U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number 0-21279
THERMACELL TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuer 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, FL 34243
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(Address of Principal Executive Offices)
(941) 358-0306
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(Issuer's Telephone Number)
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 a
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
--- ---
The number of shares outstanding of the Issuer's Common Stock, $.0001 Par
Value, as of June 30, 1999 was 8,149,769.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Page
Part I - Financial Information ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and September 30, 1998...................... 1 - 2
Consolidated Statements of Operations -
Three months and nine months ended June 30, 1999 and 1998. 3
Consolidated Statements of Cash Flows -
Nine months ended June 30, 1999 and 1998.................. 4
Notes to Consolidated Financial Statements.................. 5 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7 - 11
Part II - Other Information
Item 1. Legal Proceedings............................................ 12
Signatures.................................................. 13
Exhibit 11........................................................... 14
i
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<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets
June 30, September 30,
1999 1998
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<S> <C> <C>
Current assets
Cash $ 496,320 $ 67,405
Accounts receivable
Trade, net of allowance for uncollectible accounts
of $95,125 and $64,591, respectively 359,360 314,262
Notes receivable - trade 273,565 52,000
Notes receivable - other 75,000 76,622
Other current assets 72,156 18,998
Inventories 1,036,185 489,259
Prepaid expenses 933,859 161,308
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Total current assets 3,246,445 1,179,854
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Property and equipment 1,577,662 1,141,502
Less - accumulated depreciation 374,079 248,530
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1,203,583 892,972
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Other assets
Deposits 20,902 16,266
Deferred income tax benefit, net 966,980 795,309
Goodwill, net of accumulated amortization
of $115,267 and $95,602, respectively 1,678,276 815,010
Other intangibles, net of accumulated amortization
of $41,070 and $33,173, respectively 734,133 162,469
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3,400,291 1,789,054
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Total assets $ 7,850,319 $ 3,861,880
===================== =====================
</TABLE>
See notes to consolidated financial statements.
1
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<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
June 30, September 30,
1999 1998
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<S> <C> <C>
Current liabilities
Accounts payable $ 1,202,151 $ 445,118
Accrued expenses 27,257 45,396
Accrued payroll and payroll taxes 21,432 13,647
Current maturities of long-term debt
Notes payable 20,350 20,340
Capital leases 33,807 38,644
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Total current liabilities 1,304,997 563,145
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Long-term debt, net of current maturities
Notes payable 94,830 58,128
Capital lease obligations 113,423 73,079
Convertible note payable 1,333,333 -
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Total long-term debt, net of current maturities 1,541,586 131,207
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Total Liabilities 2,846,583 694,352
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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,
0 and 250 issued and outstanding, respectively - 250,000
Common stock, par value $.0001
Authorized 20,000,000 shares,
8,149,769 and 5,129,325 issued and outstanding, respectively 815 513
Additional paid-in capital 9,538,733 6,612,481
Deduct notes receivable associated with stockholder loan (591,389) (453,695)
Accumulated deficit (3,889,923) (3,242,271)
Treasury Stock (55,000) -
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Total stockholders' equity 5,003,736 3,167,528
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Total liabilities and stockholders' equity $ 7,850,319 $ 3,861,880
===================== =====================
</TABLE>
See notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
--------------------------------------- ---------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenue
Sales 1,310,625 $ 789,183 $ 3,250,976 $ 2,259,814
Less cost of sales 922,980 497,462 2,274,825 1,464,318
----------------- --------------- ----------------- ---------------
Gross profit 387,645 291,721 976,151 795,496
Selling, general and administrative
expenses 624,738 430,055 1,810,052 1,178,124
----------------- --------------- ----------------- ---------------
Loss from operations (237,093) (138,334) (833,901) (382,628)
----------------- --------------- ----------------- ---------------
Other income (expense)
Interest income - 15,405 4,431 40,471
Interest expense (19,430) - (28,894) (6,894)
Other - 4,368 - 51,108
----------------- --------------- ----------------- ---------------
Total other income (expense) (19,430) 19,773 (24,463) 84,685
----------------- --------------- ----------------- ---------------
Loss before income taxes (256,523) (118,561) (858,364) (297,943)
Income taxes
Deferred income tax benefit 51,305 23,712 171,672 59,589
----------------- --------------- ----------------- ---------------
Net loss $ (205,218) $ (94,849) $ (686,692) $ (238,354)
================= =============== ================= ===============
Basic loss per common share $ (0.02) $ (0.02) $ (0.09) $ (0.07)
================= =============== ================= ===============
Weighted average number of
common shares outstanding 8,696,238 4,153,620 7,575,889 3,432,484
================= =============== ================= ===============
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
---------------------------------------
June 30, June 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Reconciliation of net loss to net cash
used in operating activities
Net loss $ (686,692) $ (271,842)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 125,549 99,830
Amortization 27,562 58,634
Deferred income tax benefit (171,672) (59,589)
Changes in assets and liabilities, net of acquisitions
(Increase) decrease in accounts and notes receivable 90,053 (65,415)
(Increase) in inventories (215,416) (145,509)
(Increase) in prepaid and other assets (727,059) (213,156)
Increase (decrease) in accounts payable 196,969 (161,470)
Increase (decrease) in accrued expenses (15,415) (315,622)
Prior period adjustment (39,040) -
------------------ -----------------
Net cash used in operating activities (1,415,161) (1,074,139)
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Cash flows from investing activities
Capital expenditures (71,160) (331,188)
Acquisitions (1,396,220) (73,340)
Expenditures for patent, net (577,956) (30,000)
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Net cash used in investing activities (2,045,336) (434,528)
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Cash flows from financing activities
Proceeds from issuance of common stock 2,926,554 122,955
Proceeds from issuance of Series B preferred stock - 1,500,000
Proceeds from issuance of notes payable 92,025 61,407
Proceeds from issuance of convertible note 1,333,333 -
Conversion of Series B preferred to common stock (250,000)
Principal payments on notes payable (19,806) (10,624)
Principal advances on stockholder loan (137,694) -
Proceeds from payments on stockholder loan - 100,486
Costs associated with obtaining financing - (300,000)
Purchase of treasury stock (55,000) (40,000)
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Net cash provided by financing activities 3,889,412 1,434,224
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Net increase in cash 428,915 (74,443)
Cash beginning 67,405 580,522
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Cash ending $ 496,320 $ 506,079
================== =================
</TABLE>
See notes to consolidated financial statements.
4
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THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements, which are for
interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited financial statements should
be read in conjunction with the financial statements and the footnotes thereto
contained in Form 10-KSB for the fiscal period ended September 30, 1998 of
ThermaCell Technologies, Inc. (the "Company"), as filed with the Securities and
Exchange Commission.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (which are of a normal and recurring nature) necessary
for a fair presentation of the financial statements. The results of operations
for the three months and nine months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
Note 2 - Basic loss per share calculations
The computation of net earnings (loss) per common share has been based upon the
weighted average number of shares of outstanding common stock, which for the
three month periods ended June 30, 1999 and June 30, 1998 were 8,696,238 and
4,153,620, respectively. The weighted average number of shares outstanding for
the nine month periods ended June 30, 1999 and June 30, 1998 were 7,575,889 and
3,432,484, respectively.
Note 3 - Accounting Change
The Company adopted Statement of Accounting Standards #128, Earnings per Share,
during the quarter ended December 31, 1997. Since the Company has reported a
loss only the basic earnings (loss) per share is thereby reported as the
reporting of diluted loss per share would be anti-dilutive. The inclusion of
converted preferred shares in the calculation of weighted average shares for
diluted earnings per share purposes would be anti-dilutive and per FASB 128,
cannot be included in the financial statements.
