square feet of office and retail space with the balance
being used for warehousing and manufacturing. In January 1997, the Company
vacated its 2,500 square foot executive office in the Interstate Business Park
at 8306 Laurel Fair Circle, Suite 240, Tampa, Florida. In addition, the Company
closed its Sarasota, Florida retail location located at 4215 South Tamiami
Trail, Sarasota, Florida during January 1997. The Company negotiated termination
provisions with the landlords of these facilities.
The Company currently leases and occupies 21,000 sq. ft. of space at 4801 N.W.
77th Avenue in Miami, Florida. A five year lease commenced on August 1, 1997.
Current lease payments are approximately $6,650 per month. This facility, which
houses the Company's Atlas Chemical operations, consists of approximately 5,000
sq. ft. of office and retail space with the balance used for manufacturing,
warehousing and distribution.
ITEM 3. LEGAL PROCEEDINGS.
On February 6, 1997, the Company received a letter from the counsel to the
Williams family which owns in the aggregate 21,923 shares of the Company's
common stock which was acquired for an aggregate purchase price of $31,950. The
Williams family claims Mr. Pidorenko fraudulently induced their investment and
that the Company is obligated for personal disputes between Mr. Pidorenko and
this family which primarily concern a disagreement over a purchase of a personal
residence.
The Company does not believe it is obligated to these individuals for personal
disputes with Mr. Pidorenko. The Williams family has rejected the Company's
request to purchase their shares at their original purchase price. The Company
believes it has meritorious defenses to any legal proceedings which may be
instituted by such individuals. Mr. Pidorenko has agreed to indemnify the
Company against any claims asserted by these parties.
On May 2, 1997, the Company was served with a summons regarding a civil action
filed in the United States District Court, Eastern District of Michigan by IA,
Inc., as plaintiff. The summons alleges the Company, and its president, John
Pidorenko, and Monroe Parker Securities, Inc., the Company's underwriter,
breached a marketing agreement executed by Mr. Pidorenko on March 26, 1992. This
marketing agreement related to technologies developed by IA, Inc. This agreement
contained a confidentiality and non-disclosure clause for technologies
purportedly developed by IA, Inc.
The Company was not a party to that agreement. The Company believes that it has
not infringed on any patents held by IA, Inc., not-withstanding the validity of
such patents and/or their claims. The petition requested various court actions
including a jury trial, but no specific request for damages. The Company intends
to vigorously defend itself in this action. The Company believes it has
meritorious defenses in this matter which is in a preliminary stage and which
will not be resolved for some time. The Company has agreed to indemnify Monroe
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Parker Securities, Inc., its underwriter, against any claims asserted by this
party.
To the knowledge of the officers and directors of the Company, other than as
disclosed above and in the notes to the consolidated financial statements, there
are no material legal proceedings now pending or threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET VALUE
Before the Company's public offering, which closed on March 19, 1997, there was
no market for the Company's Common Stock, Units, or Warrants. Consequently, the
offering prices of the Units and Warrant Exercise Price were determined
arbitrarily by negotiation between the Company and the Underwriter. Among the
factors considered in such negotiations were estimates of the business potential
of the Company, the present state of its development of new products, its
financial condition, an assessment of its management and the general condition
of the securities markets at the time of this offering.
On March 19, 1997, 1,581,250 Units of the Company's securities (each Unit
consisting of one share of Common Stock and one Redeemable Warrant) were issued
to investors at $4.00 per Unit. Trading of such Units commenced thereafter. On
March 19, 1997, the Underwriter commenced trading of the Common Stock and
Warrants separately.
The proceeds of the offering that was completed on March 19, 1997 and the
related costs of its undertaking are summarized as follows:
Gross Proceeds $6,325,000
Less: Underwriter commissions 632,500
Underwriter expenses 259,308
Company's expenses for offering 689,259
Net Proceeds to Company $4,743,933
Use of Proceeds:
Repayment of indebtedness $1,708,805
Purchase of fixed assets 132,321
Interest expense and accruals 383,906
Acquisition of Atlas Chemical Co. 1,059,325
Working capital 1,459,576
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Total $4,743,933
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The Company's Units, Common Stock, Warrants are listed and traded on NASDAQ
under the symbols, VCLLU, VCLL and VCLLW, respectively. The following table sets
forth, for the periods indicated, the range of high bid and low bid closing
quotations for the securities indicated as reported by NASDAQ. These quotations
are between dealers, do not include retail mark-ups, mark-downs, or other fees
or commissions, and may not represent actual trades.
Common Redeemable
Units Stock Warrants
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Closing Bid Closing Bid Closing Bid
1997 Fiscal Year High Low High Low High Low
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Second quarter 5 3/4 5 3 5/16 3 1/4 1 1/8 1 1/8
Third quarter -- -- 3 1/16 2 15/16 5/8 5/8
Year End, Sept. 30, 1997 -- -- 4 3/8 4 13/16 13/16
(1) Prior to March 1997, there was no active trading in the Company's
securities.
As of September 30, 1997, there were approximately 123 holders of record for
common stock and 3 holders of record of the warrants. However, the Company's
underwriter has advised the Company that more than 300 of its customers
beneficially own the Company's Common Stock as of December 1, 1997.
UNDERWRITER'S SECURITIES
In connection with the public offering, the Company sold to the Underwriter
Options to purchase 137,500 Units of the Company's securities, identical to the
Units publicly sold, at an exercise price of 165% of the public offering price.
The Underwriters' Units are exercisable at a price per Unit of $6.00 subject to
certain adjustments, until they expire on March 12, 2001.
The Underwriters' Warrants contained in the Underwriters' Units underlying the
Underwriters' Options contain certain registration rights and anti-dilution
provisions. The holders of the Underwriters' Warrants have no voting, dividend
or other rights as shareholders of the Company with respect to the shares
underlying the Warrants.
DIVIDEND POLICY
The Company has not paid any dividends on its common stock and does not intend
to pay cash dividends on its common stock in the foreseeable future. The Company
intends to follow a policy of retaining earnings, if any, to finance the
development and expansion of its business.
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company of New York, New York acts as the
Company's Transfer Agent and Warrant Agent.
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ITEM 6. SELECTED FINANCIAL DATA.
