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, 1999
[ ] 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.)
440 Fentress Blvd., Daytona Beach 32115
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 253-6262
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)........$4,306,408.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at December 31, 1999 was $4,987,394. The bid price of the common
stock at that date was $0.69.
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 15, 2000 are incorporated by
reference into part III of this Form.
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THERMACELL TECHNOLOGIES, INC.
FORM 10-KSB - Index
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
PART I Page
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Item 1. Business 1.
Item 2. Properties 8.
Item 3. Legal Proceedings 8.
Item 4. Submission of Matters to a
Vote of Security Holders 9.
PART II
Item 5. Market of the Registrant's Securities
and Related Stockholder Matters 9.
Item 6. Selected Financial Data 11.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11.
Item 8. Consolidated Financial Statements
and Supplementary Data 15.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosures 16.
PART III
Item 10. Directors and Executive Officers of the Registrant 16.
Item 11. Executive Compensation 16.
Item 12. Security Ownership of Certain Beneficial
Owners and Management 16.
Item 13. Certain Relationships and Related Transactions 16.
Item 14. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K 17.
Signatures 19.
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This Form 10-KSB contains forward looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, regarding future events and the future performance of the
Company involve risks and uncertainties which may cause the Company's actual
results in future periods to be materially different from any future performance
suggested herein. The Company believes that the patents it is seeking on its
microshell technologies are unique in manufacture and application. There can be
no assurance that such patents will be granted. The patent approval process is
both involved and time dependent. There can be no assurance that approval will
be granted in a manner that protects the Company's technologies or that others
have not claimed aspects of these technologies in patents or pending patents. As
to the Company's performance, actual results could differ materially from those
projected in the forward looking statements contained herein.
PART I
ITEM 1. BUSINESS.
GENERAL
The Company was incorporated in Florida in August 1993, for the purpose of
developing, manufacturing and marketing insulating materials and coatings using
partially evacuated glass microspheres (sometimes referred to as "shells"). The
process of evacuation removes air and other gases from the sphere and thereby
creates a vacuum. A shell is a very small glass sphere (generally the size of a
grain of salt) made by crushing glass particles. The insertion of shells into
various materials and products ("shell technology") can substantially improve
the thermal resistive characteristics of such materials and products resulting
in improved insulation ("R") values. The more a shell is evacuated, the higher
the thermal resistive characteristics of the product or material to which the
shells are added.
Management of the Company believes that there is a broad range of applications
for introduction in products of evacuated or partially evacuated shells, the
effect of which is improved energy efficiency of such products because of the
inherent insulating characteristics provided by the glass spheres. The Company's
strategy is to commercially exploit the use of its shell technology to improve
the "R" values of a number of products. In fiscal year 1995, the Company
completed the development of its first product line that consisted of paints and
coatings containing shells in order to reduce heat transmission and improve the
insulation values of the products. The products are marketed under the
ThermaCool(TM) label.
On November 30, 1995, the Company acquired the assets of C.F. Darling Paint &
Chemicals, Inc., a paint manufacturing company, located in New Port Richey,
Florida ("Darling Paint") for approximately $250,000. in cash. The Company also
assumed the real estate lease for the Darling Paint facility. The Company
acquired these assets to have a facility to produce and develop paints and
coatings for its ThermaCool(TM) product line which incorporates its shell
technology. Prior to this acquisition, the Company was required to purchase
paints and coatings from independent paint and coating manufacturers.
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On March 19, 1997, the Company completed a public offering for 1,375,000 Units,
with each Unit consisting of one share of Common Stock, $.0001 par value, and
one Series A Redeemable Common Stock Purchase Warrant, at a price of $4.00 per
Unit. In addition, the underwriter exercised its over-allotment purchase option
and purchased 206,250 additional Units at the initial per Unit public offering
price, less the underwriting discounts and commissions.
On July 28, 1997, the Company acquired all the outstanding common stock,
representing 100% ownership of Atlas Chemical Co., a paint manufacturer and
distributor, located in Miami, Florida. The Company acquired this firm so that
it would have a larger manufacturing facility to both expand production of
paints and coatings and to obtain an established marketing and distribution
channel which included major accounts such as Home Depot, Ace Hardware, Lowes,
and others.
On October 15, 1998, the Company agreed to acquire T-Coast Pavers/Sealco
Systems, Inc. which had annual revenues of approximately $2 million. ThermaCell
acquired these associated businesses effective December 1, 1998 for 300,000
shares of its common stock valued at $300,000 and in an employment agreement
with its founder and key executive, a payment of an additional 300,000 shares
over the three year employment period. This company provides paver installation
and driveway sealant and coating services primarily to contractors in Southeast
Florida.
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' operations has been
consolidated into the Company's Atlas manufacturing facility to reduce duplicate
costs and increase future operating profits.
The Company has sustained significant operating losses since its inception.
Management's strategy of expanding the ThermaCool(TM) product line, developing a
commercially viable manufacturing process for shells, and expansion into new
markets for its shell technology may result in the Company incurring additional
losses due to the costs associated with these strategies. The Company expects to
incur losses until it is able to increase its sales, expand its product line and
increase its distribution capabilities to a sufficient revenue level to offset
ongoing operating and expansion costs. The Atlas Chemical acquisition and the
other acquisitions should accelerate the Company's plan to achieve profitable
operations.
The Company's long-term business strategy is to (i) expand the marketing and
distribution of ThermaCool(TM) paints and coatings (ii) develop and manufacture
the Company's own shells and (iii) expand the shell technology to other
products, such as drywall, gypsum board, home siding materials and space foam
insulation. Other markets in which the Company may utilize its technology
include refrigeration and cooling systems, automotive and transportation
applications and cups and thermoses. There is no assurance that the Company will
continue to be successful in penetrating the market with its ThermaCool(TM)
product line, developing commercially viable manufacturing techniques, or
addressing other markets.
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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 with the sale of its ThermaCool(TM) paint and coating
products.
The initial ThermaCool(TM) product is a roof coating material which incorporates
the partially evacuated shells into a roof coating mixture which the Company is
now able to manufacture. 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 because of 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. Presently, 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 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
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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 also sell in the general
market because not all shells during the manufacturing process will be
evacuated. These non-evacuated shells will be separated and sold for general use
as fillers, but will be produced at a substantially reduced cost.
Management believes that the Company's current facilities and equipment can be
used to manufacture partially evacuated shells. Presently 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. One of these potential uses include the
aroma therapy applications that the Company is exploring with Bath and Body
Works, a national retail chain. Management has also 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
have 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.
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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.