Note 4 - Equity Transactions
On June 22, 1999 the Company issued a 9% convertible promissory note in the face
amount of $666,667 for cash consideration of $500,000 before placement fees. The
note's maturity is July 1, 2002, and allows the holder to purchase this
Company's common stock at 105% of the market price at the time of conversion.
On August 6, 1999, the Company's board of directors waived conditions for
conversion of the preferred stock Series A, held by its Chairman and President.
The original number of such preferred shares outstanding was 5,000,000 but was
subsequently changed to 2,500,000 shares in January 1998 to facilitate an equity
funding. The conversion features remained as originally designated and allowed
conversion into 1.25 million shares of the Company's common stock. The Board of
Directors authorized the issuance of common stock in exchange for the retirement
of this preferred stock. Conversion rights for this preferred had originally
been allowed if the company had achieved any one quarter of profitable
operations and any one year of profitable operations. Neither of these
conditions was achieved. The conversion of this series A preferred stock amended
to 2,500,000 in January 1998, allowed the holder to vote 2,500,000 shares on
matters that come before and are voted on by the common stock shareholders. The
retirement of this preferred issue eliminates these voting privileges in the
Company's capital structure.
5
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Notes to Consolidated Financial Statements (Continued)
In May 1999, the Company and Innovation Associates, Inc.("IA") reached an
agreement and settled litigation that was commenced by IA for trade secrets
misappropriation among other matters. As part of the settlement of this
litigation, the Company has agreed to license certain patents relating to
microspheres that are owned by IA. Consideration for such license is the payment
of $25,000 and the issuance of 470,544 shares of the Company's common stock
having a value of $500,000. This common stock bears a restrictive legend as to
marketability but provides a penalty should this stock not be registered by the
Company within 150 days. If the Company is not able to provide registration of
these shares by November 7, 1999, than an additional payment of $62,500 worth of
common stock is to be made. With this licensing of IA's patents, all litigation
is dismissed. The Company intends to utilize the IA's patents with its own
microsphere technologies to strengthen its patent position in this field.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-QSB, that are not purely
historical, are forward-looking information and statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These include statements regarding the Company's
expectations, intentions, or strategies regarding future matters. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements contained in this Form 10-QSB. The forward-looking
statements contained here-in are based on current expectations that involve
numerous risks and uncertainties. Assumptions relating to the foregoing involve
judgments regarding, among other things, the Company's ability to secure
financing or investment for capital expenditures, future economic and
competitive market conditions, and future business decisions. All these matters
are difficult or impossible to predict accurately and many of which may be
beyond the control of the Company. Although the Company believes that the
assumptions underlying its forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this form 10-QSB will prove to be
accurate.
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 ("shells"). The Company's technology
utilizes the insertion of the shells in various materials and products that
improve the thermal resistive characteristics of such products.
The Company's 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,
among others.
On November 30, 1995, the Company acquired the assets of C.F. Darling Paint &
Chemicals, Inc., a paint manufacturing company, located in New Port Richey,
Florida. The Company acquired these assets so that it would have a facility to
produce and develop paints and coatings for its ThermaCool(TM) product line.
On March 19, 1997, the Company completed a public offering for 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.
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 commission. The net proceeds from this
offering was more than $4.7 million.
On July 28, 1997, the Company acquired all the outstanding common stock,
representing 100% ownership, of Atlas Chemical Company, 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 distribution channel
which included major retail paint accounts such as Ace Hardware, among others.
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 Company acquired T-Coast Pavers/Sealco Systems, Inc., which had annual
revenues of about $2 million, on December 1, 1998 for 300,000 shares of common
stock valued at $300,000 and an employment agreement with its founder that
requires an earn-out of an additional 300,000 shares over three years. T-Coast
Pavers/Sealco Systems. provides paver installation and driveway sealant and
coating services primarily to contractors in Southeast Florida.
7
<PAGE>
The Company acquired American Paints, Inc., a Pompano Beach, Florida paint
manufacturer and distributor with $2.5 million in annual revenues, for 572,000
common shares on December 1, 1998. American Paints' production capabilities have
been consolidated into the Company's Atlas manufacturing facility while its
retail operations remain in Pompano Beach.
On January 22, 1999, the Company launched its www.paint-n-stuff.com e-commerce
web site that includes more than 10,000 name brand home, boating, and commercial
building paint, hardware supplies and other improvement items for contractors,
dealers and consumers. This represents the first time such a complete array of
these products has been offered on a internet site.
The Company has sustained significant operating losses since its inception.
Management's strategy of expanding the ThermaCool(TM) product line, developing a
commercially viable manufacturing process for shells and expansion into new
markets for its shell technology may result in the Company incurring additional
losses due to the costs associated with these strategies. The Company expects to
incur losses until it is able to increase its sales, expand its product line,
and increase its distribution capabilities to a sufficient revenue level to
offset ongoing operating and expansion costs.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30, 1998
Total consolidated revenue for the three months ended June 30, 1999 was
$1,310,625 compared to $789,183 for the same period of 1998, which represents an
increase of $521,442, or 66%. This increase was primarily attributed to the
additional revenues of two recent acquisitions: American Paints and T-Coast
Pavers/Sealco Systems, Inc. ("Sealco"). The revenues for the Company's existing
business declined for this period as compared to the prior period. This decline
resulted from loss of customers because of severe competition within the
Company's Florida markets. The Company has elected to maintain its profit
margins on its business rather than resort to competitive bidding. Management
feels that at this stage in the Company's development this is the more prudent
strategy.
Gross profit margins were 30% and 37%, respectively, for the three month period
ended June 30, 1999, as compared to the prior period ended June 30, 1998. This
decrease is the result of a change in the mix of paint and coatings products
sold by the Company, and in part, by lower contribution margin from the Sealco
acquisition. Sealco has traditionally had gross profit margins in the 16% range.
The Company expects that continued buying efficiencies and supplying all coating
and sealant needed for the Sealco operations are expected to further improve
profit margins. During the recent quarter ended, Sealco's gross profit margin
was 24%.
For the three months ended June 30, 1999, total selling, general and
administrative expenses were $624,738 as compared to $430,055 for the same
period of the previous year, an increase of $194,683, or 45%. This increase is
the result of higher marketing, staffing and other general expenses associated
with both of the Company's acquisitions. The Company has taken steps to reduce
duplication of personnel and has consolidated its staffing, marketing, and
production for more efficient and effective business operation for the American
Paint acquisition. With the expansion of distribution channels provided by the
American Paints, the Company anticipates substantial benefit from the sales of
products to an expanded customer base.
The Company experienced a loss from operations of $237,093 for the three month
period ended June 30, 1999 as compared to a loss of $138,334 for the same prior
year period. This increase in the operating loss over that of the preceding year
period reflects the lower gross margin contribution from the Company's revenues
and the higher S. G & A expense during this period. Management anticipates that
increasing levels of sales, including the contribution of both of the recent
acquisitions, will result in improvement in future operating performances and
eventually profitable operations.
8
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Based upon management's current estimates of future taxable income, management
has determined that a valuation allowance of fifty percent (50%) is appropriate
during the current period ended June 30, 1999 to represent that portion of
deferred taxes that may be realized in future periods.
