SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended:
June 30, 1997
Commission File Number
0-21151
PROFILE TECHNOLOGIES, INC.
-------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 91-1418002
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1077 NORTHERN BLVD.
ROSLYN, NY 11576
-------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (516) 365-1909
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock $.001 Par Value
----------------------------
Title of Class
Check whether the issuer (1) has 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.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
-----
State issuer's revenues for the most recent fiscal year. $50,000.00.
-----------
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $34,039,200, based on the closing bid and ask prices as reported
by the NASDAQ SmallCap market on September 16, 1997
There were 4,262,600 shares of common stock $.001 par value outstanding as of
September 16, 1997.
Documents incorporated by reference:
Definitive Proxy material for annual shareholder meeting to be held November 14,
1997 filed pursuant to Regulation 14A.
Transitional Small Business Format (check one): Yes ; No X
----- -----
<PAGE>
Item 1. Description of Business.
------------------------
Introduction
The Company was originally incorporated in Washington in 1988 but has been
a Delaware corporation since 1995. Since its inception the Company has been
engaged in the business of researching and developing a high speed scanning
process, which is nondestructive and noninvasive, to remotely test buried and
above ground pipelines for corrosion and coating problems. The Company's
process, called a dual pulse propagation analyzer ("PPA") is a patented process
of analyzing the waveforms of electrical impulses in a way that extracts
point-to-point pipeline integrity information. This process involves sending an
electrical pulse along the pipe being tested from each of two locations toward
an intersecting location between the two locations. At least one of the modified
pulses is analyzed to determine whether an anomaly exists at the intersecting
location. This process is designed to detect external corrosion of pipeline
which occurs under pipe insulation without the need for taking the line out of
service, physically removing the coating, and then visually inspecting the
outside of the pipe for corrosion. The most common forms of corrosion under
insulation ("CUI") are localized corrosion of carbon steel and chloride stress
corrosion cracking of stainless steel. Refineries, chemical plants, utilities,
natural gas transmission companies and the petroleum industry have millions of
miles of corrosion protected pipeline. Much of this piping is exposed to harsh
and severe environments. As a result, there is an on-going effort by these
industries to ensure that the quality of the pipe meets standards set by
regulatory bodies and the industry to protect operating personnel and the
environment. While the Company continues to develop and refine its PPA process,
it believes that development has progressed to the point where the Company can
now demonstrate to potential customers that its technology is commercially
viable and that it is in a position to fulfill commercial contracts should they
materialize.
Corrosion Protection
Virtually all pipeline systems are required to have some type of corrosion
protection applied to extend the useful life of the pipeline and to prevent
pipeline failures due to corrosion. The effect of such failures ranges from a
few drops of a toxic substance on the surface of the pipeline to catastrophic
explosions which result in extensive damage of property and loss of human life.
Although there are many special techniques used to protect pipeline
systems, two are most common. The first is to apply a coating to the pipeline
which will keep the pipeline isolated from its environment. This is a
fundamentally sound approach, but it is complicated by the fact that coatings
can become damaged during the installation process. Most coatings also degrade
over time so the effectiveness of protection is reduced.
1
<PAGE>
The second technique, used to protect predominantly buried and submersed
pipelines, is designed to protect bare pipeline or pipeline which has damaged or
missing coating. This technique is called Cathodic Protection. Simply stated,
the technique uses the flow of electric current to polarize the pipeline and
prevent corrosion. The polarization process attempts to maintain the pipeline at
some negative voltage with respect to an external reference voltage, called a
"half-cell". That reference level is called a Pipe-to-Soil-Potential and is
commonly referred to as a "PSP". The polarization process basically uses an
electrochemical process to prevent the pipe from corroding in the ground. Many
years of experience and extensive experimentation have generated a PSP level
which is generally considered to represent "protected" pipe. To determine the
effectiveness of the cathodic protection system, it is necessary to measure the
PSP at sufficient locations along the segment of pipeline so that a protection
profile can be viewed.
A combination of federal, state, local and industry jurisdictions combine
to regulate corrosion protection. For example, regulations covering the
operation of natural gas transmission systems promulgated by the U.S. Department
of Transportation's Office of Pipeline Safety has required steel pipelines to be
equipped with cathodic protection since the early 1970's. In addition, the U.S.
Department of Labor, operating through the Occupational Safety and Health
Administration ("OSHA") has jurisdiction over numerous plants and facilities
containing corrosion protected pipeline that, if breached, could cause serious
bodily injury or death to on-site workers. Finally, the American Petroleum
Institute ("API") has promulgated a comprehensive Piping Inspection Code which
requires that extensive corrosion testing be done by all members (which includes
the vast majority of the petroleum and petrochemical industries). As a result of
the extensive regulation and testing requirements as described above, the
industry is faced with the requirement to engage in extensive testing for
corrosion.
In 1993, the API imposed even stricter test standards regarding the problem
of CUI. When pipeline is uninsulated and above ground, external corrosion can be
identified visually. The petroleum and other related industries, however,
insulate much of their piping to conserve energy and/or to prevent injury to
personnel from high temperature levels on the pipelines. As soon as piping is
insulated, a very complex situation is created. Corrosion can occur underneath
the insulation due to moisture or corrosive products that find their way through
broken or poorly sealed insulation. This CUI is very difficult to locate
economically. In the past, testing for this problem had been on a limited sample
basis and relied upon inspection processes that were very cumbersome and costly.
2
<PAGE>
Two prevalent testing methods used to detect CUI are X-ray and eddy current
methods, which are methods of detecting defects in pipe by analyzing visual
image and decay. After physically stripping away coating for visual inspection,
depth gauges, ultrasonics and X-ray could then be used to determine the severity
of CUI on questionable pipe. However, the stripping of insulation to determine
corrosion is a costly testing method for the industry because it often meant the
assembly of scaffolding for testing otherwise inaccessible above ground pipe
(particularly in refineries and petrochemical plants) or an actual dig-up on
below ground pipe. The Company's technology enables it to test pipe segments in
a refinery setting as long as one hundred feet to three hundred feet and to use
"cherry pickers" instead of costly scaffolding. CUI is also a very complicated
problem to test for because it cannot be easily identified by statistical
sampling. If, for example, a segment of pipe has a small insulation part removed
every ten feet and is visually inspected using eddy current or x-ray techniques,
there is no statistical basis to assume that the external condition of the
piping between the removed insulation parts is good or bad. The API testing
standard adopted in 1993, in essence, mandates either stripping even larger
amounts of coating or using an alternate system that will identify CUI without
stripping the coating on suspected (or unsuspected) pipe. Because of the
enormous cost involved in using the stripping and visual testing process, the
industry is enthusiastically searching for an alternate testing system that is
reliable and less costly. The Company believes that its PPA process provides an
alternate testing system that the industry is looking for. However, the
Company's technology has not yet been commercially accepted for such purpose and
there can be no assurance that such acceptance will be achieved.
The Company's Dual Pulse Propagation Analyzer Process
The PPA process extracts corrosion related information from segments of
both accessible and inaccessible pipelines underneath the entire insulation
barrier by analyzing the intersection of two electrical current pulses traveling
in opposite directions along the pipeline. This corrosion related information is
extracted without the need for removing the insulation protecting the pipeline.
