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 year ended September 30, 1998
[ ] 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.)
1125 Commerce Blvd. Sarasota, Florida 34243
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 358-0306
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 (Fiscal
year)...$2,860,196.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at December 21, 1998 was $6,645,050. The bid price of the common
stock at that date was $1.50.
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 March 16, 1999 are incorporated by
reference into part III of this Form.
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THERMACELL TECHNOLOGIES, INC.
FORM 10-KSB - Index
FOR THE YEAR ENDED SEPTEMBER 30, 1998
PART I Page
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Item 1. Business 1.
Item 2. Properties 7.
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. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11.
Item 7. Consolidated Financial Statements and Supplementary Data 16.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 16.
PART III
Item 9. Directors and Executive Officers of the Registrant 16.
Item 10. Executive Compensation 16.
Item 11. Security Ownership of Certain Beneficial Owners and Management 17.
Item 12. Certain Relationships and Related Transactions 17.
Item 13. 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 which involve risks and uncertainties that 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 Holiday, 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 so that it would have a facility to produce and develop paints and
coatings. 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'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 acquisitions within the paint industry of paint
manufacturers and distributors. Within 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:
(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.
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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 its present paint production assets. 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
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.
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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 that 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.
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.
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MANUFACTURING FACILITIES AND TECHNIQUES
Management has acquired machinery, tooling, a high temperature furnace and other
items necessary to manufacture evacuated shells at its Sarasota, Florida
location. Production of limited quantities of shells sufficient for the
Company's immediate needs is anticipated during fiscal year 1999. Management
will utilize its limited initial production to provide for early demand
expectations. Within the next 12 to 18 months a more substantial facility will
need to be built to provide evacuated shells in quantities greater than
1,000,000 pounds annually. Internal cost estimates, prepared by management,
indicate that the Company will require at least $1,500,000 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 Miami
facility. The Company also continues to produce and sell general paint and
coating products from its acquisition of Atlas Chemical Co. The Company
presently has the capability for paint and coatings 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.
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 million gallons valued at approximately
$450,000,000.
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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.
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, and Holiday, Florida. The
Miami location is adjacent to its manufacturing facilities for traditional
paints and coatings. 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 with other distributors.
There is no assurance that any of these marketing or distribution strategies
will be successful.
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NEW PRODUCT APPLICATIONS AND DEVELOPMENT
The Company presently is focused on the initial production of evacuated shells
that will prove adequate for near term demand of its ThermaCool(TM) products.
Concentration of its present efforts will continue to 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 of 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, 1998, the Company had 28 employees, of whom five are
salaried and the balance are paid hourly. Of these employees, six are located at
the Sarasota facility, two at Holiday, and the balance are at Atlas Chemical in
Miami, Florida. The Company considers its relations with its employees to be
excellent.
ITEM 2. PROPERTIES.
The Company currently leases and occupies 5,100 sq. ft. of space at 1125
Commerce Blvd, in Sarasota, Florida where it maintains its corporate offices and
where it is developing initial production facilities for its evacuated shells.
This lease expires in June 30, 2001. Lease payments are $34,800 each year. The
facility consists of approximately 850 square feet of office space with the
balance being used for warehousing and manufacturing.
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The Company leases and occupies 2,000 sq. ft. of retail space in Holiday,
Florida where it sells and distributes paint and coating products. This lease
expires in September 1999. Current lease payments are $9,075 per year.
The Company leases and occupies 2,763sq. ft. of warehousing and retail space in
Mesa, Arizona where its paint and coatings products are distributed. This lease
expires in March 1999. Lease payments are approximately $10,800 per year.
The Company 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 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
Parker Securities, Inc., its underwriter, against any claims asserted by this
party.
On or about February 11, 1998, Mr. Kevin Horrell filed an amended complaint
against the Company and Mr. Pidorenko, the Company's president. The previous
complaint had been dismissed in the Circuit court of the 12th Judicial Circuit,
in and for Sarasota County, Florida. Mr. Horrell alleges that he is due certain
unrestricted securities of the Company in connection with prior financing
activities. Mr. Horrell alleges breach of contract, fraud in the inducement of a
contract and violations of Rule 10b-5. The Company believes it has meritorious
defenses in this matter which is in the preliminary stage and is prepared to
vigorously defend in this action.
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.
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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
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Net Proceeds to Company $4,743,933
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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
Stock Warrants
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Bid Bid
1998 Fiscal Year High Low Close High Low Close
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First quarter 5 5/16 1/4 1/2 1 1/16 1/32 1/32
Second quarter 3 7/8 3/4 1 13/16 5/8 1/32 1/4
Third quarter 1 3/4 7/8 7/8 5/8 5/32 5/32
Fourth quarter 7/8 1/4 9/16 5/32 1/16 1/8
As of September 30, 1998, there were approximately 125 holders of record for
common stock and 3 holders of record of the warrants. However, the Company's
management believes that more than 300 individuals beneficially own the
Company's Common Stock as of December 1, 1998.
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. 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 until fiscal year 1996. 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 was not, prior to its Initial Public Offering, 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 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 $3,242,271 at September 30, 1998.
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 and other
acquisitions will position the Company for profitable future operations.