The interest expense for the period ended June 30, 1999 was $19,430. There was
no interest in the prior years quarter. The interest expense for the current
period was incurred primarily from debenture and vehicle financings. The prior
period benefited from interest income of $15,405. There was no comparable
benefit in the period ended June 30, 1999.
The basic loss, after income tax benefit, and basic loss per share were $205,218
and $0.02 per share respectively, for the three months ended June 30, 1999 as
compared to a basic loss and basic loss per share of $94,849 and $.02
respectively, for the same period in 1998. This loss represents a 116% increase
over the basic loss experienced in the year ago quarter. The loss per share for
the period was same as the loss per share of the year ago period. The weighted
average shares outstanding for the quarter ended June 30, 1999 was 8,696,238 as
compared to 4,153,620 for the preceding year quarter ended June 30, 1998.
The Company has focused, in the recent two quarters on the consolidation of the
acquired American Paint operations with its Miami based production facility.
Presently all paints are manufactured at that Miami location. The company will
aggressively market its paint and coatings products, with the added opportunity
to sell its expanded product line to a greater customer base. Management's
strategy will be to continue to expand within the Sunbelt Region of the United
States. In addition to the Company's marketing efforts, the recent acquisitions
will further the utilization of the Company's paint and coatings production
capacity. Management continues to be optimistic about the benefits of its
near-term strategy.
The Company anticipates improvements in raw material purchasing economies will
result in further cost savings in its purchases for its manufacturing operation.
This benefit will continue in this fiscal year. The Company also anticipates
improvement in gross profit margins during the balance of this fiscal year
resulting from these improved purchasing economies.
Nine months ended June 30, 1999 compared to nine months ended June 30, 1998
Total revenue for the nine months ended June 30, 1999 was $3,250,976 compared to
$2,259,814 for the same period of 1998, which represents an increase of
$991,162, or 44%. The increase was primarily the result of the sales
contribution of the American Paints and T-Coast Pavers/Sealco Systems
acquisitions that more than offset revenue losses in the Company's core business
segment because of competitive factors. Business was lost when management
decided to forgo price concession with customers and instead decided to maintain
its present pricing structure.
Gross profit margins were 30% and 35%, respectively, for the nine-month period
ending June 30, 1999 as compared to the prior period ending June 30, 1998. This
decrease is the result of a change in the mix of paint and coatings products
sold by the Company, and in part, by lower contribution margin from the Sealco
acquisition. Sealco has traditionally had gross profit margins in the 16% range
but that margin has improved to 24% since the acquisition. Sealco's margin is
lower than the margins in the Company's paint business.
For the nine months ended June 30, 1999, total selling, general and
administrative expenses were $1,810,052 as compared to $1,178,124 for the same
period of the previous year, an increase of $631,928, or 54%. This increase is
primarily the result of the Company's recent acquisitions and once the expected
consolidation of operations is completed, S G & A expenses are expected to
become a lower percentage of sales. Management anticipates that further
increases in sales while controlling its S G & A expense levels, will result in
an improvement in its future operating performance.
The Company continued to experience a loss from operations of $833,901 for the
nine month period ending June 30, 1999 as compared to a loss of $382,628 for the
same prior year period.
9
<PAGE>
Based upon management's current estimates of future taxable income, management
has determined that a valuation allowance of fifty percent (50%) is appropriate
during the current period ending June 30, 1999 to represent that portion of
deferred taxes that may be realized in the future.
The net loss, after income taxes benefit and net loss per share was $686,692 for
the nine months ended June 30, 1999 as compared to a net loss of $238,354 for
the same period in 1998. This represented an increase in the loss of $448,338
for this period as compared to the year before nine-month period ended June 30,
1998. The basic earnings (loss) per share was $0.09 for the nine months ended
June 30, 1999 as compared to $0.07 on the same basis for the same period in
1998. The diluted earnings (loss) per share are also $0.09 and $0.07 for these
respective periods. This current nine-month period loss per share was higher
even though there is a dilutive effect with more common shares being
outstanding. During these two comparable periods, the weighted average shares
outstanding increased from 3,432,484 to 7,575,889. This increase is attributed
to the Company's convertible preferred stock Series B financing undertaken
during fiscal year 1998, being exchanged into common stock, the issuance of
common stock for two acquisitions, common stock issued for the license of the
Innovative Associates microshell patents and the dilutive effect of outstanding
stock options.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to fund its operations and product development activities
with funds provided by issuing securities and from borrowings. During the nine
months ended, the Company raised $1.25 million, before placement expenses,
through an equity funding and the issuance of two convertible debentures. During
the year, the Company completed conversion of the "Series B" convertible
preferred stock with the issuance of 1,405,000 shares of its common stock. The
Company issued 9% redeemable convertible debentures in two tranches in the face
amount of $1,333,333 for net proceeds of $1,000,000 before placement expenses.
The Company received approximately $801,000 after placement fees, legal fees and
related expenses. Each of these two debentures are for $666,666.67 and have
maturity dates of March 1, 2002 and July 1, 2002, respectively. Furthermore,
each allows conversion into common stock at a 105% of the market price three
days prior to the election to convert. Proceeds from the debentures were used
for working capital purposes.
The issuance of common stock during the nine-month period included the payment
to retire the convertible preferred stock series B and to provide the Company
with $250,000 in additional funding. The Company received a general release from
the preferred stock Series B investor on March 4, 1999. During this fiscal year
the Company had issued 1.4 million shares of its common stock to satisfy this
preferred stock conversion requirement. In addition, the Company's two
acquisitions of American Paint and T-Coast Pavers/ Sealco Systems included the
issuance of a total of 872,000 shares of common stock with 300,000 additional
shares being issued in escrow on an earn-out basis. Common stock was also issued
for license of certain patents of IA Inc. as part of that litigation settlement.
Net cash used in operating activities for the nine months ended June 30, 1999
was $1,415,161 compared to net cash used of $1,074,139 for the nine months ended
June 30, 1998. This increase in cash used by operating activities reflects a
higher net loss for the current period and an increase in prepaid assets were
offset by higher level of accounts payables.
Cash used in investing activities for the nine months ended June 30, 1999 and
1998 were $2,045,336 and $434,528, respectively. The principal use of funds was
for two acquisitions- American Paints and T-Coast/ Sealco Systems completed
during this period and for patent licensing that involved the settlement of the
Innovative Associates litigation. In addition, capital expenditures for the
recent period decreased to $71,160 from $331,188 over the prior year's period.
There was not an acquisition in the year ago period.
10
<PAGE>
Cash provided by financing activities for the nine months ended June 30, 1999
was $3,889,412 as compared to cash used in financing activities of $1,434,224
for the nine months ended June 30, 1998. During the recent period, the Company
issued common stock with an aggregate value of $2,926,554 for acquisitions,
conversion of preferred stock Series B and payment of services to consultants
and employees. For the present period, convertible notes in the amount of
$1,333,333 were issued. These notes bear annual interest of 9% and have a
three-year maturity, but are convertible into the Company's common stock.
Shareholder loans increased during this period that included the assumption of
certain company incurred professional expenses by a shareholder.
As of June 30, 1999, the Company had net working capital of $1,941,448 as
compared to $616,709 at fiscal year ended September 30, 1998. This increase in
net working capital of $1,324,739 is primarily due to higher levels of cash,
accounts receivable including note receivables from customers, and inventories
while this increase was offset, in part, by higher accounts payable level. The
Company's ratio of current assets to current liabilities was 2.5 at June 30,
1999 and 2.1 at fiscal year ended September 30, 1998.