The following presents selected financial information of the Company as of and
for the periods ended September 30, 1997, November 30, 1996, and November 30,
1995. The Company changed its fiscal year to end September 30, 1997 for the
present year, which is a ten month period. The information set forth below is
qualified by, and should be read in conjunction with, the consolidated financial
statements and related notes thereto in their entirety
PERIODS ENDED
1997 1996 1995
Sept. 30 Nov. 30 Nov. 30
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INCOME STATEMENT DATA
Total revenue $ 1,036,376 $ 615,845 $ 43,691
Net loss $ (1,037,730) $ (1,033,553) $ (314,857)
Net loss per share $ (0.47) $ (1.34) $ ($0.53)
Shares used in per
share computation 2,217,106 771,154 626,191
BALANCE SHEET DATA, as of September 30, 1997 and November 30, 1996
Total assets $ 3,542,675 $ 1,537,273 $ 734,733
Working capital $ 334,911 $ (2,444,417) $ (874,313)
Long-term debt $ 63,089 $ -- $ --
Stockholders' equity $ 2,428,090 $ (1,363,939) $ (330,395)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company was a developmental stage enterprise during its initial three years
of operation. During this period, management devoted the majority of its efforts
to research and development, financing, purchasing and activities related to
starting up production and marketing. These activities were funded by
investments from stockholders and borrowings from unrelated third parties.
The Company has not, prior to its IPO, been in a position to generate sufficient
revenues during its limited operating history to fund its ongoing operating
expenses or its product development activities. As a result of its
11
<PAGE>
IPO, the Company repaid all its outstanding indebtedness. In fiscal year 1994,
the Company completed the development of its first product line. The Company has
sustained significant operating losses since its inception resulting in an
accumulated deficit of approximately $2,586,600 at September 30, 1997.
Management's previous strategies of expanding the ThermaCool(TM) product line,
developing a commercially viable manufacturing process for shells, and expansion
into new markets for its shell technology would have resulted in substantial
additional losses due to the costs associated with these strategies. Since the
Company's acquisition of Atlas Chemical in July of 1997, the Company has taken a
more long-term approach to the development of its shell technologies. This
present strategy anticipates a more systematic introduction of new coating
products utilizing its technologies as a supplement to the conventional paint
and coating products offered by Atlas Chemical to its distribution channel.
Management believes this more prudent approach to development will further
enhance the Company's long-term business prospects.
Although the Company has not yet generated sufficient revenues from its
operations to be profitable, management anticipates that its systematic approach
of introducing its ThermaCool(TM) product line, coupled with the revenue base
and established marketing and distribution channels of Atlas Chemical, will
yield profitable results in fiscal year 1998.
The Company will continue to incur losses until it is able to increase sales,
expand its product lines, and increase its distribution capabilities
sufficiently to offset ongoing operating and expansion costs.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenues
Total revenue for the ten month period ended September 30, 1997, was $1,036,376
compared to $615,845 for the twelve month period ending November 30, 1996, which
represents an increase of $420,531, or 68%. The increase was primarily the
result of the sales contribution of its wholly owned subsidiary which was
acquired on July 28, 1997 and provided approximately two months of operating
activity for this fiscal year.
Cost of Sales
Cost of sales for the fiscal year ended September 30, 1997, increased 71% to
$675,085 from $394,867 in the fiscal 1996 ending November 30, 1996. Cost of
sales as a percentage of sales increased from 64.1% to 65.1 % from 1996 to 1997.
This increase is attributed to higher costs associated with the Atlas Chemical
business that was acquired during July 1997. Recently, Atlas has experienced
lower gross profit margins on its product lines, in part, because few new
products were introduced to its customers over the last several years.
Management intends to introduce its ThermaCool(TM) products to the established
customer base of Atlas, stimulating new sales and thereby improving the gross
profit margin for this division of the Company.
Selling, General and Administrative Expenses
For the period ended September 30, 1997, total selling, general and
administrative expenses were $1,500,517 as compared to $1,280,339, for the
fiscal year ended November 30, 1996, a 17% increase. This increase is attributed
to the additional expense of the Atlas Chemical operation for the ownership
12
<PAGE>
period since the Company's acquisition of that business. Management anticipates
that it will reduce overhead expenses as it reduces duplicate costs incurred at
its Holiday and Miami locations.
In an effort to streamline operations and cut costs, management closed the
Sarasota location in January 1997. The effect of this closure has resulted in a
reduction of $10,000 per month in the Company's operating costs. In addition to
this retail store closure, the Company also closed its executive offices in
Tampa, Florida and relocated all operations to its manufacturing facility in
Holiday, Florida. As part of this restructuring, management incurred expenses
relating to severance agreements with employees, lease termination payments, and
additional expenses for the relocations which were substantially complete by
January 31, 1997.
Interest Expense
Interest expense decreased 20%, or $41,517 to $165,630 for the fiscal period
ending September 30, 1997 from $207,147 in the previous fiscal year ending
November 30, 1996. Although the recent fiscal year was a ten month period, the
primary reduction in interest charges is attributed to the payoff of all the
Company's indebtedness following the public offering that was completed on March
19, 1997. The Company reduced its debt from approximately $1.9 million at
November 30, 1996 to approximately $98,500 at September 30, 1997.
Net Loss
The net loss and the net loss per share were $1,037,730 and $0.47 per share
respectively, for the period ended September 30, 1997, as compared to a net loss
and net loss per share of $1,033,553 and $1.34 per share respectively, for
fiscal year 1996. The loss was a slight increase of $4,177 over the previous
fiscal year, but the loss per share was 65% less due to the greater number of
shares outstanding as a result of the Company's successful IPO during the fiscal
period. The fiscal period ending September 30, 1997 was a ten month period. On a
weighted average basis, there were 2,217,106 shares outstanding for fiscal
period ending September 30, 1997 as compared to 771,154 shares outstanding for
fiscal year ending November 30, 1996, a 188% increase.
Acquisition of Atlas Chemical Co.
On July 29, 1997, the Company acquired Atlas Chemical Co., of Miami, Florida,
through a purchase of all of its common stock. Atlas is a manufacturer and
distributor of paint and coating products that was established in 1919. The
Company anticipates that expansion of its new product sales will benefit from
the established marketing and distribution channels that Atlas has in place. For
its fiscal year ending June 30, 1997, Atlas Chemical had revenues of $2.4
million and experienced a net loss of $68,007.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenues
Total revenue for the year ended November 30, 1996, was $615,845 compared to
$43,691 for the same period of 1995, which represented an increase of $583,154.
The increase was a result of expanded sales of paint products and coatings
produced by the Company's paint manufacturing facility acquired in the 1995
fiscal year. The increased sales were a direct result of increased marketing
efforts and production capabilities.
13
<PAGE>
Selling, General and Administrative Expenses
For the year ended November 30, 1996, total selling, general and administrative
expenses were $1,280,339, as compared to $376,919 for the same period of the
previous year, an increase of $903,420. The increase was due to expenses
incurred with the initial production of the Company's proprietary products in
its newly acquired manufacturing facility, expenses incurred in relation to the
refinement of the formulations of the paint and paint coatings being
manufactured, as well as costs associated with increased marketing efforts,
staffing and other expenses associated with the Company's expanded operations.
In June 1996, the Company opened a new retail location in Sarasota, Florida
based upon the prospects of completing a public offering in the near term. Due
to the failure of the prior offering, the Company experienced negative cash
flow. In an effort to streamline operations and cut costs, management closed the
Sarasota location in February 1997. The effect of this closure is an anticipated
reduction of $10,000 per month in the Company's operating costs. In addition to
the above retail store closure, the Company also closed its executive offices in
Tampa, Florida and relocated all operations to the manufacturing facility in
Holiday, Florida.