MANUFACTURING FACILITIES AND TECHNIQUES
Management has acquired machinery, tooling, a high temperature furnace and other
items necessary to manufacture evacuated shells. Production of quantities of
shells sufficient for the Company's immediate needs is now anticipated during
fiscal year 2000. Management will utilize its limited initial production to
provide for early demand expectations. Within the next 12 months a more
substantial facility will need to be built to provide evacuated shells in
quantities greater than 500,000 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 production of 500,000 gallons per year. The
current plant facilities are capable of producing up to $10,000,000 in gross
product sales.
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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.
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, Florida and Pompano Beach ,
Florida. The Company's manufacturing facility is located in Miami, Florida
adjacent to its retail facility. Management has closed its other retail
facilities in Mesa, Arizona and Holiday, Florida to concentrate on the
manufacture and distribution of its ThermaCool(TM) and conventional paint
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products. The Miami retail location will continue 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 has
targeted chains such as Home Depot and Lowe's as point of sale distribution
outlets. 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.
NEW PRODUCT APPLICATIONS AND DEVELOPMENT
The Company 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 for these products.
The Company supplies its Atlas Chemical products with warranties for varying
periods of five to twenty years. Such warranties provide for replacement of
defective product with new product of equivalent price. The Company makes no
other warranties as to its products.
EMPLOYEES
As of September 30, 1999, the Company had 49 employees, of whom fifteen are
salaried and the balance are paid hourly. Of these employees, six are located at
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the Daytona, Florida facility, eighteen are located at T-Coast Pavers in Stuart,
Florida, seven are located at American Paints in Pompano, Florida and the
balance are employed 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 12,230 sq. ft. of space at 440
Fentress Blvd., Daytona Beach, Florida where it maintains its corporate offices
and where it is developing initial production facilities for its evacuated
shells. This lease expires in October 31, 2004. Lease payments are $8,024
monthly. The facility consists of approximately 3,230 square feet of office
space with the balance being used for warehousing and manufacturing. This
location has replaced the Company's Sarasota facility that was vacated at the
expiration of its lease.
The Company rents on a month to month basis approximately 10,000 sq. ft. of
space at 1800 North Powerline Road, Pompano Beach Florida. Current lease
payments are approximately $6,874 per month. This facility consists of
approximately 950 sq. ft. of office and retail space with the balance used for
warehousing and distribution.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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During 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 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.
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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.
During 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 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 at that time 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. This stock
was not registered as of this filing but no claim for the payment of $62,500
worth of the Company's common stock has been made. With licensing of IA's
patents, this litigation has been dismissed. The Company intends to utilize IA's
patents with its own microsphere technologies to strengthen its patent position
in this area.
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 both 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:
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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 and Warrants are listed and traded on NASDAQ
under the symbols, VCLLU, VCLL and VCLLW, respectively. See MD& A discussion of
continued listing situation. 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
1999 Fiscal Year High Low Close High Low Close
------------------------------------------------------------------
First quarter 2 3/8 1 1/4 1 3/8 11/16 3/32 5/16
Second quarter 1 5/8 5/8 1 5/16 9/16 1/8 5/16
Third quarter 1 5/32 15/16 13/16 1/2 7/32 9/32
Fourth quarter 1 27/32 1/2 11/16 1/4 1/32 5/32
(1) Prior to March 1997, there was no active trading in the Company's
securities.
As of September 30, 1999, there were approximately 135 holders of record for
common stock and 22 holders of record of the warrants. However, the Company'
management believes that approximately 300 of shareholder's beneficially own the
Company's Common Stock as of December 31, 1999.
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.
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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.
ITEM 6. SELECTED FINANCIAL DATA.
The following presents selected financial information of the Company as of and
for the periods ended September 30, 1999, September 30, 1998, and September 30,
1997. The Company changed its fiscal year to end September 30 during 1997, which
for 1997 was a ten-month period. The information set forth below is qualified
by, and should be read in conjunction with, the consolidated financial
statements and related notes thereto in their entirety.
PERIODS ENDED
1999 1998 1997
----------------------------------------------------
INCOME STATEMENT DATA
Total revenue $ 4,306,408 $ 2,860,196 $ 1,036,376
Net loss $ (3,677,068) $ (614,486) $ (1,037,730)
Net loss per share $ (0.46) $ (0.18) $ (0.47)
Shares used in per
share computation 7,924,910 3,677,183 2,217,106
BALANCE SHEET DATA, as of ended September 30, 1999, September 30, 1998, and
September 30, 1997.
Total assets $ 5,059,667 $ 3,861,880 $ 3,542,675
Working capital $ 20,430 $ 616,709 $ 334,911
Long-term debt $ 1,377,618 $ 131,207 $ 63,089
Stockholders' equity $ 2,398,737 $ 3,167,528 $ 2,428,090
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Company was a developmental stage enterprise during its initial three years
of operation for the fiscal years through September 30, 1997. During this
development stage period, management devoted the majority of its efforts to
research and development, financing, marketing and activities related to
starting up production of its proprietary technology. These activities were
funded by investments from stockholders and borrowings from unrelated third
parties. Since fiscal year 1998, the Company has been an operating stage
enterprise based upon the several acquisitions that were completed. As a result
of acquisitions, particularly the Atlas Chemical acquisition, the Company has
evolved from the development stage to that of an operating enterprise whose
principal line of business is the sale of paints and coatings within the paint
industry.
The Company has not been in a position to generate sufficient revenues during
its operating history to fund its ongoing operating expenses or its continuing
product development activities. The successful IPO completed in March 1997
allowed the Company to repay its then outstanding indebtedness and provided
working capital. 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
$6,919,000 at September 30, 1999.
Acquisition of T-Coast Pavers/Sealco Systems, Inc.
- -------------------------------------------------
On October 15, 1998, the Company agreed to acquire T-Coast Pavers/Sealco
Systems, Inc. of Stewart, Florida which for the calendar year 1997 had annual
revenues of approximately $2 million. The Company acquired these associated
businesses effective December 1, 1998 for 300,000 shares of its common stock
valued at $300,000 and an employment agreement with its founder and key
executive that requires a payment of an additional 300,000 shares over a three
year employment period. This company provides paver installation and driveway
sealant and coating services primarily to contractors in Southeast Florida.
Acquisition of American Paints, Inc.
- ------------------------------------
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' manufacturing operations
have been consolidated into the Company's Atlas manufacturing facility to reduce
duplicate costs.
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 microshells 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.
12
<PAGE>
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.