The Company is not presently profitable and continues to fund itself from the
proceeds of securities placements and debt fundings. Once the Company achieves
profitability, it will then be in a position to fund itself on an operating
basis.
The Company continues to focus its marketing efforts within the Sunbelt Region
of the United States to increase consumer awareness and acceptance of both its
existing and new products. In addition to this marketing effort, the Company has
positioned itself to expand the near term production of its proprietary
products.
Management believes that additional capital will be needed to fund its present
plan to build a manufacturing facility to produce shells for its paint and
coating technology products. The Company is optimistic that such funds will be
available from investment or financing sources to provide for this expansion
plan. Should funds not be readily available, management intends to defer the
building of the manufacturing facility to a later time when appropriate funding
can be arranged. The Company is in need of additional funding to provide for its
working capital requirements over the next six months to supplement the cash
proceeds that can be generated from its recently acquired businesses. Should
such funding not be available, the Company would have to significantly curtail
its planned operations to achieve breakeven operations.
On August 6, 1999, the Company's board of directors waived conditions for
conversion of the preferred stock, "Series A", held by its Chairman and
President. The Company authorized the issuance of 1.25 million shares of common
stock in exchange for the retirement of this preferred stock. Conversion rights
for this preferred had originally been allowed if the company had achieved one
quarter of profitable operations and any one year of profitable operations.
Neither of these conditions was achieved. The conversion of this series A
preferred stock, originally 5,000,000 shares but was amended to 2,500,000 in
January 1998, allowed the holder to vote 2,500,000 shares on matters that come
before and are voted on by the common stock shareholders. The retirement of this
preferred issue eliminates the super-voting rights in the Company's capital
structure. In addition, the Company's board of directors required that within
180 days, the promissory notes in the total amount of $591,389 owed the Company
by its president and chairman be repaid in full. A further consideration in
retiring the Series A preferred stock was the simplification of the Company's
capital structure to attract capital to fund the Company's future needs.
Enclosed in Item 5 attached as Exhibit 99 are the audited financial statements
for the Company's two most recent acquisitions, American Paints Inc. and T-Coast
Pavers/ Sealco Systems Inc., that the Company completed in December of 1998. The
presentation included the operating results had each acquisition been completed
in the earlier fiscal periods. This enclosure completes filing requirements for
the presentation of audited financials for these entities combined with the
Company's historical results.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In May 1999, the Company and Innovation Associates, Inc. ("IA") reached
agreement and settled litigation that was initiated by IA for trade secrets
misappropriation among other allegations. As part of the settlement of this
litigation, the Company has agreed to license certain patents relating to
microspheres that are owned by IA. The Company paid $25,000 and issued 470,544
shares of its common stock having a value of $500,000 to IA. This common stock
bears a restrictive legend as to marketability but provides a penalty should
this stock not be registered by the Company within 150 days. If the Company is
not able to provide registration of these shares by November 7, 1999, then an
additional payment of $62,500 worth of the Company's common stock is to be made.
With licensing of IA's patents, this litigation is dismissed. The Company
intends to utilize IA's patents with its own microsphere technologies to
strengthen its patent position in this field.
In February 1999, the Company was notified that the Kevin Horrell litigation
against the Company and Mr. John Pidorenko, the Company's president, was
dismissed. A part of this settlement, Mr. Pidorenko, transferred 40,000 shares
of the Company's common stock, he personally owned, to Mr. Horrell. The Company
did not make any payment in settlement of this matter.
On March 1, 1999, the Company reached a settlement agreement with David Feingold
and his law firm of Feingold & Kam, RAM Capital Partners, Ltd., Diversified
Lending Company and RAF Enterprises regarding compensation and the issuance of
the Company's common stock, among other matters. As a result of this settlement,
the Company's obligations to the investor who held a convertible preferred stock
issue was satisfied. Other than the common stock the Company issued in November
1998, no further consideration was paid.
On February 4, 1999, a complaint was filed in the United States District Court,
Middle District of Florida by Mr. Russell Haraburda and Eden Group, Inc. against
John Pidorenko, the Company's president, and the Company for monies purportedly
due for arranging financing for the Company prior to its IPO in March of 1997.
The Company does not believe any monies are due Mr. Haraburda or his firm. In
addition, the Company has been assigned two promissory notes of the Eden Group,
Inc., Mr. Haraburda's firm, that are unpaid. The Company will vigorously defend
itself in this matter and will seek full and complete payment under its
promissory notes from the Eden Group.
Item 5. Other Information
Audited Financial Statements for T-Coast/ Pavers, Inc. and American Paints, Inc.
and proforma statements for their respective financial results combined with the
Company for the indicated prior periods are attached in Exhibit 99.
Item 6. Exhibits and reports on Form 8K
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant had
duly caused the report to be signed on its behalf by the undersigned thereunto
duly authorized.
ThermaCell Technologies, Inc.
Dated 8/18/99
/s/ Gerald Couture
-------------------------------
Gerald Couture
Vice-President, Finance and CFO
13
<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Shares outstanding: 8,149,769 4,245,021 8,149,769 4,245,021
Weighted average shares outstanding w/o options 7,495,761 3,902,338 6,495,413 3,181,202
Incremental shares attributed to outstanding options 2,170,000 700,000 2,050,000 350,000
Weighted average number of shares repurchased (969,524) (448,718) (969,524) (98,718)
-------------- ------------- ------------- ------------
Weighted average shares outstanding 8,696,237 4,153,620 7,575,889 3,432,484
Net loss $ (205,218) $ (94,849) $ (686,692) $ (238,354)
Add preferred stock dividends 16,836 33,488
--------------- ------------- ------------- ------------
(205,218) (111,685) (686,692) (271,842)
Net loss per share $ (0.02) $ (0.02) $ (0.09) $ (0.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> SEP-30-1998
<PERIOD-END> JUN-30-1999
<CASH> 496,320
<SECURITIES> 0
<RECEIVABLES> 359,360
<ALLOWANCES> 95,125
<INVENTORY> 1,036,185
<CURRENT-ASSETS> 3,246,445
<PP&E> 1,577,662
<DEPRECIATION> 374,079
<TOTAL-ASSETS> 7,850,319
<CURRENT-LIABILITIES> 1,304,997
<BONDS> 0
0
500
<COMMON> 815
<OTHER-SE> 5,002,421
<TOTAL-LIABILITY-AND-EQUITY> 7,850,319
<SALES> 3,250,976
<TOTAL-REVENUES> 3,250,976
<CGS> 2,274,825
<TOTAL-COSTS> 2,274,825
<OTHER-EXPENSES> 1,810,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,894
<INCOME-PRETAX> (858,364)
<INCOME-TAX> (171,672)
<INCOME-CONTINUING> (686,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (686,692)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
AMERICAN PAINT, INC.
FINANCIAL STATEMENTS
NOVEMBER 30, 1998
<PAGE>
AMERICAN PAINT, INC.
FINANCIAL STATEMENTS
NOVEMBER 30, 1998 AND DECEMBER 31, 1997
TABLE OF CONTENTS
Page
Independent Auditor's Report 1
Financial Statements
Balance Sheets 2
Statements of Operations and Retained Earnings 3
Statements of Cash Flows 4
Notes to Financial Statements 5 - 6
<PAGE>
BAUM & COMPANY, P.A.
Certified Public Accountants
1515 University Drive - Suite 209
Coral Springs, Florida 33071
(954) 752-1712
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Paint, Inc.