Net Loss
The net loss and the net loss per share were $1,033,553 and $1.34, respectively,
for the year ended November 30, 1996, as compared to a net loss and net loss per
share of $314,857 and $.50, respectively, for the same period of 1995. The
increase in loss is, in part, attributed to a Company instituted marketing
campaign for the Sunbelt region of the United States.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its capital requirements and its business
operations, including product development activities with funds provided by the
sale of its securities and from borrowings. On March 19, 1997, the Company
closed a public offering of 1,375,000 Units, each Unit consisting of one share
of Common Stock, $.0001 par value, and one Series A Redeemable Common Stock
Purchase Warrant at a price of $4.00 per Unit. With the successful public
offering completed in March 1997, the Company was able to repay substantially
all of its indebtedness and utilize the remainder of this funding for the
acquisition of Atlas Chemical Co. of Miami, Florida, the initiation of its self
manufacture of micro-shells for its internal needs, and for working capital
purposes.
During the fiscal period ending September 30, 1997, certain holders of bridge
loan financing exchanged the Company's convertible debt obligations, including
accrued interest, in the amount of approximately $640,000, into its common
stock. The Company satisfied substantially all of the balance of its bridge loan
obligations through repayment from the proceeds of the public offering and the
undertaking of the Company's chief executive officer to personally assume
certain obligations. As was anticipated with this undertaking of the Company's
chief executive officer, the Company advanced funds in the net amount of
approximately $450,000 to this officer to immediately repay these obligations
pending the sale of securities owned by this officer subsequent to the public
offering. The Company obtained a security interest in this common stock pending
such sale. The sale of these securities has not taken place and the funds
advanced for repayment of this debt remains a note receivable to the Company.
14
<PAGE>
The Company continues to experience operating losses, although the public
offering has resulted in improvements in the Company's net working capital and
stockholders' equity that now are $334,911 and $2,428,090 for the fiscal year
ending September 30, 1997 as compared to deficits of $2,444,417 and $1,363,939
at November 30, 1996, respectively. The Company has historically not generated
sufficient revenues from operations to self-fund its capital requirements. The
Company alleviated its working capital deficit and obtained much needed capital
from its public offering. With its present business strategy, management
believes it is focusing on the key elements necessary to the Company to be both
profitable and successful over the long-term. Management has adopted this
present strategy and is focused on its successful implementation. Management
will arrange for the financial resources, if necessary, to properly execute its
plan.
In the opinion of management, the Company has sufficient working capital to meet
its planned needs for the next twelve months. However, the Company will require
additional capital and substantial revenues from the sale of ThermaCool(TM)
products in order to fund a substantial growth in operations over the next
twenty-four months. Management believes it will be successful in obtaining
future financing.
On January 5, 1998, NASD Regulation, Inc. announced that a complaint was issued
on December 23, 1997 charging Monroe Parker Securities, Inc. and certain of its
officers with price manipulation and excessive markups in the trading of Seven
Madden, Ltd. and fraud in the sales of securities of United Leisure. Neither
firm is affiliated with the Company. The complaint asks for restitution to
defrauded investors and potential sanctions that may include a fine, suspension,
individual bar, or firm expulsion from the NASD. Management believes there will
be no adverse effect for the Company relating to these allegations against
Monroe Parker Securities, Inc.
Monroe Parker Securities, Inc. was the Company's investment banker and
underwriter for the public offering that was concluded on March 19, 1997. The
underwriter was granted an appointee to the board of directors as a condition
for this undertaking. During December, Monroe Parker ceased substantive market
making activities in the Company's common stock. Consequently, the price of the
stock declined from about $4 to a low of $.50. On January 9, 1998, the price of
the common stock closed at $2.75. On December 19, 1997, Stephen Drescher, who
was the Monroe Parker designee to the Company's board of directors, resigned
effective that date.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company believes it will experience stronger demand for its products in the
spring, summer and fall of each year. By directing its marketing efforts to the
warmer states, the Company feels that fluctuations resulting from seasonality
will be minimized.
INFLATION
Inflation has not proven to be a factor in the Company's business since its
inception and is not expected to have a material impact on the Company's
business in the foreseeable future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 appears at page F-1, which appears after
this page.
15
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on April 15, 1998.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on April 15, 1998.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on April 15, 1998.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on April 15, 1998.
16
<PAGE>
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1)(2) CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
A list of the Consolidated Financial Statements filed as part of this
Report is set forth in Item 8 and appears at Page F-1 of this Report;
which list is incorporated herein by reference. The Financial
Statement Schedules and the Report of Independent Auditors as to
Schedules follow the Exhibits.
(a)(3) EXHIBITS.
1.1 Revised Form of Underwriting Agreement*
1.2 Revised Form of Underwriter's Warrants*
1.3 Revised Form of Selected Dealers Agreement*
1.4 [Reserved]
1.5 [Reserved]
1.6 Executed Escrow Agreement and Amendment
thereto entered into by First of America, Bank of Michigan, N.A.,
the Company and the Underwriters*
3.1 Certificate of Incorporation and Amendment to Certificate of
Incorporation of the Company*
3.1(a) Certificate of Amendment to Certificate of Incorporation to
reflect 1 for 10 reverse stock split*
3.1(b) Form of Certificate of Amendment to Certificate of Rights,
Designation and Preferences of Series A Preferred Stock*
3.2 Bylaws of the Company*
3.3 Amendment to Bylaws*
4.1 Specimen of Common Stock Certificate*
4.2 Specimen of Warrant Certificate*
4.3 Revised Form of Warrant Agreement*
4.4 Conversion Notice and Election Form for Convertible Note Holder*
5.1 Opinion of Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A. as to
legality of issuance of Units*
17
<PAGE>
10.0 Employment Agreement (4/4/96) John Pidorenko*
10.0(a) Employment Agreement (4/4/96) John Trusty*
10.0(b) Form of Convertible Note*
10.0(c) Trademark Registration for ThermaCool(TM) *
10.0(d) Published International Patent Application*
10.0(e) Stock Option Plan*
10.0(f) Asset Purchase Agreement for Darling Paint and Coatings
effective November, 1995*
10.0(g) Lease for Executive Offices*
10.0(h) Lease for Darling Paint*
10.0(i) Lease for Sarasota Store*
10.0(j) Form of Promissory Note (3/6/96)*
10.0(k) Stock Purchase Agreement between the Stockholders of Atlas
Chemical Co. and the Issuer effective August 1, 1997**
23.1 Consent of Cherry, Bekaert & Holland, C.P.A.'s, Clearwater, Florida
--------------------------
* Previously filed under cover of Form SB-2 (SEC File No. 333-22001).