With the Company's acquisition of Atlas Chemical in July 1997, that was followed
by the T-Coast Pavers/Sealco and American Paints in December 1999, the Company
has established an operating business base within the paint industry. As a
consequence of this, 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 its paint
operations to their distribution channels. 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 paint distribution channels 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 1999 COMPARED TO FISCAL YEAR 1998
Revenues
- --------
Total revenue for the fiscal year ended September 30, 1999, was $4,306,408
compared to $2,860,196 for fiscal year ended September 30, 1998, which
represents an increase of $1,446,212, or 51%. The increase was primarily the
result of the sales contribution of the company's acquisitions, American Paints
and T-Coast Pavers that were acquired during December 1998. The sales of its
Atlas Chemical subsidiary declined during the year because of aggressive pricing
of paint products within its competitive locality.
Cost of Sales
- -------------
Cost of sales for the fiscal year ended September 30, 1999, increased 73% to
$3,293,952 from $1,900,043 in the fiscal 1998. Cost of sales as a percentage of
sales increased from 66.4% to 76.4 % from 1998 to 1999. This increase is
attributed to higher costs associated with manufacture and sale of the Company's
paint products and the higher costs of the T-Coast Pavers operation as a
percentage of sales.
Selling, General and Administrative Expenses
- --------------------------------------------
For the fiscal year ended September 30, 1999, total selling, general and
administrative expenses were $3,529,469 as compared to $1,822,741, for the prior
fiscal year., a 94% increase. This increase is attributed to the additional
selling, general and administrative expenses of all the company's operations
including the two businesses, American Paints and T-Coast Pavers, that were
acquired during this fiscal year.
13
<PAGE>
In an effort to streamline operations and further cut costs, management closed
its Arizona operation in September 1999 just prior to the end of its fiscal year
and in November 1999 closed down its retail paint store in Holiday, Florida.
These endeavors had no impact upon fiscal year 1999 operating results but will
further reduce future overhead expenses. A major effort undertaken during the
final quarter of this fiscal year was the establishment of new corporate office
and manufacturing facility in Daytona Beach, Florida. Previously the Company had
established its corporate offices in Sarasota, Florida that was subsequently
relocated to Daytona, Florida. This new Daytona facility has the capability to
house the extensive manufacturing operation that the company anticipates
establishing to meet its projected needs for microshell products.
Interest Expense
- ----------------
Interest expense increased 1022%, or $256,062 to $284,130 for the fiscal year
ended September 30, 1999 from $25,068 in the previous fiscal year ended 1998.
This increase is attributed to the interest accrued on the discounted
convertible debentures the company issued during the fiscal year in the total
amount of $1,333,333.
Tax Benefit
- -----------
As a result of current management's year end review of the Company's financial
status, a determination has been made by management to establish a 100%
valuation allowance for deferred relating to the net operating losses.
Net Loss
- --------
The net loss and the net loss per share were $3,677,068 and $0.46 per share
respectively, for the period ended September 30, 1999, as compared to a net loss
and net loss per share of $614,486 and $.18 per share respectively, for fiscal
year 1998. The loss was a 498% increase amounting to $3,062,582 over the
previous fiscal year, but the loss per share was a 155% increase because of the
greater number of shares outstanding. On a weighted average basis, there were
7,924,910 shares outstanding for fiscal year ended September 30, 1999 as
compared to 3,677,183 shares outstanding for the previous fiscal year, a 115%
increase.
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 same period ending of 1997, which represented an increase of
$1,823,820, or 176%. The increase was a 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 contribution in the prior
fiscal period was minimal.
14
<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 the fiscal 1997. Cost of sales as a percentage of
sales increased to 67.2% from 65.1% for 1998 over 1997. This increase is
attributed to a product mix contributing to higher cost of sales on its present
production volume. Consequently, the gross profit margin decreased to 33.6% for
fiscal year 1998 over that of 34.9% for the prior fiscal period. Management
expects that the eventual introduction of its ThermaCool(TM) products to the
established customer base of Atlas will stimulate new sales and thereby improve
gross profit margins.
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 same period of the
previous year, an increase of $322,224, or 22%. The increase was largely due to
additional expenses incurred with the acquisition of Atlas Chemical with its
existing S,G, & A burden as well as costs associated with increased marketing
efforts, staffing, and other expenses associated with the Company's expanded
operations. Management has taken step during the recent fiscal year to eliminate
duplicate costs.
In June 1998, the Company relocated its corporate offices to 1125 Commerce Blvd,
Sarasota, Florida from its former location in Holiday, Florida.
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 did not
incurred any significant debt over the 1998 fiscal year.
Net Loss
- --------
The net loss and the net loss per share were $614,486 and $0.18, respectively,
for the year ended September 30, 1998, as compared to a net loss and net loss
per share of $1,037,730 and $.47, respectively, for the period ending September
30, 1997. The decrease in loss is, in part, attributed to the Company's higher
level of sales while both holding its selling, general and administrative costs
to a 22% increase over the prior year and benefiting from the substantial
reduction in its interest expense over that prior period. On a weighted average
basis, there were 3,677,183 shares outstanding for fiscal year ending September
30, 1998 as compared to 2,217,106 shares outstanding for fiscal period ending
September 30, 1997, a 66% increase.
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. During this fiscal year, the Company
received $250,000 from a unaffiliated stockholder and completed conversion of
15
<PAGE>
all convertible preferred stock for the issuance of 1,405,000 shares of common
stock. Also during this year, the Company completed two acquisitions: American
Paints, Inc. of a Pompano Beach, Florida, a paint manufacturer and distributor;
and T-Coast Pavers/Sealco Systems, Inc., a Stewart, Florida, firm that provide
paving installation and seal coating within the residential and commercial
markets in Southeast Florida.
On September 1, 1999, the Company was notified by NASDAQ that its listing on the
NASDAQ Small Markets was in violation of the stock price requirements for
continued listing. This present requirement was implemented on August 27, 1997
and required the Company to maintain a $1 bid price for its listed common stock.
Presently, the Company does not meet this requirement. The Company has filed for
a hearing to present information for waiver of this present deficiency subject
to the Company's compliance within the next thirty days.
During the fiscal year ended September 30, 1999, the Company arranged the
placement of $1.3 million of 9% Redeemable Convertible Promissory notes with a
private funding source. Within this financing, the Company issued two warrants
to purchase 50,000 shares each of the Company's common stock at $0.50 per share.
This placement was discounted from face value with the Company receiving
approximately $900,000 after placement costs and expenses to complete this
funding. The funds from this funding were used for the relocation of its
corporate offices to Daytona, Florida, establishment of its microshell
manufacturing facility at that location, and to supplement working capital.
The Company continues to experience operating losses. The Company's net working
capital and stockholders' equity were $20,430 and $2,398,737 at September 30,
1999 as compared to $616,709 and $3,167,528 at September 30, 1998, respectively.