Pompano Beach, Florida
We have audited the accompanying balance sheets of American Paint, Inc. as of
November 30, 1998 and December 31, 1997 and the related statements of operations
and retained earnings and cash flows for the eleven month period ended November
30, 1998 and year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Paint, Inc.. as of
November 30, 1998 and December 31, 1997 and the results of its operations and
its cash flows for the eleven month period ended November 30, 1998 and year
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Baum & Company, P.A.
Coral Springs, Florida
July 25, 1999
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PAINT, INC.
BALANCE SHEETS
NOVEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash on hand $ 400 $ 400
Accounts Receivables Less Allowances for Bad Debts 243,128 340,304
of 110,600 in 1997 and 120,600 in 1998
Inventory 304,647 293,708
Prepaid Expenses 6,185 7,084
----------------- -----------------
Total Current Assets 554,360 641,496
----------------- -----------------
Property Plant & Equipment (Net) (Note 2) 73,025 80,402
Other Current Assets
Deposits 240 240
Loan Receivable Stockholder - 0 - 24,803
----------------- -----------------
Total Other Current Assets 240 25,043
----------------- -----------------
Total Assets $ 627,625 $ 746,941
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 349,601 $ 305,679
Current Portion of Long Term Debt 7,590 16,833
Cash Overdraft - 0 - 32,509
Income Tax Payable (Note 1) 12,348 316
----------------- -----------------
Total Current Liabilities 369,539 355,337
Long Term Debt 24,690 37,948
Stockholders' Equity:
Common stock, No Par Value, 1,000 Shares Authorized
Issued and Outstanding 1,000 1,000
Additional Paid-in Capital 156,751 156,751
Retained Earnings 75,645 195,905
----------------- -----------------
Total Shareholders' Equity 233,396 353,656
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 627,625 $ 746,941
================= =================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
AMERICAN PAINT, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE 11 MONTHS ENDED NOVEMBER 30, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue $ 1,781,416 $
2,423,645
------------------- -----------------
Cost of Sales 1,024,543 1,418,897
------------------- -----------------
Gross Profit 756,873 1,004,748
Selling General and Administrative Expenses 671,966 933,199
------------------- -----------------
Income before income taxes 84,907 71,549
Provision for income taxes 22,739 22,622
------------------- -----------------
Net Income 62,168 48,927
Retained Earnings - beginning of year 195,905 146,978
Less Distributions (Note) (182,428) - 0 -
------------------- -----------------
Retained Earnings - end of year $ 75,645 $ 195,905
=================== =================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
AMERICAN PAINT, INC.
STATEMENTS OF CASH FLOWS
ELEVEN MONTHS ENDED NOVEMBER 30, 1998
AND YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 62,168 $ 48,927
Adjustments to reconcile net income to
Cash provided by operating activities:
Depreciation 12,916 23,251
(Increase) decrease in accounts receivable 97,176 (65,269)
(Increase) in inventory (10,939) (18,666)
Increase in prepaid expenses 899 6,114
Increase in accounts payable 43,922 33,700
Increase (Decrease) in income taxes payable 12,032 (13,300)
Cash overdraft (32,509) 32,509
----------- ------------
Net Cash Provided by Operating Activities 185,665 47,266
----------- ------------
Cash Flows From Investing Activities:
Fixed assets purchased (23,066) (18,406)
------------- -------------
Net cash used in investing activities (23,066) (18,406)
------------- -------------
Cash flows from financing activities:
Reductions of notes payable (15,382) (35,938)
Reductions in stockholder loan receivable 24,803 6,550
Distributions to stockholder (172,020) - 0 -
------------- -------------
Net cash used in financing activities (162,599) (29,388)
------------- -------------
(Decrease) in Cash - 0 - (528)
Cash on hand - beginning of year 400 928
------------- -------------
Cash on hand - end of year $ 400 $ 400
============= =============
Supplemental Cash Flows Information:
Cash Paid for Interest $ 13,512 7,035
Cash Paid for Income Taxes 22,622 10,391
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
AMERICAN PAINT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE - 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company, wholesales and retails, paint, roofing materials and
related items. Sold goods include purchased products and items
manufactured by the company. The company was incorporated in the
State of Florida on February 15, 1987. On December 1, 1998, the
Company's business and operating were acquired and became a Division
of Thermacell Technologies, Inc. ( a publicly-held company )
Revenue Recognition
Revenue is recognized at the time of sale..
Use of Estimates
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, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, and
any highly liquid investments with a maturity of three months or
less at the time of purchase.
The Company maintains cash and cash equivalent balances at a
financial institution which is insured by the Federal Deposit
Insurance Corporation up to $100,000. In 1998 and 1997 there are no
concentrations of credit risk from uninsured bank balances.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred assets and liabilities
are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
basis.
Inventory
Inventory is stated at the lower of cost or market
<PAGE>
AMERICAN PAINT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE - 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect
on deferred assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Due to the immaterial effect of any deferred based income tax
provisions, no related tax adjustments have been recognized.
NOTE - 2 PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Transportation Equipment $ 65,132 $ 98,581
Leasehold Improvements and Equipment 155,718 132,651
------- -------
Total 220,850 231,232
Less: Accumulated Depreciation 147,825 150,830
------- -------
Net Fixed Assets $ 73,025 $ 80,402
======== ========
</TABLE>
NOTE - 2 LEASING ARRANGEMENTS
Operating Lease
The Company conducts its operations from facilities that are leased
under a five year lease ending 1999.
Rent expense amounted to $75,117, $100,112 and $105,317 for the
11 months ended November 30, 1998 and the years ended December 31,
1997 and 1996 respectively.
Future minium lease payments for 1999 operating leases at November
30, 1998 are:
Years Ending
1999
2000
<PAGE>
AMERICAN PAINT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE - 3 NOTES PAYABLE - BANK
Various installment notes secured by equipment
NOTE - 4 SUBSEQUENT EVENTS
On December 1, 1998, the Company sold all its operating assets and
related liabilities except as noted in the sales agreement and its
existing retail paint store for 572,000 sales of common stock of
Thermacell Technologies, Inc.( A public company ). The exceptions as
noted above include the withdrawal by the sole stockholder of American
Paint, Inc. the cash in bank, note receivable and some fixed assets
that were on the books of the company. Additionally, the stockholder
of American Paint, Inc.signed to a non-competition agreement as part
of the consideration.
<PAGE>
The unaudited pro forma financial statements as of and for the year ended
September 30, 1998 have been prepared based on historical data of the
Registrant, as adjusted to reflect the acquisition of American Paints, Inc. as
if each such agreement and merger had been effective October 1, 1997. The pro
forma income statement data may not be indicative of the future results of
operations or what the actual results of operations would have been had the
acquisition described above been effective earlier.
<PAGE>
<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(in thousands)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
ThermaCell American Paints for
Technologies per 10-K the eleven months
of 9/30/98(a) ended 11/30/98 Adjustments Proforma
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Net $ 2,860 $ 1,781 $ 4,641
Sales
Cost of Sales 1,900 1,025 2,925
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Gross Profit 960 756 1,716
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Operating Expenses:
Selling and Administrative Expenses 1,823 672 2,495
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
(Loss) Income from Operations (863) 84 (778)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Interest Expense, net (Loss) 15 15
Other (Loss) 69 69
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Provision (Benefit) for Income Taxes 164 (23) 141
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
(Loss) Income (615) 62 (553)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
</TABLE>
<PAGE>
THERMACELL TECHNOLOGIES, INC.