**See Form 8-K filed August 7, 1997 via EDGAR.
(b) Reports on Form 8-K
(i) Form 8-K filed August 7, 1997 containing the Stock Purchase Agreement
between the Issuer and the stockholders of Atlas Chemical Co.
(ii) Form 8-K/A filed October 15, 1997 containing the audited financial
statements of Atlas Chemical Co. and related pro-forma financial
information.
18
<PAGE>
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.
Date: January 13, 1998 By: /s/ John Pidorenko
_____________________
John Pidorenko
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John Pidorenko President and Chief Executive
_______________________ Officer (Principal Executive January 13, 1998
John Pidorenko Officer) and Chairman of
the Board
/s/ Gerald Couture Vice President and Chief
_______________________ Financial Officer (Principal January 13, 1998
Gerald Couture Financial Officer) and Principal
Accounting Officer
/s/ Kendall B. Stiles
_______________________ Director January 13, 1998
Kendall B. Stiles M.D.
19
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND NOVEMBER 30, 1996
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONTENTS
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets F-2 & F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 TO F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ThermaCell Technologies, Inc.
Holiday, Florida
We have audited the accompanying consolidated balance sheets of ThermaCell
Technologies, Inc. and Subsidiary as of September 30, 1997 and November 30, 1996
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the periods then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ThermaCell
Technologies, Inc. and Subsidiary as of September 30, 1997 and November 30, 1996
and the results of its operations and its cash flows for the periods then ended
in conformity with generally accepted accounting principles.
Clearwater, Florida /s/ Cherry, Bekaert & Holland, L.L.P.
December 19, 1997
except for Note 19 as to which
the date is January 5, 1998
F-1
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, November 30,
1997 1996
------------------ ------------------
------------------ ------------------
<S> <C> <C>
Current assets
Cash $ 580,522 $ 3,512
Notes receivable - 213,750
Accounts receivable
Trade, net of allowance for uncollectible accounts
of $90,147 for 1997 and $21,000 for 1996 384,351 64,006
Officers - 4,637
Other 1,676 6,000
------------------ ------------------
------------------ ------------------
386,027 74,643
------------------ ------------------
------------------ ------------------
Inventories 410,972 150,872
Prepaid expenses and other 8,886 14,018
------------------ ------------------
------------------ ------------------
Total current assets 1,386,407 456,795
------------------ ------------------
------------------ ------------------
Property and equipment 697,671 322,979
Less accumulated depreciation 86,773 41,060
------------------ ------------------
------------------ ------------------
610,898 281,919
------------------ ------------------
------------------ ------------------
Other assets
Restricted cash - 15,000
Deposits 14,795
Deferred offering costs - 297,648
Deferred income tax benefit, net 631,372 337,350
Goodwill, net 819,199 75,433
Other intangibles, net 80,004 73,128
------------------ ------------------
------------------ ------------------
1,545,370 798,559
------------------ ------------------
------------------ ------------------
Total assets $ 3,542,675 $ 1,537,273
================== ==================
================== ==================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30, November 30,
1997 1996
------------------ ------------------
------------------ ------------------
<S> <C> <C>
Current liabilities
Accounts payable $ 551,572 $ 444,537
Accrued expenses 277,192 175,696
Accrued payroll and payroll taxes 187,321 223,156
Current maturities of long-term debt
Notes payable 18,434 -
Capital lease obligations 16,977 -
Bridge financing - 1,898,500
Stockholders - 135,000
Other - 24,323
------------------ ------------------
------------------ ------------------
Total current liabilities 1,051,496 2,901,212
Long-term debt, net of current maturities
Notes payable 41,856 -
Capital lease obligations 21,233 -
------------------ ------------------
------------------ ------------------
Total long-term debt, net of current maturities 63,089 -
------------------ ------------------
------------------ ------------------
Total liabilities 1,114,585 2,901,212
------------------ ------------------
------------------ ------------------
Stockholders' equity
Preferred stock, par value $.0001
5,000,000 shares, authorized, issued
and outstanding 500 500
Common stock, par value $.0001
Authorized 20,000,000 shares,
outstanding 3,021,139 and 869,899 shares,
1997 and 1996, respectively 301 87
Additional paid-in capital 5,564,319 184,314
Deduct notes receivable associated with stockholder loan (550,460) -
Accumulated deficit (2,586,570) (1,548,840)
------------------ ------------------
------------------ ------------------
Total stockholders' equity 2,428,090 (1,363,939)
------------------ ------------------
------------------ ------------------
Total liabilities and stockholders' equity $ 3,542,675 $ 1,537,273
================== ==================
================== ==================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the periods ended
----------------------------------------
September 30, November 30,
1997 1996
---------------- --------------
<S> <C> <C>
Revenue
Sales $ 1,036,376 $ 615,845
Less cost of sales 675,085 394,867
---------------- --------------
Gross profit 361,291 220,978
Selling, general and administrative
expenses 1,500,517 1,280,339
---------------- --------------
Loss from operations (1,139,226) (1,059,361)
---------------- --------------
Other income (expense)
Commissions (35,000) -
Interest income 50,764 24,763
Interest expense (165,630) (207,147)
Other (7,412) (3,500)
---------------- --------------
Total other income (expense) (157,278) (185,884)
---------------- --------------
Loss before income taxes (1,296,504) (1,245,245)
Income taxes
Deferred income tax benefit 258,774 211,692
---------------- --------------
Net loss $ (1,037,730) $ (1,033,553)
================ ==============
Loss per common share $ (0.47) $ (1.34)
================ ==============
Weighted average number of
common shares outstanding 2,217,106 771,154
================ ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
--------------------- -----------------------
--------------------- -----------------------
Number of Number of Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ -------- ---------- ------------ ------------ ----------- -------------
------------ -------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance November 30, 1995 667,472 $ 66 5,000,000 $ 500 $ 184,327 $ (515,287) $ (330,394)
Issuance of common stock as incentive to
employees 19,000 2 - - (2) - -
Issuance of stock as a perquisite for
providing financing/capital 153,227 16 - - (7) - 9
Issuance of stock to a promoter as a
perquisite 20,000 2 - - (2) - -
Issuance of stock as a credit for
services 10,200 1 - - (1) - -
Net loss for year ended
November 30, 1996 - - - - - (1,033,553) (1,033,553)
-- -- -- -- -- ----------- -----------
Balance November 30, 1996 869,899 $ 87 5,000,000 $ 500 $ 184,315 $(1,548,840) $(1,363,938)
Issuance of stock for public offering 1,581,250 158 - 5,433,033 - 5,433,191
Expenses associated with public offering - - - (689,259) - (689,259)
Issuance of stock for bridge loan
conversion 569,990 56 - - 636,230 - 636,286
Note receivable associated with
stockholder loan - - - - (550,460) - (550,460)
Net loss for period ended
September 30, 1997 - - - - - (1,037,730) (1,037,730)
-- -- -- -- -- ----------- -----------
Balance September 30, 1997 3,021,139 $ 301 5,000,000 500 $5,013,859 $(2,586,570) $ 2,428,090
============ ======= =========== =========== ============ ============== ===========