The Company has not historically 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 expects that it will be able to arrange for additional financial
resources to properly execute its strategic plan although no assurances can be
given that it will be successful in such endeavors.
The Company does not have sufficient working capital to meet its planned needs
for the next twelve months without additional funding. Management is presently
seeking funding to provide for the next twelve months of operations. One such
potential funding is that provided by Texas Pharmaceutical Inc. that will
purchase 5,000,000 shares of preferred stock for $1,000,000. This funding is
subject to execution of a definitive agreement, approval of the transaction by
the Company's board of directors and shareholder approval and is further
dependent upon the Company maintaining its listing status on NASDAQ. In
addition, management has received a second funding proposal from a foreign
financing source for $1.5 million for a convertible preferred stock issue.
Management is presently evaluating these proposals that are both subject to
finalizing definitive agreements. Although management is optimistic about
obtaining additional capital, it is not certain that either funding will
eventually be finalized and, should one be finalized, it will not necessarily
meet all the Company's financing needs over the next twelve months.
16
<PAGE>
YEAR 2000
To the best of our knowledge and belief, the Company has not experienced any
significant disruption in data processing on our financial reporting and
operational systems or malfunction in equipment containing microprocessors or
significant delays in receiving goods or services from key vendors and service
providers or delinquency in the receipt of payments from significant customers
for services provided by the Company as a result of the year 2000 issue. We
cannot be sure that some condition relating to the year 2000 exists, but has not
been identified.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
During 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 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.
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. To date, there have been no
adverse effects upon the Company relating to 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. 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.
17
<PAGE>
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.
During 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 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 at that time 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. This stock
was not registered as of this filing but no claim for the payment of $62,500
worth of the Company's common stock has been made. With licensing of IA's
patents, this litigation has been dismissed. The Company intends to utilize IA's
patents with its own microsphere technologies to strengthen its patent position
in this field.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company believes it will experience stronger demand for its products in the
spring, summer and fall of each year. By directing its marketing efforts to the
warmer states, the Company feels that fluctuations resulting from seasonality
will be minimized.
INFLATION
Inflation has not proven to be a factor in the Company's business since its
inception and is not expected to have a material impact on the Company's
business in the foreseeable future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 appears at page F-1, which appears after
this page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on March 30, 2000.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on March 30, 2000.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on March 30, 2000.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual
Meeting of Stockholders to be held on March 30, 2000.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1)(2) CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
A list of the Consolidated Financial Statements filed as part of this
Report is set forth in Item 8 and appears at Page F-1 of this Report; which
list is incorporated herein by reference. The Financial Statement Schedules
and the Report of Independent Auditors as to Schedules follow the Exhibits.
19
<PAGE>
(a)(3) EXHIBITS.
1.1 Revised Form of Underwriting Agreement*
1.2 Revised Form of Underwriter's Warrants*
1.3 Revised Form of Selected Dealers Agreement*
1.4 [Reserved]
1.5 [Reserved]
1.6 Executed Escrow Agreement and Amendment
thereto entered into by First of America, Bank of Michigan, N.A.,
the Company and the Underwriters*
3.1 Certificate of Incorporation and Amendment to Certificate of
Incorporation of the Company*
3.1(a) Certificate of Amendment to Certificate of Incorporation to
reflect 1 for 10 reverse stock split*
3.1(b) Form of Certificate of Amendment to Certificate of Rights,
Designation and Preferences of Series A Preferred Stock*
3.2 Bylaws of the Company*
3.3 Amendment to Bylaws*
4.1 Specimen of Common Stock Certificate*
4.2 Specimen of Warrant Certificate*
4.3 Revised Form of Warrant Agreement*
4.4 Conversion Notice and Election Form for Convertible Note Holder*
5.1 Opinion of Johnson, Blakely, Pope, Bokor, Ruppel & Burns, P.A. as
to legality of issuance of Units*
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*
20
<PAGE>
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.
(b) Reports on Form 8-K
(i) Form 8-K filed December 14, 1998 containing the Asset Purchase
Agreement between the Issuer and American Paints, Inc.
(ii) Form 8-K filed January 11, 1999 containing the Stock Purchase
Agreement between the Issuer and Shareholder's of T-Coast
Pavers/Sealco Inc.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: January 17, 2000 By: /s/ John Pidorenko
-----------------------
John Pidorenko
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John Pidorenko President and Chief Executive
- ---------------------------- Officer (Principal Executive January 17, 2000
John Pidorenko Officer) and Chairman of
the Board
/s/ Gerald Couture Vice President and Chief
- ---------------------------- Financial Officer (Principal January 17, 2000
Gerald Couture Financial Officer)
/s/ Kevin Brennan Controller, Principal January 17, 2000
- ---------------------------- Accounting Officer
Kevin Brennan
/s/ Kendall B. Stiles
- --------------------------- Director January 17, 2000
Kendall B. Stiles M.D.
/s/ Donald Huggins
- --------------------------- Director January 17, 2000
Donald Huggins
/s/ Maurice Malacarne Vice President
- --------------------------- Director January 17, 2000
Maurice Malacarne
22
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Financial Statements
for the periods ended
September 30, 1999 and 1998
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Contents
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ThermaCell Technologies, Inc.
Daytona, Florida
We have audited the accompanying consolidated balance sheets of ThermaCell
Technologies, Inc. and subsidiaries as of September 30, 1999 and 1998 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 financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 consolidated financial position of
ThermaCell Technologies, Inc. as of September 30, 1999 and 1998 and the
consolidated results of their operations and their cash flows for the periods
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company has suffered recurring losses from operations,
which raise substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 16. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Cherry, Bekaert & Holland, L.L.P.
-------------------------------------
Cherry, Bekaert & Holland, L.L.P.
Certified Public Accountants
Atlanta, Georgia
December 2, 1999, except for Notes 17 & 18, as to which the date is January 14,
2000.
F-2
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and 1998
Assets
September 30, September 30,
1999 1998
------------ ------------
Current assets
Cash $ 60,173 $ 67,405
Accounts receivable
Trade, net of allowance for uncollectible
accounts of $194,125 for 1999 and
$64,227 for 1998 388,316 314,262
Notes receivable - trade 93,000 52,000
Notes receivable - other 11,510 76,622
Officer advance 156,234 -
Other assets - 18,998
Inventories 541,933 489,259
Prepaid expenses and other 52,576 161,308
------------ ------------
Total current assets 1,303,742 1,179,854
------------ ------------
Net property and equipment 949,202 892,972
------------ ------------
Other assets
Deposits 55,901 16,266
Deferred income tax benefit, net - 795,309
Prepaid expenses 164,242 -
Goodwill, net of accumulated amortization
of $206,453 for 1999 and $75,937 for 1998 1,865,174 815,010
Other intangibles, net of accumulated
amortization of $33,620 for 1999 and
$16,471 for 1998 721,406 162,469
------------ ------------
Total other assets 2,806,723 1,789,054
------------ ------------
Total assets $ 5,059,667 $ 3,861,880
============ ============
See notes to consolidated financial statements.