PRO FORMA BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
ThermaCell Technologies
at 9/30/98 (a) American Paints
at 11/30/98 Adjustments Proforma
- --------------------------------- -------------------------- ------------------------ ---------------- --- -----------------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 67 $ $ $ 67
Accounts Receivable, net of
allowance for doubtful accounts 314 243 557
Inventories 489 305 794
Other current assets 310 6 316
-------------------------- ------------------------ ---------------- --- -----------------------
Total current assets 1,180 554 1,734
Property, equipment and other
assets 893 73 156 b 1,122
Goodwill and other assets 1,788 602 c 2,390
-------------------------- ------------------------ ---------------- --- -----------------------
Total 3,861 627 758 5,246
Assets
-------------------------- ------------------------ ---------------- --- -----------------------
Current
Liabilities: 445 350 795
Accounts payable
Other current liabilities 118 20 138
-------------------------- ------------------------ ---------------- --- -----------------------
Total current liabilities 563 370 933
Long-term debt,
(net of current portion) 131 25 156
Stockholders'
equity: 6,863 157 771 d 7,791
Capital
Retained earnings (3,696) 75 (13) e (3.634)
-------------------------- ------------------------ ---------------- --- -----------------------
Total liabilities and $ 3,861 $ 627 758 $ 5,246
stockholders' equity
-------------------------- ------------------------ ---------------- --- -----------------------
</TABLE>
<PAGE>
THERMACELL TECHNOLOGIES, INC.
NOTES TO PRO FORMA INCOME STATEMENT AND BALANCE SHEET DATA
(Unaudited)
(a) The historical financial statements of ThermaCell Technologies for the year
ended September 30, 1998. The American Paints column reflects the
operations of American Paints for the eleven months ended November 30, 1998
which is the time prior to their acquisition by ThermaCell.
(b) Reflects the fair market value of American Paint's fixed assets.
(c) Reflects the goodwill recorded for the American Paints acquisition.
(d) Reflects the acquisition of American Paints for 572,000 shares of common
stock.
(e) Reflects the elimination of gain on American Paints books at time of
closing of the transaction which occurred after the November 30, 1998 pro
forma statement date.
<PAGE>
SEALCO SYSTEMS INC.
FINANCIAL STATEMENTS
December 31, 1997
TABLE OF CONTENTS
Independent Auditor's Report 1
Financial Statements
Balance Sheet 2
Statement of Income and Retained Earnings 3
Statement of Cash Flows 4
Notes to Financial Statements 5
<PAGE>
Kerner & Wagshol, P.A.
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Of Sealco Systems, Inc.
We have audited the accompanying balance sheet of Sealco Systems, Inc. (an S
Corporation) as of December 31, 1997, and the related statements of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sealco Systems, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As discussed in Note K to the financial statements, certain errors resulting in
understatement of previously reported Property and Equipment as of December 31,
1996, were discovered during the subsequent audit of the prior year.
Accordingly, adjustments have been made to correct the error.
Kerner & Wagshol, P.A.
April 14, 1999
6415 Lake Worth Road, Suite 302, Lake Worth, Florida 33463
120 S. Dixie Highway, Suite 207, West Palm Beach, Florida 33401
Telephone (561)357-8776 Facsimile (561) 357-8844
<PAGE>
SEALCO SYSTEMS INC.
Balance Sheet
December 31, 1997
Assets
Current Assets
Cash $ 12,254
Accounts Receivable-Trade (Note B) 230,944
Inventory (Note B) 14,811
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts (Note C) 9,902
--------
Total Current Assets 267,911
--------
Property and Equipment (Note B) 116,834
Less Accumulated Depreciation (48,996)
--------
Net Fixed Assets 67,838
--------
Total Assets $ 335,749
========
Liabilities & Stockholders' Equity
Current Liabilities
Accounts Payable-Trade $ 82,745
Accrued Expenses 12,661
Current Portion of Long-Term Notes Payable (Note E) 18,218
Note Payable, Stockholder (Note D) 15,000
--------
Total Current Liabilities 128,624
--------
Long-Term Notes Payable (Note E) 34,791
--------
Total Liabilities 163,415
--------
Stockholders' Equity
Common Stock (Note H) 500
Retained Earnings 171,834
--------
Total Stockholders' Equity 172,334
--------
Total Liabilities & Stockholders' Equity $ 335,749
========
See accompanying notes
<PAGE>
SEALCO SYSTEMS INC.
Statement of Income and Retained Earnings
For the year ended December 31, 1997
Sales (Note B) $ 1,987,666
----------
Cost of Sales
Materials 1,000,168
Labor and Related Costs 221,199
Subcontractors 382,014
Commissions 61,067
Casual Labor 31,466
Supplies 30,632
----------
Total Cost of Sales 1,726,546
----------
Gross Profit 261,120
----------
General and Administrative Expenses
Equipment Rental 41,117
Auto and Truck Expense 37,645
Telephone 19,174
Insurance 18,272
Rent (Note F) 10,800
Legal & Accounting 7,665
Office Supplies and Expense 5,868
Interest 3,053
Licenses & Taxes 2,555
Utilities 2,168
Repairs and Maintenance 2,110
Advertising 1,502
Bank Charges 1,434
Depreciation (Note B) 7,731
Donations 985
Seminars and Meetings 750
Dues and Publications 676
Postage 621
Other Costs and Expenses 151
----------
Total General and Administrative Expenses 164,277
----------
Net Income 96,843
Beginning Retained Earnings 122,743
Draws-M. Malacarne (Note G) (47,752)
----------
Ending - Retained Earnings 171,834
==========
<PAGE>
SEALCO SYSTEMS INC.
Statement of Cash Flows
For the Year Ended December 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 96,843
Adjustments
Depreciation Expense 7,731
Accounts Receivable Increase (35,439)
Inventory Increase (4,553)
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts (9,902)
Accounts Payable Increase 19,944
Accrued Expenses Decrease (369)
---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 74,255
CASH FLOWS FROM INVESTING ACTIVITIES 0
---------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 0
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long-Term Debt (15,169)
Stockholders Draws (47,752)
---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (62,921)
---------
NET INCREASE IN CASH 11,334
CASH AT BEGINNING OF YEAR 920
---------
CASH AT END OF YEAR $ 12,254
=========
See accompanying notes
<PAGE>
SEALCO SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL
Nature of Business
The Company is engaged in paving roads in residential developments and providing
customized paving work for residences in the Stuart area of Florida. Over 50% of
the company's business is from local developers and builders and the balance of
business is from individual homeowners.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Concentration of Risk
Amounts on deposit in a financial institution do not exceed the federally
insured limit. The Company grants credit to its customers, primarily located in
the Stuart area of Florida, during the normal course of business. The
concentration of credit risk is limited due to the large number of customers
comprising the Company's customer base but is dependent on the economy of the
construction industry in the area.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The accrual basis of accounting records revenue in the period which earned
rather than when received and records expenses in the period in which incurred
rather than paid. The Company uses the percentage of completion method of
accounting for long term construction type contracts. Using this method,
contract revenues are recognized based on the ratio of contract costs incurred
to total estimated contract costs. Because of the inherent uncertainties in
estimating costs, it is possible that the Company's estimates of costs and
revenues may be revised prior to contract completion.
Changes in job performance, job conditions and estimated profitability,
including those arising from final contract settlements may result in revisions
to costs and income and are recognized when the revisions are determined.
<PAGE>
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
Operating Cycle
The accompanying financial statements are based upon a one-year operating cycle,
which exceeds the life span of most of the Company's contracts.
Inventory
Inventory of merchandise for resale and materials is stated at the lower of cost
or market method using the first-in, first-out method.