The Company established by laboratory and field testing that the electrical
response, called characteristic transfer function (CTF), of two intersecting
pulses traveling along the pipeline is uniquely defined with location specific
information that relates to the integrity of the pipeline at the point of
intersection. Constructive interference occurs when the two current impulses run
into and interfere with each other at the point of intersection on a pipeline.
The CTF is determined, not only by the nature and characteristics of the
original pulses, but by the physical characteristics of the pipeline segment in
its environment at the point of intersection.
3
<PAGE>
The PPA process was developed to evaluate the condition and integrity of
pipelines. Electro-magnetic pulses are applied at both ends of the pipe segment
being tested. Under computer control, the timing of the pulses is controlled so
that the intersection point of the two pulses moves sequentially from one end of
the pipe to the other end. A unique CTF is obtained for each intersection point
of the pipeline segment being tested on some predetermined interval; such as, in
one foot intervals. When this data is geophysically displayed, it provides a
visual display of data related to the physical condition of the pipe at each
point of intersection. Additional electromagnetic inspection of the pipeline,
using an external calibrator developed by the Company, provides a second
alternative application of the Company's technology to inspect the questionable
pipe locations found during the PPA process. This alternative application, which
the Company is refining its development of, is used as a verification of the PPA
process. It is more time consuming to use and it is doubtful that it would be
the initial method selected for testing. This alternative application involves
the use of an antenna assembly to scan the pipe under analysis in those areas
where suspected anomalies have been located using the PPA process. Thus far, the
Company has used this alternative application as confirmation of potential
anomalies. The Company is in the process of evaluating whether there is a
sufficient interest in this second alternative application to justify a second,
separate product for the Company. Information can also be derived using the PPA
process to determine the condition of the coating and the effectiveness of the
existing corrosion protection system which is being used to protect each point
of intersection. Where there are indications of problems, closer interval
inspection can be performed and/or one of the other location specific processes
used in the industry may be utilized before the insulation is removed to inspect
the pipe condition.
As simple as the concept may appear, the PPA process is not intuitively
obvious. The petroleum industry has spent large sums trying to solve the problem
of finding corrosion under insulation. Correlating pipeline corrosion
information using the Company's technology requires a combination of
state-of-the-art instrumentation plus an understanding of the physical phenomena
that are being measured. Although the principles of the PPA process are simple
to explain, management believes that the measurement and analysis of the effect
are pushing the leading edge of technology.
The Company believes that the principal advantage to using the PPA is that
it provides a method for the operating companies to do a visual equivalent
inspection on inaccessible pipe without the need to remove insulation. Research
and development efforts will continue in the development of new applications for
the Company's technology and to develop new products for the petroleum industry
and other industries.
4
<PAGE>
Patents, Proprietary Technology and Other Intellectual Property
The Company pursues a policy of generally obtaining patent protection both
in the United States and abroad for patentable subject matter in its proprietary
technology. As of June 30, 1997, the Company had four issued U.S. patents, four
issued foreign patents, three U.S. patent applications pending, seven
provisional U.S. patent applications pending and one patent application filed
under the patent cooperation treaty which enables the Company to file additional
foreign patent applications in the future.
The Company's success depends in large part upon its ability to protect its
process and technology under United States and international patent laws and
other intellectual property laws. U.S. patents have a term of 17 years from date
of issuance or, for more recently filed patent applications, 20 years from the
filing of such applications, and patents in most foreign countries have a term
of 20 years from the proprietary filing date of the patent application. The
first U.S. patent was issued in 1990 and the remaining three patents were issued
in 1993.
The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its process under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be similar
to or competitive with the Company's products or processes. The Company has no
knowledge that it is infringing any existing patent such that it would be
prevented from marketing or licensing products or services currently being
developed by the Company.
The Company may decide for business reasons to retain a patentable
invention as a trade secret. In such event or if patent protection is not
available, the Company must rely upon trade secrets, internal knowledge and
continuing technological innovation to develop and maintain its competitive
position. The Company employees and consultants have access to the Company's
proprietary information and have signed confidentiality agreements.
Research and Development Spending
During the two most recent fiscal years ended June 30, 1997 and June 30,
1996, the Company spent $272,240 and $239,422 respectively on research and
development activities. In addition, certain non-cash expenses were incurred in
connection with research and development activity. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
5
<PAGE>
Development of Business
Up through the year ended June 30, 1994, all revenues earned by the Company
were derived from research and development contracts with a large public utility
and a large independent natural gas company. These contracts focused on
evaluating below ground pipe for cathodic protection and coating defects.
However, by late 1994, the Company, as a result of its activities up to that
point in time, came to the realization that its technology had the potential to
identify the location of actual corrosion, as opposed to simply identifying
locations which might have insufficient cathodic protection or defective
coating, and therefore a likelihood of corrosion. The Company believed that the
identification of actual corrosion was of even greater importance to the
petroleum, petrochemical and utility industries because these industries'
resources could be used more efficiently in correcting actual corrosion
locations. Once corrosion locations had been identified and corrected, the
Company's technology could still be used to identify lack of cathodic protection
and coating defects as part of a preventive maintenance program.
In early 1995, the Company spent three months at the refinery of a large
multi-national oil company, researching and developing test procedures for
identifying corrosion of above ground refinery pipe as part of a shift in
emphasis away from testing of underground pipe for cathodic protection and
coating defects. An important factor in this shift in emphasis had to do with
verification. Potential customers could more easily and less expensively verify
the accuracy and dependability of the Company's technology in an above ground
environment that doesn't involve time consuming and costly dig ups. The Company
believes that once potential customers have satisfied themselves that the
technology is accurate and cost effective, they would be more likely to expand
the use of the technology to difficult to reach below ground environments. The
Company also believes that this shift in emphasis was a significant step forward
because major oil companies were willing to provide detailed data concerning
pipe quality and testing standards. Beginning in 1995, the Company began
conducting research and development activities at the research facilities of
another large multinational oil company to develop the Company's technology to
the point where it could identify corrosion locations. As part of this process,
numerous segments of pipe in various conditions ranging from excellent to
extremely corroded were assembled in various configurations and covered with
insulation. The Company then used its technology to evaluate the various pipe
segments without prior knowledge of the condition of the pipe segments. After
obtaining data, the Company evaluated the results and then submitted a report
which summarized its findings. In late July of 1996, representatives of the
Company traveled to the Prudhoe Bay area of Alaska and met with operating
personnel from three of the largest multi-national oil companies with operations
in the area to discuss the feasibility of conducting a field demonstration and
6
<PAGE>
test of the Company's technology on operating pipeline in that area. The Company
subsequently conducted a field demonstration and test on a 24 inch line in
September of 1996 and then submitted a report summarizing its activities and
findings. In August of 1997, the Company completed a second field demonstration
using refined hardware and software that the Company had developed since its
previous field demonstration. The Company has entered into negotiations with one
of these large oil companies concerning the nature and extent of future testing
and related activities on a commercial basis, but there is no assurance that a
commercial contract will be agreed upon.
The Company is also continuing its efforts on testing of below ground
piping. Development of a below ground testing capability has also progressed
substantially. By way of example, in the early stages of developing the
Company's technology, it took almost one full week to collect data on as little
as 5,000 feet of pipe during dual pulse testing. Analysis of the collected data
often took months. The data collection for the PPA has now been automated to the
point where the same amount of data that used to take a week to collect can now
be collected in a single day, depending upon location and pipe configuration.