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 1998 COMPARED TO FISCAL PERIOD 1997
Revenues
Total revenue for the year ended September 30, 1998, was $2,860,196 compared to
$1,036,376 for the period ending September 30, 1997, which represented an
increase of $1,823,820, or 176%. The increase was the result of expanded sales
of paint products and coatings produced by the Company's paint manufacturing
facility that included the business obtained in the Atlas Chemical acquisition.
Atlas Chemical was acquired on July 27, 1997; therefore, its revenue
contribution was for a full year for the year ended September 30, 1998.
11
<PAGE>
Cost of Sales
Cost of sales for the fiscal year ended September 30, 1998, increased 181% to
$1,900,043 from $675,085 in fiscal 1997. Cost of sales as a percentage of sales
increased to 66.4% from 65.1 % from 1997 to 1998. This increase is attributed to
a more competitive environment for the Company's traditional paint and coating
products and the sales mix that included higher cost product contributing to
higher cost of sales. Consequently, the gross profit margin decreased to 33.6%
for fiscal year 1998 as compared to 34.9% for the prior fiscal period.
Management expects that introduction of its ThermaCool(TM) products to the
established customer base of Atlas will stimulate new sales and improve the
gross profit margin.
Selling, General and Administrative Expenses
For the year ended September 30, 1998, total selling, general and administrative
expenses were $1,822,741, as compared to $1,500,517 for the previous fiscal
period, an increase of $322,224 or 21%. The increase was due to expenses
incurred with the development of the initial production of the Company's
proprietary products, 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.
Included in the S, G & A expense for the fiscal year ending September 30, 1998
were depreciation and amortization expenses of $235,949 as compared to $71,037
in the ten month period ended September 30, 1997. This 232% increase reflects
both the higher depreciation expense related to the Atlas Chemical acquisition
that included substantial production machinery and equipment and the higher
amortization expense of goodwill also associated with that acquisition.
In June 1998, the Company relocated its corporate offices to 1125 Commerce Blvd,
Sarasota, Florida. With this relocation, the Company phased out manufacture of
paint and coating products in Holiday, having shifted its paint and coatings
production to its Miami facility. The Sarasota location will also house the
Company's production of its microshell manufacturing operations.
Interest Expense
Interest expense decreased 85%, or $140,562, to $25,068 for the fiscal year
ending September 30, 1998 from $165,630 in the previous fiscal period ending
September 30, 1997. The primary reason for this reduction in interest charges is
attributed to the payoff of all the Company's indebtedness that followed the
public offering that was completed on March 19, 1997. The Company has not
incurred any significant debt over the last fiscal year.
Net Loss
The net loss after tax benefit but before dividends on preferred stock was
$614,486 for the year ended September 30, 1998, as compared to a net loss of
$1,037,730 for the period ending September 30 of 1997. During February 1998, the
Company completed a placement of preferred stock bearing an 8% dividend. The
dividend for the fiscal year on this issue amounted to $41,215. There was no
preferred stock outstanding in the year ago period. The basic earnings (net
loss) after dividends on preferred stock, and the basic per share earnings (net
loss) attributable to common share were $655,701 and $0.18, respectively, for
the fiscal year ending September 30, 1998 as compared to a net loss of
$1,037,730 and $.47 per share on the same basis for the period ending September
30, 1997. The decrease in loss is, in part, attributed to the Company's higher
level of sales while holding its selling, general and administrative costs to a
12
<PAGE>
18% increase over the prior fiscal period and benefiting from the substantial
reduction in its interest expense over that prior period. The weighted average
number of common shares outstanding increased to 3,677,183 for the fiscal year
ending September 30, 1998 as compared to 2,217,106 for the prior 1997 period, a
66% increase. This increase had a dilutive effect upon the basic earnings per
share loss.
FISCAL PERIOD 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 period.
Cost of Sales
Cost of sales for the fiscal period ended September 30, 1997, increased 71% to
$675,085 from $394,867 in the fiscal year ended 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.
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 period of the
Company's ownership of that business.
In an effort to streamline operations and cut costs, management closed the
Sarasota retail location in January 1997. The effect of this closure 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 period 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, representing a 188% increase.
13
<PAGE>
Acquisition of Atlas Chemical Co.
On July 28, 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.
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.
On February 5, 1998, the Company was notified by NASDAQ that its listing on the
NASDAQ Small Markets was in violation of the tangible net assets requirements
for continued listing. This present requirement was implemented on August 27,
1997 and required the Company to maintain tangible net assets of $2 million. At
September 30, 1997, the Company did not meet this current requirement. The
Company's deficiency at that time was approximately $391,000.
14
<PAGE>
In anticipation of the new NASDAQ listing requirements, on February 19, 1998,
the Company completed an offering of 1,500 shares of Series B Preferred Stock
pursuant to Regulation S. The placement agent for the offering was London Select
Enterprises, Ltd. The total offering price for the Series B Preferred Stock was
$1,500,000.00. This preferred issue had an 8% yield. Commissions of $180,000,
totaling 12% of the offering price, were paid to the placement agent.
The Series B Preferred Shares were valued at $1,000.00 per share, and upon
conversion, the Series B Preferred Shares converted into common shares of the
Company as is obtained by dividing the aggregate value of the shares "Stock
Price" per share of the conversion shares the lower of 70% of the average
closing bid prices of common shares for the period of five consecutive trading
days immediately preceding the date of conversion of the Series B Preferred
Shares or 70% of the average daily closing bid prices of common shares for the
period of five consecutive trading days immediately preceding the date of
subscription by the holder.