============ ======= =========== =========== ============ ============== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the periods ended
----------------------------------------
September 30, November 30,
1997 1996
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Reconciliation of net loss to net cash
used in operating activities
Net loss $ (1,037,730) $ (1,033,553)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 51,320 30,049
Amortization 19,717 171,930
Loss on sale of capital asset - 3,500
Deferred income tax benefit (258,774) (211,692)
Changes in assets and liabilities, net of effects of acquisition
(Increase) decrease in accounts and notes receivable 196,272 (166,910)
Increase in inventories (23,684) (79,856)
(Increase) decrease in prepaid and other assets 14,314 (13,724)
Increase (decrease) in accounts payable (100,978) 428,356
Increase (decrease) in accrued expenses (36,895) 293,412
---------------- ---------------
Net cash used in operating activities (1,176,438) (578,488)
---------------- ---------------
Cash flows from investing activities
Capital expenditures (323,234) (213,606)
Proceeds from sale of capital asset - 1,500
Acquisition of subsidiary, net of cash acquired (992,421) -
Cost associated with acquisition (59,325) -
Expenditures for patent, net (23,143) -
---------------- ---------------
Net cash used in investing activities (1,398,123) (212,106)
---------------- ---------------
Cash flows from financing activities
Proceeds from issuance of common stock 5,433,191 68
Proceeds from issuance of notes payable 174,692 1,192,822
Principal payments on notes payable (1,529,241) (10,202)
Principal payments on stockholder loans - (68,304)
Principal advances on stockholder loan (550,460) -
Costs associated with obtaining financing (391,611) (396,051)
---------------- ---------------
Net cash provided by financing activities 3,136,571 718,333
---------------- ---------------
---------------- ---------------
Net increase (decrease) in cash 562,010 (72,261)
Cash beginning 18,512 90,773
---------------- ---------------
Cash ending $ 580,522 $ 18,512
================ ===============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Thermacell Technologies, Inc. (the "Company") is a Florida corporation,
incorporated August 12, 1993. The Company is an operating company that has a
wholly owned subsidiary, Atlas Chemical Co., ("Atlas"), that was acquired in
July 1997. The Company manufactures and distributes paint and coatings that
encompass innovative microsphere technologies. The Company, having completed two
acquisitions, also produces conventional paints and coatings at its two
manufacturing facilities. Prior to 1995, the Company was in the developmental
stage. During fiscal year end 1996, significant manufacturing and sales efforts
began ushering the company out of the development stage. Operations previous to
that year were devoted primarily to developing products, raising capital,
obtaining financing, acquiring manufacturing and sales facilities, marketing,
and administrative functions.
On July 28, 1997, the Company acquired all the outstanding common stock,
representing 100% ownership of Atlas, a paint manufacturer and distributor,
located in Miami, Florida. The Company acquired this firm so that it would have
a larger manufacturing facility to both expand production of coatings and to
obtain an established marketing distribution channel which included major
accounts such as Builders Square, Ace Hardware, and Lowes, among others.
INVENTORIES
Inventories are valued using the average cost method. All inventories are stated
at the lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of assets.
INTANGIBLE ASSETS
Intangible assets subject to amortization include organization costs, agreement
not to compete, trademark, goodwill and patents. Organizational costs and
agreement not to compete are being amortized on a straight-line basis over five
years and three years, respectively. Trademark and goodwill are being amortized
on a straight-line basis over ten and fifteen years, respectively. Amounts
attributable to patents are being amortized over the useful life of the patent
(but not more than 20 years) beginning the month the patent becomes effective.
PRINCIPLE OF CONSOLIDATION
The accompanying financial statements include the accounts of Thermacell
Technologies, Inc. and its subsidiary Atlas, after elimination of material
inter-company accounts and transactions.
ACQUISITION OF ATLAS CHEMICAL CO.
In July 1997, the Company, through its wholly owned subsidiary Atlas
Acquisition, Inc., purchased all the outstanding common stock of Atlas of Miami,
Florida for total consideration of $1,000,000. Subsequently, Atlas Acquisition
Inc. and Atlas were merged. The acquisition of these shares was accounted for
under the purchase method of accounting with the excess of the purchase price
over the fair market value of the assets acquired (approximately $760,000)
allocated to goodwill. The Company obtained the funds for this purchase from the
underwriting completed in March 1997.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's cash, trade accounts receivable and
payable approximated their carrying value at year end. It is not practicable to
estimate the fair value of other financial instruments held or owned by the
Company, including, but not limited to, other receivables and payables due to
the lack of readily available information regarding the marketability of such
instruments and the effect of credit risk on the measurement of fair value for
such instruments.
LOSS PER COMMON SHARE
Primary loss per common share equals net loss divided by the weighted average
number of common shares outstanding. The convertible securities are not included
in the fully diluted earnings per share calculation for September 30, 1997 and
November 30, 1996 because they are anti-dilutive. There were no convertible
securities at November 30, 1996 as discussed in Note 5. Consequently, there is
no separate presentation of fully dilutive loss per share.
F-7
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ADVERTISING
The Company expenses advertising costs as they are incurred.
INCOME TAXES
Income taxes are accounted for by an asset and liability approach for financial
accounting and reporting purposes. Deferred income taxes are provided based on
the estimated future tax effects of differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities, and are
adjusted for changes in tax laws and tax rates when those changes are enacted.
The provision for income taxes represents the total of income taxes paid or
payable for the current year, plus the change in deferred taxes during the year.
FISCAL YEAR
The Company changed its financial reporting year from a fiscal year ending
November 30 to September 30. The Company also changed the financial reporting
year of its subsidiary from a fiscal year ending June 30 to September 30.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128 "Earnings Per Share." SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential publicly held common stock. Essentially, this standard
replaces the primary EPS and fully diluted EPS presentations under APB Opinion
No. 15 with a basic EPS and diluted EPS presentation. SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997, earlier application is not permitted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15, as well as SFAS No. 47.
There will be no changes to the Company's disclosures pursuant to the adoption
of SFAS No. 129. This statement is effective for financial statements for
periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. The
comprehensive income and its components in a full set of general purpose
financial statements. The comprehensive income and related cumulative equity
impact of comprehensive income items will be required to be disclosed
prominently as part of the notes to the financial statements. The Company will
have no additional disclosures to comply with the requirements of SFAS No. 130.
The statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
NOTE 2--INVENTORIES
Inventories consist of the following at September 30, 1997 and November 30,
1996:
1997 1996
---- ----
Raw materials................................ $ 232,041 $ 76,375
Finished goods (manufactured and purchased).. 178,931 74,497
------- -------
$ 410,972 $ 150,872
======= =======
F-8
<PAGE>
NOTE 3--RESTRICTED CASH
Cash restricted for payment to a former note holder and held in agency by the
Company was $15,000 at November 30, 1996. There were no cash restrictions at
September 30, 1997.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1997 and
November 30, 1996:
1997 1996
---- ----
Furniture and fixtures............. $ 64,889 $ 38,233
Equipment.......................... 389,816 255,473
Transportation equipment........... 174,158 26,023
Leasehold improvements............. 68,808 3,250
-------- --------
Total cost......................... 697,671 322,979
Accumulated depreciation........... (86,773) (41,060)
-------- --------
Property and equipment, net........ $ 610,898 $ 281,919
======== ========
NOTE 5--BRIDGE FINANCING
In September 1995, the Company commenced a private placement offering of
securities in the form of convertible unsecured notes in order to obtain funds
to be used for working capital, to pay operating expenses, to acquire a
complementary paint company or equipment necessary to manufacture the Company's
insulative coatings, and to pay the organizational and underwriting costs to be
incurred in an initial public offering of the Company's stock. A second offering
of unsecured notes and common stock was commenced January 1996 to obtain
additional funds for the purposes stated above. The selling agents received up
to ten percent (10%) of the amounts raised.
Included in notes payable at November 30, 1996 is $1,898,500, representing the
aggregate amount raised by the selling agents through the issuance of the
securities under private placement offerings described above. The notes bore
interest at the rate of twelve percent (12%), with principal and interest due on
the earlier of the date of the closing of the public offering or one year from
the date of the notes that were executed during the period October 15, 1995
through July 26, 1996. The notes contain a provision for penalty upon default.
The notes were convertible, at the option of the holder, to an amount of common
stock based between 50% to 60% of the price of the shares of the Company's
common stock offered in the public offering. The option to convert was
conditioned upon the closing of the initial public offering of the Company's
stock, At November 30, 1996, $505,000 of these notes were in default.
Following the public offering that was completed in March 1997, all bridge
financing indebtedness was either repaid with full interest or converted into
the common stock of the Company.
NOTE 6--RELATED PARTY TRANSACTIONS
The Company received $149,287 in legal services from a law firm that is a
stockholder and had an account payable of $24,287 and $110,470 at September 30,
1997 and November 30, 1996, respectively.
Notes receivable totaling $550,460 at September 30, 1997 are from an officer and
stockholder of the Company. These are demand notes bearing interest at 5%. One
note, for approximately $450,000, resulted from the assumption of certain
obligations by the President of the Company prior to the underwriter agreeing to
a undertake the public offering that was consummated in March 1997. It was
anticipated at that time that the President would sell common stock in that
offering. The underwriting firm did not complete this undertaking and
consequently the Company advanced funds to meet these maturing obligations,
irrespective of the sale of these securities. A security interest in these
securities was perfected by the Company as collateral for these demand notes.
Future sale of the officer's common stock is anticipated to repay the advance of
funds. The note receivable has been presented as a reduction in stockholders'
equity in these financial statements.
Monroe Parker Securities, Inc. was the Company's investment banker and
underwriter for the public offering that was concluded on March 19, 1997. The
underwriter was granted an appointee to the board of directors as a condition
for this undertaking. During December 1997, Monroe Parker ceased substantive
market making activities in the Company's common stock. On December 19, 1997,
Stephen Drescher, who was Monroe Parker designee to the Company's board of
directors, resigned effective that date.
F-9
<PAGE>
NOTE 7--CAPITAL LEASES
The Company acquired a phone system, a truck and an automobile under the
provisions of long-term leases. For financial reporting purposes, minimum lease
payments relating to the phone system and vehicles have been capitalized. Two of
the leases expire in 1999, with the third expiring in 2000. The leased property
under capital leases as of September 30, 1997 has a cost of $ 55,826,
accumulated amortization of $17,305, and a net book value of $38,521.
Amortization of the leased property is included in depreciation expense.
The future minimum lease payments under the capital leases and the net present
value of the future minimum lease payments at September 30, 1997 are as follows:
Total minimum lease payments $ 42,577
Less amount representing interest 4,367
-------
Present value of net minimum lease payments 38,210
Less current maturities 16,977
-------
$ 21,233
=======
NOTE 8--LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1997 November 30, 1996
<S> <C> <C>
10.35% note due in 60 monthly installments of $525 including interest,
through October 2001, collateralized by vehicle $ 20,835 $ --
9.5% note due in 60 monthly installments of $589,including interest,
through October 22, 2002, collateralized by vehicle 26,239 --
9.5% note due in 60 monthly installments of $300, including interest,
through September 1999, collateralized by vehicle 7,500 --
9.5% note due in 36 monthly installments of $597, including interest,
through July, 1998, collateralized by vehicle 5,716 --
------ ------
60,290 --
Less current maturities 18,434 --
------ ------
$ 41,856 $ --
====== ======
</TABLE>
Maturities of long-term debt are as follows:
1998 $ 18,434
1999 13,665
2000 11,410
2001 12,264
2002 4,517
------
$ 60,290
======
NOTE 9--OPERATING LEASES
The Company leases a building, office space, office equipment, and a vehicle
under operating leases. These leases expire at various dates through 2002.
Rental expense under these leases was $100,944 and $52,216 for 1997 and 1996,
respectively. The following is a schedule by years of minimum rentals under the
above lease agreements as of September 30, 1997.
Year ending September 30,
1998...............................$ 98,583
1999...............................$ 90,262
2000...............................$ 124,621
2001...............................$ 124,871
2002...............................$ 111,825
F-10
<PAGE>
NOTE 10--STOCK TRANSACTIONS
In April 1996, the Company effected a one-for-ten reverse stock split and
increased the number of common shares authorized from 10,000,000 shares to
20,000,000 shares
The Company has one employment contract that provides for granting shares of
stock for years of service to an officer and key employee. The Company's
president was awarded options exercisable for five years that entitled him to
acquire up to 500,000 shares of the Company's common stock at a price of $4.00
per share. In addition, the Company from time to time grants stock incentive
awards to officers and other key employees. There was one award of 200,000
shares at $4.00 per share to the chief financial officer of the Company during
fiscal year ending September 30, 1997. There were no awards outstanding at
September 30, 1997 or November 30, 1996.
During the period ended September 30, 1997, the Company issued 1,581,250 shares
of common stock as part of its public offering for total net consideration of
$4,743,832 after deducting expenses associated with the offering. In addition,
569,990 shares of common stock were issued for consideration of $636,286, as
part of a debt-to-equity conversion option for bridge loan holders.
NOTE 11--RESEARCH AND DEVELOPMENT COSTS
Research and development cost included in the statements of operations totaled
$12,833 and $9,500 for the periods ended September 30, 1997 and November 30,
1996, respectively.