Data processing is not yet fully automated and requires some manual
interpretation. The Company is now actively marketing such capability; there can
be no assurance, however, that such marketing activity will lead to commercial
contracts and achieve market acceptance.
Strategy and Proposed Plan of Operations
The Company intends to increase its marketing activities. Initially such
marketing activities will be directed at the large multi-national petroleum
companies, petrochemical companies and utilities that are already aware of the
Company's technology and its potential to help solve the testing requirements
mandated by the API Piping Inspection Code, as well as voluntary testing for
safety concerns. The Company believes that the corrosion control specialists in
the petroleum and utilities industries constitute a reasonably small community
and the free flow of information regarding emerging or new technologies among
this group is common. Accordingly, the Company believes that word of mouth will
be an important factor in the Company's marketing efforts. The Company will be
providing service for two levels of testing on above ground or refinery pipe.
The first level of testing will be a "global testing", i.e., a screening test to
identify problem areas of corrosion in pipe. The second level of testing will be
a detailed analysis of the corrosion in the pipe. If the Company is successful
in entering into testing program agreements, of which there can be no assurance,
the Company intends to hire field technicians in two person crews, who will take
the raw field data generated by the dual PPA process and submit such data to the
Company's research and development and processing facilities in Ferndale,
7
<PAGE>
Washington for evaluation. However, in the near term, the Company also believes
that it will be possible to evaluate the collected data at the job site in the
field. The Company believes it is possible that each of its field crews could
operate at one refinery or similar facility on virtually a year round basis.
Pricing of the Company's services is based upon a dollar amount per linear foot
of pipeline tested or on a per diem basis, with pricing to be based upon many
factors including difficulty of access, cost of alternate means of testing,
availability of crews and urgency of immediate testing data and evaluation. The
actual pricing used in any particular contract is based upon arm's length
negotiations with the customer. Although the Company believes it can price its
services to operate profitably, there can be no assurance of such at the present
time because no prices or costs have as yet been established. The Company
intends to hire its field technicians locally from the geographic area near the
facility being tested and does not expect to encounter any difficulty in finding
qualified field technicians for its work crews.
The Company also intends to increase its promotional budget for industry
journals, trade shows, newsletters, direct mail and seminars. The Company may
also consider from time to time the acquisition of complimentary businesses
providing services to the petroleum and petrochemical industry, as well as
expansion into foreign countries.
Competition
The Company believes that the nondestructive testing industry is highly
fragmented and comprised of numerous companies, many of whom are larger and have
greater financial resources than does the Company. However, the Company believes
that these competitors are offering non-destructive testing services that rely
on technologies which are different from the technology offered by the Company.
These other technologies, including x-ray, ultrasonic and eddy current, have
been in existence for many years and have gained wide acceptance within the
industry. In addressing the requirements of the large national companies that
would be expected to have an interest in the Company's services, the Company
expects to compete on the basis of technical performance, delivery capability,
service quality and price.
Substantially all of the Company's competitors have, and potential future
competitors could have, substantially greater technical, financial, marketing,
and other resources than the Company and have, or could have, greater name
recognition and market acceptance of their products and technologies. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing services or introduce new services that
will offer superior price or performance features. In such case, the Company may
experience significant price competition, which could have a material adverse
effect on gross margins.
8
<PAGE>
Marketplace
Nondestructive corrosion testing services are required across a broad
market. Customers are expected to be generally the owners of, or engineering
firms associated with, major processing facilities and pipeline systems. The
Company's services are expected to be provided to the refining, petrochemical
and pipeline segments of the petroleum industry and to the utilities industry,
and demand for these services is typically driven by safety and environmental
considerations.
The Company will seek to obtain business through ongoing contractual
relationships and competitive and sole source bidding. The Company's officers
are presently responsible for sales and marketing and will continue to have such
responsibility in the foreseeable future.
Most refineries, petrochemical plants and other similar facilities have
ongoing maintenance programs which may require one or more crews performing
corrosion control testing on a continuous basis. Typically, these services are
provided by an outside contractor under a blanket service agreement, rather than
by the employees of the refineries and plants. The Company expects that if it is
successful in obtaining contracts with major oil refineries (of which there is
no assurance), such contracts will be of this type.
The Company also will seek to perform testing services for the utility
industry. Utilities have thousands of miles of underground gas transmission
lines that are constantly being monitored and tested for corrosion.
Employees
The Company presently has four employees, including Gale D. Burnett and
Henry Gemino. In preparation for the hiring of field crews, the Company
anticipates that it will have three to five additional employees, who will be in
the areas of administration, accounting, marketing, promotion and clerical.
Field crews will, in all likelihood, consist of two field technicians per crew.
The number of crews employed by the Company at any given time will be dependent
upon the Company's level of business activity. In addition, the Company will
continue to retain independent consultants to render advice with respect to
technical and scientific matters.
Compliance With Environmental Laws
Because of the nature of the Company's business, it does not believe that
the costs and effects of compliance with environmental laws, whether federal,
state or local, would be significant or even material.
9
<PAGE>
Item 2. Description of Property
-----------------------
The Company's executive offices are located at 1077 Northern Blvd., Roslyn,
NY 11576. The Company leases approximately 1,400 sq. feet of office space at the
address from a non-affiliate. The rental payment is twenty-two thousand eight
hundred dollars per year ($1,900 per month) and the term of the lease is two
years with a two year renewal option.
The Company's research and development facility is located in Ferndale,
Washington. The Company lease 1,800 sq. feet of space under a one year lease
from a non-affiliate at a monthly rental rate of $1,400. The Company has an
option to renew the lease for an additional term of one year.
The Company does not own any real estate.
The Company does not invest in, nor does the Company intend in the future,
to invest in real estate or interests in real estate, real estate mortgages or
securities of or interests in persons primarily engaged in real estate
activities.
Item 3. Legal Proceedings.
------------------
The Company is not a party to any material pending legal proceedings nor is
any of its property subject to any such legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended June 30, 1997, either through the
solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The Company's common stock has been traded on the NASDAQ SmallCap market
since it began public trading in February of 1997, under the symbol PRTK. The
following table sets forth the high and low bid prices for the Company's common
stock, by quarter, since the commencement of public trading, as reported by
Nasdaq.
Quarter Ended High Bid Low Bid
------------- -------- -------
March 31, 1997 $ 7.25 $5.75
June 30, 1997 $10.75 $6.00
10
<PAGE>
The above prices are believed to be representative interdealer quotations,
without retail markup, markdown or other fees or commissions, and may not
represent actual transactions.
At September 16, 1997, the bid price of the Company's common stock was
$12.00 per share. On such date the Company had 125 holders of record of the
Company's common stock and the Company estimates that it has approximately 450
beneficial shareholders.
The Company has not paid any dividends on its common stock and the Board of
Directors presently intends to continue a policy of retaining earnings, if any,
for use in the Company's operations and to finance expansion of its business.