The funds were used for general corporate purposes that included purchase of
equipment for further development of its microshell technologies. This capital
infusion permitted the Company to comply with the new NASDAQ Small Markets
listing requirements.
The Company continues to experience operating losses since its public offering
although the Company's net working capital and stockholders' equity have
increased to $616,709 and $3,167,528 at September 30, 1998 from $334,911 and
$2,428,090 at September 30, 1997, respectively. The Company has historically not
generated sufficient revenues from operations to self-fund its capital
requirements. 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 is optimistic about 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 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.
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. Consequently, the price
of the stock declined from about $4 to a low of $.50. On December 19, 1997,
Stephen Drescher, who was the Monroe Parker designee to the Company's board of
directors, resigned effective that date. Since then, the Company has not
suffered any further consequence of Monroe Parker ceasing operations.
15
<PAGE>
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company believes it will experience stronger demand for its paint and
coatings 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 7. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 7 appears at page F-1, which appears after
this page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. 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 March 16, 1999.
ITEM 10: 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 March 16, 1999.
16
<PAGE>
ITEM 11: 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 March 16, 1999.
ITEM 12: 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 March 16, 1999.
ITEM 13. 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*
17
<PAGE>
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*
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 February 19, 1998 containing information regarding
the Regulation S offering.
(ii) Form 8-K filed December 14, 1998 containing information
regarding the acquisition of American Paints, Inc.
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: December 30, 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 December 30, 1998
John Pidorenko Officer) and Chairman of
the Board
/s/ Gerald Couture Vice President and Chief
- ----------------------- Financial Officer (Principal December 30, 1998
Gerald Couture Financial Officer)
/s/ Jeffrey Kraft Controller
- ----------------------- December 30, 1998
Jeffrey Kraft
/s/ Kendall B. Stiles
- ----------------------- Director December 30, 1998
Kendall B. Stiles M.D.
/s/ Peter Mahovlich
- ----------------------- Director December 30, 1998
Peter Mahovlich
19
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998 AND 1997
F - 1
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
CONTENTS
Page
----
Report of Independent Certified Public Accountants F - 3
Consolidated Balance Sheets F - 4 & F - 5
Consolidated Statements of Operations F - 6
Consolidated Statements of Changes in Stockholders' Equity F - 7
Consolidated Statements of Cash Flows F - 8
Notes to Consolidated Financial Statements F - 9 to F - 21
F - 2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
ThermaCell Technologies, Inc.
Sarasota, Florida
We have audited the accompanying consolidated balance sheets of ThermaCell
Technologies, Inc. and Subsidiary as of September 30, 1998 and 1997 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, 1998 and 1997 and the
results of its operations and its cash flows for the periods then ended in
conformity with generally accepted accounting principles.
/s/Cherry, Bekaert & Holland, L.L.P.
Clearwater, Florida
December 21, 1998
F - 3
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------------ ------------------
<S> <C> <C>
Current assets
Cash $ 67,405 $ 580,522
Accounts receivable
Trade, net of allowance for uncollectible accounts
of $64,227 for 1998 and $90,147 for 1997 314,262 384,351
Notes receivable - trade 52,000 -
Notes receivable - other 76,622 -
Other assets 18,998 1,676
Inventories 489,259 410,972
Prepaid expenses and other 161,308 8,886
------------------ ------------------
Total current assets 1,179,854 1,386,407
------------------ ------------------
Property and equipment 1,141,502 697,671
Less - accumulated depreciation 248,530 86,773
------------------ ------------------
892,972 610,898
------------------ ------------------
Other assets
Deposits 16,266 14,795
Deferred income tax benefit, net 795,309 631,372
Goodwill, net of accumulated amortization
of $75,937 for 1998 and $17,618 for 1997 815,010 819,199
Other intangibles, net of accumulated amortization
of $16,471 for 1998 and $28,276 for 1997 162,469 80,004
------------------ ------------------
1,789,054 1,545,370
------------------ ------------------
Total assets $ 3,861,880 $ 3,542,675
================== ==================
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------------ ------------------
<S> <C> <C>
Current liabilities
Accounts payable $ 445,118 $ 551,572
Accrued expenses 45,396 277,192
Accrued payroll and payroll taxes 13,647 187,321
Current maturities of long-term debt
Notes payable 20,340 18,434
Capital leases 38,644 16,977
------------------ ------------------
Total current liabilities 563,145 1,051,496
------------------ ------------------
Long-term debt, net of current maturities
Notes payable 58,128 41,856
Capital lease obligations 73,079 21,233
------------------ ------------------
Total long-term debt, net of current maturities 131,207 63,089
------------------ ------------------
Total Liabilities 694,352 1,114,585
------------------ ------------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, Series A, par value $.0001
5,000,000 shares, authorized, issued
and outstanding 500 500
Preferred stock, Series B convertible, $1,000 stated value, 8% dividend
Authorized 1,500 shares,
250 issued and outstanding September 30, 1998 250,000 -
Common stock, par value $.0001
Authorized 20,000,000 shares,
5,129,325 and 3,021,139 issued and outstanding, respectively 513 301
Additional paid-in capital 6,612,481 5,564,319
Deduct notes receivable associated with stockholder loan (453,695) (550,460)
Accumulated deficit (3,242,271) (2,586,570)
------------------ ------------------
Total stockholders' equity 3,167,528 2,428,090
------------------ ------------------
Total liabilities and stockholders' equity $ 3,861,880 $ 3,542,675
================== ==================
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Period Ended
-----------------------------------
September 30, September 30,
1998 1997
--------------- -------------
<S> <C> <C>
Revenue
Sales $ 2,860,196 $ 1,036,376
Less cost of sales 1,900,043 675,085
--------------- -------------
Gross profit 960,153 361,291
Selling, general and administrative
expenses 1,822,741 1,500,517
--------------- -------------
Loss from operations (862,588) (1,139,226)
--------------- -------------
Other income (expense)
Commissions - (35,000)
Interest income 40,471 50,764
Interest expense (25,068) (165,630)
Other 68,762 (7,412)
--------------- -------------
.