NOTE 12--SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $ 48,408 and $13,198 for the periods ended September 30,
1997 and November 30, 1996, respectively. In addition, certain bridge loan
holders converted their debt obligations into common stock for consideration of
$636,286.
NOTE 13--CONCENTRATION OF CREDIT RISK
The Company operates from two locations in Florida and manufactures and sells
paint and related products. The Company extends credit to its customers
substantially without collateral. The business operations are influenced by the
general economic conditions of the surrounding area.
The Company maintains its cash accounts primarily with one bank located in
Holiday, Florida. The total cash balances are insured by the F.D.I.C. up to
$100,000. The Company had cash balances on deposit at September 30, 1997 that
exceeded the balance insured by the F.D.I.C. in the amount of $462,481. The
Company does not anticipate any losses related to the balances not insured by
the F.D.I.C.
NOTE 14--ACQUISITION OF A PAINT MANUFACTURING COMPANY
On July 28, 1997, the Company acquired all the outstanding common stock,
representing 100% ownership, of Atlas, a paint manufacturer and distributor,
located in Miami, Florida. The total purchase price of $1,000,000 was tendered
with $800,000 paid in cash at the time of closing and $200,000 held in escrow
until the audited financial statements of Atlas for the fiscal year ending June
30, 1997 were issued. These financial statements have been issued. Disbursement
of the balance of the escrow funds is anticipated in January, 1998 less an
adjustment of approximately $25,000.
The operating results of Atlas from July 29, 1997 through September 30, 1997
have been included in the Company's statements of operations for the ten months
ended September 30, 1997. Had a full year of operations of Atlas, based upon its
June 30 year end, been included in the Company's financial statements for the
periods ended September 30, 1997 and November 30, 1996, the balance sheet at
November 30, 1996 and the statement of operations, for the periods then ended,
would have been as follows on a pro forma basis:
F-11
<PAGE>
NOTE 14--ACQUISITION OF A PAINT MANUFACTURING COMPANY (continued)
<TABLE>
<CAPTION>
1996 (Unaudited)
--------------------------------------------------------------------------------
-------------------------------- -------------------------- --------------------
ThermaCell Atlas Total
-------------------------------- -------------------------- --------------------
<S> <C> <C> <C>
Total assets $ 1,537,273 $ 803,103 $ 2,340,376
Total liabilities 2,901,212 418,342 3,319,554
Total shareholders' equity (1,363,939) 384,761 (979,178)
(deficit)
Total liabilities & shareholders' $ 1,537,273 $ 803,103 $ 2,340,376
equity
-------------------------------- -------------------------- --------------------
-------------------------------- -------------------------- --------------------
-------------------------------- -------------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
1997 (Unaudited)
-------------------------------------------------------------------------------------------
-------------------------------- -------------------------- -------------------------------
ThermaCell Atlas Total
-------------------------------- -------------------------- -------------------------------
<S> <C> <C> <C>
Net sales $ 684,459 $ 2,399,103 $ 3,083,562
Cost of sales 394,235 1,727,994 2,122,229
-------------------------------- -------------------------- -------------------------------
Gross profit 290,224 671,109 961,333
Selling, general & adm. 1,299,092 777,109 2,076,201
Interest expense (164,987) (4,031) (169,018)
Other expense (35,000) (4,602) (39,602)
Other income 56,061 19,056 75,117
-------------------------------- -------------------------- -------------------------------
-------------------------------- -------------------------- -------------------------------
Total other income (expense) (143,926) 10,423 (133,503)
-------------------------------- -------------------------- -------------------------------
-------------------------------- -------------------------- -------------------------------
Loss before income taxes (1,152,794) (95,577) (1,248,371)
Deferred income tax benefit 229,995 27,570 257,565
Net loss ($ 922,799) ($ 68,007) ($990,806)
================================ ========================== ===============================
($0.45)
===============================
Shares outstanding 2,217,106
===============================
</TABLE>
F-12
<PAGE>
NOTE 14--ACQUISITION OF A PAINT MANUFACTURING COMPANY (continued)
<TABLE>
<CAPTION>
1996 (Unaudited)
------------------------ ----------------------- ----------------------
ThermaCell Atlas Total
------------------------ ----------------------- ----------------------
<S> <C> <C> <C>
Net sales $ 615,845 $ 2,699,375 $ 3,315,220
Cost of sales 394,867 1,936,444 2,331,311
------------------------ ----------------------- ----------------------
Gross profit 220,978 762,931 983,909
Selling, general & adm. 1,280,339 790,987 2,071,326
Interest expense (207,147) (8,281) (215,428)
Other (3,500) (5,397) (8,897)
Other income 24,763 1,266 26,029
------------------------ ----------------------- ----------------------
Total other income (expense) (185,884) (12,412) (198,296)
------------------------ ----------------------- ----------------------
------------------------ ----------------------- ----------------------
Loss before income taxes (1,245,245) (40,468) (1,285,713)
Deferred income tax benefit 211,692 7,679 219,371
------------------------ ----------------------- ----------------------
Net loss ($1,033,553) ($32,789) ($1,066,342)
======================== ======================= ======================
Loss per common share ($1.38)
======================
Shares outstanding 771,154
======================
</TABLE>
NOTE 15--INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109) "Accounting for Income Taxes", the Company recorded deferred tax assets to
reflect the future tax benefits of financial operating loss carry-forwards
incurred in 1997 and 1996.
The Company has a net operating loss carry-forward of $3,171,475 at September
30, 1997 that expires in 2009 through 2012. Management's determination of an
adequate valuation allowance is based upon its current estimates of future
taxable income. If the Company is unable to generate sufficient taxable income
in the future through operating results, increases in the valuation allowance
will be required through a charge to expense. However, if the Company achieves
sufficient profitability to utilize a greater portion of the deferred tax asset,
the valuation allowance will be reduced through a credit to income.
A valuation allowance is required by SFAS 109 if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The need for the valuation allowance
is evaluated periodically by management. Based on available evidence, management
concluded that a valuation allowance of 50 percent is sufficient at September
30, 1997 and November 30, 1996. Significant components of the Company's net
deferred tax assets are as follows:
1997 1996
------ ------
Deferred taxes.................. $ 1,262,744 $ 674,700
Less valuation allowance...... (631,372) (337,350)
-----------------------
Net deferred tax assets......... $ 631,372 $ 337,350
========= =========
Based on management's assessment, it is more likely than not that the net
deferred tax assets will be realized through future taxable earnings.
F-13
<PAGE>
NOTE 16--WARRANTS
On March 19, 1997, 1,581,250 units of the Company's securities (each unit
consisting of one share of common stock and one Series A redeemable stock
purchase warrant) were issued to investors at $4.00 per unit. On March 19, 1997,
the underwriter commenced trading of the common stock and warrants separately.