The declaration and payment of dividends in the future, of which there can be no
assurance, will be determined by the Board of Directors in light of conditions
then existing, including earnings, financial condition, capital requirements and
other factors. There are no restrictions that currently materially limit the
Company's ability to pay dividends or which the Company reasonably believes are
likely to limit materially the future payment of dividends on common stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
GENERAL
The Company is a development stage enterprise and has recently completed
development of its pulse propagation analyzer process and is further refining
the technology associated therewith to the point where it believes that
commercial utilization is now possible. The Company has not, as of yet, obtained
significant revenues from its planned primary source of revenues and has no
commercial contracts in place for the use of its product or technology. The goal
of the Company has been the establishment of technological feasibility
associated with services to electronically measure corrosion in piping of all
kinds. The Company's product identifies areas of corrosion, areas that lack
cathodic protection and areas that may have defective coating on both below
ground and above ground pipes. The pulse propagation analyzer consists of a
computer, software to enhance collection and processing of data, a precision
multi-channel pulse generator and a signal analyzer. During fiscal 1996, the
Company began to see rapid progress in the development of its technology and its
ability to meet the expectations of potential customers. By that time, the
Company had begun to accelerate its efforts and expend more resources to develop
its technology faster. Thus, expenses and purchases of equipment have been
generally increasing at a faster pace than in prior periods. This trend
accelerated in the fiscal year ended June 30, 1997, particularly after
completion of the Company's initial public stock offering in February of 1997.
The Company believes that it attained technological feasibility of its product
with the completion of its research and development activity in a controlled
11
<PAGE>
environment in July of 1996. A field demonstration of the Company's service
capabilities utilizing its pulse propagation analyzer process was performed for
two multinational oil companies at Prudhoe Bay, Alaska in September of 1996. A
further demonstration using updated and more sophisticated hardware and software
was completed in Prudhoe Bay, Alaska in August of 1997.
In order for the Company to obtain significant revenues from the use of its
technology, the Company must establish a sales and marketing organization that
is effective and obtains customers for its pulse propagation analyzer. The
Company must also be able to supply and train work crews in sufficient numbers
to satisfy the requirements of its customers. From inception through June 30,
1997, the Company has incurred losses of $2,432,857 and losses are expected to
continue at least through the third quarter of the year ending June 30, 1998; no
assurances can be given that losses will not be incurred thereafter.
In the opinion of management, significant progress has been made to date in
developing its technologies, gaining credibility with its markets and building
its board of directors and investor base, without spending inordinate sums to
achieve these goals. As of June 30, 1997, the Company had been issued four
patents covering its unique technology. An additional ten provisional patent
applications have been filed, and the Company may file for additional patents in
the future.
RESULTS OF OPERATIONS
- - ---------------------
Years Ended June 30, 1997 and June 30, 1996
- - -------------------------------------------
The Company incurred a net loss from operations of $1,035,003 in the year
ended June 30, 1997 compared to a net loss from operations of $400,853 in the
year ended June 30, 1996. Revenues for the year ended June 30, 1997 were
$50,000, which represented an increase of $12,500, or 33% as compared to
revenues of $37,500 for the year ended June 30, 1996. Revenues for the year
ended June 30, 1997 were earned from two major international oil companies for
demonstrations of the Company's technology both in the field and in a controlled
setting at one of such oil company's research and development facilities.
Interest income increased to $97,703 for the year ended June 30, 1997 from
$5,205 for the year ended June 30, 1996. This increase is the result of the
Company's investment of the net proceeds of its public stock offering in short
term interest bearing accounts and interest bearing instruments.
Total expenses for the Company for the year ended June 30, 1997 increased
significantly over the year ended June 30, 1996. Total expenses of $1,182,706
were recorded in the year ended June 30, 1997 compared to total expenses of
$443,558 for the year ended June 30, 1996. This represented an increase in
expenses of $739,148 or 167% and is attributed in large part to the issuance of
12
<PAGE>
common stock purchase warrants to outside consultants (see below). The increase
is also attributed in part to increased expenditures associated with the
research and development involved in the preparation and filing of seven
additional provisional patent applications since the completion of the Company's
public stock offering in February of 1997. General and administrative expenses
increased to $351,312 for the year ended June 30, 1997 from $114,136 for the
year ended June 30, 1996 and reflects the payment of salaries and outside
consulting fees incurred in connection with the Company's field demonstrations.
Research and development expenses increased to $272,240 for the year ended June
30, 1997 from $239,422 for the year ended June 30, 1996, an increase of $32,818
or 14%.
During the year ended June 30, 1997, the Board of Directors extended the
expiration date of certain common stock purchase warrants and issued to a
consultant who was involved in research and development activities new warrants
whose fair market values as of the extension date or the issuance date, as the
case may be, were in excess of the exercise price, which resulted in the
recognition of compensation expenses of $559,154, compared to $90,000 of such
compensation expenses in the year ended June 30, 1996. This noncash charge to
earnings increased the expenses associated with the operations of the Company
for the year ended June 30, 1997 by 89.7% over what would have been incurred
absent these nonrecurring, noncash expenses. Without giving effect to the
compensation expenses associated with the extension and/or issuance of its
common stock purchase warrants in both years ended June 30, 1997 and June 30,
1996, expenses were $623,552 in the year ended June 30, 1997 compared to
$353,558 in the year ended June 30, 1996, an increase of $269,994 or 76.4%.
Management believes that both revenues and expenses of the Company may
increase during the fiscal year ending June 30, 1998 if it is able to secure
contracts with customers, of which there is no assurance. The revenues earned by
the Company to date principally relate to research and development activities
that are sponsored by large multi-national oil companies and large utilities.
These activities include field research and development at such companies'
facilities.
These activities are likely to continue during the year ending June 30,
1998 and for the foreseeable future. Management is also vigorously working
towards obtaining fee for service contracts, which are hoped to be the major
source of the Company's revenues. If fee for service contracts are obtained,
management expects its expenditures associated with personnel and testing
equipment will begin to rise. In addition, as the Company begins to actually
provide fee for service work, additional administrative support activities will
increase together with related expenses.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Revenues for the period from July 1, 1988 (inception) through June 30,
1997, were $482,189 while expenses were $3,023,589, resulting in a loss from
operations, since inception, of $2,541,400. Net cash used in operating
activities from inception through June 30, 1997 was $1,371,334. For the year
ended June 30, 1997, cash used in operations was $451,644. Thus, while the
revenues derived from research and development activities funded by
multi-national oil companies and major utilities have been indicative of
financial support for the Company's efforts to develop its technology, they have
not been sufficient to cover expenses. Accordingly, the Company has historically
maintained adequate liquidity and cash reserves through the private placement of
its common stock. Such offerings, from inception through March of 1996, totaled
$1,471,567. No private placements have occurred since that date.
In February 1997 the Company completed an initial public offering of its
common stock which involved the sale of 1,050,000 shares of common stock at an
offering price of $6.00 per share. The Company derived net proceeds of
$5,171,687 (including the issuance of 50,000 shares of common stock at $6.00 per
share pursuant to a partial exercise of the underwriter's overallotment option).
The Company has no material long term commitments or material commitments
for capital expenditures. To date, the Company has only obtained small research
and development or field demonstration contracts, the proceeds of which were
used to defray a portion of the Company's operating costs.
At June 30, 1997 Compared to June 30, 1996.