Total other income (expense) 84,165 (157,278)
--------------- -------------
Loss before income taxes (778,423) (1,296,504)
Income taxes
Deferred income tax benefit 163,937 258,774
--------------- -------------
Net loss $ (614,486) $ (1,037,730)
=============== =============
Basic loss per common share $ (0.18) $ (0.47)
=============== =============
Weighted average number of
common shares outstanding 3,677,183 2,217,106
=============== =============
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock,
Common Stock Preferred Stock, Series B, 8% dividend,
Series A convertible
---------------- ----------------- ------------------ Additional Notes
Number of Number of Number of Paid-in Accumulated Receivable,
Shares Amount Shares Amount Shares Amount Capital Deficit Stockholder Total
--------- ------ --------- ------ --------- ------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 conversions 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 - $ - $5,564,319 $(2,586,570) $(550,460) $2,428,090
Issuance of stock
for payment of services 200,070 20 - - - - 110,015 - - 110,035
Payments associated with
stockholder loan, net - - - - - - - - 96,765 96,765
Issuance of Series B,
convertible preferred - - - - 1,500 1,500,000 (300,000) - - 1,200,000
Exchange of preferred
for common 1,872,874 188 - - (1,250) (1,250,000) 1,249,812 - - -
Dividends of Series B,
convertible preferred 55,242 6 - - - - 28,333 (41,215) - (12,876)
Cancellation of common
shares (20,000) (2) - - - - (39,998) - - (40,000)
Net loss for year ended
September 30, 1998 - - - - - - - (614,486) - (614,486)
========= ====== ========== ======= ========= ======== =========== =========== =========== ==========
Balance September 30, 1998 5,129,325 $ 513 5,000,000 $ 500 250 $ 250,000 $6,612,481 $(3,242,271) $(453,695) $3,167,528
========= ====== ========== ======= ========= ======== =========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F - 7
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period Ended
----------------------------------
September 30, September 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Reconciliation of net loss to net cash
used in operating activities
Net loss $ (614,486) $ (1,037,730)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 161,757 51,320
Amortization 74,192 19,717
Deferred income tax benefit (163,937) (258,774)
Changes in assets and liabilities, net of acquisitions
(Increase) in accounts and notes receivable (58,533) 196,272
(Increase) in inventories (78,287) (23,684)
(Increase) decrease in prepaid and other assets (171,215) 14,314
(Decrease) in accounts payable (106,454) (100,978)
(Decrease) in accrued expenses (418,347) (36,895)
Common stock issued for services 110,035 -
--------------- ---------------
Net cash used in operating activities (1,265,275) (1,176,438)
--------------- ---------------
Cash flows from investing activities
Capital expenditures (387,031) (323,234)
Acquisitions (115,000) (1,051,746)
Expenditures for patent, net (94,267) (23,143)
--------------- ---------------
Net cash used in investing activities (596,298) (1,398,123)
--------------- ---------------
Cash flows from financing activities
Proceeds from issuance of common stock - 5,433,191
Proceeds from issuance of Series B preferred stock 1,500,000 -
Proceeds from issuance of notes payable 140,178 174,692
Principal payments on notes payable (48,487) (1,529,241)
Principal advances on stockholder loan (258,330) (550,460)
Proceeds from payments on stockholder loan 355,095 -
Costs associated with obtaining financing (300,000) (391,611)
Purchase of cancelled common stock (40,000) -
--------------- ---------------
Net cash provided by financing activities 1,348,456 3,136,571
--------------- ---------------
Net increase (decrease) in cash (513,117) 562,010
Cash beginning 580,522 18,512
--------------- ---------------
Cash ending $ 67,405 $ 580,522
=============== ===============
</TABLE>
See notes to consolidated financial statements.
F - 8
<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 paints and coatings that
encompass innovative microsphere technologies. Presently, approximately 93% of
the Company's sales and accounts receivables are generated in Florida with the
remainder in the Mesa, Arizona area. All of its sales and assets are
domestically located. No customer represents more than 10% of its annual sales.
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 of 5 to 10 years.
INTANGIBLE ASSETS
Intangible assets subject to amortization include organizational 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 Chemical Co., after elimination of
material inter-company accounts and transactions.
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, accounts and notes 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.
F - 9
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
BASIC LOSS PER COMMON SHARE
Basic loss per common share equals the total of net loss and preferred stock
dividends divided by the weighted average number of common shares outstanding.