<PAGE>
Liabilities and Stockholders' Equity
September 30, September 30,
1999 1998
------------ ------------
Current liabilities
Accounts payable $ 998,961 $ 445,118
Accrued expenses 129,290 45,396
Accrued payroll and payroll taxes 31,863 13,647
Current maturities of long-term debt
Notes payable 41,172 20,340
Capital leases 82,026 38,644
------------ ------------
Total current liabilities 1,283,312 563,145
------------ ------------
Long-term debt, net of current maturities
Notes payable 1,148,393 58,128
Capital lease obligations 229,225 73,079
------------ ------------
Total long-term debt, net of
current maturities 1,377,618 131,207
------------ ------------
Total liabilities 2,660,930 694,352
------------ ------------
Stockholders' equity
Preferred stock, Series A, par value $.0001
5,000,000 shares, authorized; 0 and
5,000,000 shares issued and - 500
outstanding at September 30, 1999 and 1998
Preferred stock, Series B convertible, $1,000
stated value, 8% dividend, authorized
1,500 shares, 250 issued - 250,000
and outstanding at September 30, 1998
Common stock, par value $.0001, authorized
20,000,000 shares, 9,433,653 and
5,129,325 issued and 943 513
outstanding, respectively
Additional paid-in capital 9,519,168 6,612,481
Deduct notes receivable associated with
stockholder loan (147,035) (453,695)
Accumulated deficit (6,919,339) (3,242,271)
Treasury stock, 40,000 common shares (55,000) -
------------ ------------
Total stockholders' equity 2,398,737 3,167,528
------------ ------------
Total liabilities
and stockholders' equity $ 5,059,667 $ 3,861,880
=========== ============
F-3
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Periods ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------------- --------------------
<S> <C> <C>
Revenue
Sales $ 4,306,408 $ 2,860,196
Less cost of sales 3,293,952 1,900,043
--------------------- --------------------
Gross profit 1,012,456 960,153
Selling, general and administrative expenses 3,529,469 1,822,741
--------------------- --------------------
Loss from operations (2,517,013) (862,588)
--------------------- --------------------
Other income (expense)
Interest income 4,431 40,471
Interest expense (284,130) (25,068)
Loss on sale of division (86,945) -
Gain on sale of assets 1,898 -
Other 68,762
--------------------- --------------------
Total other income (expense) (364,746) 84,165
--------------------- --------------------
Loss before income taxes (2,881,759) (778,423)
Income taxes
Deferred income tax benefit (expense) (795,309) 163,937
--------------------- --------------------
Net loss $ (3,677,068) $ (614,486)
===================== ====================
Basic and diluted loss per common share $ (0.46) $ (0.18)
===================== ====================
Weighted average number of common shares outstanding 7,924,910 3,677,183
===================== ====================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Periods ended September 30, 1999 and 1998
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, Treasury
Shares Amount Shares Amount Shares Amount Capital Deficit Stockholder Stock Total
--------- ------ --------- ------ --------- ------ ---------- ----------- ----------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of stock for
payments of services 274,900 27 154,928 154,955
Issuance of stock for
acquisitions 872,000 87 1,399,913 1,400,000
Issuance of stock in
connection with
conversion of
preferred stock 1,405,000 141 249,860 250,001
Issuance of stock to
employees 460,000 46 379,954 380,000
Issuance of stock for
patent rights 470,544 47 499,953 500,000
Payments associated
with stockholder 251,660 251,660
loan, net
Cancellation of
Series B, preferred (428,116) (43) (250) (250,000) 250,043
Exchange of preferred
for common 1,250,000 125 (5,000,000)(500) 375
Cancellation of
dividends of Series (28,339) (28,339)
B, preferred
Return of common
shares 55,000 (55,000)
Net loss for year
ended September 30, (3,677,068) (3,677,068)
--------- ------ --------- ------ --------- ------ ---------- ----------- ----------- ----- ----------
Balance,
September 30, 1999 9,433,653 $ 943 - $ - - $ - $ 9,519,168$(6,919,339)$(147,035) (55,000)$2,398,737
========== ===== ========= ====== ========= ====== =========== ========== =========== ===== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Periods ended September 30, 1999 and 1998
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Reconciliation of net loss to net cash used
in operating activities
Net loss $ (3,677,068) $ (614,486)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 196,477 161,757
Amortization 145,970 74,192
Deferred income tax benefit 795,309 (163,937)
Gain on sale of equipment (1,898) -
Loss on sale of division 86,944 -
Common stock issued to employees 380,000 -
Common stock issued for services 154,955 110,035
Changes in assets and liabilities, net
of acquisitions
(Increase) decrease in accounts and
notes receivable 223,276 (58,533)
(Increase) decrease in inventories 141,253 (78,287)
Increase in officer advance (156,234) -
Increase in prepaid and other assets (306,213) (171,215)
Increase (decrease) in accounts payable 150,192 (106,454)
Increase (decrease) in accrued expenses 78,351 (418,347)
-------------------- --------------------
Net cash used in operating activities 1,788,686) (1,265,275)
-------------------- --------------------
Cash flows from investing activities
Capital expenditures (137,507) (387,031)
Acquisitions 93,899 (115,000)
Proceeds from sale of equipment 73,000 -
Proceeds from sale of division 8,000 -
Expenditures for patent, net (77,380) (94,267)
-------------------- --------------------
Net cash used in investing activities (39,988) (596,298)
-------------------- --------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------- --------------------
<S> <C> <C>
Cash flows from financing activities
Proceeds form issuance of common stock $ 250,000 $ -
Proceeds from issuance of Series B
preferred stock - 1,500,000
Proceeds form issuance of notes payable 1,462,363 140,178
Principal payments on notes payable (114,242) (48,487)
Principal advances on stockholder loan (326,069) (258,330)
Proceeds from payments on stockholder loan 632,729 355,095
Costs associated with obtaining financing - (300,000)
Cancellation of preferred dividends (28,339) -
Purchase of treasury stock (55,000) -
Purchase of canceled common stock - (40,000)
-------------------- --------------------
Net cash provided by financing activities 1,821,442 1,348,456
-------------------- --------------------
Net decrease in cash (7,232) (513,117)
Cash - beginning 67,405 580,522
-------------------- --------------------
Cash - ending $ 60,173 $ 67,405
==================== ====================
</TABLE>
F-6
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 1999 and 1998
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 two wholly owned subsidiaries, Atlas
Chemical Co., ("Atlas"), that was acquired in July 1997, and Sealco
Corporation doing business as T-Coast Pavers, that was acquired in
December 1998. In addition, the Company acquired certain assets and
assumed certain liabilities of American Paints, Inc. in December
1998. The Company manufactures and distributes paints and coatings
that encompass innovative microsphere technologies; the paver
subsidiary installs paving materials. Presently, substantially all
of the Company's sales and accounts receivables are generated in
Florida. The Mesa, Arizona division was closed in September 1998.