At June 30, 1997, the Company had cash and cash equivalents of $4,936,600
as compared to the June 30, 1996 cash balance of $212,689. The principal source
for the increase in cash and cash equivalents was the issuance of common stock
in early 1997 pursuant to a public stock offering in the amount of $5,171,687,
net of issuance costs. At June 30, 1997, the Company's working capital was
$4,858,223. As of June 30, 1996, there was working capital of $141,045. The
Company's principal assets at June 30, 1997, apart from the cash and cash
equivalents mentioned above, consisted of property, equipment and patents.
Property and equipment at June 30, 1997, was $34,941, up marginally over the
balance of property and equipment at June 30, 1996 of $34,443. Patents had a
balance of $189,037, which was up 59.7% or $70,676 over the June 30, 1996
balance of $118,361. Total assets as of June 30, 1997 were $5,236,726 as
compared to $461,606 at June 30, 1996 (an increase of $4,775,120). The increase
in total assets was primarily due to the Company's completion of its initial
public offering of common stock.
14
<PAGE>
Item 7. Financial Statements.
15
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Independent Auditors' Report............................................. F-2
Balance Sheet as of June 30, 1997........................................ F-3
Statements of Operations for each of the years in the two-year
period ended June 30, 1997 and for the period from July 1, 1988
(inception) to June 30, 1997 ............................................ F-4
Statement of Stockholders' Equity for each of the years in the
two-year period ended June 30, 1997 and for the period from
July 1, 1988 (inception) to June 30, 1997 ............................... F-5
Statements of Cash Flows for each of the years in the two-year
period ended June 30, 1997 and for the period from July 1, 1988
(inception) to June 30, 1997 ............................................ F-6
Notes to Financial Statements............................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Board of Directors
Profile Technologies, Inc.:
We have audited the accompanying balance sheet of Profile Technologies, Inc. (a
development stage enterprise) as of June 30, 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended June 30, 1997 and for the period from July 1, 1988
(inception) to June 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Profile Technologies, Inc. (a
development stage enterprise) as of June 30, 1997, and the results of its
operations and its cash flows for each of the years in the two-year period ended
June 30, 1997 and for the period July 1, 1988 (inception) to June 30, 1997, in
conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
Seattle, Washington
September 9, 1997
F-2
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Balance Sheet
June 30, 1997
- - --------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 4,936,600
Contract work in progress 20,000
Prepaid expenses 52,798
-----------
Total current assets 5,009,398
Property and equipment, net 34,941
Patents 189,037
Other assets 3,350
-----------
Total assets $ 5,236,726
===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable - stockholder 2,500
Other accounts payable 5,919
Accrued wages 20,614
Other accrued liabilities 122,142
-----------
Total current liabilities 151,175
-----------
Stockholders' equity:
Common stock, $0.001 par value
Authorized 10,000,000 shares;
issued and outstanding 4,262,600 shares 4,263
Additional paid-in capital 7,514,145
Deficit accumulated during the development stage (2,432,857)
-----------
Total stockholders' equity 5,085,551
Commitments
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 5,236,726
================================================================================
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Operations
=================================================================================================================
Period from
July 1, 1988
(inception)
through Years ended June 30
June 30, --------------------------
1997 1997 1996
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues - testing services and research
and development fees $ 482,189 50,000 37,500
-----------------------------------------------
Costs and expenses:
Research and development 1,357,690 272,240 239,422
General and administrative 806,745 351,312 114,136
Excess of fair market value over excise price
of extended and assigned existing common
stock purchase warrants 350,000 50,000 90,000
Fair value of common stock purchase
warrants granted to consultants 509,154 509,154 --
-----------------------------------------------
Total costs and expenses 3,023,589 1,182,706 443,558
-----------------------------------------------
Loss from operations (2,541,400) (1,132,706) (406,058)
Interest income 108,443 97,703 5,205
Other income 100 -- --
-----------------------------------------------
Net loss $(2,432,857) (1,035,003) (400,853)
===============================================
Net loss per share $ 0.26 0.11
Weighted average common and common share
equivalents outstanding 3,933,148 3,664,794
=================================================================================================================
See accompanying notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Stockholders' Equity
===================================================================================================================================
Deficit
accumulated Total
Common stock Additional during the stock
---------------------- paid-in development holders'
Shares Amount capital stage equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sale at inception (July 1, 1988), $.0005 per share 1,000,000 $ 500 -- -- 500
Sale of common stock in July, $.0005 per shares 600,000 300 -- -- 300
Sale of common stock in September, $.25 per share 400,000 1,200 98,800 -- 100,000
Net loss -- -- -- (85,749) (85,749)
-----------------------------------------------------------------
Balances at June 30, 1989 2,000,000 2,000 98,800 (85,749) 15,051
Sale of common stock in September, $.25 per share 80,000 80 19,920 -- 20,000
Net loss -- -- -- (13,683) (13,683)
-----------------------------------------------------------------
Balances at June 30, 1990 2,080,000 2,080 118,720 (99,432) 21,368
Sale of common stock in October, $.25 per share 114,000 114 28,386 -- 28,500
Issuance of common stock for services in November,
$.25 per share 40,000 40 9,960 -- 10,000
Net loss -- -- -- (30,593) (30,593)
-----------------------------------------------------------------
Balances at June 30, 1991 2,234,000 2,234 157,066 (130,025) 29,275
Sale of common stock in September, $.625 per share 296,000 296 184,704 -- 185,000
Sale of common stock in May, $1.50 per share 141,268 141 211,761 -- 211,902
Net loss -- -- -- (267,186) (267,186)
-----------------------------------------------------------------
Balances at June 30, 1992 2,671,268 2,671 553,531 (397,211) 158,991
Sale of common stock in January, $1.50 per share 51,000 51 76,449 -- 76,500
Net loss -- -- -- (132,905) (132,905)
-----------------------------------------------------------------
Balances at June 30, 1993 2,722,268 2,722 629,980 (530,116) 102,586
Net loss -- -- -- (13,503) (13,503)
-----------------------------------------------------------------
Balances at June 30, 1994 2,722,268 2,722 629,980 (543,619) 89,083
Repurchases of common stock in October (16,000) (16) (13,984) -- (14,000)
Sale of common stock in December, $1.75 per share,
net of issuance costs of $22,115 268,332 269 447,196 -- 447,465
Excess of fair value over exercise price of existing
common stock purchase warrants extended in December -- -- 210,000 -- 210,000
Net loss -- -- -- (453,382) (453,382)
-----------------------------------------------------------------
Balances at June 30, 1995 2,974,600 2,975 1,273,192 (997,001) 279,166
Issuance of common stock for services in
October, $1.00 per share 20,000 20 19,980 -- 20,000
Sale of common stock in December-March, $2.00 per
share, net of issuance costs of $34,600 218,000 218 401,182 -- 401,400
Excess of fair value over exercise price of
existing common stock purchase warrants
extended in March -- -- 90,000 -- 90,000
Net loss -- -- -- (400,853) (400,853)
-----------------------------------------------------------------
Balances at June 30, 1996 3,212,600 3,213 1,784,354 (1,397,854) 389,713
Fair value of common stock purchase warrants
granted to consultants -- -- 509,154 -- 509,154
Excess of fair market value over exercise price of
existing common stock purchase warrants assigned
by principal stockholder to others -- -- 50,000 -- 50,000
Sale of common stock in February-March, $6.00 per share,
net of issuance costs of $1,128,313 1,050,000 1,050 5,170,637 -- 5,171,687
Net loss -- -- -- (1,035,003) (1,035,003)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 4,262,600 $ 4,263 7,514,145 (2,432,857) 5,085,551
===================================================================================================================================
See accompanying notes to financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
=====================================================================================================================
Period from
July 1, 1988
(inception)
through Years ended June 30
June 30, -------------------------------