The convertible securities (stock warrants and options) are not included in the
loss per share calculation for September 30, 1998 and September 30, 1997 because
they are anti-dilutive.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising costs
were $46,116 and $75,800 for the periods ended September 30, 1998 and 1997,
respectively.
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.
CHANGE IN FISCAL YEAR
The Company changed its financial reporting year from a fiscal year ending
November 30 to September 30 which became effective for fiscal year ending
September 30, 1997. 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. The company has applied
this standard retroactively to earnings per share in these financial statements
which had no material effect on earnings per share reported in the 1998 and 1997
financial statements.
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.
The required disclosures have been included in these financial statements.
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 related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Adoption of the provisions of this statement had no
material effect on these financial statements.
F - 10
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
n 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. The Company's operations represent a single line of business. Other
required disclosures have been included in these financial statements.
NOTE 2--INVENTORIES
Inventories consisted of the following at September 30:
1998 1997
- -------------------------------------------------------------------------
Raw materials $ 267,846 $ 232,041
Finished goods (manufactured and purchased) 221,413 178,931
----------------------------
$ 489,259 $ 410,972
============================
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1998 1997
- -------------------------------------------------------------------------
Furniture and fixtures $ 125,167 $ 64,889
Equipment 551,319 389,816
Transportation equipment 263,419 174,158
Leasehold improvements 201,597 68,808
----------------------------
1,141,502 697,671
Less accumulated depreciation (248,530) (86,773)
----------------------------
$ 892,972 $ 610,898
============================
Depreciation expense was $161,757 for the year ending September 30, 1998, and
$51,320 for the period ended September 30, 1997.
NOTE 4--RELATED PARTY TRANSACTIONS
The Company received $59,805 in legal services during fiscal year 1998 from a
law firm that is a stockholder and had an account payable of $18,052 and $24,287
at September 30, 1998 and 1997, respectively.
Notes receivable totaling $453,695 and $550,460 at September 30, 1998 and 1997,
respectively 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 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
F - 11
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--RELATED PARTY TRANSACTIONS (continued)
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.
The company received assignment of patent rights involving a heat shield system
which utilizes the company's VaxCellTM technology. The assignor, an employee of
the Company who is related to the principal shareholder, received consideration
of $30,000 for assignment of these rights to the company.
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 the Monroe Parker designee to the Company's board of
directors, resigned effective that date.
NOTE 5--BASIC LOSS PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
For the Year Ending September 30, 1998 For the Period Ending September 30, 1997
--------------------------------------------------------------------------------------
Loss Shares Per Share Loss Shares Per Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
----------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $ (614,486) $ (1,037,730)
Less: Preferred stock dividends 41,215 -
----------------------------------- ------------------------------------------
Income available to common
shareholders $ (655,701) 3,677,183 $ (0.18) $ (1,037,730) 2,217,106 $ (0.47)
=================================== ==========================================
</TABLE>
Certain transactions subsequent to September 30, 1998 will have a significant
effect on future computations of earnings per share (see Note 18).
NOTE 6--CAPITAL LEASES
The Company leases various computer and plant equipment under the provisions of
long-term leases. For financial reporting purposes, minimum lease payments
relating to this equipment have been capitalized. The leased property under
capital leases as of September 30, 1998 has a cost of $159,927, accumulated
amortization of $42,421, and a net book value of 117,506. 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, 1998 are as follows:
1998
- -----------------------------------------------------------
Total minimum lease payments $ 141,698
Less amount representing interest 29,975
--------------
Present value of net minimum lease payments 111,723
Less current maturities 38,644
--------------
$ 73,079
==============
F - 12
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--CAPITAL LEASES (continued)
The following is a schedule by years of minimum lease payments under the above
lease agreements as of September 30, 1998.
1999 $ 55,165
2000 37,941
2001 31,448
2002 13,415
2003 3,729
--------------
$ 141,698
==============
Subsequent to September 30, 1998, the Company entered into a capital lease
agreement for plant equipment for approximately $50,000 over a three year term.
NOTE 7--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C> <C> <C>
10.35% note due in 60 monthly installments of $525 including interest, $ 16,522 $ 20,835
through October 2001, collateralized by vehicle
9.5% note due in 60 monthly installments of $589,including interest, 21,434 26,239
through October 22, 2002, collateralized by vehicle
9.5% note due in 60 monthly installments of $300, including interest, 3,900 7,500
through September 1999, collateralized by vehicle
9.5% note due in 36 monthly installments of $597, including interest, - 5,716
through July 1998, collateralized by vehicle
8.5% note due in 60 monthly installments of $794, including interest, 36,612 -
through May 2003, collateralized by vehicle
--------------------------
78,468 60,290
Less current maturities (20,340) (18,434)
--------------------------
$ 58,128 $ 41,856
==========================
</TABLE>
Maturities of long-term debt are as follows:
1999 $ 20,340
2000 18,676
2001 20,692
2002 12,604
2003 6,156
--------------
$ 78,468
==============
F - 13
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--OPERATING LEASES
The Company leases a building and office space under operating leases. These
leases expire at various dates through 2002. Rental expense under these leases
was $111,153 and $100,944 for 1998 and 1997, respectively. The following is a
schedule by years of minimum rentals under the above lease agreements as of
September 30, 1998.