All of the Company's sales and assets are domestically located. No
customer represents more that 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 and Long-lived Assets
Intangible assets subject to amortization include trademarks,
goodwill and patents. Agreement not to compete are being amortized
on a straight-line basis over three years. 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.
The Company evaluates the impairment of intangible and long-lived
assets on an ongoing basis in relation to the undiscounted cash
flows of the related asset.
F-7
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 1 - Summary of Significant Accounting Policies (continued)
Principle of Consolidation
The accompanying financial statements include the accounts of
ThermaCell Technologies, Inc. and its subsidiaries Atlas Chemical
Co. and T-Coast Pavers, 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.
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, 1999 and 1998 because they are
anti-dilutive.
Advertising
The Company expenses advertising costs as they are incurred.
Advertising costs were $10,463 and $46,116 for the periods ended
September 30, 1999 and 1998, respectively.
F-8
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 1 - Summary of Significant Accounting Policies (continued)
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.
Impact of New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued the
following accounting pronouncement which the Company will be
required to adopt in future periods:
FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" requires that derivative instruments such as
options, forward contracts and swaps be recorded as assets and
liabilities at fair value and provides guidance for recognition of
changes in fair value depending on the reason for holding the
derivative. The Company does not presently have transactions
involving derivative instruments, but may do so in the future. The
Company is required to adopt Statement No. 133 for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
Note 2 - Inventories
Inventories consisted of the following at September 30:
1999 1998
- -------------------------------------------------------------------------
Raw materials $ 385,746 $ 267,846
Finished goods (manufactured and purchased) 156,187 221,413
----------------------------
$ 541,933 $ 489,259
============================
F-9
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 3 - Property and Equipment
Property and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------------------- ---------------------
<S> <C> <C>
Furniture and fixtures $ 131,808 $ 125,167
Equipment 1,055,608 551,319
Transportation equipment 168,345 263,419
Leasehold improvements 207,349 201,597
-------------------- ---------------------
1,563,110 1,141,502
Less: Accumulated depreciation (613,908) (248,530)
-------------------- ---------------------
$ 949,202 $ 892,972
-------------------- ---------------------
</TABLE>
Depreciation expense was $196,477 for the year ending September 30,
1999 and $161,757 for the year ended September 30, 1998.
Note 4 - Related Party Transactions
The Company paid $80,637 for legal services during fiscal year 1999
from a law firm that is a stockholder and had an account payable of
$28,683 and $18,052 at September 30, 1999 and 1998, respectively.
Notes receivable totaling $303,269 and $453,695 at September 30,
1999 and 1998, respectively are from an officer and stockholder of
the Company. These are demand notes bearing interest at 5%. Of the
$303,269, $156,234 was paid to the Company, by the officer,
subsequent to the end of the year. This amount was reported as a
current asset on the financial statements.
Note 5 - Basic and Diluted Loss per Share Calculations
<TABLE>
<CAPTION>
For the year ending September 30, 1999 For the year ending September 30, 1998
------------------------------------------------ -------------------------------------------------
Loss Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- -------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (3,677,068) $ (614,486)
Less: Preferred
stock dividends 41,215
-------------- -------------- ----------- -------------- -------------- ------------
Income available to
common shareholders $ (3,677,068) 7,294,910 $ (0.46) $ (655,701) 3,677,183 (0.18)
shareholders
============= ============== =========== ============== ============== ============
</TABLE>
F-10
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 5 - Basic and Diluted Loss per Share Calculations (continued)
Outstanding options and warrants for 3,696,250 common shares were not
included in earnings per share calculations due to their anti-dilutive
effect as of September 30, 1999.
Outstanding options and warrants for 2,811,250 common shares were not
included in earnings per share calculations due to their anti-dilutive
effect as of September 30, 1998.
Note 6 - Capital Leases
The Company leases vehicles and 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, 1999 has a cost of $434,924, accumulated amortization
of $115,671 and a net book value of $319,253. 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:
Total minimum lease payments $ 392,518
Less: Amount representing interest 81,267
---------------
Present value of net minimum lease
payments 311,251
Less: Current maturities 82,026
---------------
$ 229,225
===============
The following is a schedule by years of minimum lease payments
under the above lease agreements as of September 30, 1999.
2000 $ 121,901
2001 120,115
2002 97,610
2003 42,308
2004 10,584
-------------------
$ 392,518
===================
F-11
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 7 - Long-term Debt
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------- ---------------------
<S> <C> <C>
19.99% note due in 48 monthly installments of $787,
including interest, through October 2000, collateralized $ 9,127 $ -
by equipment
Redeemable convertible promissory note due July 2002
interest payable quarterly at stated rate of 9% on base 531,111 -
amount of $666,667
Various notes payable on vehicles with interest ranging
from 7.3% to 10.35%, payments from $236 to $794 per month, 79,328 78,468
and maturities from September 1999 to May 2003
Redeemable convertible promissory note due March 2002
interest payable quarterly at stated rate of 9% on base 569,999 -
amount of $666,667
-------------------- ---------------------
1,189,565 78,468
Less: Current maturities (41,172) (20,340)
-------------------- ---------------------
$ 1,148,393 $ 58,128
-------------------- ---------------------
</TABLE>
Maturities of long-term debt are as follows:
2000 $ 41,172
2001 28,004
2002 1,114,234
2003 6,155
-------------------
$ 1,189,565
-------------------
F-12
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 8 - Operating Leases
The Company leases a buildings and office space under operating
leases. These leases expire at various dates through 2004. Rental
expense under these leases was $128,761 and $111,153 for 1999 and
1998, respectively. The following is a schedule by years of minimum
rentals under the above lease agreements as of September 30, 1999.
2000 $ 121,901
2001 120,115
2002 97,610
2003 42,308
2004 10,584
-------------------
$ 392,518
-------------------
Note 9 - Research and Development Costs
Research and development costs included in the statements of
operations totaled $5,992 and $50,848 for the periods ended
September 30, 1999 and 1998, respectively.