1997 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(2,432,857) (1,035,003) (400,853)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 117,342 20,822 20,213
Services received in exchange for common stock 10,000 -- --
Excess of fair value over exercise price of
extended and assigned existing common
stock purchase warrant 350,000 50,000 90,000
Fair value of common stock purchase warrants
granted to consultants 509,154 509,154 --
Changes in assets and liabilities:
Contract work in progress (20,000) (20,000) 12,500
Accounts receivable/payable - stockholder 2,500 (12,154) 24,197
Prepaid expenses (52,798) (52,549) 37
Other assets (3,350) (3,350) --
Other accounts payable 5,919 1,379 3,916
Accrued wages 20,614 20,614 (11,555)
Other accrued liabilities 122,142 69,443 12,433
----------------------------------------------------
Net cash used in operating activities (1,371,334) (451,644) (249,112)
----------------------------------------------------
Cash flows from investing activities:
Patents (169,037) (70,676) (22,566)
Purchase of property and equipment (148,182) (21,320) (12,295)
----------------------------------------------------
Net cash used in investing activities (317,219) (91,996) (34,861)
----------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net
of issuance costs 6,643,254 5,267,551 305,536
Repurchase of common stock (14,000) -- --
Organization costs (4,101) -- --
-----------------------------------------------------
Net cash provided by financing activities 6,625,153 5,267,551 305,536
-----------------------------------------------------
Increase in cash and cash equivalents 4,936,600 4,723,911 21,563
Cash and cash equivalents at beginning of period -- 212,689 191,126
-----------------------------------------------------
Cash and cash equivalents at end of period $ 4,936,600 4,936,600 212,689
=====================================================
Supplemental disclosures of noncash financing
and investing activities - patent costs in
exchange for common stock $ 20,000 -- 20,000
=====================================================================================================================
See accompanying notes to financial statements.
F-6
</TABLE>
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
June 30, 1997
================================================================================
(1) Nature of Development Stage Activities and Summary of Significant Accounting
Policies
(a) Nature of Development Stage Activities
Profile Technologies, Inc. (Company), formerly Pipeline Profiles,
Ltd., was incorporated in 1986 and commenced operations in fiscal year
1989 (inception). The Company is in the business of developing and
commercializing potential processes for the nondestructive,
noninvasive testing of both above ground and buried pipelines for the
effectiveness of pipeline cathodic protecting systems and coating
integrity. The Company believes that the first commercial applications
of this process will likely be in the refining and petro-chemical
segments of the industry, although the utilities industry has also
expressed interest in the Company's process. The Company's future
revenues are currently dependent upon the market's acceptance of its
sole developed process. To date, the Company has not obtained any
commercial contracts and there can be no assurance that the Company
will obtain such contracts. As of June 30, 1997, the Company is
considered to be in the development stage as the Company has not
generated significant revenues from its research and development
efforts and related service contracts with respect to the above
process, and operations have primarily been financed through the
issuance of common stock.
(b) Contract Revenue Recognition
Earned revenue from research and development service contracts
primarily related to testing of industrial pipeline integrity is
recognized on the percentage-of-completion method of contract
accounting. Contract revenues earned are recorded using the
percentage-of-contract costs incurred to date to total estimated
contract costs.
Anticipated losses on contracts are charged to earnings as soon as
such losses can be estimated. Changes in estimated profits on
contracts are recognized during the period in which the change in
estimate is known.
The Company records claims for additional compensation on contracts
upon revision of the contract to include the amount to be received for
the additional work performed. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools and repairs, and
depreciation costs. Selling, general and administrative costs are
charged to expense as incurred. Service contracts generally extend no
more than six months.
(c) Research and Development
Research and development costs are expensed when incurred.
(Continued)
F-7
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
(d) Property and Equipment
Property and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives of three to
seven years.
(e) Patents
Patent and related application costs will be amortized using the
straight-line method over the shorter of the patents' estimated useful
lives or their legal lives (seventeen years). Amortization will
commence once the Company has succeeded from development stage
activities. The Company assesses the recoverability of this intangible
asset by determining whether the balance can be recovered through
forecasted future operations. The amount of impairment, if any, is
measured based on projected future results using a discount rate
reflecting the Company's assumed average cost of funds.
(f) Deferred Offering Costs
Deferred offering costs include costs incurred in connection with the
initial public offering. Such costs were capitalized and charged
against additional paid-in capital upon completion of the offering.
(g) Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in operations in the period that includes
the enactment date. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that such deferred tax assets
will not be realized.
(h) Major Customers
As the Company is still in the development stage, all of the Company's
revenues were from two and three domestic customers for the years
ended June 30, 1997 and 1996, respectively.
(i) Cash Equivalents
The Company considers all short-term investments with a maturity date
at purchase of three months or less to be cash equivalents.
(Continued)
F-8
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
(j) Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock and common stock equivalents
outstanding during each year. Common stock equivalents include all
warrants and stock options which would have a dilutive effect,
applying the treasury stock method. Additionally, common and common
equivalent shares issued during the twelve months immediately
preceding the date of the Company's initial public offering have been
included in the calculation of common and common equivalent shares as
if they were outstanding for all periods presented prior to the
offering, including loss years where the impact of the incremental
shares is antidilutive, using the treasury stock method and an initial
public offering price of $6 per share.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(l) Patents, Proprietary Technology and Other Intellectual Property
The Company pursues a policy of generally obtaining patent protection
both in the United States and abroad for patentable subject matter in
its proprietary technology. The Company's success depends in a large
part upon its ability to protect its products and technology under
United States and international patent laws and other intellectual
property laws. U.S. patents have a term of 17 years from date of
issuance and patents in most foreign countries have a term of 20 years
from the proprietary filing date of the patent application.
The Company believes that it owns and has the right to use or license
all proprietary technology necessary to license and market its
products under development. The Company is not aware of the issuance
of any patents or the filing of any patent applications which relate
to processes or products which utilize the Company's proprietary
technology in a manner which could be similar to or competitive with
the Company's products or processes. The Company has no knowledge that
it is infringing on any existing patent such that it would be
prevented from marketing or licensing products or services currently
being developed by the Company.
(Continued)
F-9
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
(m) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash and cash equivalents. The
Company regularly invests funds in excess of its immediate needs in a
money market account with Citibank (Account). Funds invested in the
Account are uninsured and subject to investment risk. Included with
cash and cash equivalents were amounts held in the Account of
$4,825,000 at June 30, 1997. Additionally, at June 30, 1996,
approximately $180,000 was included in cash and cash equivalents which
was held in a separate money market account with Citibank. Amounts
held in this money market account are insured up to $100,000 by the
Federal Depository Insurance Corporation.
(n) Product Development Costs
Product development costs are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working model and
the point at which the product is ready for general release have been
insignificant. All product development costs have been expensed.