1999 $ 136,776
2000 157,800
2001 152,247
2002 118,205
--------------
$ 565,028
==============
NOTE 9--RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in the statements of operations totaled
$50,848 and $12,833 for the periods ended September 30, 1998 and 1997,
respectively.
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid totaled $25,068 and $165,630 for the periods ended September 30,
1998 and 1997, respectively.
Common stock was issued in payment of certain services and Series B preferred
stock dividend obligations (see Note 14).
NOTE 11--CONCENTRATION OF CREDIT RISK
The Company operates from three locations in Florida and one location in Arizona
to manufacture and sell its paints and coatings 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.
NOTE 12--ACQUISITIONS
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 for a total purchase price of $1,000,000. This
acquisition is classified as a purchase (or pooling of interests) transaction.
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.
On March 2, 1998, the Company acquired the assets of Ladehoff Paints, Inc., a
paint manufacturer and distributor, located in Mesa, Arizona. The total purchase
price was $115,000. This acquisition is classified as a purchase transaction.
The operating results of Ladehoff from March 2, 1998 through September 30, 1998
have been included in the Company's statements of operations for the year ended
September 30, 1998.
On October 15, 1998, the Company agreed to acquire Sealco Systems, Inc. and
T-Coast Pavers, Inc., two Miami, Florida sealant service applicator enterprises,
which have a total of more than $2 million in revenues. ThermaCell acquired both
businesses in December, 1998 for 300,000 shares of its common stock
F - 14
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--ACQUISITIONS (continued)
valued at $450,000 and an anticipated payment of an additional 300,000 shares
payable over three years. This acquisition is classified as a pooling of
interests transaction.
On November 23, 1998, the Company acquired American Paints, Inc., a Pompano
Beach, Florida paint manufacturer and distributor with $2.5 million in annual
revenues, for 527,000 common shares. This acquisition is classified as a pooling
of interests transaction.
Had a full year of operations of Ladehoff, based upon its December 31 year end,
been included in the Company's financial statements for the year ended September
30, 1998, the statement of operations for the year then ended would have been
according to the table below on a pro forma basis. In addition, the operating
results of Sealco, T-Coast, and American Paints have been included on a proforma
basis in the table below to reflect a full year of operations in ThermaCell's
operating statements at September 30, 1998:
<TABLE>
<CAPTION>
1998 (Unaudited)
---------------------------------------------------------------------
Ladehoff American T-Coast Pavers/ Consolidated
ThermaCell Paints Paints Sealco Systems
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 2,660,717 $ 365,983 $ 2,246,196 $ 1,980,400 $ 7,253,296
Net Income (loss) (620,034) 7,558 209,870 71,280 (331,326)
-------------
Earnings (loss) per Share $ (0.07)
-------------
Shares Outstanding 4,804,183
</TABLE>
Note: Each acquired entity has a 20% tax benefit applied if having a loss; or if
a profit a 20% tax rate.
Had a full year of operations of Atlas, based upon its June 30 year end and
Ladehoff based upon its December 31 year end, been included in the Company's
financial statements for the period ended September 30, 1997, the statement of
operations for the period then ended would have been according to the table
below on a pro forma basis:
1997 (Unaudited)
--------------------------------------------------------
Atlas Ladehoff Consolidated
ThermaCell Chemical Paints
--------------------------------------------------------
Total Revenue $ 684,459 $ 2,399,103 $ 325,638 $ 3,409,200
Net Income (loss) (922,799) (68,007) 3,234 (987,572)
-----------------
Earnings(loss) per
Share $ (0.45)
-----------------
Shares Outstanding 2,217,100
Note: Each acquired entity has a 20% tax benefit applied if having a loss; or if
a profit a 20% tax rate.
NOTE 13--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 1998 and 1997.
The Company has a net operating loss carry-forward of $3,242,271 at September
30, 1998 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
F - 15
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--INCOME TAXES (continued)
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, 1998 and 1997, respectively. Significant components of the Company's net
deferred tax assets are as follows:
1998 1997
- -------------------------------------------------------------------------
Deferred taxes $ 1,590,618 $ 1,262,744
Less valuation allowance (795,309) (631,372)
----------------------------
Net deferred tax assets $ 795,309 $ 631,372
============================
Based on management's assessment, it is more likely than not that the net
deferred tax assets will be realized through future taxable earnings. The amount
of taxable earnings that would be required to realize the deferred tax asset
would be $1,988,273.
The Company's deferred income tax benefits include the following components:
1998 1997
- -------------------------------------------------------------------------
Future net operating loss deductions $ 327,874 $ 517,548
Less allowance for realization (163,937) (258,774)
----------------------------
$ 163,937 $ 258,774
============================
A reconciliation of the income tax benefit computed at the federal statutory
rate and the Company's effective rate follows:
1998 1997
- ---------------------------------------------------------------------
Federal statutory rate $ 264,664 34% $ 440,811 34%
Adjustments - primarily
state income taxes: 63,210 8% 76,737 6%
Allowance for
realization of future benefits (163,937) -21% (258,774) -20%
------------------------------------
====================================
$ 163,937 21% $ 258,774 20%
====================================
F - 16
<PAGE>
NOTE 14--STOCKHOLDERS' EQUITY
Preferred Stock Transactions
On February 19, 1998, the Company completed an offering of 1,500 shares of
Series B Preferred Stock to Thomson Kernaghan & Co., Ltd. pursuant to Regulation
S. The principal placement agent for the offering was London Select Enterprises,
Ltd. The total offering price for the Series B Preferred Stock was
$1,500,000.00. This preferred issue has an 8% yield. This placement allows the
holder to convert such preferred stock into the Company's common stock at the
lower of the common stock bid price five days prior to funding or five days
prior to exercise of the conversion election. As of September 30, 1998,
$1,250,000 of preferred stock was converted into 1,928,116 shares of common
stock, including dividends paid in common stock.