Note 10 - Supplemental Cash Flow Information
Interest paid totaled $60,876 and $25,068 for the periods ended
September 30, 1999 and 1998, respectively.
Common stock was issued in payment of certain services and Series
B preferred stock dividend obligations.
Note 11 - Concentration of Credit Risk
The Company operates from four locations in Florida to manufacture
and sell its paints and coatings and related products and
services. The Company extends credit to its customers
substantially without collateral. The business operations are
influenced by the general economic conditions of the surrounding
area.
The paving business is concentrated in southeast Florida and is
influenced by the general economic conditions of the surrounding
area.
F-13
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 12 - Acquisitions
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. In September 1999 most of the
assets were sold for $8,000, and the lease was assumed by the
acquirer.
ThermaCell acquired Sealco Corporation d/b/a T-Coast Pavers on
December 1, 1998 for 300,000 shares of its common stock valued at
$302,500. This acquisition was recorded using the purchase method
of accounting for business combinations. The financial statements
reflect ten months of operations for this acquisition which is
substantially the same as the full year.
On December 1, 1998, the Company acquired certain assets and
liabilities of American Paints, Inc., a Pompano Beach, Florida
paint manufacturer and distributor for 572,000 common shares
valued at $1,100,000. This acquisition was also recorded as a
purchase transaction. The financial statements reflect ten months
of operations for this acquisition which were substantially the
same as the full year.
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 pro
forma basis in the table below to reflect a full year of
operations in ThermaCell's operating statements at September 30,
1998:
<TABLE>
<CAPTION>
ThermaCell Ladehoff American Paints T-Coast/ Sealco Consolidated
Paints
--------------- --------------- ---------------- ---------------- ---------------
<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.
F-14
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
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 carryforwards incurred in 1998.
The Company has a net operating loss carryforward of $6,919,000
at September 30, 1999 that expires in 2009 through 2013.
A valuation allowance is required by SFAS 109 if, based on the
weight of available evidence, it is more likely that 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 100 percent and 50 percent for September
30, 1999 and 1998 was necessary. Significant components of the
Company's net deferred tax assets are as follows:
September 30, 1999 September 30, 1998
------------------ ------------------
Tax benefit of net operating loss $ 2,800,999 $ 1,590,618
Less: Valuation allowance (2,800,999) (795,309)
------------------ ------------------
$ - $ 795,309
================== ==================
The Company's deferred income tax provisions include the following
components:
September 30, 1999 September 30, 1998
------------------ ------------------
Future net operating
loss deductions $ 1,210,381 $ 327,874
Change in valuation
for tax benefit of net
operating loss (2,005,690) (163,937)
------------------ ------------------
$ (795,309) $ 163,937
================== ==================
F-15
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 13 - Income Taxes (continued)
A reconciliation of the income tax benefit computed at the federal
statutory rate and the Company's effective rate follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------- ------------------
<S> <C> <C> <C> <C>
Federal statutory rate $ 979,840 34% $ 264,664 34%
Adjustments - primarily state income 230,541 8% 63,210 8%
taxes
Change in valuation for tax benefit of (2,005,690) (70%) (163,937) (21%)
net operating loss
------------------- --------------- ------------------ -------------
$ (795,309) $ (28%) $ 163,937 $ 21%
------------------- --------------- ------------------ -------------
</TABLE>
Note 14 - Segment Information
The Company operates in three primary business segments, which
are identified based on products and services.
The Company, through its wholly owned subsidiary Sealco
Corporation doing business as T-Coast Pavers installs brick
pavers in driveways, and sidewalks.
The Company, through its wholly owned subsidiary Atlas Chemical,
and through American Paints manufactures and distributes paints
and coatings.
The Company is preparing to manufacture and sell microscopic
evacuated glass spheres (microcells) in the next fiscal year.
During the current year, the Company incurred expenses in
perfecting the manufacturing process. Corporate general and
administrative expenses are included in this division. This
segment is identified as ThermaCell Technologies.
F-16
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 14 - Segment Information (continued)
The following table presents information about the results of
operations of the Company's business segments:
<TABLE>
<CAPTION>
ThermaCell Paint Paver
Technologies Division Division Consolidated
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue
Sales $ $ 2,786,961 $ 1,519,447 $ 4,306,408
Less cost of sales
2,152,405 1,141,547 3,293,952
------------- ------------- -------------- -------------
Gross profit 634,556 377,900 1,012,456
Selling, general and
administrative expenses 1,668,915 1,443,397 417,158 3,529,470
------------- ------------- -------------- -------------
Loss from operations (1,668,915) (808,841) (39,258) (2,517,014)
------------- ------------- -------------- -------------
Other income (expense)
Interest income 4,431 4,431
Interest expense (257,566) (16,999) (9,565) (284,130)
Loss on sale of division (86,944) - - (86,944)
Gain on sale of assets 6,771 (4,873) - 1,898
Other
------------- ------------- -------------- -------------
Total other income(expense) (333,308) (21,872) (9,565) (364,745)
------------- ------------- -------------- -------------
Loss before income taxes (2,002,223) (830,713) (48,823) (2,881,759)
Income taxes
Deferred income tax expense (795,309) (795,309)
------------- ------------- -------------- -------------
Net loss $(2,797,532) $ (830,713) $ (48,823) $(3,677,068)
============= ============= ============== =============
</TABLE>
F-17
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 15 - 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.
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. The offering price for such stock was $1,500,000.
Proceeds from the offering after deducting related expenses
totaled $1,200,000.
As of September 30, 1999, all of the series A and B preferred
stock was converted to 4,155,000 shares of common stock, including
dividends paid in common stock.
Common Stock Transactions
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.
During November 1998, the Company received $250,000 from an
unaffiliated investor.
F-18
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 15 - Stockholders' Equity (continued)
In December 1998, the Company completed two acquisitions: American
Paints, Inc. of Pompano Beach, Florida, paint manufacturer and
distributor for the issuance of 572,000 shares of common stock;
and T-Coast Pavers/Sealco Systems, Inc., a Stewart, Florida, firm
that provides paving installation and seal coating within the
residential and commercial markets in southeast Florida for the
issuance of 300,000 shares of common stock.
During August 1999, the Board of Directors waived certain
performance requirements that allowed conversion of preferred
stock held by its President and Chairman, John Pidorenko, and
authorized that this preferred stock issue be converted into 1.25
million shares of common stock which was consistent with its
established conversion terms. The conversion permitted the holder
to use common stock to raise funding for the benefit of the
Company. A total of $303,269 has been funded through December 31,
1999 as a result of this action.
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 separately.