(o) Stock-Based Compensation
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, during 1997. This statement permits a company to choose
either a new fair-value-based method or the Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
intrinsic-value-based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures
of net income and earnings per share computed as if the
fair-value-based method had been applied in financial statements of
companies that continue to account for such arrangements under APB
Opinion No. 25. The Company has elected to continue to record
stock-based compensation using the APB Opinion No. 25
intrinsic-value-based method and, therefore, the adoption of SFAS No.
123 has not impacted the Company's financial position, results of
operations, or liquidity.
(p) Reclassifications
Certain reclassifications have been made to the 1996 balances to
conform to the 1997 presentation.
(Continued)
F-10
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
(2) Property and Equipment
Property and equipment at June 30, 1997 consist of the following:
Trailer $ 11,670
Equipment 136,512
-----------
148,182
Less accumulated depreciation 113,241
-----------
$ 34,941
===========
Depreciation expense totaled $113,241, $20,822 and $20,213 for the period
from July 1, 1988 (inception) through June 30, 1997 and the years ended
June 30, 1997 and 1996, respectively.
(3) Services Received in Exchange for Common Stock
The Company values common stock issued in payment for services provided to
the Company based either on third-party billings or the estimated fair
value of the common stock issued. During fiscal year 1991, two individuals
(one a board member) each received 20,000 shares of common stock in payment
for services provided to the Company. These services were valued at $10,000
based on the estimated fair value of the common stock issued.
In October 1995, the Company issued 20,000 shares of common stock for legal
services provided to the Company valued at $20,000 based on third-party
billings.
(4) Related Parties
(a) Accounts Payable - Stockholder
At June 30, 1997, the Company owed $2,500 to a stockholder of the
Company for business expenses.
(b) Consulting Services and Wages
The Company's policy is to pay wages and consulting fees to two key
individuals on a basis consistent with available cash flows. Wages and
consulting fees to these individuals, Gale Burnett, President, and
Henry Gemino, Executive Vice-President, were approximately $879,000,
$209,000 and $182,000 for the period from July 1, 1988 (inception)
through June 30, 1997 and the years ended June 30, 1997 and 1996,
respectively. Included in accrued wages are amounts owing to the
president and executive vice-president totaling approximately $20,000
at June 30, 1997.
(Continued)
F-11
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
Additional consulting fees were paid to a director of the Company, Dr.
John Kuo, totaling approximately $149,000, $80,000 and $54,000 for the
period from July 1, 1988 (inception) through June 30, 1997 and the
years ended June 30, 1997 and 1996, respectively. Included in other
accrued liabilities are amounts owing to the director totaling $60,829
at June 30, 1997.
(c) Royalty Arrangement
In July 1988, the primary technology rights used by the Company were
contributed by Northwood Enterprises Inc. (NEI), a company
wholly-owned by certain Company stockholders. In exchange for
contributing the technology, the Company agreed to pay a royalty of 4%
of the Company's net earnings before taxes to certain Company
stockholders. When the Company becomes profitable, royalties will be
due quarterly. In March 1996, an additional 1% was given to a director
of the Company in exchange for his expertise, technological know-how
and proprietary information and trade secrets.
(d) Facilities
Since 1991, two of the Company's officers/stockholders have provided
the use of their homes for office facilities and research development
activity at no additional charge to the Company.
(5) Income Taxes
Federal income taxes reported by the Company differ from the amount
computed by applying the statutory rate due primarily to limitations on
utilizing net operating losses.
The tax effect of temporary differences that give rise to significant
portions of Federal deferred tax assets are comprised of the following at
June 30, 1997:
Deferred tax assets:
Net operating loss carryforwards $ 507,000
Stock compensation 292,000
Research and experimentation
credit carryforwards 57,000
----------
Gross deferred tax assets 856,000
Less valuation allowance 856,000
----------
Net deferred tax assets $ --
==========
The net increase in the valuation allowance for deferred tax assets was
$436,145 and $62,008 for the years ended June 30, 1997 and 1996,
respectively. The increases were primarily due to increases in the amount
of net operating loss carryforwards that could not be utilized and stock
compensation.
(Continued)
F-12
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
For Federal income tax purposes, the Company has net operating loss
carryforwards at June 30, 1997 available to offset future Federal taxable
income, if any, of approximately $1,500,000 which begin to expire in 2003.
In addition, the Company has research and experimentation tax credit
carryforwards of approximately $57,000 at June 30, 1997 which are available
to offset income taxes over an indefinite period.
The utilization of the tax net operating loss carryforwards may be limited
due to ownership changes that have occurred as a result of the sale of
common stock.
(6) Stockholders' Equity
(a) Stock Split
In December 1995, the Company authorized a 2-for-1 stock split of
the Company's common stock and a change in par value to $.001.
All share, par value and per share information has been adjusted
for all periods presented to reflect the stock split and par
value change.
(b) Stock Warrants and Stock-Based Compensation
The Company has granted stock warrants to compensate key
employees, consultants and board members for past and future
services. The stock warrants are generally exercisable
immediately at the date of the grant. The Company extended the
exercise period on certain warrants to October 2001 from October
1999 which resulted in compensation expense in the amount of
$210,000 in December 1994. The related warrants were originally
granted in November 1991 and September 1993.
In March 1996, the Company extended the exercise period on all
stock warrants to October 2004 which resulted in compensation
expense of $90,000.
In November 1996, the Company recorded noncash compensation
expense totaling $559,154 related to warrant transactions. The
Company issued a warrant to purchase 285,000 shares of common
stock to a consultant at an exercise price of $3.50 per share and
a warrant to its attorney to purchase 10,000 shares of common
stock at an exercise price of $7.20 per share. The Company also
agreed to issue warrants to purchase 25,000 shares of common
stock with an exercise price of $7.20 to each of its two of its
nonemployee directors. In addition, the Company's principal
shareholder agreed to assign warrants to purchase 50,000 shares
of common stock at $3.00 per share to other employees, directors
and shareholders of the Company. In connection with the IPO, the
Company issued warrants to the underwriter to purchase 100,000
shares of common stock at $8.40 per share.
At June 30, 1997, warrants to purchase 1,120,000 shares were
exercisable at prices ranging from $1.125 to $8.40 per share. The
date of expiration on all warrants is October 31, 2004, except
for the underwriter warrants for 100,000 shares issued in
connection with the IPO which expire February 12, 2002.
(Continued)
F-13
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
The following is a summary of warrants outstanding at June 30, 1997:
Warrants outstanding
Weighted-average Number of
Number remaining warrants
Exercise prices outstanding contractual life exercisable
---------------------------------------------------------------------------
$ 1.125 320,000 7.33 320,000
1.500 40,000 7.33 40,000
3.000 270,000 7.33 270,000
3.500 285,000 7.33 285,000
7.200 105,000 7.33 105,000
8.400 100,000 4.67 100,000
The Company applies APB Opinion No. 25 and related interpretations in
accounting for warrant grants to employees. Had compensation cost for the
Company's warrant awards been determined consistent with SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
Years ended June 30
--------------------------
1997 1996
--------------------------
Net loss:
As reported $1,035,003 400,853
Pro forma 1,171,003 800,003
Net loss per share:
As reported $ .26 .11
Pro forma .30 .22
The weighted average fair value per share of the warrant, grants or
extensions made during the years ended June 30, 1997 and 1996, where the
fair value of the underlying stock equaled the exercise price, was
approximately $1.27 and $0.72, respectively, and the number of warrants
were 60,000 and 315,000, respectively.