Capital Structure disclosures
Privileges and rights of outstanding preferred stock are summarized as
follows:
Series Series
A B
------- ------
Aggregate liquidation rights,
as of September 30, 1998 $10,000 $250,000
Cumulative dividend rights
(payable in cash or common stock,
at the Company's option) None 8%
Dividends in arrears
(payable as of September 30, 1998) None 12,877
Conversion (to common stock)formulas:
Preferred shares to
Common shares 1 to 4 --
Stated values of
preferred shares to
market value of
Common shares -- 1 to .7
Voting rights (compared with
rights of common shares) .5 None
Class voting majority required to
change privileges and rights 66 2/3% Simple
Pre-emptive right of
approval 66 2/3% None
Aggregate voluntary redemption price None $325,000
The above mentioned Series A conversion rights are contingent upon the company's
generation of positive net income for one quarter (50%) and one year (50%).
F - 17
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--STOCKHOLDERS' EQUITY (continued)
On February 19, 1998, the Company completed an offering of 1,500 shares of
Series B Preferred Stock pursuant to Regulation S. The offering price for such
stock was $1,500,000. Proceeds from the offering, after deducting related
expenses, totaled $1,200,000.
During the year ended September 30, 1998, holders of the Company's Series B
preferred stock exercised the above-mentioned conversion rights, exchanging
1,250 preferred shares for 1,872,874 common shares. The company is currently
negotiating the conversion of the 250 remaining Series B preferred shares.
Common stock transactions
During the period ended September 30, 1997, the Company issued 1,581,250 shares
of common stock as part of its public offering for the total net consideration
of $4,743,932 after deducting expenses associated with this 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.
During the year ended September 30, 1998, certain Series B preferred
stockholders converted their stock to common shares. 55,242 common shares were
issued in payment of $28,339 in dividends on such converted preferred stock.
200,070 common shares (including 125,000 shares issued to a corporate officer),
valued at $110,035, were issued as compensation for services to the Company.
Also, 20,000 common shares, representing paid-in capital of $40,000, were
received and canceled in the settlement of a dispute with a shareholder.
Liabilities, as of September 30, 1998, include employees' compensation of
$17,075, which was settled after year-end through the issuance of 25,000 common
shares.
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 on the common stock and warrants.
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 gave no voting, dividend
or other rights as shareholders of the Company with respect to the shares
underlying the warrants.
Authorized common shares have been reserved for the warrants.
Stock Options
The Company has made awards of incentive common stock options to corporate
officers. Also, in September, 1998, the Company authorized the allocation of
600,000 common shares for a compensatory Section 422A plan for officers and key
employees and awarded options under this plan for 455,000 common shares. Awards
outstanding as of September 30, 1998, are summarized as follows:
F - 18
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--STOCKHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Exercise Year of
Shares price expiration
-------- ----------- -----------
<S> <C> <C> <C>
Incentive awards to corporate
officers - year ended September 30:
1997 700,000 $.50 2002
1998 75,000 .50 2003
Section 422A plan awards:
Corporate officer 285 000 .50 2008
Key employees 170,000 .50 2008
----------
Total awards 1,230,000
==========
</TABLE>
The original exercise price for the 1997 incentive common stock options was
$4.00. This price was modified by the board of directors to $.50 during
December, 1997.
Authorized common shares have been reserved for the specific 1997 and 1998
awards and the plan allocation.
The exercise prices for the stock options exceeded the market price of the
common stock on the date of award. Accordingly, no related compensation cost has
been charged to operations. Due to the limited. public market history of the
Company's common stock, management is unable to estimate the fair value of the
options awarded; however, management believes such fair value was not
significant as of the date of award.
The exercise price of all options exceeded the market price of the Company's
common stock as of September 30, 1998.
NOTE 15--BUSINESS STRATEGY AND OPERATIONAL PLAN
The Company has historically been unprofitable, primarily because of activities
that require significant expenditures to develop its business concept,
opportunities, products, and operations. With the Atlas Chemical, Ladehoff
Paints, and American Paints, and Sealco Systems/T-Coast Pavers acquisitions,
management has followed its business strategy and operational plan that includes
the following essential elements: (i) achieve profitability for fiscal year 1999
by restructuring operations and consolidating production facilities; (ii) begin
production of limited quantities of microspheres to provide for internal
requirements over the next twelve to eighteen months; (iii) expand sales of
conventional paint and coating products through its channels of distribution
available from its acquisitions; and (iv) initiate a timely marketing program
for ThermaCoolTM paint products to demonstrate the benefits of this new
technology without the Company depending solely on ThermaCoolTM product line
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.
F - 19
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--BUSINESS STRATEGY AND OPERATIONAL PLAN (continued)
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 its ThermaCoolTM
products in order to fund a substantial growth in operations over the next
twenty-four months. There is no assurance that such revenues will be generated
or that funding will be available to the Company. Management believes it will be
successful in obtaining future financing.