Property and Equipment/Depreciation
Property and equipment are recorded at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
straightline and accelerated methods. Total depreciation for the year ended
December 31, 1997 was $7,731.
Income Taxes
The Company, with the consent of its stockholders, has elected to be taxed under
the Internal Revenue Code as an S corporation. In lieu of corporate income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in these financial statements.
Accounts Receivable
The allowance for doubtful accounts of $7,000 was based on management's
evaluation of outstanding accounts receivable at the end of the year.
<PAGE>
NOTE C- COSTS AND ESTIMATED EARNINGS ON COMPLETED CONTRACTS
Information with respect to uncompleted contracts as follows:
Costs on uncompleted contracts $173,002
Estimate earnings 25,031
-------
198,033
Billings on contracts (188,131)
-------
$ 9,902
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings $ 9,902
Billings in excess of costs and estimated earnings 0
------
$ 9,902
======
NOTE D - NOTE PAYABLE, STOCKHOLDER
Note payable, stockholder consisted of a $15,000, 0% note payable to
stockholder, no monthly payments, unsecured, date of maturity to be determined
by lender.
NOTE E - LONG-TERM NOTES PAYABLE
Long term notes payable consisted of the following at December 31, 1997:
SunTrust Bank
- -------------
Three notes secured by three 1996 Dodge Dakota
Pickup trucks, payable at $731 per month including
interest. Maturity is May 2001. $ 30,408
Current portion (8,778)
------
Long-Term Notes Payable $ 21,630
======
<PAGE>
NOTE E - LONG-TERM NOTES PAYABLE (CONTINUED)
Clark Credit Co.
- ---------------
One Note for the purchase of a Bobcat Loader with bucket, grapple and hydraulic
hammer. Payments are in the amount of $ 786.63 per month including interest.
Maturity is April 2000.
Total Due $22,601
Current portion (9,440)
-------
Long-term Notes Payable $ 13,161
=======
Estimated maturities on long-term notes payable are as follows:
Sun Trust Clark Credit Co.
--------- ---------------
1998 $20,580 $16,150
1999 15,220 7,500
2000 7,160 --
2001 --
Total interest expense incurred on all debts for the year ended December 31,
1997 was $3,053.
NOTE F - LEASES
a) The company has leases for two vehicles, a Peterbuilt Truck and a Mazda Van,
which are classified as operating leases. Monthly payments are $ 692 and $ 379
respectively.
b)The company leases equipment under operating leases that expire at various
dates. The total annual rental for these leases was approximately $ 16,820.
c)The company leases its facility on a month to month basis from the sole
stockholder in the amount of $ 900 per month.
<PAGE>
NOTE G -RELATED PARTY TRANSACTIONS
In addition to the note payable described in Note D and the lease described in
Note F, the company has identified the following related party transactions:
M. Malacarne, the sole stockholder of the company, takes periodic draws. The net
draws paid to M. Malacarne in lieu of wages amounted to $ 47,753 in 1997.
NOTE H- COMMON STOCK
1,000 shares of $1.00 par value common stock are issued and
outstanding at December 31, 1997.
NOTE I - CASH FL0W DISCLOSURES
Operating activities include interest paid of $3,053.
NOTE J - CONTINGENCIES
The Company is a defendant in two civil actions. The Company intends to resolve
these actions in exchange for services of less than $ 8,000. Since the ultimate
resolution of these matters is not ascertainable at this time and the amount is
not material, no provision has been made in the financial statements related to
these claims.
NOTE K - PRIOR PERIOD ADJUSTMENTS
Certain errors resulting in an understatement of previously reported Property &
Equipment were discovered during the subsequent audit of 1996. Accordingly, an
adjustment of $ 33,688 was made at December 31, 1996 to correct Property &
Equipment as of the beginning of the year. Corresponding entries were made to
Accumulated Depreciation and Notes Payable. The net earnings of 1997 was not
effected by the restatement.
<PAGE>
SEALCO SYSTEMS INC.
FINANCIAL STATEMENTS
December 31, 1996
TABLE OF CONTENTS
Independent Auditor's Report 1
Financial Statements
Balance Sheet 2
Statement of Income and Retained Earnings 3
Statement of Cash Flows 4
Notes to Financial Statements 5
<PAGE>
Kerner & Wagshol, P.A.
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Of Sealco Systems, Inc.
We have audited the accompanying balance sheet of Sealco Systems, Inc. (an S
Corporation) as of December 31, 1996, and the related statements of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards,
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sealco Systems, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Kerner & Wagshol, P.A.
April 14, 1999
6415 Lake Worth Road, Suite 302, Lake Worth, Florida 33463
120 S. Dixie Highway, Suite 207, West Palm Beach, Florida 33401
Telephone (561) 357-8776 Facsimile (561) 357-8844
<PAGE>
SEALCO SYSTEMS INC.
Balance Sheet
December 31, 1996
Assets:
Current Assets:
Cash $ 920
Accounts Receivable-Trade (Note B) 188,505
Inventory (Note B) 10,258
--------
Total Current Assets 199,683
--------
Property and Equipment (Note B) 116,834
Less Accumulated Depreciation (41,265)
--------
Net Fixed Assets 75,569
--------
Total Assets $275,252
========
Liabilities & Stockholders' Equity:
Current Liabilities:
Accounts Payable-Trade $ 62,801
Accrued Expenses 13,030
Current Portion Long-Term Notes Payable (Note D) 18,218
Note Payable-Stockholder (Note C) 15,000
--------
Total Current Liabilities 109,049
--------
Long-Term Notes Payable (Note D) 42,960
--------
Total Liabilities 152,009
Stockholders' Equity:
Common Stock (Note G) 500
Retained Earnings 122,743
--------
Total Stockholders' Equity 123,243
--------
Total Liabilities & Stockholders' Equity $275,252
========
See accompanying notes
<PAGE>
SEALCO SYSTEMS, INC.
Statement of Income and Retained Earnings
For the year ended December 31, 1996
Sales (Note B) $ 1,914,795
Cost of Sales:
Materials 932,801
Subcontractors 411,866
Staff Leasing 241,870
Commissions 53,681
Supplies 20,435
Delivery & Freight Out 12,000
------------
Total Cost of Sales 1,672,653
------------
Gross Profit 242,142
General and Administrative Expenses:
Equipment Rental 45,577
Auto and Truck Expense 24,399
Depreciation (Note B) 18,339
Telephone 16,290
Insurance 16,007
Rent (Note E) 10,800
Office Supplies and Expense 6,416
Travel 6,317
Legal and Accounting 6,008
Repairs and Maintenance 4,306
Entertainment 4,211
Interest 3,284
Utilities 2,339
Taxes 1,841
Licenses & Taxes 1,104
Dues and Publications 941
Bank Charges 775
Medical Expenses 550
Postage 546
Seminars and Meetings 520
Donations 310
Advertising 232
-----------
Total General and Administrative Expenses 171,112
-----------
Net Income 71,030
Beginning Retained Earnings 107,258
Draws - M. Malacarne (Note F) (55,545)
-----------
Ending Retained Earnings $ 122,743
===========
See accompanying notes
<PAGE>
SEALCO SYSTEMS, INC.