The weighted average fair value per share of the warrant, grants or
extensions made during the years ended June 30, 1997 and 1996, where the
exercise price was below the fair value of the underlying stock, was
approximately $1.85 and $1.31, respectively and the number of warrants were
335,000 and 360,000, respectively.
The fair value of warrant grants is estimated using the Black-Scholes
option pricing model with the following weighted average assumptions used
for grants in fiscal years 1997 and 1996: expected volatility of 50%,
risk-free interest rate of 6%, expected lives ranging from three to six
years; and a 0% dividend yield. The initial effects of applying SFAS No.
123 may not be representative of the effects on pro forma net income or
loss for future years.
(Continued)
F-14
<PAGE>
PROFILE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
================================================================================
(7) Operating Leases
During fiscal year 1997, the Company entered into operating lease
agreements that expire at various dates for office facilities in Washington
State and New York State. Aggregate minimum rental payments on operating
leases as of June 30, 1997 are as follows:
1998 $ 39,600
1999 17,100
---------
$ 56,700
=========
Total rent expense under the operating leases was $5,700 during the year
ended June 30, 1997.
(8) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. This statement establishes standards for
the computation, presentation and disclosure of earnings per share (EPS),
replacing the presentation of currently required Primary EPS with a
presentation of Basic EPS. It also requires dual presentation of Basic EPS
and Diluted EPS on the face of the income statement for entities with
complex capital structures. Basic EPS is based on the weighted-average
number of common shares outstanding during the period. Diluted EPS is based
on the potential dilution that would occur, upon exercise or conversion of
securities into common stock using the treasury stock method. SFAS No. 128
is effective for financial statements for periods ending after December 15,
1997, including interim periods, and earlier application is not permitted.
When adopted, the Company will be required to restate its EPS data for all
prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS
amounts.
In February 1997, the FASB issued SFAS No. 129, Disclosures of Information
About Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. The disclosures are not
expected to have a significant impact on the Company. SFAS No. 129 is
effective for financial statements ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS No. 130 is effective for years beginning after December 15, 1997. The
Company does not anticipate a material impact upon adoption of this
standard.
(Continued)
F-15
<PAGE>
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes the related disclosures
about products and services, geographic areas, and major customers. SFAS
No. 131 replaces the "industry segment" concept of Financial Accounting
Standards No. 14 with a "management approach" concept as the basis for
identifying reportable segments. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company does
not anticipate a material impact upon adoption of this standard.
F-16
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
----------------------------------------------------------------
In November of 1995 the Company dismissed Moss Adams, LLP, a regional
accounting firm primarily located in the Pacific Northwest, and hired KPMG Peat
Marwick LLP, an international accounting firm. None of the accountant's reports
of Moss Adams on the financial statements of the Company contained any adverse
opinion or disclaimer of opinion, or were modified as to uncertainty, audit
scope, or accounting principles. The decision to change accountants was approved
by the Board of Directors of the Company. At the time the Company changed
accountants, there were no disagreements with Moss Adams, whether or not
resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Moss Adams, would have caused Moss Adams to make reference
to the subject matter of the disagreements in connection with any of its
reports.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
------------------------------------------------------------------------
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement to be distributed in connection with the Company's
Annual Meeting of Shareholders to be held on November 14, 1997. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than October 21, 1997. The information required by this Item 9 is incorporated
by reference from the Proxy Statement.
Item 10. Executive Compensation.
-----------------------
The information required by this Item 10 is incorporated by reference from
the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information required by this Item 11 is incorporated by reference from
the Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
The information required by this Item 12 is incorporated by reference from
the Proxy Statement.
16
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3)
(i) Articles of Incorporation(1)
(ii) Bylaws(2)
(10.1) Royalty Agreement(3)
(10.2) Assignment of Patent Rights(4)
(10.3) Consulting Agreement with Dr. John Kuo(5)
(11.1) Earnings Per Share Calculation
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1997.
(1) Incorporated by reference to Exhibit 3.1 to the Registration Statement
on Form SB-2 of Profile Technologies, Inc. filed with the Securities and
Exchange Commission on May 10, 1996. (333- 4714-NY)
(2) Incorporated by reference to Exhibit 3.3 to the Registration Statement
on Form SB-2 of Profile Technologies, Inc. filed with the Securities and
Exchange Commission on May 10, 1996 (333- 4714-NY)
(3) Incorporated by reference to Exhibit 10.1 to the Registration Statement
on Form SB-2 of Profile Technologies, Inc. filed with the Securities and
Exchange Commission on May 10, 1996. (333- 4714-NY)
(4) Incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form SB-2 of Profile Technologies, Inc. filed with the Securities and
Exchange Commission on July 31, 1996 (333- 4714-NY)
(5) Incorporated by reference to Exhibit 10.3 to the Registration Statement
on Form SB-2 of Profile Technologies, Inc. filed with the Securities and
Exchange Commission on July 31, 1996. (333- 4714-NY)
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROFILE TECHNOLOGIES, INC.
By: /s/ G.L. Scott
----------------------------------
G.L. SCOTT
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Title Date
/s/G.L. Scott Chairman, Principal Sept. 24, 1997
- - -------------------- Executive Officer, --
G.L. SCOTT Director
/s/Henry Gemino Executive Vice- Sept. 24, 1997
- - -------------------- President, Chief --
HENRY GEMINO Operating Officer,
Chief Financial Officer,
Principal Accounting
Officer, Director
/s/Gale D. Burnett President, Director Sept. 24, 1997
- - -------------------- --
GALE D. BURNETT
/s/Murphy Evans Director Sept. 24, 1997
- - -------------------- --
MURPHY EVANS
/s/John Tsungfen Kuo Director, Chief Sept. 24, 1997
- - --------------------- Technical Consultant --
JOHN TSUNGFEN KUO
18
<TABLE>
<CAPTION>
1997 1996
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) - financial statements $ (1,035,003) (400,853)
Common shares outstanding at beginning of period 3,212,600 3,212,600
Common stock issued through IPO 1,000,000 -
Months outstanding 4.5 -
Common stock issued to underwriter 50,000 -
Months outstanding 3
Stock warrants and options - not dilutive (SAB 83
effect included in adjustment below)
Common shares outstanding at end of period 4,262,600 3,212,600
Weighted average outstanding common stock 3,587,532 3,212,600
SAB 83 adjustment 345,616 452,194
Shares used in computing pro forma net loss per share 3,933,148 3,664,794
Pro forma net loss per share $0.26 0.11
- - ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,936,600
<SECURITIES> 0
<RECEIVABLES> 20,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,009,398
<PP&E> 148,182
<DEPRECIATION> (113,241)
<TOTAL-ASSETS> 5,236,726
<CURRENT-LIABILITIES> 151,175
<BONDS> 0
0
0
<COMMON> 4,263
<OTHER-SE> 5,081,288
<TOTAL-LIABILITY-AND-EQUITY> 5,236,726
<SALES> 0
<TOTAL-REVENUES> 50,000
<CGS> 0
<TOTAL-COSTS> 1,182,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,035,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,035,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,035,003)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
</TABLE>