NOTE 16--YEAR 2000 READINESS PLAN (UNAUDITED)
Many existing computer systems and applications and other control devices use
only two digits to identify a year in the date field, without considering the
impact of the upcoming changes in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems, infrastructure, embedded computer
chips, networks, and telecommunications equipment and end products. The Company
also relies directly and indirectly, on external systems of other companies and
organizations such as suppliers, financial services organizations and
governmental entities for accurate exchange of data. The Company's current
estimate is that the costs associated with the year 2000 issue will not have a
material adverse effect on the results of operations or financial position of
the Company in any given year. However, despite the Company's efforts to address
the year 2000 impact on its internal systems, the Company has not fully
identified such impact or whether it can resolve it without disruption of its
business and without incurring significant expense. In addition, even if the
internal system of the Company are not materially effected by the year 2000
issue, the Company could be affected through disruption in the operation of the
activities with which the Company interacts.
NOTE 17--CONTINGENT LIABILITIES
The Company is involved in two lawsuits in which damages or claims may be
sought:
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, that 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 relating 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., non-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, as this proceeding is in defense of
its present patent position, it is an integral element in the Company's future
product offerings. The Company believes it has meritorious defenses in this
matter which is in a preliminary stage and which will not be resolved until a
considerable period of time has elapsed. The Company has previously agreed to
indemnify the Monroe Parker Securities, Inc., its former underwriter, against
any claims asserted by this party.
Management is uncertain as to what the litigation will eventually cost or
whether a settlement is plausible, and if so, what it would cost. Management
anticipates spending up to $250,000 to vigorously defend its rights to its
patents and its microsphere technologies in this matter.
On or about February 11, 1998, Mr. Kevin Horrell filed an amended complaint
against the Company and Mr. Pidorenko, the Company's president. The previous
complaint had been dismissed in the Circuit court of the 12th Judicial Circuit,
in and for Sarasota County, Florida. Mr. Horrell alleges that he is due certain
F - 20
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17--CONTINGENT LIABILITIES (continued)
unrestricted securities of the Company in connection with prior financing
activities. Mr. Horrell alleges breach of contract, fraud in the inducement of a
contract and violations of Rule 10b-5. Mr. Horrell claims he is entitled to
30,000 shares of the Company's common stock and certain litigation expenses. The
Company believes it has meritorious defenses in this matter which is in the
preliminary stage and is prepared to vigorously defend itself in this action.
NOTE 18--SUBSEQUENT EVENTS
On October 15, 1998, the Company agreed to acquire Sealco Systems, Inc. and
T-Coast Pavers, Inc. which have a combined total of more than $2 million in
revenues. ThermaCell acquired both businesses in December, 1998 for 300,000
shares of its common stock valued at $450,000 and an anticipated payment of an
additional 300,000 shares payable over three years.
Subsequent to year end, the Company acquired American Paints, Inc., a Pompano
Beach, Florida paint manufacturer and distributor with $2.5 million in annual
revenues, for 527,000 common shares. American Paints' operations will be
consolidated into the Company's Atlas unit to reduce costs and increase
operating profits.
Since the recent fiscal year end, the Company issued 1,200,000 shares of common
stock to individuals and others. In part, this issuance was to convert the
remaining Preferred Stock Class B into common stock that was originally part of
the Regulation S funding the Company initiated in January 1998. As a result of
this recent transaction, the Company received $250,000 which it recorded as an
equity investment. The parties undertaking this funding were introduced by a law
firm engaged as the Company's SEC counsel in October 1998. This law firm
withdrew as Company's counsel on December 21, 1998. The withdrawal of this law
firm was the result of a fee dispute. The Company re-engaged the attorney who
had previously represented the Company since 1993. This attorney is now
reviewing all recent transactions involving this and related matters.
F - 21
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Computation of Loss Per Common Share
For the Periods Ended
September 30,
----------------------------
1998 1997
------------- -------------
Shares outstanding: 5,129,325 3,021,139
Weighted average shares outstanding 3,677,183 2,217,106
Net loss $ (614,486) $ (1,037,730)
Less preferred stock dividends 41,215 -
------------- -------------
(655,701) (1,037,730)
Net loss per common share $ (0.18) $ (0.47)
21
<PAGE>
[LOGO]
December 30, 1998
Board of Directors
ThermaCell Technologies, Inc.
We consent to the use of our report dated December 21, 1998, on the
consolidated financial statements of ThermaCell Technologies, Inc. and
Subsidiary in Form 10-KSB for the fiscal year ended September 30, 1998.
/s/ Cherry, Bekaert & Holland, L.L.P.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> SEP-30-1998
<CASH> 67,405
<SECURITIES> 0
<RECEIVABLES> 430,489
<ALLOWANCES> 64,227
<INVENTORY> 489,259
<CURRENT-ASSETS> 1,179,854
<PP&E> 1,141,502
<DEPRECIATION> 248,530
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250,500
<COMMON> 513
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<SALES> 2,860,196
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<CGS> 1,900,043
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<OTHER-EXPENSES> (84,165)
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<INTEREST-EXPENSE> 25,068
<INCOME-PRETAX> (778,423)
<INCOME-TAX> 163,937
<INCOME-CONTINUING> (614,486)
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