In connection with the public offering, the Company sold to the underwriter
options to purchase 137,500 units (the "underwriter warrants") of the Company's
securities, identical to the units publicly sold, at an exercise price of 165%
of the public offering price. The underwriter's units are exercisable at a price
per unit of $6.00 subject to certain adjustments, until March 12, 2001, when
they expire.
The underwriter's warrants contained in the underwriter's units underlying the
underwriter's options contain certain registration rights and anti-dilution
provisions. The holders of the underwriter's warrants have no voting, dividend
or other rights as shareholders of the Company with respect to the shares
underlying the warrants.
NOTE 17--BUSINESS STRATEGY AND OPERATIONAL PLAN
The Company has historically been unprofitable, primarily because it was a
development stage enterprise whose activities required significant expenditures
to develop its business concept, opportunities, products, and operations. With
the Atlas acquisition, completed in July 1997, and with the proceeds of the
successful underwriting completed in March 1997, management has initiated a
business strategy and operational plan that include the following essential
elements: (i) achieve profitability for fiscal year 1998 by restructuring
operations and consolidating production facilities; (ii) begin production of
limited quantities of microshells to provide for internal requirements over the
next twelve to eighteen months; (iii) expand sales of conventional paint and
coating products through the channel of distribution available from the Atlas
acquisition; and (iv) initiate a timely marketing program for ThermaCool paint
products to demonstrate the benefits of this new technology without the Company
depending on ThermaCool sales for its near-term profitability. With its present
business strategy, management believes it is focusing on the key elements
necessary to the Company to be both profitable and successful over the
long-term. Management has adopted this present strategy and is focused on its
successful implementation. Management will arrange for the financial resources,
if necessary, to properly execute its plan.
In the opinion of management, the Company has sufficient working capital to meet
its planned needs for the next twelve months. However, the Company will require
additional capital and substantial revenues from the sale of ThermaCool in order
to fund a substantial growth in operations over the next twenty-four months.
Management believes it will be successful in obtaining future financing.
NOTE 18--CONTINGENT LIABILITIES
The Company is involved in two lawsuits in which damages or claims may be
sought. On February 6, 1997, the Company received a letter from the counsel to
the Williams family which owns in the aggregate 21,923 shares of the Company's
common stock which was acquired for an aggregate purchase price of $31,950. The
Williams family claims Mr. Pidorenko fraudulently induced their investment and
the Company is obligated for personal disputes between Mr. Pidorenko and this
family which primarily concern a disagreement over a purchase of a personal
residence.
The Company does not believe it is obligated to these individuals for personal
disputes with Mr. Pidorenko. The Williams family has rejected the Company's
request to purchase their shares at their original purchase price. The Company
believes it has meritorious defenses to any legal proceeding that may be
instituted by such individuals. Mr. Pidorenko has agreed to indemnify the
Company against any claims asserted by these parties.
On May 2, 1997, the Company was served with a summons regarding a civil action
filed in the United States District Court, Eastern District of Michigan by IA,
Inc., as plaintiff. The summons alleges the Company, and its president, John
Pidorenko, and Monroe Parker Securities, Inc., the Company's underwriter,
breached a marketing agreement executed by Mr. Pidorenko on March 26, 1992. This
marketing agreement related to technologies developed by IA, Inc. This agreement
contained a confidentiality and non-disclosure clause for technologies
purportedly developed by IA, Inc.
F-14
<PAGE>
NOTE 18--CONTINGENT LIABILITIES (continued)
The Company was not a party to that agreement. The Company believes that it has
not infringed on any patents held by IA, Inc., not withstanding the validity of
such patents and/or their claims. The petition requested various court actions
including a jury trial, but no specific request for damages. The Company intends
to vigorously defend itself in this action. The Company believes it has
meritorious defenses in this matter which is in a preliminary stage and which
will not be resolved for some time. The Company has agreed to indemnify Monroe
Parker Securities, Inc., its underwriter, against any claims asserted by this
party.
The Company, as a result of the acquisition of Atlas, is a party to certain
claims relating to the pollutant tax as defined in Chapter 206, Florida Statutes
that was subsequently repealed. The former shareholders of Atlas have agreed to
personally idemnify the Company from any contingent liability relating to this
matter.
The Company,as a result of the acquisition of Atlas, is a party to certain
claims relating to bankruptcy of Seaboard Chemical Corporation who operated a
facility for treatment, storage and disposal of hazardous substances from 1975
until 1989. The North Carolina Department of Environment, Health and Natural
Resources identified Atlas as one of approximately 2,000 potentially responsible
parties for cleanup of this site. Atlas was classified as a "de minimis"
participant and, as such, has limited cost and liability for site cleanup. The
former shareholders of Atlas have agreed to personally idemnify the Company from
any contingent liability relating to this matter.
NOTE 19--SUBSEQUENT EVENT
On January 5, 1998, NASD Regulation, Inc. announced that a complaint was issued
on December 23, 1997 charging Monroe Parker Securities, Inc. and certain of its
officers with price manipulation and excessive markups in the trading of Steven
Madden, Ltd. and fraud in the sales of securities of United Leisure. Neither
firm is affiliated with the Company. The complaint asks for restitution to
defrauded investors and potential sanctions that may include a fine, suspension,
individual bar, or firm expulsion from the NASD. Management believes there will
be no adverse effect for the Company relating to these allegations against
Monroe Parker Securities, Inc.
F-15
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Periods Ended
September 30, November 30,
---------------- ----------------
1997 1996
---------------- ----------------
Shares outstanding: 3,021,139 869,899
Weighted average shares outstanding 2,217,106 771,154
Net loss $(1,037,730) $(1,033,553)
Net loss per share $ (0.47) $ (1.34)
[LOGO]
January 13, 1998
Board of Directors
ThermaCell Technologies, Inc.
We consent to the use of our report dated December 19, 1997, on
the consolidated financial statements of ThermaCell Technologies,
Inc. and Subsidiary in Form 10-KSB for the period ended September
30, 1997.
Cherry, Bekaert & Holland, L.L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> SEP-30-1997
<CASH> 580,522
<SECURITIES> 0
<RECEIVABLES> 474,498
<ALLOWANCES> 90,147
<INVENTORY> 410,972
<CURRENT-ASSETS> 1,386,407
<PP&E> 697,671
<DEPRECIATION> 86,773
<TOTAL-ASSETS> 3,542,675
<CURRENT-LIABILITIES> 1,051,496
<BONDS> 0
0
500
<COMMON> 301
<OTHER-SE> 2,427,289
<TOTAL-LIABILITY-AND-EQUITY> 3,542,675
<SALES> 1,036,376
<TOTAL-REVENUES> 1,036,376
<CGS> 675,085
<TOTAL-COSTS> 1,500,517
<OTHER-EXPENSES> 157,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,630
<INCOME-PRETAX> (1,296,504)
<INCOME-TAX> 258,774
<INCOME-CONTINUING> (1,037,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,037,730)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