Statement of Cash Flows
For the year ended December 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 71,030
Adjustments:
Depreciation Expense 18,339
Accounts Receivable Increase (16,818)
Inventory Increase (1,993)
Accounts Payable Increase 7,305
Accrued Expenses Decrease (2,058)
--------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 75,805
CASH FLOWS FROM INVESTING ACTIVITIES 0
--------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 0
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Long-term Debt (30,215)
Stockholder's Draws (55,545)
--------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (85,760)
--------
NET DECREASE IN CASH 9,955
CASH AT BEGINNING OF YEAR 10,875
--------
CASH AT END OF YEAR $ 920
========
See accompanying notes
<PAGE>
SEALCO SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL
Nature of Business
The Company is engaged in paving roads in residential developments and providing
customized paving work for residences in the Stuart area of Florida. Over 50% of
the company's business is from local developers and builders and the balance of
business is from individual homeowners.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Concentration of Risk
Amounts on deposit in a financial institution do not exceed the federally
insured limit. The Company grants credit to its customers who are primarily
located in the Stuart area of Florida, during the normal course of business. The
concentration of credit risk is limited due to the large number of customers
comprising the Company's customer base, but is dependent on the economy of the
construction industry in the area.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The accrual basis of accounting records revenue in the period in which it was
earned rather than when received and records expenses in the period in which it
was incurred rather than paid. The Company did not have any contracts
outstanding for more than 12 months therefore the percentage of completion
method of accounting for long term construction type contracts was not used.
<PAGE>
Operating Cycle
The accompanying financial statements are based upon a one-year operating cycle
which exceeds the life span of most of the Company's contracts.
Inventory
Inventory of merchandise for resale and materials is stated at the lower of cost
or market method using the first-in, first-out method.
Property and Equipment/Depreciation
Property and equipment are recorded at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
straightline and accelerated methods, There were purchases made during the year
which allowed for the full benefit of Section 179 expense. Total depreciation
for the year ended December 31, 1996 was $18,339.
Income Taxes
The Company, with the consent of its stockholders, has elected to be taxed under
the Internal Revenue Code as an S corporation, In lieu of corporate income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in these financial statements.
Accounts Receivable
The allowance for doubtful accounts of $7,000 was based on management's
evaluation of outstanding accounts receivable at the end of the year.
NOTE C - NOTE PAYABLE, STOCKHOLDER
Note payable, stockholder consisted of a $15,000, 0% note payable to
stockholder, no monthly payments, unsecured, date of maturity to be determined
by lender.
<PAGE>
NOTE D -LONG-TERM NOTES PAYABLE
Long term notes payable consisted of the following at December 31, 1996:
SunTrust Bank
- -------------
Three notes secured by three 1996 Dodge Dakota
Pickup trucks, payable at $731 per month including
interest. Maturity is May 2001.
Total Due $32,120
Current portion (8,778)
Long-term Notes Payable $23,342
=======
Clark Credit Co.
- ---------------
One note for the purchase of a Bobcat Loader with bucket, grapple and hydraulic
hammer. Payments are in the amount of $786.63 per month including interest.
Maturity is April 2000.
Total Due $29,058
Current portion (9,440)
-------
Long-term Notes Payable $19,618
=======
Estimated maturities on long-term notes payable are as follows:
Sun Trust Clark Credit Co.
1997 $ 26,850 $ 22,601
1998 20,580 16,150
1999 15,220 7,500
2000 7,160 -0-
2001 -0-
Total interest expense incurred on all debts for the year ended December 31,
1996 was $ 3,284.
<PAGE>
NOTE E - LEASES
The company leases its facility on a month to month basis from the sole
stockholder in the amount of $900 Per month.
NOTE F - RELATED PARTY TRANSACTIONS
In addition to the note payable described in Note C and the lease described in
Note E, the company has identified the following related party transaction:
M. Malacarne, the sole stockholder of the company, takes periodic draws. The net
draws paid to M. Malacarne in lieu of wages amounted to $ 55,545 in 1996
NOTE G - COMMON STOCK
1,000 shares of $1.00 par value common stock are issued and outstanding at
December 31, 1996.
NOTE H - CASH FLOW DISCLOSURES
Operating activities include interest paid of $ 3,284.
NOTE I - CONTINGENCIES
The Company is a defendant in two civil actions. The Company intends to resolve
these actions in exchange for services of less than $ 8,000. since the ultimate
resolution of these matters is not ascertainable at this time and the amount is
not material, no provision has been made in the financial statements related to
these claims.
<PAGE>
2
The unaudited pro forma financial statements as of and for the year ended
September 30, 1998 have been prepared based on historical data of the
Registrant, as adjusted to reflect the acquisition of Sealco Systems, Inc. as if
each such agreement and merger had been effective October 1, 1997. The pro forma
income statement data may not be indicative of the future results of operations
or what the actual results of operations would have been had the acquisition
described above been effective earlier.
<PAGE>
<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(in thousands)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
ThermaCell Sealco Systems for
Technologies per 10-K the year ended
of 9/30/98(a) 12/31/98 Adjustments Proforma
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Net $ 2,860 $ 2,085 $ 4,945
Sales
Cost of Sales 1,900 1,733 3,633
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Gross Profit 960 351 1,312
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Operating Expenses:
Selling and Administrative Expenses 1,823 279 2,102
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
(Loss) Income from Operations (863) 72 (791)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Interest Expense, net (Loss) 15 15
Other (Loss) 69 69
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
Provision (Benefit) for Income Taxes 164 164
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
(Loss) Income (615) 72 (543)
- --------------------------------------- ----------------------- ---------------------- --------------------- -------------------
</TABLE>
<PAGE>
THERMACELL TECHNOLOGIES, INC.
PRO FORMA BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
ThermaCell Technologies
at 9/30/98 (a) Sealco Systems
at 12/30/98 Adjustments Proforma
- --------------------------------- -------------------------- ------------------------ ---------------- --- -----------------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 67 $ 12 $ $ 79
Accounts Receivable, net of
allowance for doubtful accounts 314 231 545
Inventories 489 15 504
Other current assets 310 10 320
-------------------------- ------------------------ ---------------- --- -----------------------
Total current assets 1,180 268 1,448
Property, equipment and other
assets 893 15 208 b 1,116
Goodwill and other assets 1,788 73 c 1,861
-------------------------- ------------------------ ---------------- --- -----------------------
Total 3,861 283 281 4,425
Assets
-------------------------- ------------------------ ---------------- --- -----------------------
Current
Liabilities: 445 83 528
Accounts payable
Other current liabilities 118 36 154
-------------------------- ------------------------ ---------------- --- -----------------------
Total current liabilities 563 119 682
Long-term debt,
(net of current portion) 131 31 162
Stockholders'
equity: 6,863 1 351 d 7,215
Capital
Retained earnings (3,696) 132 (68) e (3.632)
-------------------------- ------------------------ ---------------- --- -----------------------
Total liabilities and $ 3,861 $ 283 281 $ 4,425
stockholders' equity
-------------------------- ------------------------ ---------------- --- -----------------------
</TABLE>
<PAGE>
THERMACELL TECHNOLOGIES, INC.
NOTES TO PRO FORMA INCOME STATEMENT AND BALANCE SHEET DATA
(Unaudited)
(a) The historical financial statements of ThermaCell Technologies for the year
ended September 30, 1998. The Sealco Systems column reflects the operations
for the year ended December 31, 1998.
(b) Reflects the fair market value of Sealco Systems' fixed assets.
(c) Reflects the goodwill recorded for the Sealco Systems acquisition.
(d) Reflects the acquisition of Sealco Systems for 300,000 shares of common
stock.
(e) Reflects the elimination of gain on Sealco Systems books at time of closing
of the transaction which occurred after November 30, 1998.