In February, 1999 in payment of services, with compensation for
such services, the Company entered into a contractual arrangement
for warrants to purchase 450,000 shares of common stock at an
exercise price of $1.00 per share.
Authorized common shares have been reserved for the warrants.
F-19
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 15 - Stockholders' Equity (continued)
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, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Shares Exercise Year of
Price Expiration
----------------- ------------ ---------------
<S> <C> <C> <C>
Incentive awards to corporate
officers - year ended September 30:
1997 700,000 $ 0.50 2002
1998 75,000 0.50 2003
1999 75,000 0.50 2004
Section 422A plan awards:
Corporate officer 285,000 0.50 2008
Key employees 170,000 0.50 2008
-----------------
Total awards 1,305,000
=================
</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 $0.50 during December, 1997.
In addition, 360,000 common stock options were issued for
consulting and financial services at an exercise price of $1.06
and an expiration of December 31, 2002.
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.
F-20
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 15 - Stockholders' Equity (continued)
Stock Options (continued)
The exercise price of all options exceeded the market price of
the Company's common stock as of September 30, 1999.
Note 16 - Business Strategy and Operational Plan
The Company has historically been unprofitable during both its
development stage and since it acquired significant operating
businesses, beginning with the Atlas Chemical Company acquisition
in July 1997. Management has recently initiated a business
strategy and operational plan that include the following essential
elements: (i) achieve profitability for fiscal year 2001 by
restructuring operations and consolidating production facilities;
(ii) begin production of microshells during fiscal year 2000 to
provide for its immediate projected requirements over the next
nine months; (iii) expand sales of conventional paint and coating
products through the channel of distribution available from the
combined customer bases of Atlas Chemical and American Paints; and
(iv) initiate a marketing program for ThermaCool paint products to
demonstrate the benefits of this new technology without the
Company depending on ThermaCool sales, and (v) introduce unique
microshell products for special customers such as the national
chain, Bath & Body Works and others. With this 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.
Presently, the Company does not have sufficient working capital to
meet its needs to implement its present strategy. There is no
assurance that sufficient revenues will be generated or that
funding will be available to the Company.
Note 17 - Contingencies
The Company is involved in two lawsuits in which damages or claims
may be sought. On February 6, 1997, the Company received a letter
from the counsel to the Williams family which owns in the
aggregate 21,923 shares of the Company's common stock which was
acquired for an aggregate purchase price of $31,950. The Williams
family claims Mr. Pidorenko fraudulently induced their investment
and the Company is obligated for personal disputes between Mr.
Pidorenko and this family which primarily concern a disagreement
over a purchase of a personal residence.
F-21
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 17 - Contingencies (continued)
The Company does not believe it is obligated to these individuals
for personal disputes with Mr. Pidorenko. The Williams family has
rejected the Company's request to purchase their shares at their
original purchase price. The Company believes it has meritorious
defenses to any legal proceeding that may be instituted by such
individuals. Mr. Pidorenko has agreed to indemnify the Company
against any claims asserted by these parties.
On 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.
The Company, as a result of the acquisition of Atlas, is a party
to certain claims relating to the pollutant tax as defined in
Chapter 206, Florida Statutes that was subsequently repealed. The
former shareholders of Atlas have agreed to personally indemnify
the Company form any contingent liability relating to this matter.
The Company, as a result of the acquisition of Atlas, is party to
certain claims relating to bankruptcy of Seaboard Chemical
Corporation who operated a facility for treatment, storage and
disposal of hazardous substances from 1975 until 1989. The North
Carolina Department of Environment, Health and Natural Resources
identified Atlas as one of approximately 2,000 potentially
responsible parties for cleanup of this site. Atlas was classified
as a "de minimis" participant and, as such, has limited cost and
liability for site cleanup. The former shareholders of Atlas have
agreed to personally indemnify the Company from any contingent
liability relating to this matter.
On January 5, 1998, NASD Regulation, Inc. announced that a
complaint was issued on December 23, 1997 charging Montoe 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. To date, there
has been no adverse effect for the Company relating to these
allegations against Monroe Parker Securities, Inc.
F-22
<PAGE>
THERMACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Financial Statements (continued)
September 30, 1999 and 1998
Note 17 - Contingencies (continued)
On September 1, 1999, the Company was notified by NASDAQ that its
listing on the NASDAQ Small Markets was in violation of the stock
price requirements for continued listing. This present requirement
was implemented on August 27, 1997 and required the Company to
maintain a $1 bid price for its listed common stock. Presently,
the Company does not meet this requirement. The Company had filed
for a hearing that was held on January 14, 2000. At that hearing,
management presented information requesting a waiver of this
deficiency and provided assurances of the Company's compliance
within a short period of time. The Company has not received any
disposition on this matter as yet.
Note 18 - Subsequent Events
During October 1999, the Company issued 450,000 shares of common
stock to Alan Berkun, Esq. through a registration statement on
Form S-8 filed with the U. S. Securities and Exchange Commission
for professional services relating to introducing the Company to
businesses that it could either merge with or acquire. These
shares are non-refundable.
For the period October 1, 1999 through December 2, 1999, John
Pidorenko, the Company's President and Chairman, has repaid
advances of $156,234.
On December 8 1999, the Company entered into a letter of intent
with Texas Pharmaceutical, Inc. of Texarkana, Texas that could
provide the Company with funding of $1,000,000 through the
issuance of 5,000,000 shares of preferred stock. This preferred
stock would be convertible into 5,000,000 shares of common stock
at the election of the holder. A definitive agreement is required
to be executed that would be approved by both company board of
directors and for the Company is further subject to shareholder
approval. This funding is subject to the Company maintaining its
NASDAQ listing. The Company has not received a final determination
by NASDAQ as a result of the hearing held on January 14, 2000.
F-23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 60,173
<SECURITIES> 0
<RECEIVABLES> 388,316
<ALLOWANCES> 194,125
<INVENTORY> 541,933
<CURRENT-ASSETS> 1,303,742
<PP&E> 1,563,110
<DEPRECIATION> 613,908
<TOTAL-ASSETS> 5,059,667
<CURRENT-LIABILITIES> 1,283,312
<BONDS> 0
0
0
<COMMON> 943
<OTHER-SE> 2,397,794
<TOTAL-LIABILITY-AND-EQUITY> 5,059,667
<SALES> 4,306,408
<TOTAL-REVENUES> 4,306,408
<CGS> 3,293,952
<TOTAL-COSTS> 3,529,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,130
<INCOME-PRETAX> (2,881,759)
<INCOME-TAX> 795,309
<INCOME-CONTINUING> (3,677,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,677,068)
<EPS-BASIC> (.46)
<EPS-DILUTED> (.46)
</TABLE>
